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Como Negócios Funcionam PDF
Como Negócios Funcionam PDF
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A GRAPHIC GUIDE TO
BUSINESS SUCCESS
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Contents
Senior editor Georgina Palffy
Project art editor Saffron Stocker Introduction 8
Editors Anna Fischel, Alison Sturgeon,
Suhel Ahmed, Hannah Bowen,
Joanna Edwards, Alex Beeden,
Sam Kennedy HOW COMPANIES WORK 10
Designers Natalie Clay, Stephen Bere,
Phil Gamble, Vanessa
Hamilton, Jemma Westing
Managing editors Stephanie Farrow,
Gareth Jones
Business ownership 12
Senior managing
art editor Lee Griffiths Sole traders and partnerships 14
Publisher Liz Wheeler Limited companies 16
Deputy art director Karen Self Private and public companies 18
Publishing director Jonathan Metcalf Multinationals 20
Art director Phil Ormerod Franchises 22
Senior jacket designer Mark Cavanagh Not-for-profits 24
Jacket assistant Claire Gell
Jacket design Start-ups 26
development manager Sophia MTT
Start-ups from concept to launch 28
Pre-production producers Ben Marcus,
Nikoleta Parasaki Types of start-up 30
Producer Christine Ni Business plans 32
Raising money 34
First published in Great Britain in 2015
by Dorling Kindersley Limited, Business accelerators and incubators 38
80 Strand, London, WC2R 0RL
ISBN: 978–0–2410–0693–1
Printed in China
A WORLD OF IDEAS:
SEE ALL THERE IS TO KNOW
www.dk.com
HOW FINANCE WORKS 98
Management 284
Economies and diseconomies of scale 286 Contributors
Lean production 288
Just-in-time 290 Dr Julian Sims (consultant editor) entered academia
Total quality management 292 after a successful career in industry in the US and UK. He
is a lecturer in the Department of Management at Birkbeck,
Time-based management 294
University of London, UK; a Chartered Accountant (CPA Aus);
Agile production 296 and a Chartered Information Technology Practitioner (CITP).
Kaizen 298 His work is widely published in academic journals.
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HOW BUSINESS WORKS
Introduction 8 9
Introduction
The term “business“ refers to an organization or commercial
enterprise engaged in producing and trading goods and services for
money. We can trace the origins of business to the very foundations
of human society. When Homo sapiens evolved, mankind left behind
the nomadic hunter-gatherer lifestyle to become farmers. This allowed
for specialization of work, where individuals would become skilled at
specific taks to serve a particular community need. Over time, this
enabled more complex goods and services to be produced and traded,
in order to provide for all members of society. Thus, human society
has been engaging in “business” for thousands of years.
Public companies
7%
of global economic
NAMING A COMPANY
Do
❯ Use a domain suggestion
tool to search for available
Don’t
❯ Include your name, as if
the venture fails your name
internet domain names and will be associated with it.
activity is accounted work back from there. ❯ Ape competition, because
❯ Be descriptive so potential if your name is unique, you
for by the world’s customers instantly grasp
the nature of the business.
have a much better chance of
topping search-engine results.
100 largest companies ❯ Say the name out loud as it If your name is similar to that
of competitors, customers
may come across differently
from the written word. The can’t distinguish.
aim is that people can search ❯ Spend time thinking of a
and find it, especially online, name until your product and
just from hearing it. brand is finalized. Get the
❯ Keep it short and simple and product right first and the
avoid puns. name will naturally follow.
Multinationals
How it works
Many businesses start out as the NEED TO KNOW
most basic unit – either a sole trader
❯ Firm Collective term for
(sometimes called a sole proprietor) individuals in a partnership
or a partnership. A sole trader is an
❯ Limited liability partnership
individual who is the only owner of Unlimited liability: (LLP) Partners not personally
the business. This structure is easy to business debts accountable for business debts
paid personally
set up and there are no extra taxes to
pay, unlike with a company. Instead,
the sole trader files a personal tax
return. There is risk attached, however.
A sole trader has unlimited liability, so
if the business fails, the owner must
personally pay its debts. Partnerships
have more than one owner, and each
can be held liable for the whole debt Tax-efficient Simple
way to be registration
of the business. self-employed process
Sole trader
Working alone requires only
simple administration and
relatively few start-up costs.
HOW COMPANIES WORK
Business ownership 14 15
FROM INDIVIDUAL
TO MULTINATIONAL
Many sole traders and partnerships
have grown into global names:
66%
of EU private- WHEN TO MO
❯ Sir Richard Branson Sole trader COMPANY STVE TO
that expanded into Virgin empire sector jobs are in ATUS
❯ Steve Jobs and Steve Wozniak
Partnership that created Apple brand small or medium-
❯ Bill Hewlett and David Packard
Partners who founded HP technology sized enterprises
❯ John D. Rockefeller, William
Rockefeller, Henry Flagler, Jabez
A. Bostwick, Samuel Andrews,
Stephen Harkness Partnership that
grew into Standard Oil corporation If the need fo
r ca
increases (and pital
potential
debts grow),
forming
a company m
Profit and
ay be
beneficial. Se
control of the e pp.16–17.
business shared
Partnership
Like a sole trader, partners file
only personal tax returns and
are liable for business debts.
Limited companies
By setting up an organization that is legally and financially
independent – a limited company – business owners can limit
their level of risk, as personal assets are largely protected.
NEED TO KNOW
❯ Members People or institutions Limited by shares
that own shares in a company; ❯ Most common form of public limited company
directors may own shares but
❯ Must have at least one shareholder; no maximum
are not compelled to do so; also
known as subscribers ❯ Shares issued to shareholders, who are owners and
have certain rights
❯ Doing business as (DBA)
Operational rather than registered ❯ Profits distributed to shareholders as dividends
company name ❯ Liability limited to value of shares
❯ Professional corporation (PC) ❯ Used by profit-making organizations
Corporate form used in the US and
suitable for doctors, lawyers, and
similar professional service providers
HOW COMPANIES WORK
Business ownership 16 17
PROPERTY
MANAGEMENT
In the UK, a property
management company
is a type of private
company set up to retain
Private company an interest in a building
divided into units. One
❯ Single-member company typical example is a large
(SMC) Small company owned house divided into flats,
by one person each owned on a lease,
❯ Company with employees for which the company
Larger company that employs owns the freehold
56.5%
one or more people (head lease).
of UK limited
companies have
Limited by shares
employees; the ❯ Most common form of private limited company;
remaining 43.5% operates in a similar way to public limited company
Limited by guarantee
are single-member ❯ No shares issued; has members not shareholders
❯ Members guarantee debt up to a nominal fixed
companies (SMCs) amount; no profits distributed
❯ Used by clubs, charities, and community enterprises;
may be known as a Community Interest Company
Private and public
companies
While the owner-shareholders of a private company may buy and sell
their shares privately (usually with director approval), any investor in
the financial market can trade the shares of a public company.
How it works
Although most of the world’s companies are set up as
private, public companies are seen as more prestigious
Differences between private
and profitable. For business ventures requiring large and public companies
amounts of capital, a public company offers greater Private company directors have to weigh up the potential
opportunity for raising funds, since shares can be sold capital increase of floating on the stock exchange against
to public investors to generate cash. Private companies the legal red tape aimed at protecting public shareholders.
must rely on private investors or use the capital
investment of their owners. Public companies are
subject to more stringent legal controls than private
ones, and are expected to disclose financial details. Private
27 million
the number of companies
Directors
Usually control all of the shares.
Reporting
in the US, fewer than In the UK, it is mandatory to file accounts at
2,497
companies are listed on
GOING PUBLIC
There are legal requirements at each stage of converting
a company from private to public, not least voting in the
board of directors and deciding on a new name.
Inform staff
Must notify in writing anyone with
an interest (including employees
Public and proposed board members)
that company intends to go public
Register company
Directors
Documents setting out board
Not necessarily shareholders. resolutions sent to company
Reporting registry, which issues certificate
Company has legal obligation to disclose declaring the company is public
accounts and submit regular financial reports.
Make public announcement
Shareholders and management
Press releases issued, events for
Clear boundary is drawn between the role of business held, and emails sent to
shareholders and management; there may be inform contacts of change
conflicts of interest between them.
Financing
Company can tap financial markets to raise
capital by selling stock or bonds.
NEED TO KNOW
Valuation
Value of the company is easier to assess, from the ❯ Unquoted/unlisted company Another term for
trading price of shares and financial statements. a private company
Size ❯ Initial public offering (IPO) Stock-market launch
Number of shareholders is unlimited. ❯ Secondary stock offering Second-round sale of
shares to raise more capital
❯ Ticker symbols Unique codes assigned to publicly
traded companies and used by stock exchanges
Multinationals
A multinational corporation has business operations in more than one
country. It usually starts as a national company and sets up subsidiary
(branch) companies abroad for production, sales, and marketing.
Regional HQ Management
Case study: mapping a multinational and core admin functions
Sportswear company Nike has successfully spread around the globe from
Marketing UK campaigns
its corporate base in the US. It has manufacturing functions where technical and merchandising
expertise maximizes efficiency and keeps costs down; distribution hubs in
strategic locations; marketing and retail departments in countries where it
is establishing local markets; and call centres where they are cost-effective.
United States
Beaverton, Oregon
GLOBAL VS MULTINATIONAL Senior management are located
at the company’s corporate base,
A global company has facilities in different countries but they operate or “campus”, its centre for decision-
as a single corporate culture with common processes. A multinational making on global strategy, design,
has facilities in different countries but each functions as its own entity, and marketing, and core functions.
adapting locally, with little communication between geographic divisions.
Global
World HQ Management,
hello hola! Apple is an example of finance, legal, IT, and admin
a global company – the
product is the same apart
from a language change. Global marketing
Branding and marketing
Japan
Tokyo
Most manufacturing is based in
the Asia-Pacific region, benefiting
from expertise and lower wages.
Regional offices in 13 countries
also support production and retail.
Regional HQ Core
operations and marketing
Manufacturing Sites
in several countries
Brazil India
São Paulo Bangalore
Operations, marketing, and distribution for the Central and South American Call centres draw on a supply of
market are based in Brazil, with offices and retail outlets in all major countries. English-speakers on lower wages.
Central and South American Distribution Hub for retail Customer support
HQ Operational centre stores across the continent Complaints and returns
Franchises
A franchise is a business model in which an independent
entity – the franchisee – is entitled to set up a branch of an
established brand. There are advantages for both parties.
