CIMA E1 2020 Notes PDF

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Managing
Finance in a
Digital World
(E1)
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CIMA 2020 Exams Watch free CIMA E1 lectures 1
CIMA E1
Managing Finance in a Digital World
Overview of Paper E1 3
1. The Finance Function in the Digital Age 5
2. The Finance Functions 11
3. Technology and Information 19
4. Operations Management 35
5. Management of Relationships Within the Supply Chain 41
6. Process Technology and Quality control 45
7. Marketing – its Nature and Purpose 51
8. Marketing Tools 63
9. Human Resource Planning (1) 73
10. Human Resource Planning (2) 77
11. Ethics 85
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OVERVIEW OF PAPER E1
The syllabus consists of the following sections
A The role of the finance The finance function splits into a number of categories:
function financial accounting, management accounting, treasury,
financial planning etc. This section introduces the role of the
various components of the finance function.
B Technology in a digital world This section looks at new technologies, what they are and
how they affect the finance function.
C Data and information in a How the finance function can use data and communicate
digital world information.
D Shape and structure of the The various new technologies alter the shape of the finance
finance function function. Fewer employees are needed for the routine
recording of transactions and more are employees are
engaged in interpreting and using the results of information
technology operations.
E Finance interacting with the Finance sits at the centre of a web and interacts and
organisation communicates with every other function and department, in
particular supply chain management, marketing, human
resources and IT.
Chapter 1
THE FINANCE FUNCTION IN THE DIGITAL
AGE
1. The digital mindset

1.1. What is a mindset?
A mindset is an established set of attitudes and assumptions that is held by someone.
At one time, a single, static mindset could do you for life. Nothing in the environment, the
marketplace or technology changed very much so a single set of rules would be suitable for your
thought processes and business activities throughout your life.
That static environment has changed to a very dynamic one where markets, competitors, economies
and technology all rapidly and continually change and the old fixed mindset will not do. Instead it
must be willing to learn, adapt and change. It can be called a ‘growth mindset’ where the term
‘growth’ applies to individuals being willing to learn, develop, respond to challenges and to solve new
problems.
A digital mindset is simply one where accountants are continually aware of and alert to how digital
technology will affect both them and the organisations they work for. Many of the potential effects are
covered later in these notes, but a short list of relevant technology would certainly contain topics such
as:
๏ Big data
๏ Automation
๏ 3D printing
๏ Artificial intelligence
๏ Connectivity
๏ Social media
1.2. Skills needed by accountants
Accountant’s carry out a range of functions and not all are equally susceptible to automation.
McKinsey, a firm of management consultants, in their July 2016 quarterly bulletin have suggested the
following:
Function Data Data Applying Stakeholder Managing

collection processing expertise interactions others
Potential for
64% 69% 18% 20% 9%
automation
Almost certainly these percentages would be changed if the investigation were carried out today. In
particularly, the rapidly advancement of artificial intelligence will undoubtedly have raised the
amount of automation that can be expected in the ‘Applying expertise’ section.
CGMA briefing paper “Changing competencies and mindsets” suggests that Accountants will require:
๏ Technical skills relating to finance and accounting. Not only will accountants have to apply
these skills themselves, but if a task is automated or executed using artificial intelligence,
accountants will have a say in whether the automation and AI processes are being carried out
correctly and are producing useful information for decision-making. Roughly, technical skills
cover the first two functions set out above (data collection and data processing) and also some
of applying expertise.
๏ Business skills, such as judgement, commercial acumen, awareness of market development
and of environmental and technical changes. Roughly, business skills will align with applying
expertise as expertise can only be properly applied within particular business contexts.
๏ People skills. For example, technical skills of an accountant might produce an analysis that
clearly shows that the production of a component should be outsourced. Obviously, that will
have an impact on managers and employees currently involved in producing the component in-
house. Therefore, the accountant needs to exercise diplomacy, persuasion and consensus-
building if the logic of the analysis is to be accepted (though perhaps still with reluctance). This
pretty well aligns with stakeholder interactions, above.
๏ Leadership skill. Ideally, these skills follow on directly from people skills: most good leaders (but
not all) have good people skills. Leadership skills can be summed up as the ability to motivate
and inspire staff so that the organisation can be enthusiastically transformed, when necessary, to
deal successfully with changed futures. This aligns with managing other, above.
2. The shape of the finance function

2.1. The triangle
The early shape was a triangle that represented a simple hierarchy.
At the top was the finance director then, as you descend through the triangle, there would be the
chief accountant, heads of accounts receivable, accounts payable, wages and salaries all the way
down to junior accounting staff who would be recording and posting the transactions. Essentially, the
triangle represents a traditional organisation chart:
Finance director
Chief financial accountant Chief management accountant Treasury
Accounts Accounts ...... Budgets Capital projects .... Foreign

Receivable Payable . . exchange
. . . . .
. . . . .
Accounts Accounts Accounts Accounts staff Accounts
staff staff staff staff
It can be developed to represent groups or divisions, in which case it could look like:
Finance director
Division 1 Division 2 Division 3 etc
Financial controller Financial controller Financial controller
Accounts staff Accounts staff Accounts staff
2.2. The segregated triangle
Here, the split in the triangle represents the idea that as businesses grew, perhaps becoming global,
they could make use of communications and IT technology to set up shared service centres (the lower
part of the triangle). For example, a global company could decide to handle all transaction recording
in India or Germany etc. This can make the processing more efficient and cheaper because of benefits
that should arise from economies of scale.
2.3. The hexagonal structure (CGMA “The changing shape of the finance
function”)
Level 1 Leading the

finance team
Partnering for value to influence

and shape how the organisation
Level 2 creates and preserves value
Specialists generating further

Level 3 insights in their areas of specialism
Assembling and
Level 4 extracting data and
providing limited
insight
The tasks at Level 3 and Level 4 are mostly clerical. For example:Level 4’s collecting, assembling and
extracting data could be describing the production of an aged analysis of the receivables ledger. This
level is primarily concerned with gathering the information needed.
Level 3’s uses data processing to generate of further insights into the data. For example, it could
include tasks like carrying out ‘what-if?’ experiments or sensitivity analysis on investment projects.
This level helps decision-making and makes intense use of analytical techniques.
It is claimed that many of these Level 3 and Level 4 tasks are already automated or will soon be
automated. Note that managers still need to be involved at these levels so that the further use of
technology can be promoted.
Level 2, uses the results arising from Level 3. This requires the application of expertise and experience
so that good decisions can be made based on the data analysis. Stakeholders have to share in
understanding the financial information and might have to be persuaded to support certain decisions.
Level 1, is the management layer. Organisational change will be a constant feature and management
must keep the structure, skills, processes and and technology under review
Unlike the traditional triangular shape where most people are at the bottom, often performing
relatively menial tasks, Level 4 and Level 3 are now smaller (because of automation) and the greatest
number of people in the finance department are now at Level 2: higher level functions where
decisions are made using the information collected, recorded and prepared lower down the structure.
The flat top of the structure implies more collaboration at that level.
The change in structural shape have been driven by:
๏ Changes in the role of the finance department, where there is now more emphasis on
management (and management accounting) and less emphasis on (financial) accounting.
Because the finance department is involved in almost every aspect of a organisation it can have
a unique holistic view of the business: manufacturing, purchasing, invoicing, cash flow,
investment appraisal, performance measurement etc. Hence the use of the term ‘partnering for
value’: this can refer to external partners but it certainly refers to internal partners such as
departmental heads who have to embrace decisions and plans.
๏ Technology. Routine processes are automated, big data analytics help the organisation to make
more accurate predictions. Artificial intelligence will continue to make in-roads into the demand
for accountants’ higher skills, or at any rate, the number of skilled accountants who will still be
needed.
Chapter 2
THE FINANCE FUNCTIONS
1. Introduction
This chapter covers:
๏ The purpose of the finance function and its relationships with other parts of the organisation
๏ How the finance function supports the organisation’s strategies and operations.
Overall the finance function is responsible for:
๏ Accounting operations
๏ Analysis
๏ Planning
๏ Decision making
๏ Control
2. The components of the finance function

2.1. Introduction
The components of the finance function are, in general:
๏ Financial accounting
๏ Management accounting
๏ Financial planning and analysis
๏ Project management and appraisal
๏ Treasury
๏ Internal audit
2.2. Financial accounting
This function is responsible for producing the organisation’s financial statements (statement of
financial position, statement of profit or loss, cash flow statements, notes and movements on equity).
It is also responsible for maintaining the double entry system (and memorandum items) of the
organisation:
๏ Nominal or general ledger.

๏ Cash book (and perhaps petty cash book also. These are books of prime entry also).
๏ Receivable ledger (details of customers who owe money).
๏ Payables ledger (details of suppliers to whom money is owed).
๏ Non-current asset register (details of non-current assets).
๏ Sales day book (a book of prime entry in which credit sales are first recorded).
๏ Purchases day book (a book of prime entry in which credit purchases are first recorded).
Transactions are recorded in these books more or less as they occur and the financial accounting
system deals with the recording of historical transactions.
The financial statements are produced from the nominal ledger as each account ends up on either the
statement of financial position or the statement of profit or loss.
In most countries, businesses have to produce annual financial statements. These are needed for tax
purposes but also they are published so that shareholders of the company (the company’s owners)
can see how it has been doing. To add credibility to the financial statements, they will often be
audited (ie checked over) by independent outside auditors.
The financial statements have to follow detailed rules and regulations about lay-out and disclosures
made.
It is generally the financial accounting department which is closely associated with the organisation’s
system of internal control. The internal control system is there to try to prevent, detect and correct
errors that might occur and also to ensure that the organisation’s assets are safeguarded. The last
function is sometimes known as ‘stewardship’. The directors, managers and other employees have a
responsibility to look after the company’s assets on behalf of the shareholders. Examples of typical
internal controls in place to do this are:
๏ Inventory should be locked in store rooms and only issued upon proper authorisation
๏ Cash should be banked soon after receipt
๏ Purchase invoices need to be checked to ensure that goods were ordered and received
๏ Payments to suppliers should be authorised only after the company is sure proper goods have
been received.
๏ Overtime should be authorised by managers not self-certified.
๏ Credit should be given to customers only after credit checks.
๏ The price of shares is often affected by the information in the financial statements, so a better
than expected profit will usually increase the share price.
2.3. Management accounting
Unlike the documents and reports produced for the financial accounting system, management
accounting reports are not governed by regulation. Also, whereas financial accounting deals with the
recording of transactions that have happened, much of management accounting also looks to the
future, for example, by drafting budgets.
Typical management accounting functions are:
๏ Drafting budgets for profits, statement of financial position and cash flow. Budgets are rarely for
less than a year and will normally be broken down month by month. Often, longer range
budgets are also estimated, such as for three years. These are useful in the long-range planning
and funding of the business.
๏ Comparing actual results to budgets and investigating the reasons for differences. The
differences between budgets and actual result are known as variances.
๏ Working out the cost of units produced and controlling those costs.
๏ Advising on the selling prices of units produced (should be greater than cost!)
๏ Working out the effects of business decisions such as outsourcing production, setting up an
overseas operation or closing a factory.
๏ Calculating break-even points for products.
Management accounts (results so far, variance analyses and budgets) are usually prepared and
presented to the board once a month so that timely action can be taken if something is going wrong.
Management accountants are also responsible for evaluating capital investments. For example, if a
new factory is built now that should produce income over the next 10 years, special investment
appraisal techniques such as discounted cash flow calculations are needed to deal properly with the
long time-scale of the investment. Often there is insufficient funds available to take on all worthwhile
capital projects so the management accountant can become involved in helping the board to decide
on how best to invest.
Budget-setting and analysis are a key functions of management accounting. Budgets can be regarded
as quantified plans and they achieve or force, the following:
๏ Forecasting: if you are going to draft a budget you are forced to look ahead. You won’t see every
problem, but forecasting should alert you to some future difficulties. Forewarned is forearmed.
๏ Planning: based on the forecast, plan can be made. For example, is there enough production
capacity to meet forecast sales. If not, create more facilities or arrange to buy in products.
๏ Co-ordination: a sub-set of planning. There is no point in having production capacity of on
million units if distribution can handle only 500,000 units.
๏ Communication: the budget, as it is gradually broken down into smaller and smaller sections,
communicates exactly what is expected to each division, department, cost centre and person.
๏ Control: if there is no budget how does the company know that costs are being incurred
properly?
๏ Authorisation: a budget figure can be authorisation to send and can be a way of delegating
responsibility. For example, if the advertising budget is $3.5m, then the advertising department
knows it can spend up to that amount and can get on with using that money in the best way it
can.
๏ Motivation: a budget acts as a target and, provided it is not impossibly difficult, this can motivate
employees to hit their budgets.
๏ Evaluation: compare actual results with the budget (target) and this can be used to evaluate
performance.
2.4. Financial planning and analysis (FP&A)
Closely linked to the functions of traditional management accountant as listed above. Analyse what’s
happening in the company and its markets, then plan for the future: what products? Which markets?
In-house or outsource? Which products are profitable? Which markets and customers are profitable?
2.5. Project management and appraisal
The term ‘project’ implies a discrete, once-off, endeavour. For example, renewing the IT system,
building a new factory, moving production facilities abroad.
Planning involves first estimating the costs and benefits of the project. If costs > benefits, why embark
on it. Both sides of this equation require accountants to make estimates and to test the estimates of
others. Whereas many of the costs are up-front and relatively easy to estimate, benefits do not usually
arise until the future and are therefore much more difficult to estimate. Furthermore, the differences in
timing between costs and benefits means that specialist investment appraisal techniques must be
used, such as calculating net present values.
Once the project begins it is vital to monitor and control:
๏ Costs. As part of the initial project appraisal, costs will have been
estimated. It is important that costs are then carefully
monitored and controlled. Obviously a job that would be part
of the finance function.
๏ Time. This part of project management is not particularly relevant to
accountants, though accountants should be alert to cost and
revenue implications if projects are delayed.
๏ Quality. Again not directly relevant to accountants but cutting quality
is one way of reducing costs. However, the ongoing
implications of that might need to be quantified (for example,
more product failures imply more warranty costs).
๏ Scope. The scope of the project is the description of precisely what
will be achieved: the deliverables. Defining the scope should
have been carefully done as part of the initial approval for the
project, but projects often go adrift because the scope keeps
changing. This usually adds more costs and that might bring
more benefits, but accountants must carefully estimate the
effect of each change in scope, Changes should only be
permitted if incremental costs are less than expected
incremental benefits.
2.6. Treasury
This department is found only in larger organisations. It is concerned with:
๏ Company finance. Does the company need to raise a loan or issue more shares?
๏ Where to deposit temporary surpluses of funds so that they can earn some interest.
๏ Where to arrange temporary borrowing.
๏ How to reduce the risk from currency movements when importing or exporting.
๏ How to reduce the risk from interest rate movements on borrowing or deposits.
๏ Taxation management eg one subsidiary making losses available to another.
2.7. Internal audit
The Chartered Institute of Auditors defines internal audit as:
“..an independent, objective assurance and consulting activity designed to add value and
improve an organisation's operations. It helps an organisation accomplish its objectives by
bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk
management, control, and governance processes.”
Most of the work of an internal audit department is making sure that the organisation’s system of
internal control is operating as it should be.
The internal control system is the system which should:
๏ Prevent
๏ Detect, and
๏ Correct
errors in the accounting system (and in other systems such as IT and quality control). Examples of
internal control procedures include:
๏ Ensuring that all purchases are authorised by a manager

