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Operations

Managing the processes that transform and add value to inputs to create
outputs of goods and services.

Role of operations management


Strategic role of operations management cost leadership,
good/service differentiation
Strategic role = focusing on decisions for achieving long-term goals. The strategic
goals are to improve:

Productivity
Efficiency
Quality of outputs.

It involves operations managers contributing to the strategic direction of strategic


plan of the business
Cost Leadership: involves aiming to have the lowest costs or to be the most pricecompetitive in the market. This is gained by offering greater value by means of lower
prices, grater quality or by providing greater benefits and service at no extra cost.
Most businesses who aim to be cost leader will have a high degree of standardisation.
Can keep cost down through:

Economies of scale in production and distribution


Access to cheaper raw materials
Exclusive access to a large source of low cost inputs
Developing an efficient scale of operationseconomies of scale
Using up-to-date technology in production
Controlling production and research costs.

Good/service differentiation: involves differing products from competitors. Is can


be achieved through:

Altering the quality


Faster delivery (efficiency)
Customisation
More features and applications on the physical appearance
Location of operations
Improving the service

Goods and/or services in different industries


Goods can either be:

Standardised (mass produced, uniform in quality, produced with a production


focus)

Customised (varied according to the needs of the customer, produced with a


market focus)
Can be reused
Hard to modify once manufactured
Perishable or non-perishable
Tangible product that requires factory/machinery and space
Less labour intensive than services
The manufacturing of goods has become automated with computer-aided
design (CAD) and computer-aided manufacture (CAM).

Services can be:

Standardised (e.g. fast food restaurant)


Customised (e.g. medical services, hairdressers)
They are intangible
Can only be used by the customer once
Easier to change and customise
More interaction with customers
Require more people and have an office-centred production

Interdependence with other key business functions


All key functions are interdependent and rely in each other for success.
Operations- must supply a product that has the features and quality consumers want
as well as being reliable in distributing the product to the market.
Marketing- connects operations directly with the customer. Identifies the nature of
consumers desires and implements marketing strategies to encourage purchase of
goods made in operations.
Finance- required so production and distribution can take place. The finance manager
creates budgets and makes funds available to purchase inputs, equipment and
repairs.
Human Resources- required for the hiring of employees to work in production.
Ensures that there are enough employees with the appropriate skills.

Influences on operations
Globalisation, technology, quality expectations, cost-based
competition, government policies, legal regulation,
environmental sustainability
Globalisation:

Able to reduce the cost of operations by pursuing a global web strategy


(location of different parts of the production process in different areas) which
will reduce labour costs
More abundance of raw materials, technology skills and low transport costs

Can also act as a threat to a business as other businesses who apply cost
leadership can dominate the market
Able to reach new markets and provide franchises
Gives consumers the opportunity to purchase products from the business that
provides the most value for money
Access to a global market for businesses to sell their outputs

Technology:

Enables service-based businesses to penetrate global markets with the


international distribution of information through the internet and smart phones
Can result in the development of new methods of production or new equipment
that helps businesses perform functions more quickly and efficiently (lower cost)
Computer-aided design (CAD) and computer-aided manufacture (CAM) has
impacted the number of employees needed within operations
It improves efficiency, logistics and reduces reliance on human labour

Quality expectations: customer expectations and satisfaction with the product(s).


Operations of the delivery of services can have a positive impact on customer
satisfaction. Customers require world-class standards in products and after-sales
support. Customers will have certain beliefs about:

Durability (how long the product lasts given a reasonable amount of use)
Reliability (how long the product functions without needing repairs or
maintenance)
Fit for purpose (how well the product does what it is supposed to)

Cost-based competition: A business can gain a price advantage over its


competitors by using operational strategies that lower costs through:

Cheaper labour and resources


Outsourcingeconomies of scale, global web strategy
Lowering quality
Using cheaper inputs

Government policies:

Government policies are methods used by the government that encourage the
operations function of a business to be more innovative and competitive.
A common way to support these innovative businesses is to provide monetary
benefits such as a financial grant or tax concessions.
There has been a gradual reduction in protection of Australian businesses
forcing them to be more efficient in their operations and reduce costs.
Free trades, taxation, interest rates, government spending and environmental
incentives.

Legal regulations:

The aim of government regulation of a business is to promote safety and fair


business conduct.
Many of the regulatory requirements exist at a local, state and federal level.
It is the legal responsibility of the operations manager to be aware of all the
laws relevant to the operations function and ensure that the business complies
with them.
Work Health and Safety (WHS), anti-discrimination, equal employment
opportunity (EEO), local zoning, and GST collection.

Environmental sustainability:

Ecological sustainability refers to the development and use of methods of


production that allow resources to be used by producers today without limiting
the ability of future generations to satisfy their needs and wants.
Consumers need to be aware of the cost and disposal of excessive packaging.
Society will have a positive attitude towards businesses that are
environmentally friendly and good corporative citizens.
Involves the use of alternative resources, organic growing, recycling and
packaging and catering for future generations.

Corporate social responsibility


-the difference between legal compliance and ethical
responsibility
-environmental sustainability and social responsibility
Corporate social responsibility is a commitment by a business to operate ethically
to protecting and contributing to the resources and interests of customers. It is how
success and profitability is determined and how well it considers the interests of
employees, consumers and the community.
Legal compliance is mandatory and of greater importance than ethical
responsibility as there are not specific laws the business would be breaking, yet
unethical behaviours may lose customers.

Ethical behaviour involves making decisions that are not only legally correct but
also morally correct.
For operations, a code of conduct will be concerned with:
o minimising harm to the environment
o reducing waste, recycling and reusing
o producing value-for-money, quality products
o improving customer service

Environmental sustainability is about the present use not affecting the future use,
looking after the environment for future generations. Social responsibility refers to
the positive effect on the community- protecting interests of customers and wider
society, e.g. initiatives/charity to community.

By pursuing environmentally sustainable goals a business will be contributing to


a better quality of life for society.

Operations processes
Inputs
-transformed resources (materials, information, customers)
-transforming resources (human resources, facilities)
Common direct inputs= labour, energy, raw materials, skills/knowledge, machinery
and technology.
Transformed resources: inputs that are changed or converted in the operations
process to a finished good or service.

Materials- raw materials and intermediate goods (e.g. supplies, parts) used up in
the operations
Information-influence and inform how inputs are used, where and which supplier
to use and to keep control over material inputs.
Customers-their choices shape inputs. Customers can be changed in different
ways, e.g. feel that value has been added to their lives after seeing a film or
going on holidays.

Transforming resources: resources that remain in the business and carry out the
transformation process to add value to inputs.

Human resources-effectiveness of human resources determines the success of


the transformation. The skill, knowledge, capabilities and labour of people is
applied to materials to convert them into goods and services.

Facilities-plant, machinery, buildings, land, equipment and technology used in


operations.

Transformation processes
-the influence of volume, variety, variation in demand and
visibility (customer contact)
-sequencing and scheduling Gantt charts, critical path analysis
-technology, task design and process layout
-monitoring, control and improvement
The transformation processes are those activities that determine how value will be
added. These processes can add value in four ways:

Physical altering of the physical inputs or the changes that happen to people
Transportation of goods or services, e.g. having them delivered to a more
convenient location

Protection and safety from the environment; for example, protecting assets

Inspection by giving customers a better understanding of the good or service

The influence of volume:

The actual number of products or services produced by the operation.


A business using mass production will produce a high volume with a high degree
of process repetition.
A business with customization and low production will allow for lots of stoppages
and adjustments.
When volume is the largest factor, there will be lots of capital facilities and
technology, but less labour. Assembly lines using convey or belts will be
common and organized.
Low volume= 5 star restaurant, high volume = fast food restaurant.

The influence of variety:

Variety refers to the range of products made, number of different models and
variations offered in the products or services.
A business producing a high volume product with low variety will be capital
intensive.
Low variety= car factory with small variations. High variety= financial advice.

The influence of variation in demand:

amount of produce desired by customers


Variation can change according to time of day, season, holidays and time of
year.
When there are steady levels with no variation, there will be high volume and
capital costs.
Low variation= bread and milk. High variation = ice cream factory

The influence in visibility (customer contact):

Operations will also be influenced by the degree to which customers can see the
operations in action.
Service-based businesses will have a high level of visibility. Speed of operations
will also be important as customers usually have a much lower tolerance for
waiting.
High visibility= restaurant. Low visibility= beef producer.

Sequencing= a plan showing the order in which activities occur


Scheduling=used to plan the length of time activities take and the sequence of the
use of resources
Gantt charts records the number of tasks involved in each particular project and the
estimated time needed for each task, good for long-term projects, easy to understand
Critical path analysis a scheduling tool that allows manager to see shortest length
of time to complete all tasks, precise in timing, good for short-term tasks

Technology: It makes task more effective and efficient, high-tech or low-tech, less
employees needed, increasingly important, cost is also relevant, allows more work to
be done in a shorter time, machinery/manufacturing technology-robotics, CAD and
CAM.
Task Design: is how the task will be completed. It allows for ongoing analysis and
adjustments in each activity to ensure continuous improvement in productivity.
Classifying job activities, what needs to be done, making it easy for an employee to
successfully complete tasks, job analysis, can be cone after a skills audit is conducted.
Process layout: arrangement of machines in a sequence-grouped together by
function/process they perform
Monitoring- the systematic collection and analysis of information as a task
progresses. These include: quality, speed, dependability, flexibility, customisation and
costs. It is aimed at improving the efficiency and effectiveness of an operations
process. The purpose of it is to see if resources have been allocated properly and are
being used efficiently.
Control- a function that aims at keeping the businesss actual performance as close
as possible to what was planned by making adjustments to the operation process. It is
about assessing the performance of a business.
Improvement- suggests that adjustments and readjustments may need to be made
to day-to-day activities in the short term and even the entire operations process in the
long term. There can be improvements in: quality, speed, dependability, flexibility and
cost.