Business-format franchise
9.2%
How it works
Organizations that do not intend to generate profit for
their shareholders, are self-governing, and committed
to a common cause come under the broad umbrella of
not-primarily-for profit, not-for-profit, and non-profit
entities. On this spectrum, cooperatives may disburse
of all wages and salaries
profits to members, but charities are strictly non-profit.
Although their goals differ, not-for-profits have a similar
paid in the US come from
type of company status and structure to businesses. the not-for-profit sector
THRIVING SECTOR
Despite being NPOs, many cooperatives ❯ US Nationwide Mutual Assurance:
and mutuals have a sizeable annual turnover US$23 billion
(gross revenue transacted). ❯ Germany Edeka Zentrale AG cooperative:
❯ Japan Zen Noh cooperative: US$53 billion US$16 billion
❯ France Crédit Agricole Group of ❯ UK Co-operative Group: US$16 billion
cooperatives and mutuals: US$32 billion ❯ Spain Mondragon cooperative: US$14 billion
HOW COMPANIES WORK
Business ownership 24 25
Committees formed
by board members
carry out specific tasks
Non-governmental such as fundraising.
organization (NGO)
Funded by government Administration
or by international donor staff often includes
agencies such as the World a proportion of
Health Organization (WHO); voluntary workers.
operates independently
Mutual
Raises funds from
its members (usually
customers); often takes the
form of financial institutions;
profits reinvested in the
mutual or to sustain or
grow the organization
Chamber of
commerce Group of
business people that
gathers to promote trade,
investment, and cooperation;
usually funded by
subscriptions from
local businesses Charity
Must be registered as
charity status; tax exempt;
Social enterprise all resources must be devoted
May sell goods or to the charity’s stated charitable
services to fund community activities; may be organized
projects; any surplus revenue as a trust, corporation,
is reinvested in the enterprise or association
for the community
Start-ups
A start-up is a new business in the early stages of development and operation,
during which an entrepreneur or founding group comes up with an idea for a
product or service, researches it, develops a business plan, raises funds, and
launches with the aim of rapid growth. Registering intellectual property (IP) –
a unique creation, not just an idea – in order to protect it is an important stage
of the start-up process. Protection includes trademarks, patents, and copyright.
NEED TO KNOW
thousands of entrepreneurs with
web-based products and services
found funding, many on the
™ ®
❯ Internal start-ups Start-ups
that originate from inside a
strength of their intellectual
property alone. Giants Google
and Amazon both started up at
©
large organization this time. Since then, technology
❯ Patent trolls Individuals or businesses have become one of the
companies who buy up the patents most talked-about start-up types.
of failed start-ups and attempt to Their value is often based 100
collect licensing fees from potential per cent on intellectual property.
infringers of the patent
HOW COMPANIES WORK
Start-ups 26 27
he big idea
T
Consider Launch
the IP ❯ Win? Lose?
❯ Register IP. ❯ Research indicates
❯ Find a name. that, in most Western
countries, 80–90 per cent
❯ Buy a domain. of start-ups fail fail.
❯ Research market.
40%
how much it will make. See pp.34–37.
See pp.32–33.
START-UP STRUCTURE
Business
Sole trader
Pros
o cial start-ups
S
Motivation
Making a difference
Example
Ex-athlete starts
fitness-consulting
business
173%
the projected
Type of funding
Self, friends,
peers, bank loan
Example
Malaria blood-test kit
for smartphone
revenue increase
over three years
for mobile gaming Type of funding
Community, charity,
start-ups government, donation
HOW COMPANIES WORK
Start-ups 30 31
n a large c
t hi
wi or
p alab
le start-
up
ve
Motivation c
Innovating S Motivation
or
i
iat
Readiness to grow
at i
Init
on
0101010011
0100010101
Example
PC manufacturer starts
a separate business
Example
all business providing cloud
Phone app
Sm data storage
developer
Motivation
Feeding the family
Type of funding
Self, family,
bank loan
Example
Biotech
laboratory
Type of funding
Outside
investment
Business plans
Writing a business plan is one of the most important steps in
developing a start-up. The plan sets out the new business’s
goals, market analysis, and projected income and profit.
Key elements
Executive summary Business
Preparing a business plan can take
Fill in this section last, bearing in background
several weeks, and it is worth doing
mind that it may be the only part
thoroughly. It is a vital document Provide details of each person
a busy person reads:
for securing funding, so the financial in the business:
forecast must be both realistic and ❯ Business summary Company
structure, name, product or ❯ Experience Relevant work
accurate. If showing it to others, pare carried out to date
service, and customer profile
the executive summary down to two
❯ Business aims Three objectives ❯ Qualifications Credentials,
A4 pages, write it in plain English, and such as diploma in horticulture
explain any technical terms. over one, three, and five years
for a gardening service
❯ Financial summary Expected
sales and costs, and funding ❯ Training Past and future,
including business skills such
❯ Elevator pitch Two-minute talk as assertiveness
to sell your idea to a customer
2.5x
more likely
❯ Product or service With
a picture if product is new
❯ Range If more than one, such as
garden design and maintenance
❯ How it is different What makes
or individuals and their profile;
local, national, or international
❯ Market research What the
local market is for similar
products or services
Back-up plan
Make a Plan B in case something ❯ Longer-term changes Shifts such
goes unexpectedly wrong: as working online, not on premises
❯ Short-term changes Cutting costs ❯ Closure Lessons learned and skills
or boosting sales immediately acquired if the business closes
Raising money
Almost every new enterprise needs funding to get it going, and to
keep afloat until it turns a profit. Financial help is at hand from a
variety of sources, suitable at different stages of start-up growth.
Term loan Paid back regularly Bank overdraft or credit card Factoring/invoice discounting
over a set period of time Interest charged monthly if balance Unpaid invoices sold at a discount
not paid in full to a company that collects them
for commission
p fund
rt
-u
5–10%
in
Sta
g
of small and
medium-sized
enterprises in
the UK need no
start-up funding
Investors Grants
Equity capital is paid to the Financial awards and
start-up in return for a share prizes are provided
of the business. by public bodies.
Alternative models
Since the start of the economic CREDIT ANALYSIS CRITERIA FOR LENDING
downturn that started in 2008,
several innovative and more Capacity Collateral
personal types of funding, such The borrower’s ability to repay the The borrower is often expected to
as crowdfunding and peer-to-peer loan is shown by the business plan. pledge an asset that can be sold to
(P2P) lending, have evolved and Capital pay off the loan if funds are too low
blossomed on the internet. All to pay the monthly interest or repay
The borrower’s net worth is assessed the capital at the end of the term.
involve the principle of raising to check that assets exceed debts.
small amounts of money from Conditions
Character
large numbers of individuals, The lender is swayed by the current
The lender usually looks for a economic climate as well as by the
who pool their resources to p
borrower with a good credit history. sum requested.
rovide the loan or equity needed.
(FFF)
The key to successful funding is to
choose the right type of finance at ¥
each stage of a company’s early
growth. Start-ups usually begin
modestly, with self-funding and help
from friends, family, and anyone else
who is prepared to take a high risk.
Crowdfunders and business angels
are amateurs willing the entrepreneur
to succeed, while venture capitalists
become interested when the level of RISK
risk goes down and they can expect
a healthy profit in return for injecting
substantial funds. Public markets such
as stock exchanges may step in as
sales soar and success looks probable.
T
At all stages, investors will conduct MEN
VEST
credit analyis to asses a company’s IN
ability to repay its debt.
REVENUE
TIME
Idea Seed
HOW COMPANIES WORK
Start-ups 36 37
Personal Home
66% savings 5% mortgage
£ 10% Bank
loan £ 1.5% Equity
investment
SALES
Business accelerators
Suited to start-ups that have limited financing, accelerators offer short–term (one
to three months) boot camps. Their clients include web and software developers.
Marketing
Networking
Start-up pays advice
accelerator % of
equity in the business.
Management
Seed capital In return, accelerator of intellectual
provides help and property
services.
HOW COMPANIES WORK
Start-ups 38 39
Business incubators
Start-up pays
Often sponsored by non-profit incubator %
organizations, incubators tend to be of equity in the
longer term (one to five years) and business. It may
cater for a variety of clients, many also pay rent to
science-based. share part of the
incubator’s work
space. In return,
it receives a range
of benefits.
Start-up
introduced
to
incubator
33
science laboratories work from
months
the average time
US start-ups spent Interaction with Seed money
in an incubator, other start-ups to get started
during 1999–2002
Buying and
selling business
Both private and public companies regularly change hands – they are bought,
sold, and restructured to reflect changing business conditions. These deals
all come under the umbrella term of mergers and acquisitions (M and A).
Acquisition financing is usually needed to pay for the purchase of another
company, often in the form of a loan or venture capital.
Buy-out Demerger
The existing management team buys out Part of company
the company they work for. is split off to form
Buy-in new company; may
become acquisition
An external management team buys into target. See pp.44–45.
the company.
HOW COMPANIES WORK
Buying and selling business 40 41
US$311.5
M AND A KNOW-HOW
Measuring a big deal
million
The corporate world categorizes acquisition
deals according to the capitalization size (the
value of the company’s shares).
$ $ $ $ Megadeal Over
US$10 billion
Company A Company B
Merger manufactures manufactures
luxury cars in the US. luxury cars in Italy.
merges with
A B
Acquisition
takes over
A B
US$112
New company A + B now has
an expanded market spanning
Europe and North America.
A+B billion
the record annual
spend by Japanese
companies on
overseas mergers
Expanded
company A and acquisitions,
now has
in-house in 2012
A
expertise for
producing
animated films.
Demergers
While a merger results in a bigger company, a demerger reduces
the size of a business by breaking it down into smaller components
or divisions, which are then sold off or dissolved.
Demerger in practice
Smith Industries Ltd is one example of an industrial paint conglomerate that has grown
rapidly over the past five years, due to an increase in profits from its expanding sales in
China. It diversified into agricultural chemicals, textiles, and biotechnology, and set up
a separate division for each. Share prices fell in response to poor financial performance.