๏ Ensuring that claims for overtime have been authorised by a supervisor or manager
๏ Carrying out reconciliations between suppliers’ accounts in the payables ledger and suppliers’
statements.
๏ Ensuring that valuable assets are safeguarded (such as banking cash promptly or locking storage
areas)
๏ Cancelling invoices once they are paid so that the same invoice is not paid twice
๏ Counting inventory regularly and reconciling it to the book records of inventory.
Internal auditors go round the various departments and check that employees are following the laid
down procedures. For example, they might select a sample of employee time sheets and ensure that
all had been authorised by the appropriate manager. Or, they might make a surprise visit to the
factory stores to count some items and compare their result to the amount of inventory shown in the
inventory records.
It might sometimes be discovered that the laid down internal control system is inadequate and
internal audit would then recommend improvements to accounting procedures.
Ideally, the internal audit department will have its work determined and will report findings to the
audit committee. The audit committee is composed of non-executive directors who are independent
of the day-to-day running of the company. So, if very poor internal control was discovered, this would
be reported to the audit committee who could then raise the matter at a board meeting. If internal
audit report to the finance director, the finance director could well suppress the findings to save face.
The internal audit department is sometimes given special assignments such as trying to establish the
efficiency of a department (value for money) or perhaps they are asked to investigate the extent of a
fraud that was discovered.
3. Relationships within the organisation

The finance function can be thought of as sitting at the middle of the organisation. Not much goes on
without some aspect of finance being involved
Production
Purchasing and Sales and
suppliers customers
Capital projects Finance Wages and salaries

function
Treasury Marketing
Research and
development
Examples of interactions are:
๏ Purchasing and suppliers: negotiating prices and terms, maintenance of the payables ledger,
receiving discounts, payment of amounts owing.
๏ Production: estimating costs of production – material, labour, indirect costs.
๏ Sales and customers: negotiating prices and terms, credit checks, issuing invoices, credit control,
receiving payment.
๏ Wages and salaries: processing leavers, joiners and wage rate changes, dealing with clock cards,
income tax, calculation of pay (basic and bonuses) payment to employees.
๏ Marketing: agreeing marketing budgets, paying amounts due. Perhaps negotiating advertising
rates.
๏ Research and development: approving budgets, monitoring expenditure, estimating future
expenditure needed.
๏ Treasury: raising funds, depositing surplus funds, dealing with exchange rate and interest rate
risk.
๏ Capital projects: calculation of investment measured such as NPV and ROCE. Estimating
expenditure and income.
4. Potential conflicts of interest within the finance role

The finance function is responsible for:
๏ Accounting operations
๏ Analysis
๏ Planning
๏ Decision making
๏ Control
Each of these can give rise to conflicts of interest and pressure not to record or interpret information
accurately or to make incorrect decisions.
Here are some examples:
Accounting operations: items of expense reduce profits whilst capital expenditure does not. An
accountant could come under pressure to deal with expenditure incorrectly so as to boost profits (ie
treat it as capital expenditure rather than revenue expenditure).
Analysis: conceal the reasons for underperformance in one area. For example, the treatment of fixed
overheads is often arbitrary and shifting these about can alter the apparent performance of different
departments or branches.
Planning: If the directors want to close down one part of the operations, there could be adverse
knock-on effects in another. Management accountants might be pressured do conceal this effect.
Decision-making: directors, particularly directors of listed companies, usually want to produce

increasing profits or at least profits close to those forecast. It is possible to boost short-term profits at
the expense of long-term profits. For example, cutting research and development will increase current
profits. However, this will mean that in a few years profits will suffer because there are no new
products available to market.
Control: a fraud has been discovered. This can be embarrassing for the finance director, so there is
pressure to conceal it.
Chapter 3
TECHNOLOGY AND INFORMATION
1. The fourth industrial revolution

1.1. Introduction
1st industrial revolution 2nd industrial revolution 3rd Industrial revolution 4th industrial revolution
Mechanisation: Mass production: Computers and Digital assets:

steam, water power. electricity to power automation. For artificial intelligence,
Eg the cotton and assembly lines such as example, process robotics, 3d printing
steel industries car production automation and (additive
digital machines, manufacturing)
autonomous vehicles,
biotechnology,
connectivity
You will be familiar with the effects of the first three of the above and we now stand on the brink of
the fourth industrial revolution.
The World Economic Forum digital transformation initiative (DTI) suggests several key technologies; in
addition, there are several other emerging digital technologies. The complete list is:
๏ Artificial intelligence: machines can learn and machines can make deductions based on data
supplied. For example, playing games such as Go, facial recognition, predicting customer
purchasing requirements and tastes, recommending music (like Pandora) that each consumer
should like.
๏ Autonomous vehicles: Taxis, private cars and particularly delivery vehicles. When such vehicles
can communicate with each other they should, in an emergency, all be able to coordinate
braking or taking evasive action.
๏ Big data analytics: See below.
๏ The cloud: See below.
๏ Process automation: A whole process is automated. For example, when you order goods on
Amazon, once you click on ‘Buy’ the goods are automatically picked in the warehouse, brought
together and packed then despatched with very little human intervention. Similarly, car
manufacturing allows different components to be automatically delivered to the production line
so that the precise vehicles specified by customers can be made.
๏ Custom manufacturing and 3D printing (additive manufacturing): Instead of drilling holes in a
piece of metal or cutting it to shape, the material is gradually built up. The process is automated
allowing the quick production of prototypes or one-off components
๏ Internet of things and connected devices: Your phone tells your heating system when you come
in and go out so that heating is automatically switched on and off. Smart locks that you can
unlock using an App. Radio Frequency Identification (RFID) allow all components and finished
goods to be tracked (and therefore located) individually.
๏ Robots and drones: Robots offer sophisticated, reliable manufacturing. They can also be used
in human interactions. Drones allow cheap surveillance and surveying from the air. For example,
the health of crops can be analysed and based on findings an autonomous tractor can be used
to spread nutrients just where they are needed.
๏ Social media and platforms: Twitter, Facebook, Uber, Instagram. Particularly useful (and
potentially very damaging) when used for marketing.
๏ Blockchain: This technology uses a mathematical techniques to keep data secure. Information
can be added, but then it cannot be changed so that an indelible record is build up of
transactions, share transfers property registers and so on. The technology also makes use of
distributed ledgers meaning that the information is simultaneously held on many computers on
a network.
๏ Data visualisation: charts and diagrams, both animated and static help users to understand,
interpret and remember data.
๏ Mobile: laptops, tablets and mobile phones allow data to be received and uploaded from almost
anywhere. So, sales reps can take orders from customers at customers’ premises, check on
inventory and upload the orders immediately.
2. The nature of information

2.1. Introduction
Good decision-making implies looking at the available data and information and trying to respond to
it rationally. Decisions made from a position of ignorance are little more than gambling.
Already this Chapter has made use of two technical terms: data and information. These can be
described as:
Data = raw fact.
For example a list of all the heights of a city’s population or a list all sales invoices still outstanding. The
data could be perfectly accurate but if it merely exists as lists it is not of much use. A list of 1 million
people’s heights is of little use; similarly a random list of all invoices outstanding is difficult to use.
Information = data with meaning.
The data has been processed in some way so that it becomes useful and informative. For example:
People’s heights: average heights of male and female, standard deviations of heights, average height
of children of different ages, bar or pie charts showing the data graphically. The data is now much
more useful and informative.
Invoices outstanding: sort and total by customer so that you know who owes what. Also sort by date
so that you know which debts are older and may need to be chased.
The real challenge of information technology is not collecting data: it is displaying it in a useful format
at the right time to the right people.
Knowledge = information ‘in someone’s head’.
Only then can the information be used.
Explicit knowledge: captured (written down or otherwise recorded) and searchable. ‘We know
what we know’. For example, product specifications, receivables ledger, inventory quantities and
turnover.
Tacit knowledge: not formally captured and recorded; not safeguarded; not shareable nor searchable.
For example, a sales person’s skills with customers or a designer’s approach to successful design.
When the employee goes, so does their tacit knowledge.
The challenge is to transform tacit knowledge into explicit knowledge so that it can be widely used in
the organisation and is not dependent on one person’s presence.
3. The qualities of good information

Good information is often said to have the following properties (mnemonic = ACCURATE)
๏ Accurate: sufficiently accurate not to be misleading. Not all information

has to be accurate to the last dollar or cent and increasing
accuracy usually introduces delays increases costs.
๏ Complete: incomplete information is likely to be misleading.
Note: “Cleaning data” or “data cleansing” are the terms used to describe the process of
detecting, correcting or removing corrupt and inaccurate records. Incomplete,
inaccurate, irrelevant and out-of data must be detected, corrected or removed. Not
only is this process important for the purposes of analysing data and making
decisions but there are ethical and legal reasons why inaccurate or irrelevant data
should not be held.
๏ Cost-beneficial: the benefit arising from using the information should be

greater than the cost of providing it.
๏ User-targeted: ensure that the information helps the user to make decisions
and to perform his or her job well. Avoid information
overload.
๏ Relevant: relevant to the person and to the organisation.
๏ Authoritative: the provenance of the information should be stated and
should be reliable. Note that much of the information on the
Internet is not authoritative. You might be unsure about its
source, whether it is still relevant and has been updated or
whether it is deliberately distorted.
๏ Timely: the information should be provided soon enough to be of use
in decision-making. Sometime information needs to be
provided almost instantly (for example when controlling
machines). Sometimes it might not be needed for days or
weeks. Again, faster provision of information will usually
increase the cost of providing it.
๏ Easy-to-use: well laid out, well labelled, convenient menu systems and
short-cut keys.
It should be realised that people at different levels in an organisation require different types of
information
Top
management
/ board
Middle management /
supervisory
Operational staff
Information for top management is often forward-looking (for planning purposes) as well as historical,
makes use of many estimates, and needs to be sourced externally as well as internally (eg what are our
competitors doing?). It is often highly summarised and presented in graphical formats. It is often ‘ad
hoc’ meaning that very different reports and information can be required at short notice.
Information for operational staff is almost always internal, historical and very detailed and very
accurate. It is almost always routine. It is primarily used for recording transactions and making simple
decisions.
Middle managers have a mix of informational needs.
A good IT system has to be capable of supplying suitable information to every level.
4. IT Choices
4.1. Introduction
The choices available can be classed under:
๏ Configuration
๏ Wired or WiFi or 3G/4G?
๏ Local or cloud?
๏ Centralised or decentralised?
At one time most computers were stand-alone ie they had no communication with other computers.
This was of limited use in business because there is usually a need to cooperate on tasks, to share
information and to send emails.
4.2. Configuration
Soon, the concept of networks emerged:
๏ Local area networks (LANs): these operate over a restricted area such as an office, hospital or
university campus. Special wiring is installed to connect up the machines. There is usually a
special machine called a file server where shared information is held and there might be a print
server which allows a printer to be shared between many users.
๏ Wide area networks (WANs): these operate over national and international distances, linking
users in different cities and countries. They rely on public networks to transmit information from
one local area network to another. This, of course, can increase the chance of the information
being intercepted or altered whilst in transit. It is vitally important that information is encrypted
before it is transmitted then decrypted by the authorised recipient.
4.3. Wired or WiFi or 3G/4G?

In the early days of networked systems all the components were connected by cables. Increasingly
connections between machines are made by
๏ WiFi (radio) using WiFi hotspots; or

๏ Over mobile phone networks using 3G (third generation) or 4G (fourth generation) technology).
These technologies are not so important for office based employees but have become vital to
employees, such as sales personnel and service engineers, who are often away from the office at
customers’ premises. Sales can now be booked remotely when orders are placed, or technical
information on the network server can be easily accessed.
4.4. Local or cloud?

By and large, until relatively recently all computers, whether stand-alone or in a network had their
own copies of every program they used and they performed their own processing. Often results and
files were stored locally also.
A new and increasingly important approach is for each machine simply to act as an interface for the
data and processing that are stored and executed elsewhere. This is the ‘cloud’ approach.
For example, if you are word processing using Word, instead of Word operating on your machine,
Word is operating on a large, remote server and the local machine simply acts as an input-output
interface. Local users have the impression of local processing but it is done remotely. The Word file will
also usually be stored remotely, but it could be printed locally.
The advantages of this approach are:
๏ Cheaper software. The company pays for a licence which is costed according to use not per
machine.
๏ Access to powerful processing. If there is an application requiring intensive processing (like
graphics in a design company), then that processing can be performed on a powerful machine
in the cloud. Local machines simply have to show the finished image. Without this approach
every machine used by designers would have had to perform the graphics processing and
would have to be powerful (and expensive).
๏ Easier software updates. If an updated copy of the software becomes available only the cloud
version needs to be updated. Previously every user’s machine had to be brought up-to-date and
inevitably machines often began to run different versions of the software.
๏ Easier maintenance. The complex processing runs centrally and that is likely to be where
problems occur. So maintenance and trouble-shooting is easier.
๏ Because the software and data are held in the cloud, it can be accessed from any location by
anyone who is authorised to do so. No longer will users be inconvenienced because they forgot
to copy a file to their lap-top as they went to visit a client.
Disadvantages:
๏ It is completely reliant on the data communication system working and users having access to
communications.
๏ Another company has custody of the software and the data and some users are uneasy about
confidentiality and security risks.
4.5. Centralised or decentralised?
In a centralised system, a large computer does all the processing and this is connected to smaller ones
which really only act as user interfaces.
In a decentralised system each computer in the system does its own processing. A decentralised
system is sometimes known as a distributed system because processing power is distributed, or
spread, over many machines.
The advantages of one system tend to be the disadvantages of the other.
Advantages of centralised/disadvantages of decentralised
๏ All data and processing is centralised so is easier to control and safeguard. For example, access
and regular backups are centrally controlled. In a decentralised system you would be relying on
many users to back-up their files and to ensure that passwords were changed as necessary.
๏ Generally cheaper than a distributed system.
๏ Data is all in one place so is easy to share.
๏ Centralisation will mean that there is less risk of incompatible hardware or software being
added.
Disadvantages of centralised/advantages of decentralised
๏ Faster and more flexible response to user needs. Each user can be given power to install suitable
software. In a centralised system budget and administration processes can slow down the
adoption of new centralised applications.
๏ More resilient to breakdown. If a centralised computer breaks down no user will be able to work.
In a decentralised system a machine breakdown will probably affect only one user.
5. The ‘web’, the Internet, intranets and extranets