Outputs
-customer service
-warranties
Outputs: good or service provided/delivered to a customer, are the final products
that a business offers to customers.
Customer service- is a service provided to customers before, during and after a
purchase. It is an intangible output that requires extensive contact with customers.
Good customer service will increase customer satisfaction. How a business meets and
exceeds the expectation of customers in all aspects of its operations, key in
developing long-term relationships.
Warranties- an assurance that a business stands by the quality claims of the
products that they make and provide to the market. Agreement to fix defects in
products, an assessment of warranty claims can help a business to adjust
transformations processes to be more effective.

Operations strategies

Performance objectives quality, speed, dependability, flexibility,


customisation, cost
Quality= quality of service/conformity/design, can be measured in rate of returns and
feedback. Good quality prevents costs by product recalls and repairs, dimensions of
quality are: durability, performance, serviceability (convenient to repair) and
aesthetics (does it look good).
Speed= time it takes for production/operations process to respond to changes in the
market demand, tested by analysing wait time and production speed, if the production
is too fast the quality may suffer.
Dependability= consistency and reliability of products, measured by warranty claims
and complaints.
Flexibility= how quickly processes adapt to market change, technology, ability to
make changes to operations due to external factors.
Customisation= creation of individualised products to meet specific customer needs.
Cost= minimisation of expenses so that operations processes are conducted as
cheaply as possible.

New product or service design and development


New product: design, development, launch and sales of new products allows a
business to grow and maintain a competitive advantage, different approaches
(customer approach/changes or innovation in technology).
Service design and development: more complex, adding to the service offered to
the customer, can be adding to variety/increase of choice, develop within cast
structure.

Supply chain management logistics, e-commerce, global


sourcing
Supply chain management is the stream of processes of moving goods from the
customer order through the raw material stage, supply, production and distribution of
products to the customer. Integrating and managing the flow of supplies throughout
the inputs/transformation process/outputs to best meet the needs of customers,
supplier rationalism/backwards vertical integration/cost minimisation/flexible
responsive supply chain process
Logistics: the transport of physical raw materials, inputs and the distribution of
finished goods to markets. It involves the integration of information, transportation,
inventory, warehousing, materials handling and packaging. Computerisation can make
the task faster/more efficient. The role of logistics is to ensure that operations have
the right items at the right quantity and the right time at the right place.
E-commerce: the use of internet to buy and sell goods and services. Alter operation
process, e-procurement, managing supplies in an organised way, makes trading

easier, cheaper access to global markets, privacy and security issues, and increased
risk of purchasing unsatisfactory or faulty materials.
Global sourcing: business acquires the inputs it needs for production across the
borders of a number of countries. A business seeks to find the most cost effective
location for manufacturing a product, even if the location is overseas, may be cheaper
to purchase inputs from overseas than create them, keep control over complex supply
chains, lower costs, loss of control over quality, reliability and costs, slower lead times.

Outsourcing advantages and disadvantages


Outsourcing: occurs where other businesses provide the raw materials and
components, and also service inputs.
Advantages- external provider specialised, lower costs, greater effectiveness, require
less capital expenditure, can use employees of other business, may contribute to the
speed, give the business flexibility to choose the suppliers it wants, requires less input
from management, the business can focus on its core business.
Disadvantages- if ineffective may be more expensive, not in control, if competitors
are doing the same=less competitive advantage, dependent on other businesses, can
involve a loss of jobs, can the security and confidentiality issues.

Technology leading edge, established


Leading edge= most advanced or innovative, is sometimes still being developed
Established= developed and widely used

Inventory management advantages and disadvantages of


holding stock, LIFO (last-in-first-out), FIFO (first-in-first-out), JIT
(just-in-time)
Inventory management refers to the systems and processes that identify the
quantity of goods or materials to be ordered and the timing of the delivery of those
goods or materials. Inventory control has 3 aims: determine maximum and minimum
stock, provide details of changes in inventory to trigger management decisions to
reorder, strategies applied impact transformation process.
Advantages of holding stock: consumer demand can be met, reduces lead times
between order/delivery, storage of stock allows business to promote products in nontraditional/new markets, stock adds value to business, making products in bulk can
reduce costs, dependability of delivery
Disadvantages of holding stock: costs with storage, invested capital/labour/energy can
be used elsewhere, if stock is unsold the business experiences a loss, increased
management costs, goods may pass their expiry or use by date.
LIFO (last-in-first-out): last goods produced are the first out or used and therefore
each unity sold/used is the last one recorded, the newer stock is displayed for sale
before products purchased at an earlier date. This endures that up-to-date stock is on
display for customers.

FIFO (first-in-first-out): first goods produced are the first ones sold/used, therefore
the cost of each unit sold/used is first recorded, can be used if price of supplies/goods
remain relatively stable, used when products have a used-by date.
JIT (just-in-time): ensures exact amount of products or materials arrive only as they
are needed, can save money as it eliminates inventories but require flexible
operations/reliable suppliers.

Quality management
-control
-assurance
-improvement
Quality management: involves setting performance objectives that clearly set
quality as a foremost goal.
Quality Control- involves checking transformed and transforming resources in all
stages of the production processes, failure to meet pre-determined targets=corrective
action
Quality Assurance- involves monitoring and evaluation of the various processes of a
project, service or facility to ensure that a minimum level of quality is being achieved
by the production process. Assures set standards are met, pre-determined (universal)
quality standards
Quality Improvement- involves continuous improvement in all functional areas to
reduce the rate at which mistakes occur. Ongoing commitment to improving
goods/service and total quality management-quality is a commitment/responsibility of
all staff

Overcoming resistance to change financial costs, purchasing


new equipment, redundancy payments, retraining, reorganising
plant layout, inertia
Major reasons for resistance to change are:
Financial costs-purchasing new equipment, redundancy payments, retraining,
reorganisation of plant layout
Inertia- psychological resistance, fear of losing jobs/uncertainty.

Global factors global sourcing, economies of scale, scanning


and learning, research and development

Global sourcing: refers to the process of acquiring raw materials, services and
various parts that are needed to manufacture goods or services. A business may use a
global web strategy.
Economies of scale: occur when the amount of production increases and as a result
of this increased output there is a decrease in the cost of production per unit of
output.
Scanning and learning: involves monitoring a businesss internal and external
environment so that it can gather, analyse and use information for tactical or strategic
purposes. Scanning the global environment to identify and learn the critical global
trends that may impact on the business.
Research and development: helps business to creating ideas for new products or
services that will give them a leading edge over other businesses.

Marketing

The process of developing a product and implementing a series of


strategies aimed at correctly promoting, pricing and distributing the
product to its target market.

Role of marketing
Strategic role of marketing goods and services
Central and strategic role brings the products of the business and customers
together to increase the market share of the business.

Interdependence with other key business functions


Operations: as the sales of a product decline over time, the operations manager and
marketing manager need to design and develop new products, operations needs data
from marketing to know what to produce.
Finance: the business needs to know how much money it can put into marketing.
Human Resources: staff must be hired and trained to have experienced employees
marketing the products.

Production, selling, marketing approaches


Production= emphasis on quantity and reducing costs, demand greater than supply.
Mass market, low-cost production.
Selling= businesses think of customer only after product has been made, emphasis
on selling and advertising. Supply greater than demand, persuasive sales techniques
Marketing= focuses on the customers needs and wants, emphasis on customer
satisfaction, modification-societal approach emphasises quality, safety and the
environment, customer focus, customer orientation, relationship marketing.

Types of markets resource, industrial, intermediate, consumer,


mass, niche
Resource= where the production and sale of raw materials occur, e.g. land. Where
the factors of production are sold exchanges, these resources are then sold to firms
producing goods/services for customers
Industrial= markets for manufactured products, e.g. agriculture, mining. Those who
buy goods/services that go into the production of other products
Intermediate= markets to provide the link between producers and the marketplaces
where consumers make their purchase decisions, (wholesalers) e.g. supermarket.
Those who buy goods/services to resell/rent to others, wholesalers-steps to produce
the final product
Consumer= markets that sell directly to the individual. A market for goods at their
final point of consumption

Mass= market for goods appealing to the majority of customers, e.g. milk, bread,
electricity
Niche= smaller markets for more specialised goods/services, appealing to fewer
people, e.g. luxury cars.