AGRICULTURAL BIOTECHNOLOGY
CHEMICALS
AGRICULTURAL TEXTILES BIOTECHNOLOGY
CHEMICALS
HOW COMPANIES WORK
Buying and selling business 44 45
NEED TO KNOW
❯ Spin-off New company formed as
the result of a demerger; also called
a hive-off
❯ Reverse merger Not to be
confused with a demerger, a quick
and cheap method for a private
company to go public by buying a
52%
the potential
❯ Tracking stock Special type
of shares issued by a parent
company for the division or
shell stock – a public company that
is no longer operating because it
rise in a parent
subsidiary they will sell; tracking
stock is tied to the performance
went bankrupt or was simply closed
❯ Divestiture Term commonly
company’s
of the specific division rather than
the company as a whole; also known
used in the US for demerger share price
as targeted stock
❯ Letter of intent Letter stating
following a
serious intention to do business,
often concerning M and A
demerger
INDUSTRIAL
PAINT
Vertical vs horizontal
integration
Companies that want to expand through a merger or acquisition
may decide on a strategy of either horizontal or vertical integration,
combining businesses involved in similar or dissimilar activities.
Horizontal integration
Two publishing companies, both involved
in the process of book creation but with
different areas of specialization, agree a
merger deal to gain a larger market share.
PUBLISHER AB
Publisher A, a general publisher,
acquires specialist academic
PUBLISHER A Publisher B to strengthen its PUBLISHER B
textbook division.
HOW COMPANIES WORK
Buying and selling business 46 47
ONLINE
BOOKSHOP
A
31%
of businesses
worldwide
planned to
expand through
PUBLISHER/ONLINE a merger or
Forwards BOOKSHOP A
(upstream)
Publisher A buys Online
acquisition in
Bookshop A to improve
its brand presence and provide
a direct channel for sales.
the three years
Vertical
from 2014
integration
A publisher acquires two MERGER AND
related businesses – a ACQUISITION TYPES
PUBLISHER A
printer and a bookshop –
so that it can have greater Conglomerate
control over both the Combining two companies with
production of its books nothing in common: for example,
and their route to market. in 1985, cigarette-maker Philip
Morris purchased General Foods, a
new line of business unconnected
to legal wrangles around tobacco.
Market extension
Backwards
(downstream) PUBLISHER/ Combining two companies that
PRINTER A sell the same products but in
different markets: for example, in
Publisher A buys Printer A
to improve print capacity and 1996, the Union Pacific Railroad
production costs, and provide Company acquired the Southern
more warehouse space. Pacific Rail Corporation to link
railways in adjacent US regions.
Product extension
Combining two companies that
sell different but related products
in the same market: for example,
PRINTER A in 2014, Microsoft bought Nokia’s
mobile-phone unit to address
flagging PC sales and weakness
in the mobile device market.
Management buy-ins
and buy-outs
A company’s ownership may undergo a change, which can be
driven either externally, known as a management buy-in, or
internally, known as a management buy-out.
Buy-in
Some companies, such as investment banks or venture capitalists, can make
sizeable profits by purchasing undervalued businesses and transforming them.
Company Company
+
£ – =
An outside They raise funds They sack and replace the They overhaul the business
management team or to buy a majority previous management team. to improve performance and
investment group sees shareholding. realize its true value.
that a company is
undervalued.
HOW COMPANIES WORK
Buying and selling business 48 49
Company Company
Europe’s biggest
ever leveraged
buy-out — of
+ = chemist chain
Existing management
members buy company
Outside management
members brought in
New management team Alliance Boots
in 2007
Buy-out
A buy-out allows a large company to sell off a part of the business it no
longer wants or helps a small business owner to retire or move on.
+
£ + =
The management team They raise funds via They buy the business. The management
sees an opportunity to bank loans, private team – who now
take ownership when investors, their own own the company –
their corporate division is capital, or a loan streamline the
put up for sale. from the seller. business to make it
more profitable.
Who’s who
Determining a company’s hierarchy – including how many layers of power it has,
and how many staff to appoint at each level – is one of the biggest challenges of
modern management. In family-run businesses, positions are usually filled by
family members who answer to the head of the family. The emergence of public
companies has meant that company ownership is separated from management,
so that shareholder interests are prioritized.
46%
of UK employees
STRUCTURAL WHYS
AND WHEREFORES
Overtime pay
Managerial staff who are not paid for overtime
hold exempt positions. Non-exempt positions
believe what senior usually belong to non-managerial staff who are
paid by the hour and qualify for overtime pay.
managers tell them Who bosses whom
about what is happening When one manager has formal authority (decision-
making power) over another, it is called vertical
in their organization specialization. Horizontal specialization means
several managers have equal authority.
Shareholders
Any person or
institution that has
bought shares in
a publicly listed
company is a
shareholder. The
board works for
the shareholders,
who effectively £ £
own the company.
HOW COMPANIES WORK
Who’s who 52 53
Shareholders Shareholders
CEO and
CEO
chairman
Shareholders Shareholders
Supervisory board
C-SUITE VARIATIONS
The range of C-level positions
varies for each company. As well as
the three top posts, there may be:
CAO Chief Administrative Officer
51%
of CIOs and CTOs
Mid-level management
Responsible for overseeing specific
functions in the organization, the
most senior managers at this level
head up different departments or
CIO Chief Information Officer say they are divisions. These managers are often
CTO Chief Technology Officer called directors (not to be confused
CPO Chief Product/Production pioneering new with the board of directors) or, in
the US, vice-presidents. The exact
Officer, responsible for overseeing
product development and digital approaches job titles, and the number of mid-
production level managers, vary depending
CMO Chief Marketing Officer,
within their on the company.
responsible for marketing strategy
and business development business
C-level positions are evolving,
adapting to market conditions and Junior management
business priorities. New roles are and other employees
emerging while some traditional
roles are disappearing. The role of Team leaders, such as supervisors
COO, for example, is less popular and assistant managers, implement
in modern organizations. Some of management plans. They also
the new roles include: coordinate teams of skilled and
CPO Chief Privacy Officer unskilled workers in, for example,
CSO Chief Sustainability Officer production, customer service,
and sales to carry out the core
CDO Chief Digital Officer
tasks needed for the company to
CKO Chief Knowledge Officer function efficiently and profitably.
CCO Chief Customer Officer
HOW COMPANIES WORK
Who’s who 56 57
15%
CHIEF EXECUTIVE
OFFICER (CEO)
Decides on corporate
CHIEF OPERATING policy and strategy
OFFICER (COO)
Responsible for
day-to-day operations; the average salary
reports to CEO and
acts as second
in command CHIEF FINANCIAL
rise for a C-level
OFFICER (CFO)
Manages company’s
executive reporting
financial risk;
reports to CEO to the CEO, in the
US between 1986
and 2006
MARKETING FINANCE
MANAGER MANAGER
Directs marketing Puts CFO’s plans or
department directions into
day to day action, instructing
junior managers
OPERATIONS R AND D
MANAGER MANAGER
Oversees operations Heads up research
division; may also and development
direct production (R and D) of new
department products
NON-MANAGEMENT EMPLOYEES
COMPANY HIERARCHY
Mid-level
CH
management
AIN
OF
CO
MM
AN
Supervisors and
D
team leaders
Non-management
employees
HOW COMPANIES WORK
Who’s who 58 59
CASE STUDY
Restructuring the big three US car manufacturers
The economic crisis of 2008 caused
the big three American car-making
at a lower level in the organization
to create a flatter, less top-heavy
25%
the decline in the
companies – General Motors (GM), company hierarchy.
Ford, and Chrysler – to rethink their ❯ Before restructuring Thirty levels of hierarchy
corporate structure. Market share technicians reported to one
had fallen and the three companies
needed to shed employees and find
production supervisor. between division
❯ After restructuring Seventy-five
ways to cut production.
All three took similar action to
technicians now reported to one heads and CEOs
reorganize the company hierarchy,
removing some managerial roles
production supervisor, through 18
new team leader positions. in the US, from
from the mid-management level
and installing more team leaders
1986 to 2003
Flat hierarchy
This looser model is more flexible and suitable for
companies that foster creativity.
❯ Only a few layers so mid- and low-level
management are merged
❯ Large number of employees reporting to each
manager; close supervision not possible
❯ More freedom for employees to make their
own decisions
CEO
CH
AI
NO
FC
OM
M AN
Supervisors and D
team leaders
Non-management
employees
Stakeholders
A stakeholder is anyone who is affected by the performance of the
company, while shareholders own one or more shares in a company,
which makes each of them a part-owner of the company.
US$892
organizations ❯ Impact on local
❯ Contribution to inhabitants
enviromental and ❯ Concern for broader
social causes social welfare
❯ Legal compliance
million
the average drop in market
value triggered by negative
news about a company’s
human rights record
HOW COMPANIES WORK
Who’s who 60 61
$
Trade unions and Suppliers Employees Lenders
labour unions ❯ Ability to pay debt ❯ Pay and benefits ❯ Ability to repay loans
❯ Treatment of workers ❯ Enough liquidity ❯ Longevity of the ❯ Integrity of
❯ Fair pay, benefits, and company management
working conditions ❯ Employment prospects ❯ Financial strengths
of the company
STAKEHOLDERS
News breaks that spill is Stakeholder social media News media report on the
worse than BP claims. campaign intensifies. stakeholder backlash.
$60
Bill
$69
BILLION
$30
$0
US government’s Obama Obama administration Share price drops 7 per cent
administration criticizes BP advises it could take legal in London trading.
and sends company US$69 action to stop BP paying
billion bill for clean-up. dividends to shareholders.
HOW COMPANIES WORK
Who’s who 62 63
BANG!
BANG!
@
#
Oil rig explodes, killing News media report on BP starts social media
11 employees and spewing the event. campaigning on Twitter –
millions of gallons of oil into initially to minimize the
the Gulf of Mexico. impact of the spill.
$60
$$ $30
$0
Five of BP’s top 10 By 25 June, BP’s share price BP shares trading at
shareholders sell off stock. has more than halved; more
than 34 billion shares have US$23.91
been bought and sold. on 25 June 2010
Business cultures
Every organization has a particular workplace environment,
consciously or unconsciously shaped by the personalities, values,
and behaviour of the people leading it and working in it.
DECISIONS MADE
DESCRIPTIONS
PROCEDURES
SYSTEMS
RULES
JOB
POWER
bureaucratic / controlling
HOW COMPANIES WORK
Who’s who 64 65
IP
RSH
NE
RT
PA
TASK
TASK
TASK
entrepreneurial / flexible
Corporate
structure
A company’s structure – the way in which it is organized – can have a major
impact on the way it performs. There are several models of corporate structure
typically used in the business world, and they continue to evolve. The first
consideration is whether power should be centralized at the top, with decision-
making in the hands of a few key senior employees, or decentralized, with more
power in the hands of staff, and with fewer people to go through for approval.