The terms ‘Internet’ and the ‘Web’ are often used interchangeably. Strictly they are different.
The Internet is a vast network of interconnecting networks spanning the globe in which any computer
can communicate with any other computer as long as they are both connected to the Internet.
Information that travels over the Internet does so via a variety of languages known as protocols.
The World Wide Web (or Web) is a way of accessing information over the Internet. One of the
languages used to send information over the Internet is HTTP (Hypertext Transfer Protocol). Web
services, which use HTTP to allow applications to communicate in order to exchange and share
information. Email uses the internet but is not part of the Web. It uses a language called SMTP (Simple
Mail Transfer Protocol)
The Web uses browsers such as Internet Explorer or Firefox to access web-pages that are themselves
linked to each other.
Intranets are ‘internal internets’. The only data accessed and displayed is data from within the
organisation, but the distribution of the data is via HTTP and is displayed through a browser.
An extranet is when one intranet is given access to another. For example a supermarket system might
be given access to a supplier’s system so that stock and orders can be more easily managed.
6. Big data
There are many definition the term ‘big data’ but most suggest something like the following:
“Extremely large collections of data (data sets) that may be analysed to reveal patterns, trends, and
associations, especially relating to human behaviour and interactions.”
In addition, many definitions also state that the data sets are so large that conventional methods of
storing and processing the data will not work.
In 2001 Doug Laney, an analyst with Gartner (a large US IT consultancy company) stated that big data
has the following characteristics, known as the 3Vs:
๏ Volume
๏ Variety
๏ Velocity
These characteristics, and sometimes additional ones, have been generally adopted as essential
qualities of big data.
Variety:
disparate non-uniform data of different
sizes, sources, shape, arriving irregularly,
some from internal sources and some from
external sources, some structured, but
much of it is unstructured
Characteristics
of big data
(Laney)
Velocity: Volume:
data arrives continually and a very large amount of data. More
often has to be processed very than can be easily handled by a
quickly to yield useful results single computer, spreadsheet or
conventional database system
The commonest fourth ‘V’ that is sometimes added is Veracity: is the data true? Can its accuracy be
relied upon?
6.1. Volume
The volume of big data held by large companies such as Walmart (supermarkets), Apple and eBay is
measured in multiple petabytes. What’s a petabyte? It’s 1015 bytes (characters) of information. A
typical disc on a personal computer (PC) holds 109 bytes (a gigabyte), so the big data depositories of
these companies hold at least the data that could typically be held on 1 million PCs, perhaps even 10
to 20 million PCs.
These numbers probably mean little even when converted into equivalent PCs. It is more instructive to
list some of the types of data that large companies will typically store.
๏ Retailers
Via loyalty cards being swiped at checkouts: details of all purchases you make, when, where,
how you pay, use of coupons.
Via websites: every product you have every looked at, every page you have visited, every
product you have ever bought. (To paraphrase a Sting song “Every click you make I’ll be
watching you”.)
๏ Social media (such as Facebook and Twitter)
Friends and contacts, postings made, your location when postings are made, photographs (that
can be scanned for identification), any other data you might choose to reveal to the universe.
๏ Mobile phone companies
Numbers you ring, texts you send (which can be automatically scanned for key words), every
location your phone has ever been whilst switched on (to an accuracy of a few metres), your
browsing habits. Voice mails.
๏ Internet providers and browser providers
Every site and every page you visit. Information about all downloads and all emails (again these
are routinely scanned to provide insights into your interests). Search terms you enter.
๏ Banking systems
Every receipt, payment, credit card payment information (amount, date, retailer, location),
location of ATM machines used.
6.2. Variety
Some of the variety of information can be seen from the examples listed above. In particular, the
following types of information are held:
๏ Browsing activities: sites, pages visited, membership of sites, downloads, searches

๏ Financial transactions
๏ Interests
๏ Buying habits
๏ Reaction to ads on the internet or to advertising emails
๏ Geographical information
๏ Information about social and business contacts
๏ Text
๏ Numerical information
๏ Graphical information (such as photographs)
๏ Oral information (such as voice mails)
๏ Technical information, such as jet engine vibration and temperature analysis
This data can be both structured and unstructured:
๏ Structured data:
This data is stored within defined fields (numerical, text, date etc) often with defined lengths,
within a defined record, in a file of similar records. Structured data requires a model of the types
and format of business data that will be recorded and how the data will be stored, processed
and accessed. This is called a data model. Designing the model defines and limits the data that
can be collected and stored, and the processing that can be performed on it.
An example of structured data is found in banking systems, which record the receipts and
payments from your current account: date, amount, receipt/payment, short explanations such as
payee or source of the money.
Structured data is easily accessible by well-established database structured query languages.
๏ Unstructured data:
Unstructured data refers to information that does not have a pre-defined data-model. It comes
in all shapes and sizes and this variety and irregularities make it difficult to store it in a way that
will allow it to be analysed, searched or otherwise used. An often quoted statistic is that 80% of
business data is unstructured, residing it in word processor documents, spreadsheets,
PowerPoint files, audio, video, social media interactions and map data.
6.3. Velocity
Information must be provided quickly enough to be of use in decision making. For example, in the
above store scenario, there would be little use in obtaining the price-comparison information and
texting customers once they had left the store. If facial recognition is going to be used by shops and
hotels, it has to be more-or less instant so that guests can be welcomed by name.
You will understand that the volume and variety conspire against the third, velocity. Methods have to
be found to process huge quantities of non-uniform, awkward data in real-time.
7. Software for big data

Without getting too technical on this issue, a library of software known as Apache Hadoop is
specifically designed to allow for the distributed processing of large data sets (ie big data) across
clusters of computers using simple programming models. (Clusters of computers are needed to hold
the vast volume of information.) Hadoop It is designed to scale up from single servers to thousands of
machines, each offering local computation and storage.
The processing of big data is generally known as big data analytics and includes:
๏ Data mining: analysing data to identify patterns and establish relationships such as associations
(where several events are connected), sequences (where one event leads to another) and
correlations.
๏ Predictive analytics: a type of data mining which aims to predict future events. For example, the
chance of someone being persuaded to upgrade a flight.
๏ Text analytics: scanning text such as emails and word processing documents to extract useful
information. It could simply be looking for key-words that indicate an interest in a product or
place.
๏ Voice analytics: as above with audio.
๏ Statistical analytics: used to identify trends, correlations and changes in behaviour.
8. Extraction, transformation and loading (ETL)

8.1. Introduction
Data is often collected in a number of different database systems, perhaps managed by different
organisations, but could be particularly useful if pieces of it were brought together into a single
database.
For example, a supermarket will record purchases of products every hour of every day for every
branch. A meteorological company will, similarly, record weather conditions and forecasts. It might be
interesting to look for relationships between these two repositories of data. Perhaps it would show
something like:
๏ Sunny weather or sunny weather forecasted = a strong demand for barbecue supplies
๏ Cold weather or cold weather forecasted = strong demand for ‘comfort food’.
๏ Bringing together elements from separate databases is the heart of ETL
8.2. Extraction
Data from different sources will inevitably come in many different forms and patterns so extraction
has to be carefully tailored for each source. For example, one database might hold dates as ddmmyy,
another as mmddyy, another as ddmmyyyy and so on. All of these formats will have to be catered for -
and dates are relatively simple (almost standardised) data compared to most of the data that is held in
databases.
The data also needs to be validated ie is it correct? There is no point extracting data for future use if it
is obviously incorrect.
8.3. Transformation
This process converts the data that has been extracted from its original, probably varied, format into
the strict format needed by the new database. So, for example, all dates might be changed into the
format dd/mm/yyyy. Similarly, address data might have both ZIP codes (USA) and postal codes (UK)
and these will both need to be recorded the new records.
8.4. Loading
This is the process of writing the data to the new database. It might be a relatively simple process to
write the data if it a once-off exercise, but often the ETL process will be carried on every day or every
month so that the information is up-to-date. Also, historical data must be preserved so that trends and
patterns can be investigated. How much historical information is to be retained? For example, two-
year monthly comparatives imply 24 sets of data and when a new month is loaded the oldest is lost
and every month’s data moves back one month.
9. Business intelligence
Business intelligence is the technology driven process of:
๏ collecting data
๏ analysing data
๏ presenting information
to help directors, managers all employees to make informed business decisions.
Generally, the information presented will have historical, current and predictive elements. So, for
example, to make an informed business decision about whether or not a production facility should be
closed down, managers would need to know:
๏ Historical sales figures, revenues and costs

๏ Current sales figures, revenues and costs
๏ Future, predicted sales figures, revenues and costs.
To complete the picture, information would also be needed about competitor activity, new products
that might supplant current production, customers’ preferences, economic outlook
10. Dangers of big data

Despite the examples of the use of big data in commerce, particularly for marketing and customer
relationship management, there are some potential dangers and drawbacks.
๏ Cost: It is expensive to establish the hardware and analytical

software needed, though these costs are continually falling.
๏ Regulation: Some countries and cultures worry about the amount of
information that is being collected and have passed laws
governing its collection, storage and use. Breaking a law can
have serious reputational and punitive consequences.
๏ Loss and theft of data: Apart from the consequences arising from regulatory
breaches as mentioned above, companies might find
themselves open to civil legal action if data were stolen and
individuals suffered as a consequence.
๏ Incorrect data (veracity): If data is incorrect or out of date incorrect conclusions are
likely. Even if the data is correct, some correlations might be
spurious leading to false positive results.
๏ Employee monitoring: Data collection can allow employees to be monitored in detail
every second of the day. For example, sensors in name badges
so that employee movements and interactions at work can be
monitored. The badged monitor to whom each employee
talks and in what tone of voice. Stress levels can be measured
from voice analysis also. Obviously, this information could be
used to reduce stress levels and to facilitate better interactions
but you will see how it could easily be used to put employees
under severe pressure.Ethical and social issues; privacy and
security
Around the 1990s many governments became worried about the amount of information being held
about their citizens and the potential for damage or misuse. Many countries therefore enacted data
protection legislation to govern the collection and use of data.
For example, the UK Data Protection Act (which implements the European General Data Protection
Regulations) imposes obligations to not hold data for longer than needed, to allow individuals to see
information about themselves and to ask for it to be corrected.
Obviously the huge amount of data now being collected and held (see Section 7 above) mean that
this problem is potential more serious.
In addition to the obvious privacy issues, the following are ethical, social and security dangers:
๏ Incorrect data leading to incorrect decisions. For example, incorrect information on financial
affairs can lead to individuals being refused credit.
๏ Theft of information (such as the theft of credit card information, the hacking of emails and
industrial espionage).
๏ Unauthorised alteration of information.
๏ Fraudulent websites (eg ‘phishing’ sites can look like legitimate bank sites and can induce
people to enter their account and PIN numbers).
๏ Time-wasting by employees as they browse the internet.
๏ Downloading or sending offensive material.
๏ Violations of copyright laws.
๏ Denial of service attacks (DoS) where there are attempts to make a machine or network
unavailable to its intended users. For example, a site is bombarded with automated requests for
access and the site fails.
๏ Computer viruses which might simply be a nuisance or which are designed to cripple machines
and systems.
๏ Physical dangers, such as floods, fire or terrorist attacks can mean that organisations cannot
continue to function.
๏ Innocent harm being done. For example, there have been several recent cases of banks
updating their software and errors in the updates caused on-line banking and cash machines to
fail for several days.
It is therefore essential that organisations:
๏ Ensure that data is collected legally.

๏ Ensure that the data is input completely and accurately.
๏ Ensure that data is held safely and securely – including physical security.
๏ Ensure that data can be accessed only for authorised purposes by authorised individuals
๏ Ensure that software is properly tested.
๏ Arrange regular backups of data.
๏ Use virus checkers.
๏ Use firewalls to prevent unauthorised access from outside (by hackers).
๏ Have suitable standby arrangement (disaster recovery plan) should the computer system be
severely damaged.
11. Monetising data; from data to impact

11.1. Introduction
Profit seeking organisations should be making use of data and information technology to enhance the
long-term profitability and sustainability of their businesses. IT is not an end in itself. Similarly, not-for-
profit organisations should be using IT to save costs or to improve their efficiency and services they
are providing. The term ‘monetising’ will be used for both types of organisation.
There are several levels of data analysis and use and these can lead to different opportunities for the
monetisation of data:
๏ Data reporting: ie what happened?

๏ Data analysis: ie why did it happen?
๏ Monitoring: ie what’s happening now?
๏ Prediction: ie what might happen in the future
11.2.Monetising data
These different level of analysis allow data to be used to produce economic benefits in the following
ways:
๏ Increasing efficiency. For example, automating processes, using 3D printing to economically

produce low-volume items, moving to just-in-time inventory.
๏ Developing and monitoring key performance indicators. (KPIs). For example, a common KPI for a
supermarket is gross margin and real-time reporting and analysis of sales allows this to be
monitored continuously
๏ Forecasting. Better forecasting leads to less wastage and production or purchasing being more
closely aligned to demand.
๏ More accurate customer segmentation ie understanding better the requirements and
behaviours of different sections of customers.
๏ Better coordination with suppliers, logistics companies and customers
๏ Adding new products or services to existing offerings. For example, analysing consumer
behaviour can provide insights into which current products are preferred by which type of
customer and from that new, targeted products can be developed. Computer aided design and
manufacture can accelerate new product launch.
๏ Developing entirely new business models. For example, the move from high street stores to
internet based mail-order operations, or the rise of companies like Netflix which deliver
entertainment on demand and for subscriptions compared to traditional TV stations.
๏ Joining with similar companies to share data so that these large amounts of relevant data can be
exploited.
๏ Selling data to other companies. Obviously care is needed when selling or transferring personal
data, but there are large amounts of data that do not have these constraints. For example, there
are huge geographical data-sets available with information including satellite images,
population statistics, geological surveys.
11.3. Data to impact
If the aim of a profit-seeking business is to maximise profits (and for a non-profit organisation to
increase efficiency), then the involvement of the finance department is key. It is for the finance
department to determine the financial and operational data needed, to ask relevant questions, to
analyse the data and then to ensure that insights discovered are actually used to improve the
organisation’s performance. It is the last step that means the data has impact.
The finance department therefore can act as a link between data and its implications. To this end the
finance function must have close links:
๏ With the IT department. It is the finance department which knows which data is needed and it is
the IT department which knows how to capture and supply the data.
๏ With specialist data scientists. Although the data scientists have sophisticated analytical skills
they know little about finance and their analytical skills have to shepherded by the finance
department so that the right questions are asked and the results are interpreted correctly.and to
interpret results
๏ With other managers throughout the business as they will probably need assistance in
understanding and using the data.
๏ The following shows how management accountants link the business to data analytics so that
the data actually impacts on performance:
The business Management accountant Data scientist
Question the logic
Need for performance Seek guidance Analysis/validation Ask the questions Big data
improvement against business model initiatives/analytics
Quality control/
Produce verify findings
Build the hypothesis
Commercial insight Analytics findings
Align with KPIs, budgets

and forecasts
Impact Influence
(CGMA Report, From Insight to Impact)
Chapter 4
OPERATIONS MANAGEMENT
1. What is operations management?

1.1. Introduction
Operations management refers to the activities required to make and deliver products or to deliver
services. For a manufacturing organisation these activities include
๏ Procurement/purchasing
๏ Receipt of raw material
๏ Warehousing of raw material
๏ Issuing material to the production lines
๏ Manufacturing the product
๏ Warehousing the finished goods
๏ Receiving orders
๏ Despatching goods
1.2. The value chain

Michael Porter, a professor at Harvard Business School, introduced the concept of the value chain,
which shows many of these activities:
Firm Infrastructure
Support/ Technology Development

secondary
activities Human Resource Management
Procurement
Inbound Operations Outbound Marketing Service

Logistics Logistics & Sales
Profit, or margin
Primary activities
This model represents organisations by setting out the activities they carry out.
By carrying out these activities organisation can make profits. However, it is essential for the
organisation to know what gives the right (or ability) to make profits. Why do customers pay enough
to allow a profit to be made? It might be because:
๏ The organisation possesses knowhow that customers pay for.