Influences on marketing
Factors influencing customer choice psychological,
sociocultural, economic, government
Psychological: personal characteristics of an individual (perception, attitudes,
lifestyle, personality and self-concept).
Sociocultural: forces exerted by other people and groups (family and roles, religion,
culture, peers).
Economic: the amount of money available to spend (boom, recession).
Government: policies and laws directly/indirectly influence business activity and
consumers spending habits (interest rates, fiscal and monetary policies, age
restrictions, income tax).

Consumer laws
-deceptive and misleading advertising
-price discrimination
-implied conditions
-warranties
The Competition and Consumer Act 2010 attempts to promote fair and competitive
behaviour in the marketplace.
Deceptive and misleading advertising= overstating benefits, offering discounts
and special offers that dont exist, bait and switch advertising (promotes a product
that is heavily discounted even though the business has very little supplies).
Price discrimination= the process of a business giving preference to some retail
stores by providing them with stock at lower prices than is offered to the competitors
of those retailers.
Implied conditions= terms unspoken or written in a contract. The product needs to
be good quality, of reasonable standard and fit for purpose.
Warranties= a promise by the business to repair or replace faulty products. A
business must either refund or exchange goods recognised as faulty at the time of
leaving the store, this is an implied warranty.

Ethical truth, accuracy and good taste in advertising, products


that may damage health, engaging in fair competition, sugging

Ethical behaviour refers to the generally accepted code of behaviour. When marketing
a business should act in an ethical way. They need to consider health concerns, social
obligations, cost of marketing, sugging and fair competition.
Truth, accuracy and good taste in advertising: it is expected that all promotional
material is truthful, accurate and in good taste. Consumers have a right to accurate
and truthful information from businesses about their purchases.
Products that may damage health: restrictions on products that damage health,
e.g. tobacco smoking
Engaging in fair competition: business behaviour must be fair and ethical towards
their competitors.
Sugging: selling under the guise of a survey. This is not illegal but it is unethical as it
involves an invasion of privacy and deception.

Marketing processes
Elements of the marketing plan are:
1.
2.
3.
4.
5.
6.
7.

Executive summary
Situational analysis
Market research
Establishing marketing objectives
Identifying the target market
Developing marketing strategies
Implementing, monitoring and controlling.

1. Situational analysis SWOT, product life cycle


A situational analysis is the current situation of the business.
SWOT- provides the information needed to complete the situational analysis and
gives a clear indication of the businesss position compared to its competitors. The
strengths and weaknesses are the internal forces within the business. Opportunities
and threats are the external forces as they operate outside the business and cannot
be controlled by the business.
Product lifecycle- different marketing strategies should be used as products travel
through the product life cycle

Introduction/establishment: profits are limited, penetration policies will be used,


business establishing a loyal customer base
Growth: profitability will grow, costs will increase, marketing strategies will need
to change, businesses lower their costs.
Maturity: steady income stream with limited prospects, marketing strategies
modified, try to differentiate through price, after-sales service or by making the
product easier to access.

Post-maturity: increased competition and changing customer preferences, can


either decline, renew, steady state (profits stay the same) or cessation (business
shut down).

2. Market research
Primary research: surveys, interviews, observations, experiments
Secondary research: *can be internal or external-census, data, competitors sales
data, annual reports

3. Establishing market objectives


Businesses generally adopt a SMART approach to setting objectives:

Specific the objective needs to be clear


Measurable the business needs to find ways to measure success
Achievable the business needs to have the financial and human resources to
achieve goal
Realistic the objective should be reasonable
Time bound the time frame must be reasonable

Marketing objectives usually include:

Increasing market share


Expanding the product range
Expanding existing markets
Maximising customer service

4. Identifying target markets


To appeal to a target market the business needs and in-depth understanding of the
nature of consumer markets. Consumers can be grouped into segments of:

Demographic
Sociocultural
Geographic
Psychographic

5. Developing marketing strategies


Marketing involves a number of strategies designed to price, promote and place
products in the market. The marketing mix consists of four elements called the 4Ps:

Product the product is a combination of quality, design, name, warranty,


packaging and exclusive features. Customers buy products that satisfy their
needs as well as provide them with intangible benefits.
Price the right price needs to be chosen to prevent the product from not
selling at all if the price is too high or receiving lower turnover as well as cheap
image if the price is too low.
Promotion the promotion strategy is the method that is to be used by the
business to inform, persuade and remind customers about its products.
Place deals with the distribution of the product and consists of two parts
which are transportation and the number of intermediaries involved.

6. Implementation, monitoring and controlling developing a


financial forecast; comparing actual and planned results, revising
the marketing strategy
Implementation- is the process of putting the marketing strategies into action.
Implementation of the marketing plan involves integrating it with all sections of the
business, establishing lines of communication, motivating the employees and making
them familiar with the marketing objectives and strategies.
Monitoring- means checking and observing the actual progress of the marketing
plan. The information is used to control the plan.
Controlling- involves the comparison of planned performance against actual
performance and taking corrective action to make sure the objectives are achieved.
The controlling process requires the business to outline what is to be accomplished by
establishing a performance standard which is a forecast level of performance against
actual performance can be compared. Cash flow statements, balance sheets, profit
and loss
Developing a financial forecast a business must develop a financial forecast that
details the revenues and expenditures for each strategy when evaluating alternatives.
Cost benefit analysis is a helpful tool used to itemize fixed and variable costs and
draw up a profit forecast showing profit and return. Developing a financial forecast
requires two steps that are: cost estimate- how much the marketing plan is expected
to cost and revenue estimate- how much revenue will be generated as a result.
Comparing actual and planned results this is the monitoring which will involve
comparing actual results with planned results.
Revising the marketing strategy the marketing plan can be revised and corrective
action taken is needed.

Marketing strategies
Market segmentation, product/service differentiation and
positioning
Identifying the niche markets within the mass market by grouping people with similar
characteristics.
Demographic: age, sex,
Geographic: location
Psychographic: lifestyle, social class, personality
Behavioural: consumer loyalty, purchase occasion, benefits sought, usage rate
Product/service differentiation= how a business separate themselves from the
competition. Price, product quality, providing after-sales.
Positioning= process or marketers creating an image/identity for their product,
brand and organisation. These can be based on factors such as price, quality, value,

safety. A positioning matrix may be helpful. Positioning strategies include: positioning


by benefit, price or quality, direct comparison, use occasion or users

Products goods and/or services


-branding
-packaging
Goods/services should be seen as flexible and product range/use, what to emphasise,
position should be taken into consideration
Branding: a brand name is a way of distinguishing a product from its competitors,
branding strategies include: generic brand (e.g. no frills), individual brand (e.g. dove,
lux)
Packaging: often first image of the product- image should be positive and effective
while aiming to protect and maintain quality. Should offer a reason to purchase
product, this may be: nutritional information, benefits, feature, design and colour.

Price including pricing methods cost, market, competitionbased


-pricing strategies skimming, penetration, loss leaders, price
points
-price and quality interaction
Pricing methods:
Cost- (mark up), adding a percentage to purchase price.
Market based- setting prices according to supply and demand.
Competition based- considers total cost to the business of manufacturing or
providing a good or service to the consumer and then adds an additional
amount. Comparable to competitors price.
Pricing strategies:
Skimming- a business charging the highest possible price
Penetration- setting prices at the lowest possible price to gain an immediate
groups of customers. Used to gain market share rapidly.
Loss leader- selling products at a loss to entice customers into the business
Price points- selling products only at predetermined prices, e.g. $29.99, $39.99.
Price and quality interaction: products that are a higher price usually have a
higher quality than those sold at a low price. Higher price products also tend to seem
better quality than low-cost product. Prestige/premium pricing= high price is charged
to give the product an aura of quality and status.

Promotion
-elements of the promotion mix advertising, personal selling
and relationship marketing, sales promotions, publicity and
public relations

-the communication process opinion leaders, word of mouth


Elements of the promotion mix:
Advertising - conveys a non-personal message to a large market.
Personal selling- activities of a sales representative directed at a customer to
make a sale
Sales promotions use of activities/materials as direct inducements to
customers, e.g. coupons, samples, loyalty cards
Publicity and public relations free news story, creating and maintaining
favourable relations between a business and its competitors.
Relationship marketing- long term, cost effective and strong relationships with
customers, e.g. Fly Buys
The communication process:
Opinion leaders- respected and trusted well known members in the public eye,
e.g. sports stars, singers
Word of mouth- friends and family communicating experiences and beliefs on
products to others.

Place/distribution
-distribution channels
-channel choice intensive, selective, exclusive
-physical distribution issues transport, warehousing, inventory
Distribution channels: routes taken to get the product from the business to the
customer, e.g. ProducerRetailerCustomer.
Channel choice:
Intensive- saturate the market, e.g. milk
Selective-moderate proportion of all possible outlets, e.g. clothes sold in
department stores, e.g. big W
Exclusive-the use of only one retail outlet for a product in a large geographic
location, e.g. boutique.
Physical distribution issues:
Transport- needed to deliver products to stores.
Warehousing- involved in receiving, storing and dispatching goods.
Inventory- (stock) need inventory control to maintain quantities and varieties.

People, processes and physical evidence


*For service-based industries.
People: having well-trained staff who can support the products of the business. The
quality of interaction between the customer and those within the business who will
deliver the service.