Choosing a structure
Most start-ups have a centralized structure. More complex structures either evolve or are designed
as the company grows, depending on the nature and size of the business, the complexity of the work,
any requirement for instant expertise, and the geographical location of parts of the business.
78%
of groups reach
100%
of groups reach
WARNING
When change is needed
Signs that a structure is not working
include low morale and high staff
turnover, no new products being
solutions to solutions to developed, and profit suddenly
accelerating or decelerating. Tools
simple tasks complex tasks to amend poor structure include:
❯ Business process reengineering
faster in faster in (BPR) Analysing and redesigning
the workflow within a company.
centralized decentralized ❯ Altering the reporting line
In a traditional solid-line reporting
structures structures relationship, one line manager
oversees goals and performance.
It can be beneficial to switch to
the weaker chain of a dotted-line
reporting relationship, in which
a manager sets some but not all
the objectives.
Network Team-based
Decentralized
Suits creative For companies that Power is spread through the company, and staff
and technology rely on innovation make their own decisions.
companies in which and are customer ❯ Power shared
everyone is online. focused.
❯ Organic
See pp.74–75. See pp.76–77.
❯ Experimental
❯ Flexible
❯ Fast response to change
How it works
The chain of command is straightforward. The
business typically consists of a chief executive
Typical departmental hierarchy
officer (CEO) or president at the top, with the The departments operate independently, with the
various specialist departments or divisions, managers reporting to the CEO or president, who has
such as marketing and finance, aligned below. overall command. The sales and marketing department
usually takes responsibility for managing product lines.
Each department operates as an independent
unit, with its own budget, and reports directly to
the CEO, who takes responsibility for the operation
of all the departments. A functional structure is the
most common type of organization.
WARNING
Dangers of silo mentality
Silo mentality describes a scenario in which each
department has a different, closed view of its role within
the overall scheme and information does not get shared.
£
2 for 1
1 Sales and marketing 2 Finance is not briefed and Production/ Research and Finance
decide to launch a special processes the order for one
online two-for-one offer. item only. operations development manager
manager manager
41%
of UK companies FUNCTIONAL: PROS
AND CONS
say the structure of Pros
their organization is a ❯ Allows for the development of
specialization and expertise
barrier to improving ❯ Enables efficient use of resources
and potential economies of scale
CEO customer experience ❯ Offers obvious career path for
employees in each department
❯ Simple, efficient structure for
manufacturers producing a
limited range of goods for sale
Cons
❯ Formal lines of communication;
stifles innovation and creativity
❯ Departments fail to coordinate
with one another efficiently
❯ Response time on problems
and queries between different
departments slow
❯ Many decisions referred up
to the top, creating a backlog
How it works
Under the overall control of a CEO Division by geography
or president, several divisions work For businesses with products that need to
alongside one another to design, be adapted to local markets, an organization
research, produce, and sell a can be structured according to each of the
particular product, or to service regional markets it serves. These may be
a specific market. Each division domestic or international. Print technology
runs its own specialist functions, and services company Xerox has successfully
such as operations and production, adopted this structure (see case study, right).
sales and marketing, and finance.
A company may arrange its divisions
according to the types of product
it makes, the regions in which it
operates, or the customers to whom
it sells. Large companies may adopt
hybrid structures – by product and North America
geography, for example. The main market for
the company
CASE STUDY
Printer technology and services
company Xerox has restructured
several times to align the business
with the main markets that buy its
CEO products. In 1992, Xerox’s high-
profile change from a functional
to a new divisional structure, with
nine self-contained divisions each
serving a particular customer type,
hit the headlines. This also allowed
the company to focus on its core
business – digital publishing, colour
copying, and printing.
Dividing the company by market
location is another strategy Xerox
has used successfully. In 2006, each
division was organized once again,
geographically, to ensure that those
making the decisions were closest
to the customers in each market.
Europe Developing Global services
The company’s next- markets Additional division
largest sales region All other markets consulting across regions
7%
Businesses with distinct customer
markets may be organized by
customer division. For example,
the financial institution Bank of
America Merrill Lynch caters to
individuals, small businesses, and the increase in
corporate and institutional clients.
CEO Xerox’s share
value when
it announced
its move from
a functional
CONSUMER
Typically the
BUSINESS
Products adapted or
INSTITUTIONAL
Large-scale provision
to a divisional
original market favourably priced to a single client structure
in 1992
Matrix structure
Unlike a conventional company hierarchy organized either by function
or division, a matrix combines the two approaches so that staff work
in both functional and divisional units, and report to two bosses.
How it works
A business that uses a matrix set-up often begins Matrix structure
with the more traditional functional structure. As
In this example, an oil exploration and
the business develops, it may make sense to overlay
production company has several oil-
a divisional structure to meet changes in business refining projects to manage. The matrix
conditions – for example, if a company is managing guardian oversees the matrix and makes
several large projects for a client or expands globally sure it works efficiently.
and is selling its products in several regions. A matrix Engineering
grid may start out as temporary – perhaps formed to director
manage short-term projects – and become permanent.
The two chains of command in a matrix create the
grid. Staff report along a vertical line to a functional
manager, such as the marketing director, and along Matrix
a horizontal line to the project manager of a specific guardian
business line, brand, project, or region.
CEO 90%
of FTSE 50 companies
had adopted a matrix
structure by 2013
MATRIX: PROS
AND CONS
Pros
Site-supervision Sales Finance
❯ Faster decision-making
team team team
❯ Potential for improved
productivity
❯ Flexible use of staff
Cons
❯ Expensive to set up and run
❯ Possible confusion as to the
reporting line
❯ More potential for interpersonal
Line operations Marketing and Finance conflict as team goals conflict
team PR team team
Network structure
Also called a virtual organization or virtual corporation, a network
structure is centred around a streamlined company, with digital
connections linking it to external, independent businesses.
How it works The various parties can be scattered around the globe
The company at the centre of the structure is stripped and are connected by the internet. Together, they
back to basic functions that are essential to the type of provide all the services needed for the network to
business being operated – research and development, function as one entity. This type of business structure
for example, in the case of a technology company. All is based on the idea of the social media network, and
other functions are outsourced to external specialists. so is known as a network enterprise.
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Set design
Location scout in Sydney,
in Istanbul, Turkey Australia
Team-based
structure
As its name implies, a team-based organization (TBO) is made up
entirely of teams. Managers and staff from different departments join
to form teams handling specific projects, in the short or long term.
Team-based hierarchy
While TBOs still have a CEO, little other hierarchy exists. Team leaders are
part of the team rather than above it in a chain of command. At its best, a
team-based model fosters a culture of trust, so individuals take pride in their CEO
work and responsibility for carrying out tasks well and on time and budget.
Team Team
leader leader
Team A Team B
$
HOW COMPANIES WORK
Corporate structure 76 77
Business goals
HR framework Business goals are the
The starting point for any driver for every business
decision in an organization is decision, and HR
its business goals. HR supports polices support them.
the delivery of these goals by
ensuring that there is a staffing
strategy to support the business
plan. Typically, an HR framework
sets out a people strategy
including the competencies
of the people who best suit
the organization. This is then
SELECTION SUCCESSION PERFORMANCE LEARNING
implemented in a range of areas, AND AND TALENT MANAGEMENT AND
from recruitment and selection RETENTION PLANNING See pp.84–85. DEVELOPMENT
to learning and development. See pp.82–83. See pp.82–83. See pp.82–83.
HR professionals work closely
with business leaders and
line managers to design and
implement HR systems that
back up strategic business aims.
3.2 billion
ESSENTIAL PEOPLE
SKILLS
As well as recruiting effectively and
ensuring employees deliver, HR plays
a role in nurturing essential people
people were in recorded skills across the organization.
Relating to others
employment globally in 2014 ❯ Some people are natural leaders,
but most leaders can benefit
from objective thinking about
the leadership strategy they wish
to follow. See pp.88–89.
❯ Even in flattened, team-based
hierarchies, team leaders need to
develop leadership skills to guide
and support their teams.
See pp.90–91.
❯ Despite the revolution in technology,
people remain vital to organizations,
as skills and knowledge are central
to success. As a result, HR has an
expanding role. One example is
Google, which calls its HR function
People Operations (POPS) and treats
REWARDS AND EMPLOYEE its staff as a valuable asset, offering
BENEFITS ENGAGEMENT a range of attractive perks to “find
See pp.86–87. See pp.92–93. them, grow them, and keep them”.
See pp.92–93.
Managing projects
❯ Project management is an essential
skill for managers at all levels,
whether they are running regular
day-to-day activities or special
projects. See pp.94–95.
Negotiating
❯ The ability to negotiate successfully
is an essential skill. Awareness of
strategies and styles is key to success.
See pp.96–97.
The human
resources cycle
From the moment a company starts the process of recruiting an
employee to the time that person leaves the company, the individual
is in a cycle that is managed by the human resources (HR) department.
NEED TO KNOW CV
Contract
“Hire people
Once terms are
agreed and a smarter than
Employ contract signed,
the candidate you and get out
becomes the
firm’s employee. of their way.”
Howard Schultz
HOW COMPANIES WORK
Human resources 80 81
¥
An induction programme
explains the new role and
Reward introduces the team. HR
gives a briefing on pay, tax,
and benefits such as leave,
insurance, and pensions.
94%
of recruiters in
Job description and
person specification
Clear written statement
of the role, including job
the US used, title, purpose, duties,
responsibilities, scope,
or planned and reporting structure,
as well as qualities and
to use, social competencies required. It
is used in the recruitment
Person specification
media for process to provide a clear
guide for both applicants Summarizes the necessary
recruiting and interviewers. or desired criteria for
candidate selection,
in 2013 including required skills
and/or competencies for
the role, experience, and
educational qualifications.
HOW COMPANIES WORK
Human resources 82 83
NEED TO KNOW
❯ Psychometric tests Often used
as an initial screening method,
these aim to assess attributes such
Applications as intelligence, aptitude, and type
The curriculum vitae (CV) or résumé is of personality, using verbal and
the essential document, often with non-verbal reasoning tests and
behaviour questionnaires.
a covering letter. Companies
may use an application
form instead.
CONTRACT
Selection Appointment
After HR has drawn Companies may take up
up a shortlist, references and/or request
candidates are a medical examination for
assessed by the chosen candidate. The
individual face- employment offer is a legally
to-face interviews, binding contract that sets out
group assesssment, the terms and conditions of
and psychometric the job.
testing.
Evaluating staff
For a business to achieve its goals, it needs to
have a process that measures the contribution and
performance of each individual against those goals.