๏ The organisation offers flexibility.
๏ The organisation offers economies of scale.
๏ The organisation take on risks.
Whatever it is that customers value is the key to an organisation’s success and its performance there
needs to be carefully managed. If an organisation is carrying out tasks that are not valued by
customers, performance could well improve if these were changed or discontinued.
For example, in the UK many financial institutions moved their call centres to other countries. Many
customers disliked this – particularly elderly customers whose less acute hearing gave them problems
with foreign accents. The operations carried on by the financial institutions were therefore less
acceptable to customers who began to move their business elsewhere. Many institutions have begun
to reverse their call centre off-shoring.
2. The supply chain

2.1. Suppliers – company - customers
A useful view of SCM is suggested by Meyer, Wagner and Rohde (2004):
Sales Procurement Production Distribution Sales Procurement
Collaboration Collaboration
Here, in contrast to Porter:
๏ Procurement is seen as a primary activity. It is a central part of the supply chain and not merely a
support function. Wise and skilled purchasing will be capable of creating value.
๏ Customer-facing activities (previously, sales, marketing and services) are combined into sales.
๏ Inbound and outbound logistics activities are combined in distribution.
๏ Operations in Porter’s value chain are more precise (but perhaps more restricted) with the term
‘production’.
Concluding, the supply chain and supply chain network concept extends Porter’s value chain towards
cross-company networks in order to improve efficiency and delivery service, minimise costs and
inventories.
The important additional emphasis in this presentation is on collaboration between up-stream

suppliers and the down-stream customers.
๏ Upstream = the supply chain before materials and goods reach the manufacturer
๏ Downstream = the supply chain for products after they leave the manufacturer and are on their
way to customers.
Together, they form the value network that creates value through the appropriate operation of the
whole chain to improve efficiency, delivery accuracy and times, cost reduction and inventory
minimisation.
You will readily understand that collaboration can often be greatly facilitated by the use of
information technology, which can integrate online orders received from customers with
manufacturing inventory management and purchases of raw materials and components from
suppliers.
2.2. Push/pull supply chain models
A push model (build-to-forecast) of the supply chain relies on manufacturers producing according to
historical demand patterns and pushing products out to distributors and customers. Inventory is held
at various points as a buffer against unexpected demand or production delays. By contrast, in a pull
model (build-to-order) demand stimulates production and delivery. Essentially, just-in-time
inventory control is a pull model as ordering and production are triggered by customers’ orders. No
orders are raised nor production started until there is downstream demand.
In demand-driven systems it is a customer who activates flow by ordering from the retailer, who in
turn reorders from the wholesaler, who reorder from the manufacturer, who reorders raw materials
from the suppliers. Orders flow backward, up the chain, in this structure. Great care is needed to
ensure that, because there is no buffer stock, delays occurring as orders flow up the supply chain do
not jeopardise the delivery of the final products.
Many companies are trying to shift from a build-to-forecast to a build-to-order discipline. The property
of being demand-driven is variable:
๏ Being 0% demand-driven means all production/inventory decisions are based on forecasts and
all products available for sale to the end user are there because of the forecast. This could be the
case of fashion goods, where the designer may not know how buyers will react to a new design
(and the article of clothing cannot be ordered before manufacture), or the beverage industry,
where products are produced based on a given forecast.
๏ A “100 percent” demand-driven is one in which the order is received before production begins.
The commercial aircraft industry match to this description. In most cases, no production occurs
until the order is received.
Of course, pure push or pull models exist only in theory: demand for a product will never cause a
supply chain to start mining iron ore and producing steel. Nor will a push model guarantee that
products made will be bought. At some point, in every supply chain, demand push will meet demand
pull, and inventory will accumulate there. Note that large geographical distances between suppliers
and customers, or processes that take time (such as growing crops) make pull systems more difficult
to organise.
However, inventory can be minimised and customer service improved if all parties in the supply chain
can be better synchronised and have the ability to react quickly. For example, a traditional model of
replenishing inventory in supermarkets would rely on each supermarket issuing an order to suppliers,
probably by electronic data interchange (EDI), once inventory falls below reorder level. However,
orders then arrive ‘out-of-the-blue’ at suppliers, who either have to have sufficient production
capacity or who have to hold inventories to respond quickly.
A better way is to give suppliers access to supermarkets’ inventory records through an extranet so
that inventory levels and rates of change can be monitored. Supplies can be dispatched even without
having to wait for an order. In this way, suppliers will be much better able to anticipate demand and
produce accordingly. Better synchronisation and lower inventory levels have been achieved.
2.3. Supply chain pathways and networks
Supply chain networks shows the links between organisations and how information and materials
flow between these links. For example:
Third Party
Logistics Company
Ultimate Ultimate
Supplier ORGANISATION Customer
Supplier Supplier
Third Party Third Party

Logistics Company Logistics Company
As with many other functions, outsourcing is increasingly used in supply chain management. Logistics
companies can perform many supply chain functions more efficiently and economically than they can
be done in-house.
These can be complex. For example, here is the supply chain network for an orange juice company:
Upstream Downstream
Inbound logistics Outbound logistics
Orange grower Supermarkets

C
Wholesalers O
Juicing plant
N
Retailers S
Bottler Juice marketer Logistics firms U
/supplier
M
Label producer
Restaurants E
Plastic bottle manufacturer R
Airlines etc
S
Oil company
3. Supply portfolios
3.1. Introduction
Not all supplies and raw materials are of equal importance. A supply portfolio approach (Kraljic) allows
organisations to display their supplies according to:
๏ The profit impact or annual expenditure relating to the supply.

๏ The supply difficulty (number of suppliers, internal constraints).
3.2. The supply portfolio matrix
Low Profit impact High
Low
Acquisition Leverage
Supply
difficulty
Critical/bottleneck Strategic
High
๏ Acquisition/non-critical: Low profit impact; low market difficulty. Example: stationery.

๏ Critical/bottleneck: Low profit impact; high market difficulty. Example: unique components or
components with erratic supplies.
๏ Leverage: High profit impact; low market difficulty. Example: packaging.
๏ Strategic: High profit impact; high market difficulty. Example: special software.
By segmenting the market in this way, it becomes possible to decide on the required approach to
suppliers and the most effective way to purchase the resources.
๏ Acquisition/non-critical quadrant.
Items in this quadrant have a profile of low market difficulty and a low profit impact
(expenditure). Buyers might be tempted to spend a lot of time in this quadrant. However, that
would not be a wise business decision as the return on the time invested would be small.
Items in this quadrant should be bought in a standardised, simplified way to minimise costs.
๏ Critical/bottleneck quadrant.
Items here have the profile of high market difficulty and low profit impact (expenditure).
Typically, the supply market is difficult because there is only a small number of suppliers. These
items do not have a high profit impact until they are not available.
A risk analysis with respect to supply should be carried out. A cost reduction strategy is
inappropriate in the critical quadrant in case supplies dry up. One way of reducing risk might be
to over-order when supplies are good.
๏ Leverage quadrant.
The items in this quadrant have low supply market difficulty and high profit impact
(expenditure). The return on time invested in this area will result in profit maximisation.
A planned cost reduction strategy for items in this quadrant. For example, there are many
suppliers who can be played off against one another.
๏ Strategic Quadrant.
Items in this quadrant have the profile of high market difficulty and high profit impact
(expenditure). These items lend themselves to a strategy such as taking over a supplier or
forming very close links with one. Cost reductions in this area require a long term strategic plan
to ensure continuity of supply in these expensive items.
Suitable strategies are those that reduce risk and maximise profit. These strategies can take two
directions: a partnering strategy with a suppliers or a strategy to create competition (eg by self-
supply) and drive the item to the Leverage Quadrant.
Some of the main choices to be made in supply chain pathways are as follows.
๏ Who transports the goods? The main solutions are:

• the buyer transfers them using own transport
• the seller transfers them using own transport
• a logistics company transfers them
๏ What delivery pathways are best?
๏ Who stores the goods? The organisation, the supplier, or a logistics company.
๏ Which manufacturing, packaging, labelling, kitting, or completion tasks are carried out by the
organisation and which by other parties? (Kitting relates to processes such as adding batteries).
๏ Who is responsible for quality assurance and proper handling of the goods?
๏ How should returns be handled?
๏ How can fast and responsive deliveries by arranged?
๏ Who handles customs clearance?
Chapter 5
MANAGEMENT OF RELATIONSHIPS
WITHIN THE SUPPLY CHAIN
1. Lean synchronisation
Lean synchronisation means that products and services are always delivered to exactly match what
customers want, in exact quantities and at the required time and place for delivery. Lean
synchronisation should achieve these objectives at the lowest possible cost and it should result in
items flowing rapidly and smoothly through manufacturing processes and supply networks.
In a traditional manufacturing approach, each stage in the process will place its production in an
output inventory that buffers that stage, helping to isolate it from the next process downstream. The
next stage of manufacturing will the take outputs from the inventory, process them and pass the more
complete items to the next buffer inventory, and so on.
The intermediate inventories insulate each stage from its neighbours, making each stage relatively
independent. The system is also more resilient if there should be a problem at one stage as buffer
inventory can be used to keep subsequent processes going. However, this safety and flexibility has to
be paid for in terms of:
๏ inventory holding costs

๏ relatively slow throughput times
๏ possibly less flexibility to change production quickly because buffer inventories have to be held
for even longer.
2. Supply chain relational management (SRM)

SRM is concerned with the management of the supplier relationship. This:
“Involves managing the interfaces between organisations supplying goods and/or services to an
organisation in order to maximise their value”. It is about building relationships that work towards
supporting an “effective, financially beneficial environment”.
Within SRM there are several types of relationships observed.
These are often classified as
๏ Transactional
๏ Contractual
๏ Value Added
๏ Collaborative
๏ Partnership
These are summarised below:
๏ A transactional relationship is based on the exchange of services or products within

an agreed timescale for an agreed price. Some
transactional relationships are sustained over
considerable periods of time, and these demonstrate
commitment. However there is little trust between
supplier and customer. The relationship is essential
adversarial.
๏ A contractual relationship is very similar to a transactional approach but it is a
relationship which is built around delivering the terms of
the contract. The supplier will deliver neither more nor
less than the contract and the customer will use the
contract to manage the supplier. There is still little trust
between the two parties. Again, a rather defensive
outlook.
๏ A value added relationship is usually adopted by suppliers when they move to a
strategy to retain customers and therefore they develop
customised solutions to meet the customer’s needs. This
helps to lock together supplier and customer
๏ A collaborative relationship can be described as a close working between the
supplier and customer, which delivers value and benefit
to both organisations. There is also a structure of shared
responsibility, accountability, resources and rewards.
They cooperate and collaborate for the good of each
party.
๏ Partnership based relationships have many similarities to collaborative SRM styles in that
both parties derive mutually beneficial value from the
relationship. The intention with a partnership approach
is that the association will be over a long period of time
with both parties looking to develop a two way rapport.
There is a recognition of mutual dependency, even more
so than with collaborative ventures. Partnership
relationships are seen as strategic alliances, where skills
and resources are shared to achieve mutual benefits
which cannot be achieved working individually. They
could produce joint venture structures where the legal
ownership and management of organisations are
shared.
3. Materials resource planning (MRP I) and manufacturing

resource planning (MRP II)
A materials resource planning information system is one which uses sales orders and sales forecasts to
schedule raw material orders, deliveries and quantities.
For example, if an order is received for 100 units of a product, the system expands this into the parts
needed, can check inventory and work out what orders have to be placed with suppliers in order to
fulfil the sales order. Many systems will place the purchase orders automatically.
Materials resource planning is sometimes known as MRPI to distinguish it from MRPII, which means
manufacturing resource planning where not only materials but also labour and machine resources are
integrated into the production plan.
4. Statistical process control

Statistical Process Control is a methodology for measuring and controlling quality during the
manufacturing process. Quality data (for example, measuring the sizes or weights of components) are
obtained in real-time during manufacturing. Sometimes all components will be measured; sometimes
only a sample. The data is then plotted on a graph that has pre-determined control limits. Control
limits are determined by the nature of the process and the client's needs.
Corrective
action needed
Upper control limit
Lower control limit
Data that falls within the control limits indicates that everything is operating as expected and that the
small variations with control limits are likely due the natural variations that occur as part of the
process. If data falls outside of the control limits, this indicates that a specific cause is likely the source
of the product variation. For example, the setting on a machine might have slipped. Something within
the process should be changed to fix the problem.
Chapter 6
PROCESS TECHNOLOGY AND QUALITY
CONTROL
1. Computer numerical control (CNC)

Instead of a worker controlling a machine, such as a lathe, drill or saw, the machines are controlled by
computer. This technology has the following advantages:
๏ Increases the speed with which articles can be processed.

๏ Increases precision.
๏ Can link to computer aided design (CAD) software so that designs can be quickly manufactured.
๏ The machines can work for long hours without deterioration in performance (or the need for
overtime payments).
2. Robots
Robots extend the flexibility first seen in CNC technology. Industrial robots usually consist of a jointed
arm with a gripping tool at the end that can lift move and rotate articles. They are commonly seen in
car manufacturing plants.
3. Automated guided vehicles (AGV)

Automated guided vehicles are now commonly found in warehouses and factories.
AGVs safely transport all kinds of products without human intervention within production, warehouse
and distribution environments and offer ways to reduce costs and to increase efficiency and
profitability. They can lift, rotate and move goods, fetch goods from racks and deliver them onto
conveyors. They can also store goods onto shelving.
Some navigate by following wires burying the floor, some use lasers and some GPS. All have radio
connections to assign task and to continually report where they are to speed flow and to avoid
collisions with other vehicles. All have safety mechanisms which will stop the vehicle if something is
blocking its path – such as an employee.
4. Flexible manufacturing systems (FMS)

A Flexible Manufacturing System is one that can be changed or adapted rapidly to manufacture
different products or components at different volumes of production. Sometimes the production
needed has been predicted, sometimes not.
Flexibility comes from two sources:
๏ Machine flexibility: a machine can quickly be reset to perform different tasks. For
example different patterns and sized of holes being drilled.
๏ Route flexibility: the ability to send different items through different processes.
For example, if a component didn’t need holes drilling it
would miss out the drilling machine.
Potential advantages from an FMS are:
Reduced WIP Inventory. FMS allows units to be made as needed rather than being produced in
batches so can enable pull-systems and JIT (Just in Time) inventory management.
๏ Increased machine use. Highly automated FMS can reduce tool changeover time and machine
tool-setting times. This both increases machine utilisation and reduces manufacturing lead-time.
๏ FMS reduces transportation times because a single machine can carry out multiple tasks.
๏ Shorter lead times. Because transportation, scheduling and set-up times are all reduced, there
can be a significant reduction in the lead-time for production.
๏ Ability to handle a variety of configurations of a part ie tailor made parts.
๏ Reduced labour costs. The number of employees needed to manage machines in FMS is much
lower than the conventional set-up.
Potential disadvantage from an FMS is:
๏ Cost. A widely-quoted case is that of Yamazaki Machinery Company in Japan. Which installed an
FMS system costing $18 million. The results were:
๏ Number of machines reduced from 68 to 18
๏ Employees were reduced from 215 to 12
๏ Floor space from 103,000 square feet to 30,000 square feet
Despite these impressive figures the return on investment was only 10% even when total savings after
two years were close to $7.0 million and a projected savings of $1.5 million per year for next 20 years
was envisaged. This is why many companies have trouble justifying investment in FMS, as the target
on ROI for many is 15%
5. Computer integrated manufacturing (CIM)

This is the use of computers to control the production process. For example, if you go to most car
company websites you will be given options as to:
๏ Engine size and type

๏ Body type
๏ Body colour
๏ Interior colour
๏ Level of trim and accessories
๏ Wheel styles
๏ Options for built-in GPS etc
To make the specified cars reliably and economically requires a high degree of IT involvement to
ensure that the correct parts come together on the production line to make the specified vehicle.
These systems can also integrate computer aided design to the manufacturing process. This means
that the technical drawings specifying the size, shape and other details of a component can be used to
control the machinery used in production.
It is worth just mentioning here the new technique of additive manufacturing or 3D printing. In this
process the material is extruded to form complex shapes which harden to produce sophisticated
components that can be difficult or expensive to make in any other way.
6. Quality management
6.1. Definitions
Quality can be defined as: “Fitness for use” (Juran)
Or
“ …the totality of characteristics…ability to satisfy customers’ stated or implied

needs..” (ISO 9000 handbook.)
๏ Quality control refers to the processes (such as sampling and testing) that an organisation
employs to check on quality.
๏ Quality assurance is the sum of the management allow an organisation to dependably achieve
a stated level of quality.
๏ Quality management is the overseeing of all the activities needed to achieve and maintain the
required quality. It includes establishing the required quality level, setting quality control
procedures and also considering quality improvement.
6.2. Costs associated with quality
Costs of conformance (i.e. of improving quality)
๏ Prevention costs
๏ Appraisal costs
Costs of non-conformance (i.e. of allowing poor quality)
๏ Internal failure costs