Processes: the flow of activities that a business will follow in its delivery of a service.
Physical evidence: the environment in which the service will be delivered, e.g.
signage, brochures, calling cards, website, etc.

E-marketing
The practice of using the internet to perform marketing activities. Webpage, podcasts,
sms, blogs, web 2.0, social media advertising.

Global marketing
-global branding
-standardisation
-customisation
-global pricing
-competitive positioning
Many TNCs adopt global marketing, e.g. Coca-Cola.
Global branding: worldwide use of a name, term, symbol, logo to identify a sellers
products.
Standardisation: the needs it satisfies are the same throughout the world, e.g.
mobiles
Customisation: the needs it satisfies are different between countries, e.g.
McDonalds menus.
Global pricing: customised, market-customised, standardised.
Competitive positioning: how a business will differentiate its products from other
businesses.

Finance
The planning and monitoring of a businesss financial resources in order
to allow the business to achieve its financial objectives.

Role of Financial Management


Strategic role of financial management
The strategic role of financial management is to provide the financial resources to
allow the implementation of the businesss strategic plan. It ensures that a new
business continues to operate, grow and is able to achieve its financial objectives.

Objectives of financial management


-profitability, growth, efficiency, liquidity, solvency
-short-term and long-term
Profitability:
Profitability is the ability of the business to maximise its profits. This is achieved by
carefully monitoring the businesss revenue and pricing policies, costs and expenses.
Growth:
Growth is the ability of the business to increase its size in the longer term. Growth
ensure that the business it sustainable into the future.
Efficiency:

Efficiency is the ability of the business to maximise its costs and manage its assets so
that maximum profit is achieved with the lowest possible level of assets.
Liquidity:
Liquidity refers to the ability of the business to pay short-term liabilities using its
current assets. Therefore the current assets need to be greater than current liabilities.
Solvency:
Solvency is the extent to which the business can meet its financial commitments in
the longer term (12 months+).
Short-term:
Short-term financial objectives are the tactical (one to two years) and operational (day
to day) plans of the business. They are mainly concerned with managing cash flow
and ensuring that the balance between current assets and current liabilities is positive
for the business.
Long-term:
Long-term financial objectives are the strategic plans of the business. They are mainly
concerned with the growing of the business and tend to be broad goals, e.g.
increasing profit and market share.

Interdependence with other key business functions


Operations:
Finance is required for inputs, machinery, land, etc. to create value whilst receiving a
return on investments.
Marketing:
Finances are required for advertising to occur, e.g. ads, which generates sales that
help the business increase its value and short-term financial goal of managing cash
flow.
Human resources:
Finance is an important aspect to help human resources achieve its resources. The
information finance gathers on earnings, productivity and customer satisfaction
provides insights into the staffing and development needs of a business and without
this HR cannot do its job effectively.

Influences on Financial Management


Internal sources of finance-retained profits
Internal sources of finance are obtained from within the business. They include
owners equity, retained profits and sale of assets.

Owners equity- is the funds contributed by owners or partners to establish and


build the business.
Retained profits- are the part of the net profit of a business that are not distributed
but are invested back into the business to be a cheap and accessible source of
finance.

External sources of finance


-debt- short-term borrowing (overdraft, commercial bills,
factoring), long-term borrowing (mortgage, debentures,
unsecured notes, leasing)
-equity- ordinary shares (new issues, rights issues, placements,
share purchase plans), private equity
External finance refers to funds provided by sources outside the business, e.g. banks
and government.
Debt: short-term borrowing
Overdraft: an arrangement between the business and its bank that allows the
business to borrow money from the bank at short notice through its cheque or current
account.
Commercial bills: are a type of bill of exchange (loan) issued by institutions other than
banks.
Factoring: is the selling of a companys accounts receivable (money that is owed to
the business) at a discount to a finance company for immediate cash.
Debt: long-term borrowing
Mortgage: loans with a fixed schedule of payments that is repaid over a number of
years with interest
Debentures: are fixed interest securities issued by a company that will pay a fixed
interest rate on the money loaned to the company for a set time period. They are
issued by a company for a fixed rate of interest and for a fixed time.
Unsecured notes: are loans made by finance companies and are not secured by any
assets, and therefore presents the most risk to the investors in the note (the lender).
For this reason it attracts a higher rate of interest than a secured note.
Leasing: involves the payment of money for the use of equipment that is owned by
another party. It allows a business to use an asset in return for payments over a set
time.
Equity: ordinary shares

Ordinary shares are the usual way that an investor can buy part ownership of a public
company (a business listed on the Australian Securities Exchange or ASX).
New issues: a security that has been issued and sold for the first time on a public
market; sometimes referred to as primary shares or new offerings.
Rights issues: the privilege granted to shareholders to buy new shares in the same
company.
Placements: allotment of share, debentures, etc. made directly from the company to
investors.
Share purchase plans: an offer to existing shareholders in a listed company the
opportunity to purchase more shares in that company without brokerage fees. The
shares can also be offered at a discount to the current market price.
Private equity
Private equity refers to securities that are held in companies that are not listed and
not publicly traded in the Australian Securities Exchange (ASX). The aim of the private
company (like the publically listed companies who sell ordinary shares) is to raise
capital to finance future expansion/investment of the business.

Financial institutions- banks, investment banks, finance


companies, superannuation funds, life insurance companies, unit
trusts and the Australian Securities Exchange
Banks
Banks are the most important source of funds for businesses. Banks accept deposits
from the general public and provide funds for loans and, in turn, make investments.
Investment banks
Investment banks provide specialised advice and services for businesses financial
needs. They deal with businesses and governments in raising large amounts of capital
by underwriting share issues.
Finance companies

Finance companies make loans (unsecured and secured) to consumers and


businesses. They raise capital through share issues and funds through debenture
(company bond) issue.
Superannuation funds
Provide funds to the corporate sector through investment of funds received from
superannuation contributions and fees. Superannuation funds are able to invest the
contributions of members into a range of short and long-term investments with the
aim of maximising a return.
Life insurance companies
Insurance companies cover various risks that people and businesses face. To purchase
insurance, customers pay a premium to an insurance company. These companies
invest in other businesses as a method of spreading their exposure to risk.
Unit trusts
Unit trusts (mutual funds) take funds from a large number of small investors and
invest them in specific types of financial assets.
Australian Securities Exchange
The Australian Securities Exchange (ASX) is a market that brings together buyers and
sellers to exchange shares. Once approved by the ASX businesses can issue shares to
the general public on the primary market. Buyers and sellers can exchange shares on
the secondary market.

Influence of government- Australian Securities and Investments


Commission, company taxation
The government influences the financial management of businesses through the
implementation of economic policies (fiscal-budgets and monetary- interest rates),
and through the implementation of current and changing legislation.
Australian Securities and Investments Commission
The Australian Securities and Investments Commission (ASIC) aims to reduce fraud
and unfair practices in financial markets and financial products.
Company taxation

Companies and corporations in Australia pay company tax on profits. Company tax is
paid before profits are distributed to shareholders as dividends.

Global market influences- economic outlook, availability of funds,


interest rates
Financial risks associated with global markets are greater than those encountered
domestically, but such risk taking is necessary for a business strategy to be
implemented. Globalisation has created more interdependence between economies
and businesses.
Economic outlook
The projected changes to the level of economic growth throughout the world. It may
increase the demand for products/services and the interest rates on funds borrowed
internationally.
Availability of funds
Refers to the ease with which a business can access funds (for borrowing) on the
international financial markets. The availability of funds depends on the risk, demand
and supply and the domestic economic conditions.
Interest rates
Interest rates are the cost of borrowing money. The higher the level of risk involve in
lending to a business, the higher the interest rates.

Processes of Financial Management


Planning and implementing-financial needs, budgets, record
systems, financial risks, financial controls
Financial planning is essential if a business is to achieve its goals. The financial
planning process begins with long-term or strategic financial plans.
The planning process involves the setting of goals and objectives, determining the
strategies to achieve those goals and objectives, identifying and evaluating
alternative courses of action and choosing the best alternative for the business.
Financial needs

Financial needs are essential to determine where a business is headed and how it will
get there. Important financial information needs to be collected before future plans
can be made. A new business will have to determine its start-up costs, e.g. cost of
equipment and employees. Once a business has begun operations financial
information from balance sheets, incomes statements and cash flow statements need
to be analysed to determine if profits can be given to shareholders.
Budgets
Budgets provide information in quantitative terms (facts and figures) about
requirements to achieve a particular purpose. Budgets are often prepared to predict a
range of activities relating to short-term and long-term plans and activities. Budgets
can be operating, project or financial.
Operating budgets- relate to the main activities of a business and may include
budgets relating to sales, production, raw materials, direct labour, expenses and cost
of goods sold.
Project budgets- relate to capital expenditure and, research and development.
Financial budgets- relate to financial data of a business and include the budgeted
income statement, balance sheet and cash flows.
Record systems
Record systems are the mechanisms employed by a business to ensure that data is
recorded and the information provided by record systems is accurate, reliable,
efficient and accessible.
Financial risks
These are the risks to a business of being unable to cover its financial obligations,
such as the debts that a business incurs through borrowings, both short-term and
longer term.