Individual goals
How it works
The way in which tasks are done is becoming as
important as what tasks are done, as organizations
1 Personal goals are set to
align with business strategy
Traditional performance-
management cycle
Performance management is an ongoing,
continuous process. Some companies are now
moving away from traditional performance
management to “crowdsourcing” as a way
for managers to collect, evaluate, and share
information on employee performance.
WINNER!
A WIN-WIN SITUATION
Evaluating performance is good for both
the business and the individual.
Business
❯ Aligns individual goals with company goals.
❯ Offers consistent approach, with benchmarks.
❯ Continuously enables improvement.
Rewards
❯ Fosters the right behaviours and relationships.
Individual
5 Promotion and pay
rises in line with
performance
❯ Understands what is expected of them.
❯ Has the skills to deliver on these expectations.
❯ Is supported to fill any gaps in capability.
❯ Is given feedback and allowed to discuss aims.
HOW COMPANIES WORK
Human resources 84 85
NEED TO KNOW
❯ Balanced scorecard
Framework to measure
performance against
strategic goals, devised by
Drs Kaplan and Norton
❯ Competencies Defined
behaviours and attributes
that individuals must have to
perform effectively at work
Discussion ❯ Performance appraisal
2 Ongoing communication on
standards of work and behaviour
to improve working relationships
Process via which individual
employee and their manager
can discuss performance and
development
360-degree feedback
Coaching Gives a rounded picture with
3 Feedback on performance to
help individuals work efficiently
better information about
working relationships
Customer
4 Appraisal
Formal feedback
from the line Direct
reports Manager
manager, with
an opportunity INPUT FROM
COLLEAGUES
for individuals
to contribute
Colleagues
Motivation
and rewards
People work for money, but they are also motivated by other factors
such as doing a good job and being valued. Non-financial rewards
drive day-to-day motivation more strongly than pay and benefits.
How it works external to the actual work and others control the
In the past, tangible pay and benefits were the key amount, distribution, and timing. Employers now
motivational tools for employees. These financial recognize that while extrinsic incentives are clearly
rewards are termed extrinsic because they are important, intrinsic (psychological) rewards are crucial.
Individual
Extrinsic motivation
Policies implemented Employees obtain
by the company: psychological benefits
from doing meaningful
Financial rewards work and performing it
well. Only one in eight
❯ Base pay
workers (about 180
❯ Bonus million employees in
❯ Incentives 142 countries studied)
Benefits are committed to
their jobs and make a
❯ Pension contributions
positive contribution
❯ Paid holidays to their organization.
❯ Health care
HOW COMPANIES WORK
Human resources 86 87
Only this
13%
the percentage of
WHY PEOPLE DO TASKS
MOTIVATION
creates positve
motivation
EXTRINSIC
INTRINSIC
fully committed to Do this task I don’t want
their jobs or get in trouble. to do this task –
it is pointless.
DEMOTIVATION
INCREASING MOTIVATION
Leadership strategy
and styles
Top-down leadership, in which managers give orders, is not always
the best way to get results. A number of different leadership styles
have been identified by business experts.
How it works
Every leader is an individual with
In 2007, for example, business
authors Eric Flamholtz and Yvonne
“Outstanding
his or her own approach. However,
over the years, management gurus
Randle developed a leadership
matrix based on Lewin’s theories,
leaders go out
have identified key leadership which shows the best style to use
in any given situation, ranging from
of their way to
styles that can be used to achieve
different results, depending on the autocratic (one all-powerful leader) boost the self-
environment. Many frameworks are to consensus (decisions reached
based on the ideas of psychologist by general agreement). Truly esteem of their
Kurt Lewin, who developed his inspirational leaders encourage
theories in the 1930s with three people to believe in themselves so personnel.”
major styles: autocratic, democratic, that they achieve results beyond Sam Walton
and laissez-faire (non-interference). even their own expectations.
TRANSFORMATIONAL LEADERSHIP
While different styles can suit different situations, transformational leadership,
in which leaders and their followers raise one another to higher levels of integrity
and motivation, was identified by guru James McGregor Burns as the most
effective. This has been developed by others, including
industrial psychologist Bernard Bass, who listed
the qualities of a transformational leader. Inspires people
Stirs the to reach for the
emotions improbable
Encourages of people
others
Sets clear
goals
Affiliative “People come before task.” Use in times of stress, when Praise and nurturing
Focuses on creating emotional team-mates need to recover can foster mediocre
bonds within a team and a from trauma, or when the performance and lack
sense of belonging within an team needs to rebuild trust. of direction.
organization.
Commanding/ “Do what I tell you.” Only use in times of Insistence should only
coercive Demands immediate crisis or to control be used when essential; it
compliance, without problem employee can alienate people, stifle
discussion or negotiation. when all else fails. inventiveness/flexibility,
and tauten atmosphere.
Democratic “What do you think?” Use when it is necessary for This is not for use in crisis
Aims to build consensus the team to buy into or have or when team-mates are
through participation. ownership of, a decision, not well enough informed
plan, or goal. to be able to offer suitable
guidance to the leader.
Pace-setting “Do as I do, now.” Only use when the team Style can overwhelm
Expects and models is already motivated and some team members and
excellence, creating competent, and when fast adversely affect employee
challenging and exciting results are necessary. commitment; it may stifle
goals for the team. creativity and innovation.
Visionary/ “Come with me.” Use when the team needs This is not effective
authoritative Mobilizes the team towards a new vision because when a leader is working
a common vision and goal, circumstances have with a team of experts or
leaving the means up to the changed, or when explicit better-informed group.
individual. guidance is not required.
Leadership for
team building
Just as generals have to get the best from their troops, so business
leaders must make the most of their teams. The key is ensuring
that individuals work together to achieve a common goal.
How it works
From statesmen such as former British prime minister of other people. They have a passion that sweeps
Winston Churchill to former General Electric CEO people along with them; they learn from mistakes
Jack Welch, great leaders recognize that to achieve and are prepared to alter course to meet changing
a long-term goal, they must not only use their own circumstances. Much academic work has been done
capabilities but also maximize the combined strength to study the traits and strategies of such leaders.
How leaders
inspire their teams Focusing on goal
Academic Carl Larson and organizational ❯ Defines goal in clear and
effectiveness expert Frank LaFasto inspirational way
conducted a three-year study of more ❯ Helps each team member see
than 75 diverse teams. They identified six how they contribute to goal
characteristics of leadership that steer a
❯ Does not play politics
team towards optimum results.
Encouraging
collaboration
❯ Allows open discussions
“Leadership is ❯ Demands and rewards
the art of getting collaboration
❯ Involves and engages people
someone else to
do something you
Building confidence
want done because ❯ Accentuates the positive
he wants to do it.” ❯ Shows trust by assigning
responsibility
Dwight D. Eisenhower
❯ Says “thank you”
HOW COMPANIES WORK
Human resources 90 91
Providing know-how
❯ Knows own area
❯ Gets expert help for other areas
❯ Shares context with team
Setting priorities 1
2
❯ Demonstrates focus; avoids ambiguity 3
❯ Is clear about what must and must
not happen
❯ Is prepared to change course if
priorities switch
Managing performance
❯ Sets clear objectives
❯ Gives constructive feedback; confronts
and resolves performance issues
❯ Aligns incentives with team goals
Employee relations
and communications
Thriving organizations recognize the importance of harnessing people’s
ideas and energy to provide a competitive edge, while managers are
keen to gain, retain, and build employee commitment and engagement.
Commitment
The art of communication
In this example, a company is establishing weekly
employee forums to facilitate communication and
build trust throughout the business. To strengthen
employee awarenees, engagement, and commitment
to the idea, various media are used, from email to
webinars and discussion. Managers focus ever more
on collaboration rather than just imparting information.
Engagement and
EMPLOYEE FORUMS
involvement
In many countries, employee communication used
to focus on structured industrial relations, managed
by HR. Employee relations are now based more on
trust and building strong relationships. Many firms
create formal works councils or employee forums.
At their best, employee forums:
❯ Allow representatives from across the Awareness and
DEGREE OF COMMITMENT
TIME
HOW COMPANIES WORK
Human resources 92 93
CASE STUDY
John Lewis £200
million
The John Lewis chain of department ❯ Partnership council Made up of
stores in the UK is famous for its 80 elected partners from across the
unique employee-owned structure, business, the council meets four
in which every worker is a partner times a year. The chairman and
in the business. It has a number of directors report to the council,
employee-communication policies:
❯ Gazette Employees can send
which can remove the chairman.
❯ Branch forums Elected by
the amount paid
letters directly to management
through the weekly gazette.
employees at each branch, these
forums work with management to
in staff bonuses by
Managers publish their responses
in the gazette for all to read.
influence the running of the shop
and select local charities to support.
John Lewis in 2013
REINFORCE AND
INTERNALIZE
Regular face-to-
face updates
ESTABLISH PRACTICE show employees
A company-wide how forums have
awayday illustrates made a difference.
to employees
how the forums
have changed
working practices.
STIMULATE POSITIVE
PERCEPTION
An inspirational seminar
illustrates the benefits
of the new councils.
ADOPT AND SHARE
AID UNDERSTANDING Employees attend forums
Resources placed on and then share their opinions
the company intranet on Twitter and Yammer
detail how employee so they feel involved and
forums will work. collaborate with managers.
CREATE
AWARENESS
The purpose of
employee forums
is explained at a
company-wide
video conference.
Project management
Besides day-to-day activities, a business may have projects – one-off,
temporary, specific pieces of work. Projects need to be well managed
so they deliver on time, to budget, and to specification.
Unclear ❯ Review project charter and revisit vision ❯ Seek clarity from sponsors
vision or lack and objective. and/or senior management.
of clarity ❯ Involve team so everyone understands
direction of work and avoids stalling.
Scope creep ❯ Manage requests for change against ❯ Communicate to identify why
– project business case and project objective. change is important and how to
changes once incorporate, or find alternative.
under way
97%
of managers*
Monitoring and control Closure
❯ Measuring effort and progress ❯ Finalizing all activities believe project
❯ Managing and mitigating risk
❯ People management
❯ Communication
❯ Learning – project review
management
is critical
to success
*surveyed from 34 different countries
Negotiating strategy
Skilful negotiation is vital in business when two or more sides have
different viewpoints, and each party wants to press for their own
advantage. The ideal outcome is a compromise that resolves conflict.
Reaching agreement
Any strategy, from a wage negotiation between a trade union and employer to a
sales negotiation between a customer and supplier, depends on the relationship
between the two parties. Good negotiation should leave each party feeling
satisfied with the outcome of the discussion and ready to do business again.