๏ External failure costs
Moving effort towards the top of this list should save costs.
๏ If there is no quality at all, all failures will happen once the customer receives the goods (external
failure). That is very expensive in terms of goodwill lost and replacing goods.
๏ If goods are tested when finished but before leaving the factory some will fail (internal failure).
The faults have to be found and the faults have to be repaired, but at least customers are not
affected. This should be cheaper than external failures.
๏ If goods are inspected after every operation is completed, faults can be diagnosed immediately
and repaired (appraisal costs).
๏ Cheapest of all is to prevent any quality control problems at all. This will involve careful design,
the purchase of good quality components and staff training. However, these costs will more
than compensate the cost of finding and repairing costs later in the process.
Hence the claim that ‘quality is free’: better quality control at earlier point in the process will, overall
save costs.
6.3. Total Quality Management (TQM)
TQM is defined as:
“The continuous improvement in quality, productivity and effectiveness obtained by

establishing management responsibility for processes as well as outputs. In this, every
process has an identified process owner and every person in an entity operates within a
process and contributes to its improvement”.
Any manufacturing company will want to deliver goods to the customer that are of sufficiently high
quality to avoid goods being returned. To check this the company will have some form of quality
control checks on goods leaving the factory. However, even though good quality control will results in
poor quality goods being rejected, and therefore not reaching the customer, there remain the costs
associated with waste and poor quality work.
It is therefore important that all possible steps are taken not only to check quality at each stage, but to
design processes and educate the workforce to facilitate good quality production. If everything is
done right first time, there will be no quality control problems and no waste of materials or time.
TQM does not apply only to the manufacturing system. It will also apply to phone answering,
provision of information, the organisation’s web-site, order processing, invoicing, recruitment and
training.
The implementation of TQM is never really complete and there is a culture within the organization of
never being satisfied and of continually achieving improvements. Often these are small, but
nevertheless will add up to be significant. The process of a continuous series of small improvements is
known as ‘Kaizen’.
The improvements can be to cost, quality, efficiency, less wastage, better service ie all aspects of
operations. Note that unlike quality control which aims to maintain quality and control costs, kaizen
aims to improve these all the time.
6.4. Six sigma

๏ Six sigma is an approach to quality control that was originally devised by Motorola, a high tech
electronics company that manufactures, amongst other products, microprocessor chips. The aim
of the company was to achieve very low rejection rates, < 3.4 defects/million, though that
specific objective is not as important as their methodology, known as DMAIC: define, measure,
analyse, improve, control.
๏ Define: define what is meant by quality. For example, reliability, style, fast response, helpful
service.
๏ Measure: ways of measuring the quality factors have to be devised. For example, failure rate for
reliability, customer surveys for style. Measure both current performance and use the
measurement methods to better define what is meant by quality i.e. set targets.
๏ Analyse: investigate why current performance falls short of required performance.
๏ Improve: attempt to improve performance. Repeat the D, M, A, I cycle until the required
standards have been achieved.
๏ Control: This is continuously applied to ensure, for example, that definitions are still relevant,
that costs are within budget and that progress is being made.
DMAIC fits in with Kaizen ie a continuous series of improvements to improve quality and reduce costs.
7. Reverse logistics
Reverse logistics refers to all operations related to the reuse of products and materials. It is:
"the process of planning, implementing, and controlling the efficient, cost effective flow of raw
materials, in-process inventory, finished goods and related information from the point of
consumption to the point of origin for the purpose of recapturing value or proper disposal. …
Remanufacturing and refurbishing activities also may be included in the definition of reverse
logistics."
The reverse logistics process also includes the management and the sale of surplus as well as returned
equipment and machines from the hardware leasing business.
A manufacturer's product normally moves through the supply chain network to eventually reach the
distributor or customer. Any process or management after the sale of the product involves reverse
logistics.
๏ If the product is defective, the customer would return the product. The manufacturing firm
would then have to organise shipping of the defective product, testing the product, dismantling,
repairing, recycling or disposing the product.
๏ At the end of the product’s life it can be returned to the manufacturer for refurbishment or
recycling. For example, photocopier toner cartridges can be sent back for refilling.
๏ At the end of the product’s life it could be sent back to the manufacturer for safe disposal after
the manufacturer arranges the salvaging of valuable material. For example, electronic products
contain valuable rare earth metals that can be recovered, reprocessed and reused.
Chapter 7
MARKETING – ITS NATURE AND
PURPOSE
1. What is marketing?
To understand the marketing concept or the marketing approach it’s useful to contrast this with
certain other approaches that might be available.
๏ The product-led approach
For this, imagine a company which was started by a couple of engineers, clever and successful
people, who are very interested in the technical qualities and the cleverness of the products they
produce. They get enormous satisfaction in well-engineered, clever innovative products.
Unfortunately, just because the product is well-engineered, innovative and clever doesn’t mean
that product will sell. No matter how much those engineers appreciate the fine details of that
product it may be a product that no one wants, or a product which is too expensive.
๏ The sales-led approach.
This might sound okay, but what it means is that there is great emphasis on selling what you
have, even if customers don’t really want it. The sales-led company will have a very high-
powered sales team, skilled in the arts of persuasion and getting people to sign contracts which
they may later regret.
๏ The marketing-led approach.
This is quite different. What’s important about that is that it is very outward looking. It looks to
see:
‣ What will potential customers want?
‣ What do they appreciate?
‣ What amount of money do they think it’s worth paying for the product or service we are
providing?
Through market research we will establish the needs of potential customers and then develop an
appropriate product to match those needs. It will stress to those customers the ability of the product
or service to satisfy their needs and it will profit through customer satisfaction because it fulfils the
needs of its customers.
In many ways it’s a very humble approach. It’s saying that the customer knows best. There is no point
in making a product which we think is good if customers think it’s not very satisfactory. It doesn’t
mean, of course, that it’s an entirely passive process, only just taking input from customers. You can’t
always expect customers to be innovative and it will certainly be part of the market research process
to develop prototype products to show those to customers, to see whether the customers will be
interested, or to find out how those products could be changed in some way to better match the
requirements of the customers. But at the end of the day, the marketing concept means finding out
what do customers want and developing products or services to fulfil customer’s needs.
2. The macro-environment (PESTEL)

The goods that organisations decide to market and how they market them very much depends on the
environment they are in. It is therefore important to analyse the environment and a common
approach is to use PESTEL: political, economic, social, technological, ecological/environment and
legal). These factors affect whole countries.
๏ Political factors: political factors such as a potential change of government, enlargement (or
reduction!) of the European Union, the threat of war will affect buying habits. For example,
unrest in certain areas of the world will reduce the number of holidays that can be sold there
and tour companies will have to market different products.
๏ Economic factors: changes in, say sales tax (VAT) will affect expensive items like cars more than
cheap every-day items. If sales tax increases car manufacturers might offer a period where the
selling price to the customer will be held constant and the manufacturer absorbs the increase. If
a country is facing an economic recession then it is clear that this will have to be taken into
account when deciding which products to market and their prices,
๏ Social factors: these cover population changes, fashion, habits and fads. For example, over the
last 10 years or so, in the UK more and more men grow beards. This has affected sales of razors
and firms like Gillette would have to alter their marketing approach to try to overcome the
decrease in sales. A big change in many countries is the increasing proportion of older people in
the population and marketing departments must pay attention to the needs and preferences of
a growing segment.
๏ Technology: the internet has made huge differences in how products and companies are
advertised, how products are ordered and delivered, and the amount of information that is
known about customers. It is also important for businesses to be aware of technological
advances so that their products and service offerings stay up-to-date and competitive.
๏ Ecology/environment: emphasising the ‘green’ credentials of products and your company has
become increasingly important in generating favourable customer impressions.
๏ Legal: laws and regulations can affect how marketing can be used. For example, in the UK
advertising cigarettes is almost impossible. Laws and regulations also affect the products
themselves, for example their safety. Occasionally governments intervene to set prices.
3. Market segmentation
We have said that marketing is finding out what customers want and designing products and services
to meet customers’ needs. The first stage to find out whether all potential customers want the same
thing or can the market be broken down into different sections or segments. Market segmentation
looks in how a market can be split up.
Commonly, it can be split up according to:
๏ Age
๏ Sex
๏ Lifestyle
๏ Wealth
๏ Geography
For example in the fashion market, there are quite different fashions which are bought by younger
and older people. Obviously there are different fashions depending whether you are selling to male or
female. Lifestyle is important, are we addressing the leisure market or are we addressing a more
formal market? Wealth and disposable income are important, and it’s normal for most ranges of
fashions to have cheaper ‘diffusion lines’ and also the more expensive luxury goods. Geography, for
example simply whether people live in the north of the country or the south of the country can make
a difference in the type of clothing they want to buy.
Companies might decide not to sell to all segments of the market. They may find a segment is too
small, or too unprofitable, likely to decline because of PESTEL factors or that there is too much
competition there already.
4. Market targeting
After investigating market segmentation, the next stage is market targeting, that is deciding which
segments of the market to attack.
๏ Undifferentiated market targeting
The first type of market targeting is known as undifferentiated market targeting. This means that
your research has shown that the market is effectively not segmented and that one product will
suit all potential buyers.
Product Market
This is extremely rare; in fact, it is very difficult to think of an example. Even the sale of basic
products like water is to a segmented market. Some people are perfectly happy with tap water,
others want mineral water, but some want still, some want sparkling. It is sold in different
quantities of small bottles, large bottles, and there is whole range of flavours.
๏ Differentiated market targeting
By far the most common type of market targeting is known as differentiated market targeting.
Here the firm perceives that the market is segmented and designs a different product or service
to suit each segment of that market.
Market Segment 1
Products Market Segment 2
Market Segment 3
You only have to try to buy a common consumable such as shampoo or toothpaste to see how
the manufacturers have differentiated their products. There are probably dozens of products to
choose from, and the manufacturers hope that by changing the product and a number of other
variables that they make their product particularly suitable and attractive to one segment of the
market.
๏ Concentrated market targeting
Finally there is concentrated market targeting. This may be known as niche marketing.
Market Segment 1
Product Market Segment 2
Market Segment 3
The company perceives the market as being segmented, but for some reason decides to target
only one, or a limited number of segments of that market. It could be that the company is too
small to have a wide range of products, so concentrates on one segment. Or, the company may
believe that it has particular expertise to fulfil the needs of one segment or that the company
perceives that segment as being the only one that is profitable. But for whatever reason, the firm
concentrates its resources in addressing the very specific needs of one or a very limited number
of segments.
A good example of concentrated market targeting can be seen in a holiday industry. In the UK, a
company known as the Crystal Holiday concentrates on skiing holidays. It has made to that
segment of the market its own and designs holidays making use of its expertise there.
5. Product positioning (the 7Ps)

5.1. Introduction
‘Positioning’ means make a product or service address specific segments of the market.
Originally there were four variables or levers that could be used. These were known as McCarthy’s
marketing mix, or the Four Ps. Now 7 Ps are often shown:
๏ Product
๏ Price
๏ Promotion
๏ Place
๏ People
๏ Process
๏ Physical evidence
The first four (product, price, promotion, and place) were the original components of the marketing
mix and relate to the marketing of both services and products.. The three last ones (people, process,
and physical evidence) are specifically to do with positioning services. The three additional Ps are
sometimes known as the service extension to the marketing mix
When services are provided there is no physical product and so there is a growing importance in skills
and attitudes of the people who provide the service.
The process by which a service is provided, and the physical evidence that something has actually
happened are also important.
For example, if you are booking an airline flight, you may ring up the airline and you expect to be dealt
with in a helpful and friendly way by the representative. The process has to be convenient to you, you
don’t want to be waiting too long before your phone call is answered. Finally you expect some sort of
physical evidence, such as an e-mail, to show you that the service is actually going to be provided.
5.2. Product
The first of the Four Ps is product, and this includes:
๏ The features of the product (what it does)

๏ Quality,
๏ Design,
๏ Brand,
๏ Packaging.
For example, take calculators. Some have got simple arithmetic functions whereas others have
trigonometric, scientific or statistical functions; some have rolls of paper on which calculations can be
displayed. These are all different features of the product. Some calculators will be relatively cheap and
perhaps very durable whereas others will be of high quality for everyday office use. Design might not
be very important in calculators, but some are marketed on the basis of having a sleek futuristic
looking design whereas others are more commonplace. Brand and packaging are probably not
particularly important for calculators, but are very important when considering something like
cosmetics or perfume where the packaging might possibly be more expensive than the contents.
5.3. Pricing
The second of the Four Ps is price. This includes not only the price itself (the price level or price point),
but also discounts for bulk buying which is particularly important in business-to-business sales. Price
also includes the terms, ie how long a customer has to pay. There are also various types of strategic
pricing, described below.
Pricing can be more sophisticated than it first looks. For example if your customer had a very seasonal
business, perhaps in agriculture, you might be able to make your product attractive to that customer if
your terms of sale were arranged to match that customer’s cash flow. Perhaps the customer could buy
in the spring and not have to pay until the autumn when crops are harvested.
Price skimming is when a very high initial price is set for a product, for example a new electronic
product. You might know that there will be a certain number of people who will be prepared to pay,
let’s say $1000. After they have all bought the product you can then lower the price, say to $900, and
there will another layer of people who will be willing to pay that, and so gradually you work your way
down. Price skimming is nearly always a temporary phenomenon. Prices usually fall, if for no other
reason because other manufacturers will join in and bigger volumes that have to be sold.
Penetration pricing means going in with a very low initial price in a hope of getting a very high
market share. With luck the high market share will give you very high volume and consequently a low
cost per unit for production, and you may be able to sustain a very low market price indefinitely.
Indeed, this can be a strategy to protect yourself against new entrants to the market. If you are going
with a low price and win, let’s say a 70% market share, it will be quite expensive for anyone else to
come into the market and make as good profits as you are.
Related product pricing aims to get someone ‘hooked’ by a low initial price, then follow up prices
are high. A good example of related product pricing can be seen with inkjet printers. Typically a new
inkjet printer might cost around $100, but then to renew the ink cartridges might be costing about
$70. The initial printer is almost a lost leader, the rationale being that once you have bought that, the
follow-on cost of maintaining and replenishing the supplies is where the profit is going to be made.
5.4. Influences on prices
The prices that can be charged depend on:
๏ Costs
๏ Competitors
๏ Consumers
๏ Controls
Costs
Ultimately revenue must cover costs. Often cost plus pricing is carried out to give an indication of the
desired cost. For example:
Cost + desired mark-up = selling price
If the mark-up required is 30% then if an item costs $150 to make it will be sold for:
$150 + 30% = $195
This is an easy calculation, but there is no guarantee that the goods will sell at the price that is
calculated. There might be cheaper competing goods or customers might baulk at the high price
demanded.
Competitors
There are four competitive environments:
There are four main types of market, each giving rise to a particular type of competition:
๏ Perfect competition. Many small suppliers and customers none of which can
influence the market. There is free entry and exit from the
market and all supply identical products. Here, suppliers must
charge the market price. They cannot charge more because, as
the products are identical, every customer would move to
cheaper suppliers; there is no point in reducing their prices
because all output can be sold at the market price. It is worth
noting that the Internet has tended to make price and
competition much more transparent and that there are sites
which specialise in comparing suppliers’ prices.
๏ Oligopoly. A small number of suppliers supplying identical products. An
example is found in petrol companies. If a supplier increases
prices, the others simply have to maintain theirs to gain
market share. If a supplier reduces prices, the others must
follow suit to maintain their market share. There is therefore
little incentive to reduce prices as competitors will follow.
๏ Monopoly. One supplier of a product. The supplier can charge whatever is
wished, though demand is likely to vary as a result. This is the
great freedom a monopolist has: choose the price to charge so
that profits can be maximised. Note that despite that
statement, being a monopolist does not guarantee that a
profit is made. You might be the sole suppliers of something
no one wants.
๏ Monopolistic competition. This is an almost self-contradictory term. It means that there
are a number of suppliers supplying similar but not identical
goods. Essentially, the products are being differentiated in
some way and therefore can command different prices.
Suppliers are competing, but with different offerings.
Price competition means that consumers are motivated primarily by price and usually suppliers will
have to offer low prices to succeed. Very often organisations which use a cost leadership strategy
adopt price competition. Their products are ordinary, but because their costs are very low (if not
actually the lowest) prices can also be kept down.
Many laptop producers use price competition because, for most, their products have been
commoditised: they all do the same things, with the same operating systems, run the same
application software and have similar reliabilities.
Non-price competition means that consumers pay attention not only to the price of the goods but
are also influenced by other marketing mix variables such as the:
๏ Quality, brand and features of the goods