Financial controls
Financial controls are the policies and procedures that ensure that the plans of a
business will be achieved in the most efficient way. This enables the manager to
determine if the objectives set were achievable or need to be reassessed.

-debt and equity financing- advantages and disadvantages of


each
Debt financing

Relates to the short-term and long-term borrowing from external sources by a


business. External (debt finance) is a liability as it is owed to sources external to the
business.
Advantages:
Readily available

Interest payments can be tax


deductible
Increased funds lead to increased
earnings and profits
Loans provide a business with the
opportunity to grow
Profits are not shared with the
lender of the loan

Disadvantages:
Costs to a business-establishment
costs and ongoing fees and charges
Security is required by the business

Regular payments have to be made

Increased risk if debt comes from


financial institutions because the
interest that the bank charges
Interest rates can vary over the loan
period-making it more expensive
If it is a secured loan, defaulting on
the loan may lead to loss of an
asset

Equity financing
Related to the internal sources of finance in the business. It is the money lent to the
business in exchange for ownership, including start-up capital.
Advantages:
Remains in the business for an
indefinite time

Does not need to be repaid on a set


date
Safer than debt

Cheaper that other sources of


finance as there is no interest
There is flexibility in timing of
dividend payments
The debt to equity
(gearing/leverage) ratio decreases,
lowering the risk to the business

Disadvantages:
Requires sufficient profits to be
made so that the business can
continue to operate
Lower profits and lower returns for
the owner
Equity is hard to obtain and can
take time to organise and,
therefore, may limit growth
Not tax deductible

Central ownership is reduced,


causing a loss of control in decisionmaking
High demand for dividend payments
to shareholders may reduce the
level of retained profits

-matching the terms and source of finance to business purpose

When a business identifies and plans to meet its financial objective, it is necessary to
match the terms of finance with its purpose. This requires a business to consider:
The terms, flexibility and availability of finance
The cost of each source of funding- equity and debt
The structure of the business- small business and public company

Monitoring and controlling- cash flow statement, income


statement, balance sheet
Monitoring and controlling is essential for maintaining business viability and affects all
aspects all aspects of business operations. The main financial controls used for
monitoring include cash flow statements, income statements and balance sheets.
To fully analyse and interpret the financial controls a number of basic formulas need to
be used including:

COGS = Opening Stock + Purchases Closing Stock (income)


Gross Profit = Sales COGS (income)
Net Profit = Gross Profit Expenses (income)
Owners Equity = Assets Liabilities (balance)
Total Equity = Owners Equity + Net Profit (balance)

Cash flow statement


A statement that summarises cash transactions that have occurred over a period of
time. Its purpose is to provide information about the cash inflows (receipts) and
outflows (payments). Users of cash flow statements include creditors (people who a
business owes money to) and well as owners and shareholders. In preparing a cash
flow statement, the activities of a business are generally divided into: operating
activities, investing activities and financing activities.
CASH FLOW STATEMENT
For Eastern Shores Restaurant (Coffs Harbour) ($ 000's)
Jan Feb Mar Apr May Jun

Jul Aug Sep Oct Nov Dec

Opening Balance

12

15

-4

-6

-8

-5

-3

10

Revenue

26

24

20

14

15

12

20

27

Expenses

20

20

17

14

15

11

16

10

12

10

15

Closing Balance

12

15

-4

-6

-8

-5

-3

10

22

Income statement

The income statement outlines the level of revenue (sales), cost of goods sold
(opening stock+purchases-closing stock) and operating expenses. It calculates
whether a business have made a profit or loss over a particular period of time, usually
a year.
Income Statement
Caroline-Anne's IT Supplies
For year ending 30 June 20X2
Sales

360 000

Less Cost of goods sold


Inventory 1 July

10 000

(+) Purchases

120 000

(+) Cartage inwards

4 000

(-)Inventory 30 June

8 000

126 000

Gross Profit

234 000

Less Operating Expenses


Selling/distribution expenses
Advertising

5 000

Depreciation

1 000

Wages

50 000 56 000

General expenses
Insurance

4 000

Rent

34 000

Utilities

6 000 44 000

Financial expenses
Interest on loan
Interest on mortgage
Net profit

Balance sheet

13 000
3 000 16 000

116 000
118 000

The balance sheet is a statement showing the total value of a business on a particular
day (snapshot). It is based on the accounting equation: Assets (A) = Liabilities (L) +
Owners Equity (E)
Balance Sheet
El-Caf Pty Limited
As at 31 December 2000
Current Assets
Cash

1 300

Accounts receivable

3 000

Inventory

3 000

7 300

Non-Current Assets
Plant and machinery

10 000

Buildings

140 000

Good will

50 000

Total Assets

200 000
207 300

Current Liabilities
Accounts payable

14 300

Overdraft

6 000

20 300

Non-Current Liabilities
Bank Loan

34 000

Mortgage

70 000

Total Liabilities

104 000
124 300

Owner's Equity
Capital

75 000

Retained Earnings

8 000

Total L & OE

83 000
207 300

Financial ratios
-liquidity- current ratio (current assets current liabilities)
-gearing- debt to equity ratio (total liabilities total equity)

-profitability- gross profit ratio (gross profit sales); net profit


ratio (net profit sales); return on equity ratio (net profit total
equity)
-efficiency-expense ratio (total expenses sales), accounts
receivable turnover ratio (sales accounts receivable)
-comparative ratio analysis- over different time periods, against
standards, with similar businesses
Liquidity
Liquidity is the extent to which the business can meet its financial commitments in the
short-term. The amount of current assets should be higher than debts.
Current Ratio (working capital) = Current Assets Current Liabilities
It is generally accepted that a business that has a current ratio of 2:1 is in a good,
stable financial position.
Gearing
Gearing measures the relationship between debt and equity. It is the proportion of
debt (external finance) and the proportion of equity (internal finance) that is used to
finance the activities of a business. Gearing ratios determine the firms solvency
(long-term debts).
Debt to Equity Ratio = Total Liabilities Owners equity
The higher the ratio, the less solvency of the firm/business (rely on debt more).
Lower=good.
Profitability
Profitability is the earning performance of the business and indicated its capacity to
use its resources to maximise profits.
GROSS PROFIT
Gross Profit Ratio = Gross Profit Sales X 100%
The amount of sales that is available to meet expenses. The higher the ratio, the
better.

NET PROFIT
Net Profit Ratio = Net Profit Sales X 100%
The profit or return to the owners. The higher the ratio the better.
RETURN ON EQUITY
Return on Equity Ratio = Net Profit Total Equity X 100%
How effective the funds contributed by the owners have been in generating profit. The
higher the ratio or percentage, the better the return for the owner.
Efficiency
Efficiency is the ability of the firm to use its resources effectively in ensuring financial
stability and profitability of the business. The more efficient the firm, the greater its
profits and financial stability.
EXPENSE
Expense Ratio = Total Expenses Sales X 100%
The amount of sales that are allocated to individual expenses, the lower the better,
the more efficient.
ACCOUNTS RECEIVABLE TURNOVER
Accounts Receivable Turnover Ratio = Sales Accounts Receivable X 100%
The effectiveness of a firms credit policy and how efficiently it collects its debts. High
turnover ratios indicate that business has efficient debt collection. The bigger the
number the worse it is.
Comparative ratio analysis
Over different time periods: comparing ratios for a business over various periods to
identify trends and assist with interpretation of ratio results.
Against common standards: such as industry averages and benchmarks to assist a
mangers interpretation and decision-making on the businesss performance.
With similar businesses: comparing ratios from businesses in the same industry and of
the same size will give further insight into the performance of a business.

Limitations of financial reports- normalised earnings, capitalising


expenses, valuing assets, timing issues, debt repayments, notes
to the financial statements
Normalised earnings
Earnings on the balance sheet are adjusted to remove unusual or one-off events to
show the true earnings of a company.
Capitalising expenses
Process of adding a capital expense to the balance sheet that is regarded as an asset
(in that it will add to the value of the company) rather than as an expense.
Valuing assets
The process of estimating the market value of assets or liabilities. Some assets
change value over time due to inflation and the market. Therefore it would have been
worth less in the past and would not reflect the true value.
Timing issues
Financial reports cover activities over a period of time, usually a year. Therefore, the
businesss financial position may not be a true representation if the business has
experienced financial fluctuations.
Debt repayments
Financial reports can be limited because they do not have the capacity to disclose
specific information about debt repayments, e.g. how long the business has had or
has been recovering the debt.
Notes to the financial statements
These are the details and additional information that are left out of the main reporting
documents, such the balance sheet and income statement.

Ethical issues related to financial reports


Businesses have a legal and ethical responsibility to provide accurate financial
records.
Ethical issues related to financial reports include:
Audits- independent check of the accuracy of financial records and accounting
procedures. There are three types of audits:

1. Internal: conducted internally by employees to check accounting


procedures and the accuracy of financial records
2. Management: conducted to review the firms strategic plan and to
determine if changes need to be made
3. External: conducted by independent and specialised audit accountants.