65%
of face-to-face communication
BODY LANGUAGE IN
DIFFERENT CULTURES
With international negotiations, it
can be hard to read body-language
signals, particularly as the meaning
is through non-verbal signals of gestures can vary.
Eye contact Chinese
people avoid direct eye
contact to show respect
while American people
see lack of eye contact
as a sign of shiftiness.
Facial expressions
When emotions are
high in the US, it is
acceptable to frown,
even to swear, but not
to cry. Japanese people
might smile or laugh,
but never frown or cry.
Head movements In
much of Europe and the
US, people nod to mean
yes and shake their head
to mean no. But in some
parts of the world, such
as in Bulgaria, it is the
Agree, close, opposite way round.
and implement Gestures Western
❯ Conclude with an cultures use a hand
agreement that is extended towards a
mutually acceptable. person to indicate
❯ Clearly articulate and “Come here”. Chinese
note agreement and people would see this
concessions. gesture as offensive.
❯ Formalize agreement in Posture In the US,
writing and follow up. being casual is valued;
people might slouch
when standing or sitting.
In some European
countries, such as
Germany, a slouching
posture is considered
rude. Formality is
also valued in Japan,
particularly the ability
to sit upright and still.
£ £ £
£ £
HOW
FINANCE
WORKS
Financial reporting ❯ Financial accounting
Management accounting ❯ Measuring
performance ❯ Raising finance and capital
$
¥
£
Financial
reporting
Financial reports are everywhere: a bill at a restaurant is a financial report, as
are sales receipts and bank statements. In business, however, financial reporting
refers to the financial statements that make up a company’s annual review and
accounts. Compiled by accountants, they provide investors and lenders with
information to assess a company’s profitability, and enable company managers,
government, tax authorities, and other stakeholders to evaluate the business.
US$50
govern what should be put into this report.
billion
The eight steps of the accounting cycle are
used by nearly all accountants. The cycle
helps by standardizing processes and makes
sure that accounting jobs are
performed correctly and in
the same way and order
for every activity.
the amount hidden via
See pp.102–103. loans diguised as sales by
Lehman Brothers in 2008
$ $ $
HOW FINANCE WORKS
Financial reporting 100 101
TYPES OF ACCOUNTING
There are seven widely recognized types of accounting:
❯ Financial Drawn up by accountants; ❯ Forensic Engages in disputes and
statements
c ial
an
n
NEED TO KNOW
❯ Debits Expenses – dividends,
assets, and losses. In double-entry
accounting, debits appear on the
left-hand side of the account
❯ Credits Gains – income, revenue,
owners’ equity, and liabilities. In
double-entry accounting, credits
appear on the right-hand side
Journal entries Posting ❯ Chart of accounts List giving
Accountants then analyse the Journal entries are then the names of all of a company’s
transaction and note it down in transferred to the general accounts, used to organize records
the relevant journal – a book or ledger – a large book or ❯ Audit trail Full history of a
an electronic record. electronic record logging transaction, allowing auditors to
all the company’s accounts. trace it from its source, through
the general ledger, and note any
adjustments made
Trial balance
13%
€
A list of all the company’s
€ € accounts is prepared at the
end of the accounting period,
usually a year, quarter, or month.
more accountants
will be required
in the US by 2022
10,000
55 230
21,000
Worksheet
Often, trial balance calculations
don’t accurately balance the
Adjusting journal entries books (see pp.116–117). In such
cases, changes are made on
Once the accounts are balanced, any a worksheet.
adjustments are noted in journals at
the end of the accounting period.
Financial statements
The formal records of a business’s financial activities are presented as
financial statements. Most jurisdictions require accurate information
by law, and finance directors and auditors are liable for its contents.
introdu nvironm
r’s It is common for the chairman re These pages contain much of
ct
en
i
Ou
ion
es
different values.
re
or
Di
icators
ntal ac t audito
me c The environmental en Auditors are independent
Independ
Environ
r’s
report
ou
to
Note
rs
nts
Deconstructing a
financial statement TAXES
The profit and loss account shows
The percentage of business taxes taken by governments varies from country
revenues, costs, and expenses –
to country but the generic types remain similar:
how much money the business
makes – over an accounting period. ❯ Direct taxes are levied directly on profits or income and
The balance sheet shows what include income taxes, inheritance taxes, and taxes relating
to sales or purchase of property and other capital assets.
a business is worth at the time
it is published, and is relevant
to investors as it reveals assets, ❯ Indirect taxes are paid on goods or services – value added tax
liabilities, and shareholders’ (VAT), for example. Indirect taxes are often targeted to reduce
equity – all useful for gauging consumption of harmful goods, a factor relevant to companies
business health. The cash-flow working in the alcohol and tobacco industries.
statement shows the movement ❯ Green taxes are increasingly common and are often indirect.
of cash within a business – its They are generally used as a way of prohibitively increasing
liquidity. However, along with the the price of goods or services harmful to the environment,
big three financial statements, an such as air travel, landfill sites, or fuel, to diminish their use.
annual review contains a wealth
❯ Corporation tax is only paid by companies, not by sole
of information about a company’s
traders or partnerships. It is levied as a percentage of the
performance, of interest to its company’s total profit.
stakeholder groups. It is often the
notes that bring statements to life.
Our finance
This section contains the 30 25
£ headline financial figures of
ENVIRONMENT
Charitable donations
Companies vaunt their
philanthropy in the annual review,
detailing how much they have £
given away and how it has helped.
They may support charities
relevant to the nature of their
business or let employees vote
on recipients.
Customer satisfaction
Overall, this section shows how the
company works with customers to
96%
Wessex Water’s
improve service and support. In
monopoly and oligopoly industries,
customer satisfaction is particularly
important, as governments often set
high targets. Wessex Water’s annual
review shows a customer satisfaction
utility’s customer rating of 96 per cent.
satisfaction score
FINANCIAL STATEMENTS
Financial statements for users operations and policies. For this reason, financial
The many financial statements included in the annual statements are useful to a wide range of stakeholders,
review are a goldmine of information for those who from the company’s employees, customers, and
know how to read them. They provide headline profit shareholders to potential investors, governments,
figures, explanations of issues from directors, detailed tax authorities, journalists, credit-rating agencies,
financial data, and information about companies’ banks, and the general public.
company is making
❯ Balance sheet ❯ To assess the long-term strength
❯ Dividends of the company
❯ To see how much will be paid
out to them
6% post-tax ❯ This percentage is estimated by dividing income after tax by the amount of investment. It is
return on capital useful for showing shareholders the kind of returns they can expect on their investments.
64% ❯ For most industries, gearing is a company’s debt compared to its equity. In the water industry,
gearing it compares a company’s net debt to its regulatory capital value (the value of the business that
earns a return on investment). Gearing is expressed as a percentage. See pp.174–175.
A3/A-/BBB+ ❯ Credit ratings assess the likelihood that individuals, businesses, or governments will be able
credit rating to pay back money lent to them. A3 and A- fall at the bottom of the strong capacity to meet
financial commitments, while BBB+ comes at the top of the adequate range.
S/B
ANKS
Key elements
The profit and loss account,
balance sheet, and cash-
flow statements are the
most important financial
statements in an annual Accounting Profit and loss Balance sheet
review, supplemented standards statement Gives a snapshot of
by the report’s notes. Generally accepted Shows how much how much a business
To understand these principles standardize money a company is worth at a certain
statements, a knowledge practice worldwide is making and is time and is a good
of accounting principles, to ensure accuracy especially useful for indication of its
depreciation, amortization, and prevent fraud. potential investors long-term health.
and depletion is vital. See pp.112–113. and stakeholders. See pp.116–119.
Accountants also need ❯ International See pp.114–115. ❯ Balances company’s
to understand the legal standards simplify ❯ Outlines revenues assets against its
requirements that the account reporting. and gains minus equity and liabilities.
statements must satisfy ❯ Companies must expenses and losses ❯ Lists different types
and how environmental meet environmental or operating costs. of assets, including
laws can affect a business accounting rules ❯ Informs a company tangible fixed assets
and its accounts. and regulations. if a profit warning and current assets.
See pp.122–123. is needed.
£
HOW FINANCE WORKS
Financial accounting 110 111
US$74
AUDITING
The accounts of public companies are
given unbiased scrutiny by external
accountants to check that they are
billion
accurate and clear. This is a legal
requirement in most countries,
designed to ensure market
confidence in the business
world and transparency
in corporate finance. A
the total value lost by company may also have
an internal audit process,
shareholders in the 2001 which means that its
accounts are checked
Enron accounting scandal before being submitted
to an external auditor.
Accounting standards
ECONOMIC MONETARY UNIT GOING CONCERN TIME PERIOD FULL DISCLOSURE
ENTITY ASSUMPTION ASSUMPTION ASSUMPTION PRINCIPLE
ASSUMPTION
Transactions by International economic The financial activities Different operations All information, past,
businesses owned activity is expressed in of a business will carry of a business can be present, or future,
Standard
by one group or monetary terms, with on indefinitely. divided into arbitrary which could affect
individual are all units assumed to be time periods. financial performance
kept separate from quantifiable, constant must be disclosed,
transactions made and not affected by usually in the notes of
by other companies inflation or deflation. financial statements.
owned by that group
or individual.
If a group owns Current manufacture Oil reserves will never Sales of toothbrushes If a coconut importer
two companies, of tennis rackets is run out; gold in a gold can be measured daily, knows that a hurricane
Example
one manufacturing compared financially mine will last forever; a monthly, quarterly, and has damaged next year’s
televisions and the to manufacture that was toy manufacturer will so on (when in reality coconut crop, it must
other selling mobile carried out 30 years ago, not go out of business. they are constant, or mention this in its
phones, the financial without taking inflation subject to unpredictable financial statement.
statements for each into account. variations).
company are separate.
Helps the group Shows as much of the Offers a model for Makes financial Provides full information
of companies and company as possible in businesses to look at reporting easier. for shareholders and
investors compare financial statements, the long-term future potential investors.
Purpose
Largely beneficial It is hard to measure It is not applicable The more often Companies may try
Pros and cons
Assets and liabilities are The time period in Revenue should If there are alternatives Accountants may
valued at their buying which a business’s be recorded at the for reporting on an make a professional
price (in countries expenses and revenue moment when: item, accountants decision to go against
with high inflation or figures are collected a) goods or services should choose to report any one of the other
hyperinflation, other always concurs. are exchanged; the lower amount of principles.
principles, such as b) assets can be income or asset gain.
fair value, are used). converted to cash;
c) it is earned – not
when it is received.