๏ Promotion activities
๏ Place (where the goods or services are obtained).
Essentially, organisations which follow a differentiation or focus strategy will be making use of non-
price competition. They seek to make their products different so that they are particularly attractive to
consumers, who in turn are willing to pay premium prices. Considering again the laptop producers
mentioned above, we could probably argue that Apple uses non-price competition. Its laptops look
different and unique, they have a different operating systems and run different (but often compatible)
software. This can make it different to directly compare prices, but many people have the impression
that, insofar as it’s possible to compare like with like, Apple machines are more expensive than others.
Nevertheless, they sell well and profitably.
Consumers
Suppliers have to keep in mind both what the end consumers are willing to pay and also the profits
that will be expected by intermediaries in the supply chain. Many industries have ‘rules of thumb’
about the mark-ups they expect to be able to apply. It is common to segment markets according to
wealth so that a company will have a ‘value’ range of goods for poorer or thriftier customers who
might respond to price competition, and a more exclusive range for better-off customers, who might
respond to non-price competition.
Even if there are not different lines of goods for different customer groups, it can still be possible to
charge different prices for the same product to different groups. This is known as price
discrimination. For example, it is often cheaper to buy electronic goods in the USA than in Europe.
Leakage of goods from the cheaper to the more expensive market must be prevented in some way, so
the groups have to be sufficiently separate (or un-informed).
The perceived value of goods is a concept which is also related to non-price competition and, indeed,
to price. We have all, no doubt, been influenced by the thought that a higher price implies goods of a
higher value even though we are often essentially ignorant about the merit of those goods. For
example, when buying a T shirt there is a very wide range of prices for a range of garments which are
very similar looking. We assume that the expensive T shirt with the fashionable label is ‘better’ than
the cheaper, more basic lines. However, often we really don’t know, and might even be paying for the
kudos we feel an exclusive label gives us.
Whether goods are necessities or luxuries also influences consumers’ reactions to prices and price
changes. This affects the elasticity of demand of the product, which is a measure of how a change in
sales volume is caused by a change in price. Goods that have a high elasticity of demand are very
price sensitive and are likely to be luxury products that consumers are prepared to do without if the
price rises too much. Raising prices will be more than offset by a rapis fall in volume and revenue will
decrease.
Goods with a low elasticity of demand are relatively unaffected by price changes and are likely to be
necessities. As prices rise, demand will stay high and revenue will rise because customers need the
goods.
Controls
Some industries are closely regulated by statute and regulation, and they have little power to choose
their own prices. Other industries are able to, or try to, dictate final prices charged to consumers. For
example, exclusive perfume and cosmetic producers resist price competition by insisting in their
supply contracts that their retailers do not discount their products. Note that not all contractual
arrangements are legal. Pricing cartels (competitors fixing prices) are frowned upon by most
governments.
5.5. Promotion
There are four main types of promotion:
๏ Advertising
๏ Sales promotion
๏ Personal selling
๏ Public relations.
We are all familiar with advertising and we know that it can take place on a number of different
media. For example, television, magazines, newspapers, billboards by the side of roads. Television
addresses a mass audience and it wouldn’t be particularly sensible to advertise a specialist product
there. Those types of products would be better advertised in specialist magazine.
Billboards by the side of roads can’t contain huge amounts of technical information. People can’t and
won’t stop to read them. They can only give a very brief impression of the product and to spread
knowledge of its existence and perhaps its brand name.
The internet is now a very important and powerful advertising medium. With television advertising
you broadcast to all viewers but only some of whom might be interested and you are never sure who
they are. Internet advertising, however, is often started when a user visits a particular web-site or
enters a search term. The user’s activities can then be tracked and measured.
Sales promotion is something which happens very close to the point-of-sale. You may have been in
supermarkets where staff offer small portions of cheese or small glasses of wine for you to try in a
hope that you will then go and purchase. Buy one get one free offers and coupons which give you
money off the next purchase are also forms of sales promotion.
Personal selling is when a salesman or saleswomen, a sales representative in other words, goes
around spending time with customers or potential customers trying to persuade them to buy. This is
very important in business-to-business sales and, of course, it is economically justified there because
often the orders placed in business-to-business sales are quite large and valuable. It only happens in
business-to-consumer sales where the value of the product is particularly high.
Public relations usually means good mentions in the press. Sometimes there are charitable
endeavours where a local firm has made some sort of donation or lent some sort of equipment.
Perhaps sponsoring the local amateur football team also falls into the category of public relations.
Public relations doesn’t particularly advertise a product, it tends to be rather more orientated towards
giving a good impression of your organisation.
Promotion can be divided into two categories:
๏ Push promotion
๏ Pull promotion
Imagine a new product is about to be launched. Push promotion is concerned with getting the
product into the shops and would use, for example, personal selling. Pull promotion is getting the
public to demand that product, to go into shops and ask to buy it. That promotion could be done by
advertising. For the whole promotional campaign to be successful, you need both push promotion
and pull promotion to match up. There is no point in people knowing about a product if it is not
available; there is no point in the product being available if nobody wants to buy it.
5.6. Place
The last of the four Ps is ‘Place’, meaning the place you go to buy or acquire the product. It really
means distribution. Considerations to bear in mind there are:
The length of the distribution chain. The shortest distribution chain is going directly from
manufacturer to consumer and this is sometimes seen in mail order businesses. Some computer
manufacturers such as Dell operated in this way for many years. It doesn’t work quite so well when
you come to distributing something like clothing
By contrast, many consumer goods have a very long distribution chain, going from manufacturer to
wholesaler to retailer and ultimately to the consumer. Everyday products such as sugar, milk, butter,
cigarettes follow this sort of distribution chain because it gets the goods very, very deeply and widely
distributed within a community. They become available in almost every outlet. Those types of goods
are sometimes called convenience goods, goods that you expect to be available in a convenient way
and where you probably won’t bother getting in your car to travel across the city to buy a particular
brand.
Things like carpets, furniture, large electrical items. These represent significant amounts of money,
they are rare purchases, which, we hope, will last for many years. There, we would bother to travel
across the city to go to a major outlet which offers us comparisons of many different brands of
product. So those types of goods tend to be sold through a smaller number of larger outlets.
Suitability of the outlet. For example, if you are selling very, very high quality audio equipment, you
would expect the people in the shop to be able to explain the pros and cons of different systems.
Perhaps the shop should be equipped with soundproof rooms where could try different speakers out
in. You wouldn’t expect to buy very high quality audio equipment in your local supermarket.
6. Social media
Social media such as Facebook and Twitter have become very important promotional tools. Be-
friending a supermarket allows you to receive up-to-date offers, recipes and news. Similar effects are
obtained through Twitter accounts where consumers can follow brands and suppliers.
Note that some Twitter campaigns have backfired on companies where consumers have been
disappointed or feel that the organisation is being unfair. Angry ‘tweets’ can be ‘retweeted’ and soon
multiply potentially damaging a brand.
Social media can be used for guerrilla and viral marketing:
๏ Guerrilla marketing is designed to allow small businesses to promote their products or services
in an unconventional way with only a small budget. It involves focusing on grabbing the
attention of the public in a personal and memorable way. Some large companies also use
unconventional advertisement techniques
The main point of guerrilla marketing is that the activities are done exclusively in public places,
such as shopping centres, parks and streets. The hope is to attract a crowd which in turn attracts
other people who wonder what the fuss is about.
๏ Viral marketing is an approach which relies on information about a product being spread by
people, particularly if they post links on the internet (for example to YouTube), send emails, post
Facebook ‘Likes’ or tweet to their friends and followers. Often the subject matter is an amusing
picture or video featuring the product to encourage propagation of the message. Hand held
devices such as smart phones and tablets are important in this marketing so that the volume of
recipients and visitors to a site grows quickly.
An example of Viral Marketing is the Cadbury Gorilla campaign. This was a 90 second film
sequence, aired in cinemas, TV and the Internet, of a gorilla passionately playing the drums to
Phil Collins’ 1981 hit “In the Air Tonight”. The sequence was uploaded the YouTube shortly after
its public release in August 2007, and received over 500,000 views in its first week. Cadburys
reported a 9% increase in sales on the year before and, interestingly.
7. The impact of E-business

7.1. Introduction
The terms e-business and e-marketing are often user interchangeability but strictly e-commerce refers
to the customer-facing side of the operation (web-site, sales, order delivery) whereas e-business
includes e-commerce plus internal processes such as inventory, human resources, production and
finance
E-commerce implies marketing, buying and selling over the Internet. Most businesses now have a web
presence even if not buying and selling through their website. A simple web-site can provide
customers and potential customers with details about the company. Furthermore, a well-designed
web-site should be findable by Google and other search-engines and this can be a valuable source of
new business.
Strictly, e-commerce means entering into transactions over the Internet. For example a company like
Amazon trades exclusively in this way. Other companies, like many supermarkets, have a mix of
physical outlets plus they allow customers to buy through their web-site for delivery by courier or
post.
7.2. The 6Is of e-commerce and e-marketing
E-business has the following characteristics, known as the 6Is which differentiate this approach from
conventional commerce:
๏ Intelligence: this is collected every time a user visits a web-site.

๏ Individualisation: based on the intelligence collected each user can be given a
unique experience by the supplier. For example, Amazon will
make recommendations about which other books or films you
might like.
๏ Interactivity: users are encouraged to review products etc. They can also
often customise the product they want to buy.
๏ Integration: once an order is placed over the internet, much of the
subsequent processing and despatch of goods is automated.
๏ Independence (of location): E-business can give even small companies a global presence.
๏ Industry (structure changed): think how iTunes has altered the music business. E-books are
altering the conventional publishing industry.
Social media, such as Facebook, have become very important tools in e-marketing.
Chapter 8
MARKETING TOOLS
1. Marketing research
1.1. Introduction
Good marketing depends on good information, and this comes from marketing research.
Who are our customers? What do they want/need/appreciate/respond to?
Information is needed, not guess-work, on all of the marketing mix
There are three types of marketing research:
๏ Desk research
๏ Field research
๏ Test markets
1.2. Desk research
Desk research uses information that has already been collected. This approach is usually relatively
quick and cheap, but might not answer all your questions.
Sources of information are:
๏ Internal – accounting department

๏ Internal - data warehousing and data mining
๏ Government – national and local
๏ Market research consultancies
Internal sources
First of all, the accounting department can supply enormous amounts of information, provided the
information with properly coded originally. For example, if instead of simply crediting one sales
account in a nominal ledger, there are various different categories of sales account. One can easily see
how the sales of different products may be increasing or decreasing perhaps seasonally or perhaps in
responds to competitor action. The process of keeping track of sales goes in further if the company
sets up a data warehousing system.
As explained in Chapter 5, ‘big data’ has become a vital marketing tool. A good example of this is
seen when supermarkets provide their customers with loyalty cards. This may encourage customers to
go back and accumulate points which can then be traded in for some product later on, but the real
benefit of the supermarket is that the shopping habits of their customers can be carefully recorded.
Every purchase made at the supermarket using the loyalty card is recorded and this information can
be kept for many years. That’s the data warehousing part of the operation.
Data mining means that data is then examined in the hope of finding something useful or
unexpected which would help the marketing of the products or services of the supermarket. It may
uncover certain patterns or seasonality of the sales of products. It may uncover unexpected
correlations of sales of different products, so by putting these products together near each other on
the shelves overall sales are increased.
External sources
Some companies find valuable external data from the information which is routinely collected by
governments, both national and local. For example, most countries run a census perhaps every 10
years, so governments know very precisely how many children there are, for example under the age of
five. This could be useful to a company producing educational equipment or educational publications,
they need to know whether the school population is going to be increasing or decreasing and by
roughly how much. Local governments frequently know how many people lie within a certain radius
of the centre of the city and this can be useful when, for example deciding where to position a
supermarket. Often for detailed government information the company may have to pay, an
information can be available more or less instantly.
Finally, there are market research consultancies which collect information routinely in the hope of
selling it to suppliers of products and services. For example in the motor industry, research
consultancies routinely collect information about the number of new cars registered in the period, the
average price of second hand cars, and probably something about the profile of customers buying
each model. If you were for example working in Ford Motor Company, it might be very useful to you
to purchase this information if they gave you some insight in the success or otherwise of a say cars
manufactured and sold by Volkswagen, Renault, and General Motors.
1.3. Field research
Field research means going out and collecting specific information. The first and perhaps commonest
method is the use of questionnaires. In fact, you may well have been stopped by someone who is
carrying out a market research survey. It may ask you about your consumption habits, it may ask you
what adverts you remember seeing in television the previous night, they might ask you what well-
known brands of beer or cars or petrol that you remember and they may show you sometimes
examples of marketing initiatives to get your opinion or whether or not you think they might be
successful or desirable. Sometimes market research companies get together panels of users who can
then discuss between themselves various ideas and views while it’s been monitored and recorded by
the market researcher.
At some stage it may be important to actually test products before they are released. For example new
food products, new chocolate bars are often given to families to consume and several weeks later the
researcher comes back and asks what people’s opinions were of these products. Product testing is also
important to establish the safety and durability of certain products and that type of testing is often
done on research lab.
1.4. Test markets
The final piece of marketing research comes just before a new product is launched. The company
might decide to experiment in a test market. So, rather than a full national or international launch, the
product is tried out in a relatively small area. Test markets should be:
๏ Small
๏ Representative of the full customer population
๏ Stable population (a university town would often be unsuitable the population varies radically
from as terms change)
๏ Suitable facilities. So, if you were aiming to sell you product through supermarkets and
advertising it on a local radio station, your test market should have these facilities also.
The company will watch carefully how the launch goes in the test market. Frequent additional market
research should be carried out and the test market gives the company its last opportunity to get
things right before it goes to the expense of launching nationally. Remember not only is an obvious
loss of money if a product launch is unsuccessful. There will also be damage to the company’s
reputation and it may mean that the company will find it difficult to get into that segment of the
market in the future had they once failed.
2. Business to Consumer, Business to Business and Business to

Government marketing
The group to whom marketing efforts are addressed will affect the approaches taken. For example:
๏ Business to consumer (B2C):
Inexpert buyers so susceptible to promotional messages. Promotion often by TV, newspapers

and the Internet. Products are used domestically so often don’t need to be as sturdy as products
used in business. Styling will often be different so as to suit a domestic environment. Small
quantities bought, on-line or from retail outlets.
๏ Business-to-business (B2B)
Very expert buyers so they will bargain very hard to get discounts and lower prices. Promotion
typically by catalogue and by sales representatives visiting. Quality often very important. Styling
can be office-like.
Large orders mean that certain buyers will be very important and must be looked after carefully.
๏ Business-to-government (B2G)
Often huge orders so prices will reflect this. Often specialised negotiation tactics and promotion
needed. Decision on purchasing often very slow so representatives need patience.
3. The marketing of services and products compared