Record keeping- all accounting processes depend on how accurate and honest
data is recorded in financial reports
GST obligations- businesses have an ethical and legal obligation to comply with
GST reporting requirements
Reporting practices- accurate financial reports are necessary for taxation
purposes as well as for other stakeholders.
Businesses are to not make the business look better than it actually is by adding
revenues that do not exist
Businesses should show all liabilities and expenses in the balance sheets and
income statements
Accountants must display integrity, confidentiality and a high level of
professional and technical ability
Financial managers and accounts cannot be creative when recording
transaction and preparing financial reports in order to make the business appear
more profitable
Managers should not use the businesss credit cards for personal expenses

Financial Management Strategies


Cash flow management
-cash flow statements
-distribution of payments, discounts for early payment, factoring
Cash Flow Statements
Cash flow statements indicate the movement of cash receipts and cash payments
resulting from transactions over a period of time. They are also used to show the
trends of short-term and long-term cash inflows and outflows.
Management Strategies
Distribution of Payments: by spreading expenses over the whole year there is more
equal cash outflow each month rather than one huge outflow during one month.
Discounts for Early Payment: a business may offer discounts to encourage people to
pay their payments early to improve cash flow.
Factoring: the selling of accounts receivable for a discounted price to a finance or
specialist factoring company.

Working capital management


-control of current assets- cash, receivables, inventories
-control of current liabilities- payables, loans, overdrafts
-strategies- leasing, sale and lease back
Working capital is the funds available for the short-term financial commitments of a
business.
Working capital management is determining the best mix of current assets and
current liabilities needed to achieve the objectives of the business.
Current (working capital) ratio = current assets current liabilities
The current ratio of 2:1 or 200% is generally acceptable.
Control of Current Assets
Cash: it is the most liquid current asset in the business. It is important as it allows the
business to be able to pay its debts, loans and accounts in the short-term. Businesses
can increase their cash amount by sale and leaseback. However, too much cash can
be unproductive.
Accounts Receivable: the total amount of money that customers owe to the business.
The collection of accounts receivable is important in managing working capital.
Managing accounts receivable involves: checking the credit rating of prospective
customers, sending customers statements monthly and at the same time each month
so debentures know when to expect accounts, following up on accounts that are not
paid by the due date and putting policies into place for collecting bad debts.
Inventories: the total amount of goods or materials in a store or factory (stock).
Inventory control involves a balance between too much and too little stock. Strategies
involved in the management of inventory include: regular and ongoing stocktaking,
control systems (e.g. JIT), use of sales to convert stock into cash and limiting staff
access. In order to remain solvent the business needs to manage their inventories.
Control of Current Liabilities
Accounts Payable: sums of money owed by the business to its suppliers (creditors).
Some strategies include payment on time (to avoid late fee charges), taking
advantage of early payment discounts and maintain a good credit rating for
continuing access to lines of credit provided by suppliers.
Loans: sums of money that are borrowed from financial institutions for the purpose of
funding such things as property and equipment. Control of loans involves comparing

the cost of the loan to other sources of finance to find that most appropriate and cost
efficient source.
Overdrafts: a relatively cheap and convenient form of short-term borrowing.
Businesses may control overdrafts by ensuring that all cash received is promptly
deposited in the businesss account to reduce the amount owing.
Strategies
Leasing: the hiring of an asset from another person or company. By leasing assets the
business maintains more working capital to invest in other assets and opportunities
for expansion of the business.
Sale and lease-back: involves the selling of assets such as buildings and equipment
and leasing them back from the purchaser. This increases a businesss liquidity as the
cash that is obtained from the sale is used as working capital.

Profitability management
-cost controls- fixed and variable, cost centres, expense
minimisation
-revenue controls- marketing objectives
Profitability management: involves the control of both the businesss expenses and its
revenue.
Cost controls
Fixed and Variable costs: fixed costs do not change when the levels of activity
changes, e.g. rent, insurance. To minimise fixed costs it is essential to negotiate
satisfactory arrangements initially or to take advantage of discounts for early
payments. Variable costs change proportionally with the level of operating activity in a
business, e.g. advertising, employee wages, overtime payments. Strategies to reduce
variable costs include: negotiating discounts with all suppliers, reducing the number of
suppliers and/or switching to a cheaper supplier.
Cost Centres: the expenses associated with each key business function. Businesses
attempt to control costs by allocating a proportion of total costs (direct and indirect) to
particular parts of the business. These cost centres are then responsible and held
accountable for the costs that they incur.
Expense Minimisation: the reduction of costs and expenses in order to maximise the
profits and gain a competitive advantage. Strategies include outsourcing, sales and
lease-back, replacing labour with technology and improving budget and accountability.
This is done to reduce expenses consuming valuable resources within the business.
Revenue controls

Marketing Objectives:
Sales objectives- the link between the marketing plan and the financial plan.
Sales targets are to maximise sales, increase the turnover of stock and
maximise revenues. Need to set targets to generate maximum revenue.
Sales mix- the range of products and services sold by the business. Businesses
should control this by maintaining a clear focus on the important customer base
when deciding whether to diversify or extend product ranges or ceasing
production. Need to review each products profit-margin contribution
Pricing policy- is necessary as the setting of prices is a complicated task and
staff need to be aware of the business strategy for pricing. The main aim of
pricing policy is to balance sales with profits. Pricing decisions should be closely
monitored and controlled. Overpricing could fail to attract customers, while
under-pricing may bring higher sales but may still result in cash shortfall and
low profits. Need to review price penetration, price skimming, price points and
discounts.

Global financial management


-exchange rates
-interest rates
-methods of international payment- payment in advance, letter of
credit, clean payment, bill of exchange
-hedging
-derivatives
Global financial management refers to the strategies implemented by businesses to
deal with the export component of the business activities.
Exchange Rates
The foreign exchange rate is the ratio of one currency to another; it tells us how much
a unit of one currency is worth in terms of another. Exchange rates fluctuate over time
due to variations in demand and supply. Such fluctuations in the exchange rate create
further risk for global businesses. Currency fluctuations will impact on the revenue
profitability and production costs.
A currency appreciation raises the value of the Australian dollar in terms of foreign
currencies. This means that each unit of foreign currency buys fewer Australian
dollars. However, one Australian dollar buys more foreign currency. Therefore, an
appreciation makes our exports more expensive on international markets but prices
for imports will fall. The result of the appreciation reduces the international
competitiveness of Australian exporting businesses.
A current depreciation lowers the price of Australian dollars in terms of foreign
currencies. Therefore, each unit of foreign currency buys more Australian dollars. The
result is that our exports become cheaper and the price of imports will rise. An

depreciation, therefore, improves the international competitiveness of Australian


exporting businesses.
Interest Rates
Interest rates can have an impact on the willingness and ability of businesses to
invest in business activities, and of customers to purchase goods and services. Low
interest rates reduce borrowing costs and encourage expansion. High interest rates
increase borrowing costs and discourage expansion. It is therefore important to find
the lowest interest rate, as exchange rate fluctuations can make repayments more
costly.

Methods of International Payment


Payment in advance: the exporter/seller receives payment by the buyer before the
products are sent. There is a risk of the goods not being sent.
Letter of credit: commitment where the buyer/importers bank promises to pay the
exporter a specified amount when the documents proving shipment of goods are
presented.
Clean payment: the goods are shipped before payment is received. This is used when
businesses and their exporters have a good relationship and history.
Bill of exchange: a document written by the exporter demanding payment from the
importer at a specified time. This method of payment allows the exporter to maintain
control over the goods until payment is either made or guaranteed.
Hedging
Hedging is the process of minimising the risk of currency fluctuations. Hedging helps
reduce the level of uncertainty involved with international financial transaction.
Derivatives
Derivatives are financial instruments that support a businesss hedging activities. It is
a financial contract that is based on the future market value of an asset such as a
commodity, shares or currency. The main purpose is to reduce risk for one party. They
include:
1. Forward exchange contracts= the bank will guarantee the exporter a certain
exchange rate on a certain rate.
2. Currency option contracts= gives the buyer the right to buy or sell foreign currency
at some time in the future.
3. Swap contracts= an agreement to exchange currency in the spot market to reverse
the transaction in the future.

Human Resources
Role of human resource management
The management of the total relationship between employer and
employee.
Strategic role of human resources
Ensures that the business has well trained staff that will benefit the business in the
long-term. By being proactive and adopting a long-term approach, managers may
seek to improve a diverse range of human resource issues within the business, e.g.
policies and practices. The business must also develop appropriate performance
review measures to examine the effectiveness and efficiency of their employees.

Interdependence with other key business functions


Operations:
The operations function works closely with human resources to ensure that the
business has recruited staff with the relevant skills and experience. Additional workers
may be required depending whether finance allows it.
Marketing:
The human resource is related to marketing as staff must be motivated and skilled to
develop products. It is also through marketing that businesses are able to determine
the skills required for employees to produce the desired product. Marketing may
require additional managers which need to be sourced.
Finance:
The human resources is related to finance as budgets are often established that
allocate funds towards training and workplace education issues. Human resources
must also work within these budgets to provide for the needs of its employees. A

decline in the hiring of new employees may be present to ensure the business is
liquid.