If a company bought a A shop measures costs A toy-maker takes If a company is An oil refinery buys
factory 50 years ago for incurred and revenues an order for 500 toys involved in a lawsuit, a £100 whiteboard,
£100,000, that will be its gained over the same in July, delivers it in it must report the which could last
stated value today, even time period, because September, and is paid potential losses, rather 10 years. Under the
though its market value when sales are high for it in December. The than the potential gains, matching principle,
now will be far higher. costs are also likely revenue is recorded in in the notes of the it should be billed for
to be high, due to the September, when the financial statement. £10 each year, but the
need to buy more stock. goods were exchanged. accountant enters it
as a one-time cost.
Ensures uniformity and Avoids different time Matches the time Prevents companies Saves time for small,
prevents overvaluation scales, which could period when work from overestimating almost insignificant
of assets, which was a present a distorted was undertaken to money they will make in transactions when
feature of the 1929 Wall picture and erratic when the payment was the future, then running there is no risk of
Street Crash. financial results – for received, as with the into debt if it does not it being applied
example, with high matching principle. materialize. misleadingly.
revenues from one
period and high costs
in another.
Assets, especially Helps to present Revenue may not Requires a degree Saves time on
property, acquired accounts in a always be received. of objectivity from accountancy
a long time ago are representative manner. accountants: if this
invariably represented If there are doubts objectivity is absent, Makes information
as being worth less than about a recipient’s financial reports can easier to read – for
their current real value. ability to pay, the be misleading. example, figures can be
company can make rounded to the nearest
an allowance for pound, thousand, or
doubtful accounts. even million pounds
Profit and loss
statement
A profit and loss statement is a financial statement which shows all
revenues, costs, and expenses during an accounting period. It is also
known as an income statement, or an income and expense statement.
How it works profitable the company is. The statement usually works
The purpose of the profit and loss statement is to show by showing revenues and gains, less expenses and
the profitability of a business during a given period. losses from business activities, as well as on the sale
Along with the cash-flow statement and the balance and purchase of assets. By law, limited companies
sheet, it is the most important financial statement must produce a profit and loss statement every year;
businesses produce, as it shows investors how sole traders and partnerships are not obliged to do so.
£
Case study: profit and loss statement
This statement taken from the 2013 annual review of Wessex Water, a UK utility
company, shows that it is making a healthy profit.
Profit earned from the business’s core Operating profit 224.0 219.0
operations after expenses have been
Interest payable and similar charges (86.9) (81.7)
taken off, but before taxes have been
deducted; it does not include money Interest receivable 2.9 1.2
made on investments
Other finance costs (1.5) (1.0)
Profit before tax after all
income and expenses have been Profit on ordinary activities before taxation 138.5 137.5
taken into account, excluding Taxation on profit on ordinary activities (30.6) (44.3)
extraordinary payments
Profit attributable to shareholders 107.9 93.2
Level of profit which can
be paid out in dividends to
the company’s shareholders
TYPICAL EXPENSES
Payroll Office supplies
£
Salaries and wages paid to staff, temporary Stationery such as pens, paper, and filing
contractors, and indirect labour systems, office printers, furniture, lighting
Utilities Legal fees and professional services
Water, electricity, and gas; postal services; Accounting and legal fees, payable to
transport accountants, auditors, and legal advisers
Insurance Interest on loans
Insurance on fixed assets and personal
liability insurance for employees
% Interest paid on money borrowed, which
counts as a business expense
Phone/internet bills £
Tax
Cost of telephone, internet broadband, Varying among jurisdictions, this may include
and mobile devices used by employees payroll tax and corporation tax
Advertising Entertainment
Sales and marketing of the company Legitimate costs of business entertaining,
and its products subject to certain criteria being met
£
Case study: operating costs
This table breaks down the company’s operating costs in more detail. It is important to
read any notes regarding depreciation and ordinary and extraordinary costs and gains.
£
Case study: balance sheet
This example from Wessex Water, a UK utility company,
shows how a balance sheet works in practice.
Fixed assets (or non-current assets) ASSETS, LIABILITIES, AND CAPITAL Year 2013 Year 2012
are not easily converted into cash £m £m
and usually last longer than one
year. They are either tangible, such Fixed assets
as land, or intangible, such as logos Tangible assets 2,167.1 2,069.2
Investments – –
Current assets are assets that last
one year or less, and can be easily
converted into cash. Cash, cash
equivalents, and inventory are
Current assets
the most common current assets Stock and work in progress 7.0 6.3
Debtors 162.6 153.9
Creditors are the individuals or Cash at the bank and in hand 181.0 211.0
organizations to which the company
owes money. Here, the money must be 350.6 371.2
repaid in the current financial year
Creditors - amounts falling due within one year (198.8) (171.7)
Net current assets equals current
assets after money due to creditors Net current assets 151.8 199.5
has been deducted
Total assets less current liabilities Total assets less current liabilities 2,318.9 2,268.7
is the sum of fixed and net current
assets minus liabilities due within Creditors – amounts falling due after more (1,891.5) (1,811.9)
the current financial year
than one year
Liabilities due in more than one Provisions for liabilities and charges (114.9) (115.3)
year are amounts due to creditors,
deducted from total fixed and net Retirement benefit obligations (93.1) (83.0)
current assets. Deferred income (17.2) (17.9)
Understanding the notes after the summary, the detailed notes to the balance
The balance sheet is a useful indication of the health sheet explain the specific financial workings of the
of a business and it is important that investors know business. They show exactly where money has been
how to analyse it. It can be read in two ways – “at gained or lost, in figures, and often include a written
a glance”, as on the previous page, where general commentary about potential developments that may
information is summarized, or in depth, with more affect the company, such as court cases, staffing, or
detailed information about each element. Provided availability of resources.
Balance-sheet notes
Investors may want to know more about the figures in the summary section,
so additional notes and tables give detailed breakdowns of the figures.
£
Case study: tangible fixed assets
This table presents details of Wessex Water’s tangible fixed assets (long-term assets
that cannot easily be converted into cash).
2013 2012
Individuals or entities that £m £m
sell assets to third parties on
Trade debtors 48.9 48.1
credit, receiving payment at
a later date Owed by group companies 31.8 35.0
Prepayments and 70.3 62.1
accrued income
Prepayments for services Other debtors 11.6 8.7
that will be received in the
future, which the business 162.6 153.9
has already been paid for,
and accrued income that
is expected in the future
PAYMENTS
ON ACCOUNT AND
= TOTAL
£
Case study: creditors
Creditors are individuals or entities that the business
owes money to. They are in credit of Wessex Water.
£
Case study: cash-flow statement
By analysing this water utility’s statements, which includes a comparison to the
previous year, decision-makers can base future plans on past cash flows.
Capital expenditure and financial Capital expenditure and financial investment (215.4) (149.7)
investment is, here, the sum of the sale
of tangible assets plus connection
charges, grants, and deferred income Dividends paid (129.6) (129.4)
How it works are performing. The profit and loss statement, for
The cash-flow statement is often more useful for example, obscures this by adding in non-cash factors
investors assessing a business’s health than other key such as depreciation. Similarly, the balance sheet is
statements, because it shows how the core activities more concerned with assets than liquidity.
A JUICE
COMPANY SELLS
%
$100
GS
25
TA IN
IN ARN
= $80
A DEPRECIATION
- - + +
I
EXPENSE OF NO CHANGE
AND SPENDS
$20
OVER THE
IN WORKING
CAPITAL
CASH FLOW
$20 PERIOD $0 FROM
OPERATING
ON ORANGES ACTIVITIES
=
Cash flow from Cash flow from Total cash flow
investing activities financing activities Adding all three cash flows
Buying or selling assets This includes buying or gives the total. Separating
or investments is in this category. selling stock or debt and paying out the three types shows decision-
This figure is usually a cash outflow out dividends. Money made from makers the health of core activities
(negative figure) due to buying more selling something is called cash as opposed to financing and
than selling, but can be positive if inflow; money lost through paying investing, which bear little relation
there are significant sales. out is cash outflow. to day-to-day operations.
Environmental
accounting
Environment regulations force companies to consider the impact of
their activities and to adopt corporate social responsibility (CSR) as
they grapple with legislation, climate change, and public opinion.
How it works
Globally, there are reams of different environment
acts spread across multiple jurisdictions that affect
Environmental credentials
the companies operating within their borders in Most companies include a section on environmental
different ways. Areas protected by environment accounting in their financial statement. Some details are
acts include the atmosphere, fresh water, the marine required by law, but the statement also gives an opportunity
environment, nature conservation, nuclear safety, and
to showcase environmental credentials to stakeholders.
noise pollution. International acts are usually ratified
by each country individually before taking effect
there. An example of a common global means of
reducing greenhouse gas emissions is emissions
trading (“cap and trade”), by which companies must
buy a permit for each tonne of CO2 they emit over a Society
certain level. Those emitting under the agreed level
❯ Programmes and practices
can sell their permits to other companies. that assess and manage
the impact of operations
on communities
❯ Fines and sanctions for
non-compliance with
CASE STUDY regulations
Cleaning up rivers
Wessex Water’s impressive record on pollution is
mentioned several times in its statement, including in Product
the chairman’s introduction. This prominence shows responsibility
that the company believes acting in an environmentally
conscious manner is important to its investors. The ❯ Life-cycle stages in which the
company illustrates several areas where it has acted health-and-safety impact
with others to positively affect the environment: of products and services are
assessed for improvement
❯ Work with the charity Surfers Against Sewage,
which campaigns for clean sea water ❯ Adherence to laws,
standards, and voluntary
❯ Its river strategy: collaborating with pressure groups codes relating to marketing
and organizations to reduce pollutants and the impact communications
of habitat alteration, and so to increase the numbers
of aquatic plants, invertebrates, and fish in local rivers
❯ Improving bathing water quality at beaches in the
region, in compliance with mandatory standards
HOW FINANCE WORKS
Financial accounting 122 123
Economic
❯ Financial implications, risks,
and opportunities for the Human rights
organization’s activities ❯ Investment agreements
due to climate change that include human-rights
❯ Financial assistance received clauses or that have undergone Labour practices
from the government human-rights screening ❯ Workforce by employment
❯ Suppliers and contractors type, contract, and region
that have undergone screening ❯ Average hours of training
on human rights; actions taken per year, per employee by
to address any issues employee category
❯ Ratio of basic salary
of men to women by
employment category
Environmental
❯ Direct and indirect
energy consumption
❯ Waste by type and disposal method
❯ Water withdrawal by source;
discharge by destination and quality
❯ Fines and sanctions for non-
compliance with regulations
Depreciation
When a company buys an asset, its cost can be deducted from income
for accounting and tax purposes. Depreciation allows the company to
spread the cost, by calculating the asset’s decline in value over time.