The nature of what is provided by service orientated businesses is often different to what
manufacturing businesses provide in the following respects:
๏ Heterogeneity: manufacturing often produces many identical units; service

industries often produce tailored products eg an audit.
Costing information and efficiency measurement will be quite
different. Pricing will be very different as customer (or clients)
will find it more difficult to judge prices.
๏ Perishability: many services are perishable ie they lose their value after a
certain time. An example is airline seats: once the aircraft
departs the seats have no value. Again, this presents
interesting pricing challenges. Performance will be improved
by attracting each extra passenger at the maximum marginal
price, but if everyone knows that prices will fall near the
departure date, passengers will be encouraged to postpone
booking until prices reduce.
๏ Intangibility: it is difficult to show potential customer what they will get for
their money. Auditing firms cannot show clients an audit or
audit file so how can potential clients judge value for money?
๏ Simultaneity: in manufacturing, production and sale can be separated. This
allows products to be quality checked before dispatch and
allow flexibility in timing. For example, production can be
carried out steadily throughout the year and inventory can be
stored until busy sales periods. Services cannot be stored and
are often instantly delivered. This places additional demands
on scheduling, pricing and quality control information
๏ No transfer of ownership: Often services or the use of a service provider is for a limited
period of time. Pricing and demand information has to reflect
this. For example, the pricing of hotel rooms will vary from
week-days to weekends. In addition because a service is being
provided for a limited period only, consumers are likely to be
very demanding during that period.
The information needed to perform well when providing a service will often be more related to
qualitative than quantitative aspects. For example, reputation, customer satisfaction, availability of the
service when required,
4. Relationship marketing
Relationship marketing is a form of marketing that emphasises customer satisfaction and retention,
rather than simply living from sales transaction to sales transaction.
Relationship marketing has been aided by software that allow tracking and analysing of each
customer's preferences, activities, conversations with the seller, tastes, likes, dislikes, and complaints.
For example, a car manufacturer that maintains a database of when and how customers buy their
products, the options they choose, the way they finance the purchase etc., is in a powerful position to
develop one-to-one marketing offers and product benefits. The aim is to turn a casual customer into a
client (a repeat customer) and eventually to be an advocate of the company.
Obviously when customers access the company’s web-site visit pages and perhaps eventually make
a purchase, relationship data can be built up easily.
5. Experiential marketing
Experiential marketing, sometimes called "engagement marketing," "event marketing", "on-ground
marketing", "live marketing" or "participation marketing," is a marketing approach that directly
engages consumers and invites and encourages them to participate in the evolution of a product or
brand. The objective of experiential marketing is to create a closer bond between the consumer and
the brand by involving them in a fun, exciting and memorable experience.
For example:
Zappos (on-line clothing): on one of the busiest travel days in the USA, Zappos sprung a surprise on
one of its most loyal markets, Houston. Zappos turned one of the baggage carousels at George Bush
Intercontinental Airport into a "Wheel of Fortune"-style game that awarded travellers the prizes upon
which piece of the carousel their luggage landed on.
Coca Cola and the Fort Lauderdale Convention & Visitors Bureau created bus shelters in some
northern cities that warm shivering commuters in wintry weather while promoting brand messages.
Coke brought "happiness" and Fort Lauderdale, Florida pointed out that they could be sun bathing
elsewhere.
6. Brands
A brand is a unique design, sign, logo, symbol (or combination of these) used to create an image that
identifies a product and differentiates it from competitors.
Over time, successful brands become associated with desirable qualities of the product such as
quality, reliability, price, taste. This enables consumers to quickly identify and buy products that they
like and trust.
For example, supermarket shelves are crowded with competing products, but when shopping we
often simply grab the familiar (for example a packet of toothpaste like ‘Colgate’). The packaging,
colours and graphical devices allow us to quickly find and buy the product without much thought –
except we know that the brand has pleased us previously.
Brands owners often work hard to associate a particular image with their brands (for example, up-
market or down-market) and defend the image strongly. For example, some manufacturers will allow
their luxury brands to be stocked by only exclusive outlets.
Brand value (or brand equity) considers the additional income a company can make from a product
with a recognisable brand name as compared to its generic equivalent. If consumers are willing to pay
more for a generic product than for a branded one, however, the brand is said to have negative brand
equity. This might happen if a company had a major problem or scandal associated with a brand
(think of Volkswagen in 2015 with the diesel emission scandal).
7. Product life cycles

7.1. Introduction
The product lifecycle is a well-known diagram which purports to show how the sales revenue and net
cash flows of a product change as it moves from the introductory phase through growth to maturity
and then decline. It is always shown as follows but not every product life will follow this shape.
Sales
time
Introduction Growth Maturity Decline Senility
Profit
The problem with this diagram is that no product is guaranteed to follow this pattern and even if it
does the lengths of the various phases on the diagram will show tremendous variation. For example,
the mature phase of some products can last for decades, but for others may last only a few years. What
we would really like to know for product planning purposes is when irrevocable decline sets in. This
diagram doesn’t predict that. What it does do is provide us with a set of labels which can be used as a
kind of shorthand.
7.2. The phases explained

๏ Introductory phase: if we know that a product is in the introductory phase we
know that we should want to watch sales very carefully to see
whether the product is likely to succeed or not.
๏ Growth phase: here, many competitors will start coming into the market,
encouraged by our success. We might therefore want to keep
advertising the product strongly so that we can stay ahead of
the field.
๏ Mature phase: at the mature phase there are likely to be many suppliers, and
buyers of this established product are likely to be well-
informed and demanding. Generally at this phase there is
price pressure and buyers demand more for their money as
they are more aware of the different features of the product.
In extreme cases, there may be over-capacity in the industry
and this will cause very extreme price pressure indeed.
๏ Decline phase: businesses must be careful not to misinterpret a temporary
dip in the sales as the start of the decline phase. Relatively
cheap upgrades and facelifts can extend product life for a few
years and that is important because usually development
costs will have been already covered, as will depreciation of
machinery bought for the production of that product. The
additional years can be very profitable despite the product
being in decline. Decline phases can last for very long times
for some businesses and plenty of money can still be made
there. A strategic decision has to be made as to whether or
not to get out of the product quickly or whether to be the last
player remaining standing, effectively becoming a monopoly
player in a declining market.
7.3. Life cycle costing
Although not all product life cycles necessarily follow a predictable bell shaped curve, all products do
have a life that can be described as:
๏ Initial costs - before production

๏ Operating costs - during production
๏ Disposal costs - after production
๏ The concept of life cycle costing recognises that, if a profit is going to be made, revenue has to
cover all costs, not just the production costs.
๏ For example:
๏ Initial research and development cost $2m
๏ 100,000 units would then be made with each cost $10 to manufacture.
๏ Demolishing the factory at the end of its useful life cost $0.5m
Total life cycle cost = $2m + $10 x 100,000 + $0.5m = $3.5m
Life-cycle cost per unit = $3.5m/100,000 = $35.
The selling price would have to be set above this for a profit to be made.
8. Boston Consulting Group Matrix (BCG)

The Boston Consulting Group Matrix is another very well-known analysis. Note that it is sometimes
known as a portfolio analysis and it really makes sense to use the BCG Matrix if there is more than one
product (or product line) in a company’s portfolio. The axes of the matrix are relative market share and
the market or industry growth rate.
Relative market share

Low High
High
Question mark/
Star
problem child
Market
growth
rate
Dog Cash cow
Low
We’ll go through each quadrant in turn.
๏ Question mark/problem child. This product has a high growth rate but a low market share.
Why is it known as a question mark or problem child? Well, the BCG analysis suggests that there
is no long-term future for this product if it has only a small market share. Suppliers who have
large market shares have much greater economies of scale and could easily dominate the small
supplier. The question therefore is: should we get out of this product or should we try and grab a
large market share? If we go for the large market share, this will require investment. It will be a
heavily negative cash flow and losses will be made because money has to be spent on
promotion, research and development or investing the margin (that is reducing the selling
price to win a higher market share).
๏ Star products. If the quest by the problem child for high market share is successful, the product
will become a star. This isn’t as good as it sounds. Although we now have a high market share
(and therefore would enjoy economies of scale and are well down the experience curve),
because we have one of the highest market shares, and highest profiles, competitors will be
trying to steal market share from us. We will be the target for competitors also wanting to gain a
high market share. Remember, if the market has a high growth rate this product is perceived as a
product with a future and many companies will be anxious to get a large share of the action.
Therefore, cash flow with the star product is usually soon to be roughly zero.
๏ Cash cows. The initially high growth rate of products will always slow down, perhaps to zero or
even becoming negative (a declining market). The product then becomes a cash cow. It’s a cash
cow because we still have a high market share but nearly all the initial expenses will have been
written off. Also because this is now perceived as an old product, competitors will not be keen in
stealing market share from us. Essentially they leave us alone. We therefore enjoy high cash
inflows without having to spend a lot on promotion, or research and development, or defending
our market share. At this stage there will be great emphasis on cost control in order to to
maximise profits.
๏ The dog sector is on its own. Cash cow products do not turn into dogs! This is a product which
has a low growth rate and we don’t have much of a market share. Therefore, get out of it, divest.
There’s no point spending time effort and money achieving a high market share in an old
product. So, close down the production facilities or try to sell them to another company.
Finally let’s return to the name “portfolio analysis”. If we have lots and lots of problem children they
will all require financing and where is that money going to come from? If we have almost exclusively
cash cows we have a very positive cash flow now, but a few years down the line the market for those
cash cows could have declined rapidly and what are we going to replace those cash flows with?
A well-balanced portfolio has some cash cows and some question marks. The cash generated from the
cash cows can be used to invest in the question marks, so securing the long-term future of the
company.
Chapter 9
HUMAN RESOURCE PLANNING (1)
1. The importance of human resource management (HRM)

1.1. Introduction
Human resource management can be defined as:
“Human resource management is defined as a strategic and coherent approach to the

management of an organisation’s most valued assets the people working there who
individually and collectively contribute to the achievement of its object.”
(Armstrong)
HRM views people as an important resource or asset to be used for the benefit of the organisation and
its employees with mutual benefit to the achievement of both organisational and individual goals.
HRM is as important as cash management, ensuring that there are enough raw materials and that
customers are happy with the products provided.
1.2. HRM difficulties

It’s worth noting the following particular difficulties with HRM:
๏ Changes in population, higher skill levels, a move from manufacturing to service industries,
more frequent job changes, and potential changes in the work-life balance. All of these mean it
is more difficult for an organisation to ensure that it has adequate human resources to fulfil its
strategic plans.
๏ An organisation’s human assets leave the premises each evening and there is no guarantee that
they will come back to that they won’t voluntarily relocate themselves to a competitor. You do
not get that sort of behaviour with computer equipment or other assets!
๏ People are not machines and their performance varies depending on their mood and on how
they are managed and treated within an organisation.
2. The HR cycle
2.1. Introduction
The whole human resources cycle is summarised in this diagram.
Development,
training
Selection: Performance
Planning Induction
• Advertising • Motivation Appraisal
• Shortlisting • Job design
• Interviewing
• Testing
• References
Rewards: fixed,
performance
2.2. Planning stage
Human resource planning should be based on the strategic plan of the organisation. If the strategic
plan suggests that the organisation is going to be opening in most countries in Europe it will need
people with the proper language skills. If the organisation is moving organisation up market, it may
need better people or at least people who are trained differently.
In essence, there has to be a budget:
๏ Assess the current position: what people are there? With what skills?
๏ Look at the future requirements. This will depend on the organisation’s strategy, growth, the
environment it is going to be trading in, and technological changes.
๏ Adjust the current position for estimated leavers, estimated number of people who will retire,
the aspirations and hopes of the people already employed, and the sort of skills they have.
๏ Essentially, there is going to be a gap which has to be filled.
Current human resources:

adjust for leavers, retirees, Future human
Recruitment
internal job changes resource needs
Let’s say the current position showed 100 people with adequate skills, but the future requirements,
suggested 500 people of those skills would be required. That’s a gap of 400, but then take into
account those who may leave and retire, let’s say that’s another 50 people over the five years.
Therefore, the company will have to recruit around 450 people. Of course, that won’t be an accurate
figure, it’s an estimate, but the company needs to know whether our recruitment burden is something
like 100 people, 1,000 people or only 10 people.
2.3. Selection
Selection covers a large number of steps:
๏ Job analysis to find out what the job entails. For example, will it involve customer contact,
supervision of a team, travel, budgeting, and IT competencies?
๏ A job description will be the result of the analysis: it sets out what the person will be doing.
๏ A person specification can then be prepared. This sets out the type of person, skills a person
who could carry out the job: skills, experience, intelligence, personality, physical attributes such
good eyesight.
๏ Next advertise to attract candidates. The advert must be worded so as to attract a reasonable
number of potentially suitable applicants. Sometimes a business will make use of a recruitment
agency to help with the wording. Also recruitment agencies often have lists of people on their
books who are looking for jobs and they can quickly select candidates for interview. Applicants
are shortlisted for the next stage.
๏ The interview stage is usually next. Interviewing well is a skilled process if it to be of any use
identifying good candidates. Often it is done badly and is not successful at discovering better
candidates.
Closed questions (ie can be answered with ‘Yes’ or ‘No’) should be avoided. For example “Can
you work to deadlines?” will almost certainly produce the answer ‘Yes’. Instead, ask open
questions such as ‘How do you deal with work pressure and tight deadlines”.
Increasingly frequently tests are given to candidates as part of the interviewing process:
๏ Ability: if someone claims to be able to type at 80 words per minute, it won’t take long to prove
that claim.
๏ Intelligence: might be needed for candidates who have few formal qualifications
๏ Aptitude: often used to select trainee computer programmers.
๏ Psychometric tests: used to assess candidates skills, knowledge and personality. For example,
will the person show initiative or be good at working in a group.
๏ Work sample tests replicate the work tools and environment associated with the vacancy, to
assess the level of the candidate’s current skills and knowledge as accurately as possible. This
involves looking at a sample of the skills and behaviours that can be used to predict future
performance in a similar work situation.
Sometimes employers use an assessment centre to provide an extended period of interviews, tasks
and assessment exercises. The process can last for several days. This method of assessment is
expensive and usually confined to candidates who will be expected to progress quickly through
management levels in the organisation.
Appointment: the favoured candidate is offered the job. There might be some negotiation about
terms, conditions and the starting date. After the candidate accepts, it is recommended that
references are taken from their existing employer to confirm their job title there, dates of
employment and salary.
Chapter 10
HUMAN RESOURCE PLANNING (2)
1. Appraisal
Employees’ performance must be monitored to identify and evaluate:
๏ Inadequate standards of work