Outsourcing
-human resource functions
-using contractors- domestic, global
Outsourcing- when a company takes a part of its business functions and gives it to
another company to complete.
Human resource functions
The human resource function is the second most frequently outsourced after
information technology.
The most commonly outsourced human resource functions include: recruitment,
induction, leadership training, mediation, outplacement and payroll. However,
businesses need to realise that outsourcing may not solve the problems that it was
supposed to. There are a number of disadvantages involved in outsourcing human
resources including: cost saving are not always achieved, employee unrest, problems
with outside HR provider, loss of control, and reasons for outsourcing the HR function
are not clear.
Using contractors
A contractor works for many employers as once the contract has been completed they
are free to offer their services to any other business. Contractors have independence
and are not subject to the regulations and directives of the business.
Domestic: domestic subcontracting is very common and avoids the need to employ
additional in-house staff, along with all the overhead expenses involved. Some risks
include: loss of customer contact.
Global: using global contractors as an external provider of services allows the
Australian business to access the use of labour without having to consider issues such
as minimum labour requirements and WH&S.

Key influences
Stakeholders- employers, employees, employer associations,
unions, government organisations, society
Each stakeholder seeks to protect and promote its own interests.
Employers
The individual or organisation that pays others to work for them. They are often the
owners and take responsibility in the organisations goals. They handle HR
management on a daily basis. Employers responsibilities are increasing due to recent
legislation requiring them to resolve disputes and negotiate agreements.

Employees
An individual who provides his or her skills to a business in return for a regular source
of income. They are now considered in the decision making process and workers can
now work from home to accommodate a work-life balance. Labour shortages are
looming due to aging population.
Employer associations
Organisations that aim to promote the interests of employers within the business
environment. They lobby governments to develop policies that enhance the interests
of the employer and consult with governments on changes to key policy issues. They
provide advice, negotiate agreements and make submissions to safety net wage
cases.
Unions
Are organisations formed by employees in an industry, trade or occupation to
represent them in efforts to improve wages and working conditions for members. They
provide representation in disputes, free or discounted legal services, superannuation
schemes, cheap home loans, training through TAFE, insurance and WH&S advice.

Government organisations
Government departments oversee legislation relating to employment relations. They
establish the legal framework by which employers, employees and trade unions
coexist and operate within the employment relationship.
Society
Workplace practices are reflective of behaviours that are upheld within society. Issues
such as discrimination and harassment are becoming publicised. Businesses must act
consistent with the views of society.

Legal- the current legal framework


-the employment contract- common law (rights and obligations of
employers and employees), minimum employment standards,
minimum wage rates, awards, enterprise agreements, other
employment contracts
-occupational health and safety workers compensation
-anti discrimination and equal employment opportunity
The employment contract
Is a legally binding formal agreement between employer and an employee. A written
contract is more protective than verbal.

Common Law (rights and obligations of employers and employees)


Common law is developed by courts and tribunals. Under common law employers and
employees have basic obligations in any employment relationship.

Employer obligations= providing work, payment of income and expenses,


meeting requirements of industrial relations legislation and duty of care.

Employee obligations= obey lawful and reasonable commands by the employer,


use care and skill in the performance of their work activities and act in good
faith.

Minimum employment standards


The standards cover basic rates of pay and casual loading, maximum ordinary hours
of work, annual leave, personal leave and parental leave. The employment standards
are implemented to provide safety for employees.
Minimum wage rates
The employees base rate of pay is determined by:
- The award or agreement that overs the employee
- The national wage minimum.
Awards
Awards are legally binding documents containing minimum terms and conditions of
employment in addition to any legislated minimum terms for an industry or
occupation. They may include minimum wages, penalty rates, types of employment,
flexible working arrangements, hours of work, rest breaks, classifications, allowances,
leave and leave loading, superannuation, redundancy entitlements and procedures for
consultation. They are established through negotiations between employers and
associations.
Enterprise agreements
Enterprise agreements are collective arrangements made at workplace level between
an employer and a group of employees about terms and conditions of employment.
Other employment contracts
As the nature of work changes, greater variety is occurring in the types and features
of employment contracts available.

Individual common law employment contracts= exist when an employer and an


individual employee negotiate a contract covering pay and conditions.

Independent contracts= known as consultants, undertake work for others;


however, they do not have the same legal status as an employee.

Contracts for casual work= receive no holiday or sick leave entitlements.

Work Health and Safety


WHS legislation is the process of being made uniform around Australia to improve
business productivity. Employers must provide a safe system of work, ensure
employees are trained and supervised in their work.
Workers compensation
Provides a range of benefits to an employee suffering from an injury or disease
sustained by their work.
Anti-discrimination
Involves reducing harassment and vilification. All employers must implement antidiscrimination legislation to avoid large fines, legal orders and damages, and loss of
reputation.
Equal employment opportunity
Refers to equitable policies and practices in recruitment, selection, training and
promotion to eliminate direct and indirect discrimination.

Economic
Economic factors impact on the demand for labour and the pressure of wage growth.
It involves the economic cycle, inflation and globalisation. Globalisation has increased
competitive pressures on businesses with many increasingly recruiting or outsourcing
functions offshore.

Technological
Changes in technology require employees to be trained in new technology. It can lead
to: increased levels of productivity, lower costs and improved profitability. It can
however lead to job losses and employees can lead to feeling less valued.

Social- changing work patterns, living standards


Today there are more multicultural workplaces and more working women. Many
employees also want to achieve a balance between work and family.
Changing work patterns
The workforce is increasingly more flexible in working arrangements, with a recent
dramatic increase in part-time and casual work.

Living standards
Australias high living standards include: WH&S, regular wage increases, performance
bonuses, fringe benefits and leave and superannuation benefits. There is pressure
from global competition and conflict for desire of high living standards and work-life
balance.

Ethics and corporate social responsibility


Ethical business practices are those practices that are socially responsible, morally
right, honourable and fair. CSR is the commitment by companies to behave ethically
and to contribute to economic development, while improving the quality of life of the
workforce and their families, as well as the local community and society at large.

Processes of human resource management


Employment Relations: the function that deals specifically with the relationships
between the employer and the employees of the business. The role of employment
relations is to provide the business with the workforce it requires. They also aim to
find, attract, develop and motivate the people who can provide services the business
requires.
The human resource cycle involves acquisition, development, maintenance and
separation of employees. It involves acquiring people with skills for the job and the
continued development of employees knowledge and capabilities. The cycle also
involves providing incentives for effective, reliable employees to remain motivated
and to stay within the business.

Acquisition
Acquisition is the obtaining of employees. It requires the manager responsible for
employment relations to make decisions about and take action on planning the
organisations human resources needs, recruiting staff and selecting staff.
Acquisition involves analysing the internal environment (businesss goals and culture,
focus on cost containment, growth, downsizing, improved customer service or quality)
and the external environment (economic condition, competition, technology, and the
legal, political and social factors).
Recruitment: the process of locating and attracting the right quantity of staff to
apply for employment vacancies or anticipated vacancies at the right cost.
Selection: involves gathering information about each applicant and using that
information to choose the most appropriate applicant.
Placement: involves locating the employee in a position that best utilises the skills of
the individual to meet the needs of the business.

Development

Development is concerned with improving employees skills and knowledge to


improve performance and productivity.
It involves induction, training, organisational development, mentoring and coaching,
and performance appraisals.
Induction:

Gives employees a positive attitude to the job and the business


Builds a new employees confidence in the job
Stresses the major safety policies and procedures, and explains their application
Helps establish good working relationships with co-workers and supervisors

Training:

The aim of training is to seek a long-term change in employees skills,


knowledge, attitudes and behaviour on order to improve work performance in
the business.
It is essential in overcoming business weaknesses, building on strengths and
maintaining staff commitment.
It involves educating an employee in the skills and processes of the job they
currently have.

Organisational development:

Businesses are using flatter structures to improve efficiency and competiveness


by creating more opportunities for employees to innovate and participate in
solving business problems.
Strategies to help motivate and retain talented staff include: job enlargement,
job rotation, job enrichment, job sharing, self-managing teams and mentoring
and coaching.

Mentoring and coaching:

Used to motivate and develop staff with leadership potential.


Mentoring= mutually agreed role, focused on building a personal relationship
that encompasses the life experience of both parties
Coaching= focused on improving skills and performance and on helping
individuals manage specific work roles more effectively.

Performance appraisals:

Is a systematic process of accessing the performance of en employee, generally


against a set of criteria or standards.
Is used to evaluate employee performance, and identify areas for mentoring,
coaching, leadership development or performance management to enable the
employee to contribute most effectively to a businesss success.

Maintenance

Maintenance is concerned with building a long-term relationship with the employee


and focuses on the processes needed to retain staff and manage their wellbeing at
work.
Communication and workplace culture:

Effective workplace relations depend heavily on the strength of a businesss


communications systems.
Poor communication is often reflected in workplace conflict and high turnover
rates.
Strategies to improve communication and workplace culture involve: changing
the layout of offices to increase communication, being interactive and walking
around, and implementing various team building activities.

Employee participation:

Businesses encourage employee participation to improve communication,


empower employees and develop their commitment to improving quality and
efficiency.
Regular team meeting/briefings to discuss customer feedback, company trends
and issues helps to build a sense of shared purpose and company identity.