๏ Where training or additional experience might be needed
๏ Where promotion might be in order (progression)
๏ To determine pay and bonuses
It is important that managers prepare properly for appraisal interviews by collecting information
about each employee’s performance and also looking at previous appraisal records where the
employee might have been told areas where improvement is needed.
3600 appraisal is becoming increasingly common where employees are appraised by their boss, their
subordinates and their colleagues.
It is also important that good two-way communication is encouraged rather than the manager simply
doing all the talking. Employees might have legitimate complaints or reasons why their performance
seemed to be inadequate. Finding out employees’ preferences is also important for the employees’
promotion and movement through the organisation.
Most appraisal processes make use of a form listing the important aspects of performance such as:
technical ability, punctuality, ability to get on with customers etc. Scores are allocated to these
elements of performance (eg – 5 to + 5).
The most effective way of doing this is using an open appraisal process in which the form is initially
blank and the manager and employee go through it together discussing what the mark should be.
This forces the parties to communicate. Less successful is where the manager has already filled in the
form and then goes through it with the employee. Managers will rarely change a score no matter what
the employee says.
The appraisal approaches are sometimes described as:
๏ Tell. Your manager tells you how you have got on with little room for discussion or
disagreement.
๏ Tells and sells. Your manager tells you how you got on and tries to persuade you that view is
correct
๏ Problem-solving where employer and employee cooperate in arriving at a fair appraisal.
A number of problems can arise from poorly-executed performance appraisals. Indeed some writers
and practitioners dislike the term ‘performance appraisal’ because of its judgemental and critical
overtones. They prefer to use the term ‘performance management’ so that emphasis is placed on
improving the performance of the employee – which should benefit both employer and employee.
J Lockett suggested six barriers of human performance appraisal. These are:
๏ Confrontation: angry disagreement and emotions block any useful communication and the
employee feels persecuted.
๏ Judgement: one-sided criticism by the manager with no employee input.
๏ Chat: too informal and doesn’t lead to conclusions or targets
๏ Bureaucracy: form-filling the appraisal form so that the manager can say that task is done – but
no other purpose.
๏ Event: a traditional, annual ceremony carried out every year with little thought about its
purpose
๏ Unfinished business: no proper to-do lists or follow up. Promises might have been made in the
meeting but they are then forgotten.
2. Competency frameworks
Competency frameworks are a method of describing the values, skills and abilities that are required to
perform given roles. They also provide clear focus to support the development of staff in order to
deliver the best possible performance. They can also be used as recruitment tools.
Typically, to define a framework for a given role, there will be a general description of the competency
followed by a list of attitudes, behaviours, skills and abilities that would indicate competence in the
relevant area.
There can also a negative statement at the end of each competency to indicate the sort of behaviour
that is actively discouraged, as it works against the principle of continual improvement an
organisation is striving for.
Competency frameworks serve several purposes which help organisations to improve and develop
their staff, products and services. They:
๏ Inform prospective recruits what is expected of them

๏ Inform staff of the sort of attitudes, behaviours and skills the organisation encourages when
carrying out their duties
๏ Inform staff of what they can expect from their managers
๏ Can be used to shape and define the organisational culture based around strong principles of
acceptable and expected behaviour
๏ Supports and guides staff at all levels in their development in order maximise their potential
๏ Should link to some of the key strategies that drive the objectives of the organisation as these
are crucial to success.
Target Actual
performance performance
Generic competences
Fire safety 80 50
First aid 0 0
Ethics 75 75
Specialist skills
Excel 100 80
Accounting package 80 80
Competence definition: Evidence of employee

competency:
Skill description
Skill aims and objectives Date competency attained
Competency levels and their Trainer/assessor data
definition Assessment method
3. Training and development

3.1. Introduction
๏ Training: very specific and dealing with current employees needs for their current job.
๏ Development: less specific and more aimed at equipping employees for future jobs.
3.1. Delivering training and development

Training and development can be delivered by:
๏ Formal, face-to-face courses, sometimes in-house and sometimes delivered by external trainers.
๏ Coaching, where a junior watches, accompanies and is helped by a more senior employee whilst
the junior is doing their job.
๏ Shadowing, whereby a trainees follows and observes a more senior person doing the job.
๏ Computer based training software.
๏ Self-study of manuals.
๏ Being sponsored by employers to undertake external qualifications, such as MBAs.
Training and development can be expensive. Trainers have to be paid and trainees are devoting time
to being trained rather than doing their main jobs. Furthermore, if the training is wrongly pitched, the
trainees will not be more able to do their jobs after training than before. So training has to be
designed carefully and the following steps are typical:
๏ Establish analyse training and development needs for each person.

๏ Set training objectives eg what the person should be able to do afterwards that was not possible
before.
๏ Plan the training and arrange for trainees to have time in which to undertake the training.
๏ Deliver the training.
๏ Review the success of the training that has taken place and update training records.
4. Motivation of employees
Identifying how employees can be motivated is of great importance to employers. Motivation was
once described as getting employees to run towards a target rather than amble towards it.
A motivated employee is fired-up to try hard and to do better.
There are many theories of motivation. One famous one that is easy to understand is Herzberg’s
Hygiene Theory.
Herzberg was using the word “hygiene” as an analogy with hospitals. If the hospital is going to make
you well it must be hygienic; in other words, clean. If it’s not hygienic you’ll get worse. But hygiene
itself doesn’t make you well: hygiene is just a starting point.
Herzberg argued that an organisation must get its hygiene factors correct before it can start
motivating employees. If a hygiene factor is missing then people become dissatisfied.
Examples of hygiene factors would be enough money to live on, reasonable relations with colleagues
and your superiors, reasonable physical conditions in which you’re working, a feeling that you’re
being fairly treated. If any of these is missing you are likely to be so upset that none of the other
motivating factors that the organisation tries will work.
Once the hygiene factors are in place then you can have the motivating factors such as recognition,
praise, a feeling that you are advancing and getting better skills, a feeling that what you’re doing is
worthwhile interesting work, and a feeling of having responsibility.
In his first version of the theory, money was only present as a hygiene factor; later versions had money
as both a hygiene factor and a motivation factor. The Herzberg theory is sometimes known as a two-
factor theory (hygiene factors + motivation factors).
5. Job design
5.1. Introduction
Most theories of motivation suggest that there is more to successful work environments than simply
requiring people to unthinkingly repeat simple tasks: challenge, variety, initiative, recognition and
team-work are all seen as valuable contributors to motivation and productivity. Undoubtedly there
will be some situations where traditional production lines, in which each person does only a repetitive
simple task, will minimise the marginal cost of production. However, those calculations would not take
into account:
๏ The costs of recruitment and training caused by high staff turnover that is likely to result if
employees dislike their jobs.
๏ The costs of staff shortages.
๏ Poor quality because employees do not identify with what they are producing.
๏ Disengagement of employees from trying to improve production methods.
In the 1960s and 1970s these considerations gave rise to the job design movement which attempted
to improve jobs (and employee performance) by deliberately designing ‘better’ jobs with
characteristics that should produce the following outcomes:
๏ High intrinsic motivation, leading to high productivity

๏ High job performance (quality)
๏ High employee satisfaction
๏ Low absenteeism
๏ Low employee turnover
5.2. Job design in practice

The practice of deliberate improvement in a job’s characteristics is called ‘job design’ of which there
are three types:
๏ Job enlargement means allowing an employee to take on more tasks, but still at the same
level. So if you were working on a car assembly line, instead of merely fitting the front wheels,
you are now asked to fit the front and rear wheels and the bumpers (fenders). The job cycle time
is increased (you would spend longer on each car), there is some more variety and therefore less
boredom. Note however, that all of these tasks are at the same level: basic, repetitive assembly
tasks.
๏ Job rotation moves employees round, perhaps on a daily basis, from one simple task to
another. So, one day the car worker might be on wheels and bumpers, the next day the worker
might be fitting the front and rear windows. The third day would be a different set of tasks.
Again this introduces the employee to some additional skills (though all at the same level)
reduces boredom and is perhaps beginning to give more insight into task identity: building a
car.
๏ Job enrichment is a vertical change because it gives an employee some responsibility,
discretion and authority that would previously been exercised by supervisors and managers. So
now the car worker might be expected to perform some quality control checks as the car is
being worked on, or might be responsible for reporting production problems. Not only does this
increase task significance but it adds to challenge and autonomy. Feedback can also become
more comprehensive.
6. Reward systems
Rewards can be:
๏ Extrinsic: rewards that arise outside the employee and include pay, praise by a manager and
promotion.
๏ Intrinsic: rewards that arise from psychological enjoyment and the satisfaction of challenge and
a feeling of having done well.
This section deals with extrinsic rewards arising from an employee’s pay structure.
Pay can be divided into three parts:
๏ Base pay: such as a monthly salary, or a rate per hour

๏ Performance pay: which relates to performance, such as a sales representative’s commission.
๏ Indirect pay: which relates to benefits such as pension contributions and employee life
assurance.
Performance pay can be:
๏ Performance-related pay: this links additional payments directly to the performance of an

individual or team.
๏ Incentive pay: offered before setting performance targets to encourage acceptance of the
targets or changes in work practice.
๏ Profit-related pay: where additional payments are made based on the organisation’s profits.
๏ Share-based plan: where shares in the employer are given to employees. The hope is that if
employees own shares in their company they will want the company to do well.
๏ Merit pay: for exceptional past performance.
๏ Commission: a financial incentive typically based on sales performance.
๏ Team-based pay: rewards members of a team according to performance of the team. This should
encourage members of the team to cooperate and to be mutually supportive.
For performance pay to be an effective motivator for employees it is essential that any objectives
given in order to qualify for additional remuneration are SMART:
๏ Specific: precise achievements and targets that are easy to understand.

๏ Measurable: necessary to prevent pay being arbitrary
๏ Agreed/achievable: employees must believe that with effort the target can be achieved
otherwise they are liable to give up.
๏ Time-limited: targets should be achieved by a specific time.
Chapter 11
ETHICS
1. What are ethics?

1.1. Definition
Ethics is concerned with distinguishing between good and evil, between right and wrong human
actions, and between virtuous and non-virtuous characteristics of people and organisations, and the
rules and principles that ought to govern behaviour.
Ethics pervades business. For example:
๏ Technology usage: issues about privacy, surveillance, collecting information secretly, monitoring
employees.
๏ Business strategy: moving operations abroad, approach to competition, monopoly building.
๏ Finance: paying suppliers on time, realistic forecasts and proper accounting
There are a number of philosophical approaches to ethics. For example:
๏ Absolutists: believe that certain actions are always wrong – no ‘ifs’ or

‘buts’.
๏ Relativists/pluralists: believe that that nothing is objectively right or wrong and that
‘right’ or ‘wrong’ depend on the prevailing view of a particular
individual, culture, or historical period.
๏ Consequentialism: whether something is right or wrong depends on the
consequences, or outcome, of the act.
But these terms are not of great importance to this syllabus as the importance of good ethics can be
demonstrated using arguments about good, sustainable business decisions leading to profit
maximisation.
2. The importance of ethics in business

Different stakeholders are likely to have different ethical views. For example, on a crowed train some
standard class passengers might see nothing unethical about sitting in first class (“I’ve bought a ticket
I should have a seat”); some other passengers and managers of the train company might see this as
unethical (“You can buy extra comfort if you want to”). Some shareholders might have ethical
objections to their company taking part in arms manufacturing whilst directors and employees might
have no ethical objections.
Perhaps what is most important is that stakeholders are informed about a company’s ethical position
on a number of issues so that there is openness and that everyone understands the company’s ethical
stance. Corporate codes of ethics can help to achieve this. These are documents issued to employees
that attempt to establish ethical rules or guidelines so that employees know how to behave if, for
example, offered a bribe by a supplier or they see a machine in a dangerous condition, or they are
considering whom promote.
Often these guidelines are made available to outside stakeholders to advertise the company’s ethical
stance. For example, the Coca Cola ethical guide can be found at:
http://assets.coca-colacompany.com/45/59/f85d53a84ec597f74c754003450c/COBC_English.pdf
Here is a short extract from the section dealing with treatment of customers, suppliers and consumers:
“Always deal fairly with customers, suppliers and consumers, treating them honestly and with respect:
๏ Do not engage in unfair, deceptive or misleading practices.

๏ Always present Company products in an honest and forthright manner.
๏ Do not offer, promise or provide anything to a customer or supplier in exchange for an
inappropriate advantage for the Company.”
Even if stakeholder disagrees about what appropriate ethics are, the importance of an organisation
being ethical can be linked to its profitability or its financial viability. Organisations might obtain short-
term advantages by being unethical (for example to encourage sales a pharmaceutical company
could conceal a drug’s side effects) but most ethical breaches are discovered and then huge long-term
damage is done both financially and reputationally.
Good ethics therefore:
๏ Reduce the risk for shareholders.

๏ If risk is reduced then capital can be raised more cheaply (the cost of capital and risk are linked).
๏ Goodwill towards the company is increased – improving sales.
๏ Regulatory compliance is easier to achieve, reducing the cost of damages and fines.
๏ Good candidates are attracted to companies with good reputations
๏ Joint ventures are easier if the company has a good reputation
3. CIMA’s ethical guidelines

CIMA’s ethical guidelines are based on those of the International Ethical Board for Accountants
(IESBA), part of the International Federation of Accountants (IFAC).
The fundamental ethical principles are:
๏ Integrity: be straightforward and honest in all professional

work. Stand up for what you believe to be right. Do
not ‘turn a blind eye’.
๏ Objectivity: do not allow bias, self-interest or conflicts of
interest to influence professional judgements and
conclusions.
๏ Professional competence and due care: carry out work to proper standards; don’t skimp;
keep up to date with changes in legislation,
methodology and regulations.
๏ Confidentiality: do not disclose information received through
professional work without permission or if there is
a legal duty or right to disclose it.
๏ Professional behaviour: comply with laws and regulations and do not act in
a way that brings CIMA or the wider accountancy
profession into disrepute.
Compliance with the ethical guidelines is continually threatened. For example, integrity and
objectivity can be threatened by personal relationships which could mean that an accountant does
not want to report errors made by colleagues. Accountants have to ensure that threats are reduced to
acceptable levels.

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Spread the word about OpenTuition, so

How to use OpenTuition:

IMPORTANT!!! PLEASE READ CAREFULLY

In addition question practice is vital!!

The syllabus consists of the following sections

1. The digital mindset

1.2. Skills needed by accountants

Function Data Data Applying Stakeholder Managing

2. The shape of the finance function

The early shape was a triangle that represented a simple hierarchy.

Chief financial accountant Chief management accountant Treasury

Accounts Accounts ...... Budgets Capital projects .... Foreign

Division 1 Division 2 Division 3 etc

Financial controller Financial controller Financial controller

Accounts staff Accounts staff Accounts staff

2.2. The segregated triangle

Level 1 Leading the

Partnering for value to influence

Specialists generating further

The change in structural shape have been driven by:

Overall the finance function is responsible for:

2. The components of the finance function

The components of the finance function are, in general:

2.2. Financial accounting

๏ Nominal or general ledger.

2.3. Management accounting

Typical management accounting functions are:

2.4. Financial planning and analysis (FP&A)

2.5. Project management and appraisal

Once the project begins it is vital to monitor and control:

This department is found only in larger organisations. It is concerned with:

2.7. Internal audit

The Chartered Institute of Auditors defines internal audit as:

The internal control system is the system which should:

๏ Ensuring that all purchases are authorised by a manager

3. Relationships within the organisation

Capital projects Finance Wages and salaries

Examples of interactions are:

4. Potential conflicts of interest within the finance role

Here are some examples:

Decision-making: directors, particularly directors of listed companies, usually want to produce

1. The fourth industrial revolution

Mechanisation: Mass production: Computers and Digital assets:

2. The nature of information

Data = raw fact.

Information = data with meaning.

Knowledge = information ‘in someone’s head’.

Only then can the information be used.

3. The qualities of good information

๏ Accurate: sufficiently accurate not to be misleading. Not all information

๏ Cost-beneficial: the benefit arising from using the information should be

Middle managers have a mix of informational needs.

A good IT system has to be capable of supplying suitable information to every level.

The choices available can be classed under:

4.3. Wired or WiFi or 3G/4G?

๏ WiFi (radio) using WiFi hotspots; or

4.4. Local or cloud?

The advantages of this approach are:

4.5. Centralised or decentralised?

The advantages of one system tend to be the disadvantages of the other.

Advantages of centralised/disadvantages of decentralised

Disadvantages of centralised/advantages of decentralised