Benefits:

Benefits may be monetary (money) in value or non-monetary.


Typical benefits include: flexible working arrangements, paid training
opportunities, travel allowances, health insurance, subsidised gym
memberships, housing and company car.
Employers are responding to employees desires for a work-life balance with
more flexible working arrangements.

Legal compliance and corporate social responsibility:

Anti-discrimination
Equal Employment Opportunities
Work, Health and Safety
Taxation
Social justice legislation
Bullying and sexual harassment

Separation
Separation is the ending of an employment relationship and can be either voluntary or
involuntary. Voluntary separation may take the form of resignation, relocation,
voluntary redundancy or retirement. Involuntary separation may take the form of
contract expiry, retrenchment or dismissal.
Dismissal:

Occurs when the employer terminates an employees employment contract due


to unacceptable conduct or behaviour of the employee.

It can also be based on poor performance or redundancy due to organisational


restructuring, a downturn in business or technological change.

Unfair Dismissal:

Unfair dismissal occurs when an employee is dismissed by their employer and


they believe that action is harsh, unreasonable or unjust.

Strategies in human resource management


Leadership styles
Authoritarian:

Long chain of command


Managers lead
Employees cannot contribute to the decision-making process
Decisions made quickly

Participative/Democratic:

Involves employees in the decision-making process


Encourages employees to become empowered

Delegative:

Allows the employees to make decisions


Employers trust employees to make the right decisions

Job design- general or specific tasks


General or Specific Tasks:
Job Design: the process of developing the content of the job and how it will interact
with other jobs and employees, so as to motivate and retain employees and to
achieve the business objectives.

Several methods used to design for better jobs:

Job enrichment- employees are provided with challenging tasks, responsibility,


autonomy and decision-making power.
Job rotation- employees move around to perform a number of varied tasks
during a day or week-reduces boredom
Job enlargement- employees are given additional tasks to increase the variety
and challenge involved in a position.
Semi-autonomous work groups-increases skills and team work
Cross functional, team based matrix structures
Flexible work structures

Recruitment- internal or external, general or specific skills

Recruitment: the process of locating and attracting the right quantity and quality of
staff to apply for employment vacancies or anticipated vacancies at the right cost.
Internal or External Recruitment:
Internal: involves filling job vacancies with people from within the business.

Advantages- incentive for staff to improve their performance, promotions seen


as a reward for hard work, cheaper than external
Disadvantages- staff overlooked may lose motivation, can reinforce negative
culture

External: involved filling job vacancies with people from outside the business.

Advantages- wider applicant pool, business is encouraging new ideas, more


diversity in employment, get specific skills needed
Disadvantages- risk of unknown staff, may take time to settle in, takes a lot of
effort and time

General or Specific Skills:


Can be recruited for general or specific skills.
General= attitudes and behaviours that are a good cultural fit for the business, job
customised to suit individual, flexibility, social confidence, positive attitude,
motivation, ability to work as a team, etc.
Specific= recruiting overseas or outsourcing, employee poaching (the practice of
enticing employees to work for another business) is commonly used.

Training and development- current or future skills


Current or Future Skills:
-

The means by which a business is able to provide its employees with an


avenue to develop and enhance their knowledge, skills and understanding of
various activities related to the operations of a business.
Training aims to develop skills, knowledge and attitudes that lead to superior
work performance.
Development is focused on enhancing the skills of the employee in line with
the changing and future needs of the business.
Businesses need to consider the mix of skills they can develop internally and
those for which they need to recruit.

Performance management- developmental or administrative


Performance Management: a systematic process of evaluating and managing
employee performance in order to achieve the best outcomes for a business.
Objectives:

Evaluate an individuals performance


Use that information to develop the individual

Benefits:

The employee has an improved understanding of their role and what needs to
be done.
The employer is able to identify and problems
Allows the employee to be aware of their personal goals

Developmental:

Focused on using data to develop the individual skills and abilities of employees,
so they improve their effectiveness in their role, overcome weaknesses and are
prepared for promotion.
Year round periodic feedback and shared discussion that is both emphatic and
goal focused

Administrative:

Provides information often following an annual appraisal, which can be used by


management for planning in human resource functions such as training,
development, rewards, pay levels, benefits and performance improvements.
Focus on collecting data to manage human resource management function
more efficiently.

Rewards- monetary and non-monetary, individual or group,


performance pay
Rewards motivate all employees to work to their potential and cooperate with each
other to achieve the goals of the business.
Monetary or non-monetary:
Monetary: those reflected in pay or having financial value.
Non-monetary: those that do not have a financial value, e.g. social activities,
retirement planning
Intrinsic: those that the individual derives from the task or job itself, e.g. sense of
achievement
Extrinsic: those given or provided outside the job itself.

Individual or group:

Individual rewards can lead to conflict and rivalry


High quality work is achieved by an individual with the reliance on other and
other systems therefore the induction of group awards
A fair rewards system can encourage a greater sense of team work
Employees can become more motivated

Performance pay:
The process of linking part of an employees income to their performance at work

This concept recognises that employee motivation comes from financial benefits
Advantages= performance may improve, it encourages unmotivated staff and
inefficient individuals
Disadvantages= the performance of employees may be difficult to measure for
some jobs, some employees may seek non-financial rewards.

Global- costs, skills, supply


Costs, Skills, Supply:

More companies are entering international markets by exporting their products


overseas
Access to a cheaper workforce that possesses the required skills will be a key
consideration for a business
The ability of labour to learn new skills will be affected by the countrys
education system.

Polycentric Staffing Approach:


-

Uses host-country staffing with parent-country staff in corporate


management at its headquarters.
Helps the company access good market knowledge
Often cost effective
Satisfies local pressure for employment opportunities
May limit management experience for host-country staff

Geocentric Staffing Approach:


-

Uses the staff with the most appropriate skills for a particular role and
location
Builds a pool of managers with global experience
Can be complex and expensive- local employment regulations, relocation and
retraining costs.

Ethnocentric Staffing Approach:


-

Uses parent-country staff in its business


May limit ability to interact with customers and learn from overseas markets

Workplace disputes
-resolution- negotiation, mediation, grievance procedures,
involvement of courts and tribunals

Disputes: conflicts, disagreements or dissatisfaction between individuals and/or


groups.
Industrial Dispute: a disagreement over an issue or group of issues between an
employer and its employees which results in employees ceasing work.
Resolution of Disputes:
Negotiation- a method of resolving disputes when discussions between the parties
result in a compromise and a formal or informal agreement
Mediation- the confidential discussion of issues in a non-threatening environment, in
the presence of an objective third party.
Grievance Procedures- formal procedures generally written into an award or
agreement that state agreed processes to resolve disputes in the workplace.
Involvement of Courts and Tribunals

Conciliation- a process where a third party is involved in helping two other


parties reach an agreement
Arbitration- the process where a third party hears both sides of a dispute and
makes a legally binding decision to resolve disputes
Orders- decisions that require employees or employers to carry out a direction
from the tribunal. They may be inserted in awards or agreements.

Effectiveness of human resource management


Indicators
-corporate culture
-benchmarking key variables
-changes in staff turnover
-absenteeism
-accidents
-levels of disputation
-worker satisfaction
Indicators are performance measures that are used to evaluate organisational or
individual effectiveness. Many businesses use a range of indicators to reflect on the
effectiveness of the human resource functions.

Corporate Culture:
Refers to the values, ideas, expectations and beliefs shared by members of the
business.
The indicators that reveal a workplace has a poor corporate culture include:

High staff turnover


Poor customer service
High levels of absenteeism
Accidents
Disputes and internal conflicts

Benchmarking Key Variables:


Benchmarking is a process in which indicators are used to compare business
performance between internal sections of a business or between businesses.

Involves measuring employees performance against established standards


Aiming to achieve best practice
Uses real facts and figures rather than assuming
Benchmarking methods: performance appraisals, productivity levels,
management consultants to come in and use benchmarks.

Changes in Staff Turnover:


Refers to the number of employees leaving an organisation relative to the number
that have been employed.

High turnover rates indicate that employees are dissatisfied with their job, that
there is a problem with HR in the organisation and poor employment relations
High rates lead to a loss of productivity, profitability, corporate knowledge and
skills

Absenteeism:
Refers to employee absences, on an average day, without sick leave or leave
approves in advance.

High levels may indicate: workers are dissatisfied, conflict within workplace,
stressed, sickness, and personal needs/family issues.

Accidents:

Approx. 5.3% of Australias 12 million employees experience a work-related


injury or illness each year.
A low level of accidents indicate effective human resource strategies

Level of Disputation:

Disputes or disagreements can be costly to a business.

The greater number of disputes the more likely that the workforce is unhappy or
there is a poor working relationship between the employer and employee
Disputes may arise as a result of managerial policy, discrimination and use of
outsourcing
Formal grievance procedures are an indicator of poor quality relationships in the
workplace

Worker Satisfaction:
Refers to whether employees are happy and content and fulfilling their desires at work

Employee satisfaction is a key factor in developing a committed and motivated


workforce
Satisfied employees often work more efficiently and value the organisation that
they work for
Employee satisfaction is improved by matching the purpose of the business with
the skills and cultural fit of the employee