£10,000
PURCHASE SCRAP ANNUAL
VALUE – VALUE DEPRECIATION (£) £5,000
= £
USEFUL ECONOMIC
LIFE (YEARS) £ 0 1
60%
Tax authorities often specify the typical useful (economic) life of a particular asset.
This helps to standardize depreciation, and to eliminate uncertainty about value
and the number of years over which an asset can be depreciated.
0
,00
£17
0
,00
£13
000
£9,
000
£5,
2 3 4 5
TIME (YEARS)
Year 2 After the second year, the Year 3 At the end of the third Year 4 The van Year 5 By the
value has depreciated by a further year, the van has depreciated by has depreciated by end of year five,
£4,000. The van will lose an equal another £4,000, and its book a further £4,000, to the van is valued
amount of value each year for the next value is £13,000, although its £9,000, at the end at only £5,000 –
three years of its useful economic life. actual value may be more or less. of four years of life. its scrap value.
DEPRECIATION
is 15 (5 + 4 + 3 + 2 + 1). In year 1, it loses 33 per cent When to use it This is another accelerated method, which can
(5 ÷ 15), in year 2, 27 per cent (4 ÷ 15), and so on. also be used for vehicles that lose most of their value early on.
HOW FINANCE WORKS
Financial accounting 126 127
It is particularly useful for transport industries. When to use it This method may be used to match an aeroplane’s
flying hours with the revenue generated from those hours.
Amortization
and depletion
Similar concepts to depreciation, amortization and depletion are used
by accountants to show how intangible assets and natural resources
respectively are used up.
Intangible assets
INITIAL COST YEARLY
In this example, a VALUE (£) =
USEFUL LIFE AMORTIZATION
company buys an
intangible asset – £20,000
a patent for a new, £20,000
= £2,000
revolutionary type £16,000
10 YEARS
of tennis racket – for
£20,000. The patent £12,000
will be useful for 10
years, so its cost is
recorded as a £2,000 £8,000
amortization [expense]
each year rather than £4,000
as a one-off cost. Unlike
tangible assets, a patent
does not have a salvage 0 1 2 3 4 5 6 7 8 9 10
value (see p.124). TIME (YEARS)
Loan percentage
COST OF LOAN YEARS TO REPAY
If a company has a loan outstanding worth = = %
£150,000, and pays off £3,000 of this loan YEARLY REPAYMENT 100
each year, then £3,000 of the loan has been
amortized. It can also be said that two per 150,000 50
cent of the loan has been amortized, as it will = = 2%
3,000 100
take 50 years to repay the loan at this rate.
HOW FINANCE WORKS
Financial accounting 128 129
NUMBER
M £10
IO
OF TREES
ILL
N
M £9.1
IO
ILL
N
M £ 8. 2
IO
ON
60,000
MI £7.3
ILL
LLI
ON
MI £6.4
50,000
LLI
ON
MI £5.5
ON
LLI
MI £4.6
40,000
LLI
ON
MI £3.7
ON
LLI
30,000
MI £2.8
ON
LLI
MI £1.9
N
LLI
20,000
IO
MI £1
LL
10,000
0
1 2 3 4 5 6 7 8 9 10
TIME (YEARS)
Management
accounting
For a company’s management to anticipate profit and loss, plan cash flow, and set
effective goals for the business, the coming year’s incomings and outgoings need
to be set out in detail. Unlike financial accounting, which is primarily for external
users such as investors, lenders, or regulators, management or cost accounting
takes place within a business to project expected sales revenue and expenses,
so that the business can decide how to best use its available resources.
Timesheets
Staff employed on an hourly or daily basis fill in timesheets;
these help managers calculate overall staff costs. See pp.140–141.
Invoices
Invoices submitted by contractors and suppliers have to be matched
against purchase orders and paid out. See pp.134–135.
Goods received
Employees log receipt of merchandise, describing what
the goods or services are and the quantity received.
Management
Information
Managers create budgets and document business costs is passed
to monitor business performance, and plan for the short to finance
and medium term. The information they collate sheds light department.
on the financial implications of ongoing projects.
HOW FINANCE WORKS
Management accounting 130 131
80%
of accountants and
COST ACCOUNTING PRINCIPLES
The Chartered Institute of Management Accounting (CIMA)
in the UK and the American Institute of Certified Public
Accountants (AICPA), with members in 177 countries, have
established Global Management Accounting Principles (GMAP).
financial professionals ❯ Communication provides insight that is influential
Facilitate good decision-making through discussion.
in the US are employed ❯ Information is relevant Source best material.
❯ Stewardship builds trust Protect financial and non-
within a business or financial assets, reputation, and value of organization.
❯ Impact on value is analysed Develop models to
organization demonstrate outcomes in different scenarios.
Cash-flow statement $
This shows how well the business will be able to meet its financial
obligations and generate cash in the future. See pp.120–121.
Balance sheet
Financial The balance sheet estimates the value of assets and inventory held, $ $
analysis is so that management can reduce it if necessary. See pp.116–117.
passed to
managers. Profit and loss statement
$
Also called an income statement, the P&L statement tells
management how much money the business made or $
Finance department
Accountants in the finance department (or contracted
from outside the business) receive information about
the costs from managers. They then use these to generate
reports and statements for the managers, who use this
information to make decisions for the next financial year.
Cash flow
The money coming in and going out of a business is its cash flow.
Inflows arise from financing, operations, and investment, while
outflows are expenses, purchases of inventory, and capital costs.
Sales revenue
should never Ca
sh
in
be empty.” han
d
How it works investment, and other sources. Cash drains out to pay
Cash flow is the movement of cash in and out of a employees, rent and utilities, suppliers, and interest on
business over a set period of time. Cash flows in loans. Timing is key – having enough cash coming in
from sales of goods and services, from loans, capital to pay bills on time keeps the company solvent.
Other revenue
Grants, donations,
and windfalls
❯ Grants from government or other
Loans institutions – usually one-off sum
for research and development
Bank loans and overdrafts ❯ Donations and gifts (applicable to
CASH not-for-profit organizations)
IN ❯ Working capital loans to meet
shortfalls, with anticipated inflows ❯ Sales of assets and investments
as collateral ❯ Repayment of loans made to
❯ Advances on sales invoices other organizations
from factoring companies ❯ Tax refunds
$ CASH
IN ❯ Short-term overdrafts
❯ Also known as cash flow from
financing activities
$
$
CASH OUT
k
toc
or s
CASH
IN
CASH
IN
$
CASH IN HAND INCREASES
$
CASH CASH IN HAND STABLE
OUT
$
HOW FINANCE WORKS
Management accounting 134 135
NEED TO KNOW
❯ Factoring Transaction in which a
business passes its invoices to a third
party (factor), which collects payment
from the customer for a commission
Cash conversion
Successful businesses convert their
product or service into cash inflows
80%
of small business
before their bills are due. To make the
❯ Accounts payable Payments a
business has to make to others
conversion process more efficient, a start-ups across
business may speed up:
❯ Accounts receivable Payments ❯ Customer purchase ordering the world fail
a business is due to receive
❯ Order fulfilment and shipping
❯ Ageing schedule A table charting
❯ Customer invoicing
because of
accounts payable and accounts
receivable according to their dates ❯ Accounts receivable collection
period
poor cash-flow
❯ Cash flow gap Interval between
payments made and received ❯ Payment and deposit management
Setting and
controlling budgets
Budget-setting is a process that
takes place between the department
managers, senior management, and
finance department in a company to
establish and control the cost of each
€
department or project.
1%
of companies
worldwide made
accurate budget
Consultation Prepare the budget
forecasts, from Senior management set out The budget is usually based on the
2004 to 2007 the objectives of the company
to the department managers.
accounting year, but broken down
into shorter periods. Department
Each manager is then responsible managers submit their budgets to
for working out the budget required senior management for approval.
by their individual department, These may cover areas such as
in order to meet those objectives operating costs (salaries and supplies)
for the coming year. and administration (office expenses).
HOW FINANCE WORKS
Management accounting 136 137
€
€ €
Assets € Assets €
TYPES OF INVENTORY
Inventory can include three types of stock, depending on the kind of business being
carried out: raw materials, unfinished goods, and finished goods. See pp.316–317.
N
RT
O
LA
EN
ER
CO
TO
Y
Y
Retail outlets plus Shop displays and Computers for Trucks and branded Warehouse and
company headquarters back office furniture administrative work company cars distribution equipment
AL
AR
ER
Y
CO
INT
COP
TIE
E
TY
©
S
Brands and designs, Legally protected words Own-brands, including Internet portal for Licensing revenue
creative innovation and symbols value and luxury ranges online sales streams
Costs
Costs are the direct or indirect expenses that a business incurs
in order to carry out activities that earn revenue, such as
manufacturing goods or providing a service.
How it works
There are two main ways of classifying costs: direct,
or variable, costs, which increase as more goods and
Variable costs
services are sold, and indirect costs, which contribute
to the overall running of the business, and can either
vary with the level of production or stay fixed. There The head chef orders
are three main costs that businesses need to account the ingredients that will
for. The first is labour – wages paid to people who are be required each day.
employed to carry out a particular task. Labour can For peak evenings the
be regarded as direct or variable, or as a fixed cost cost of the food order
or overhead. The second is the raw materials used is higher; for quieter
in production and other materials used in service nights, the food order
industries – these costs are variable. The third is is lower. LARGE
FOOD ORDER
expenses, which are other costs incurred in the
course of the business’s activities.
LAUNDRY
SERVICES
NEED TO KNOW
❯ Break-even point (BEP) The
point at which total sales revenue
is equal to total costs
❯ Questionable costs Costs that
can be treated as fixed or variable
❯ Sunk costs Costs incurred in the
past that cannot be recovered
❯ Prospective costs Costs that
may be incurred in the future
depending on which business
decisions are made
PEAK QUIETER
EVENINGS EVENINGS
SMALL
FOOD ORDER
EXTRA
LAUNDRY
SERVICES
38%
the average total of US
The change in total costs incurred
when one additional unit is made
❯ Throughput costing An analysis
of the impact that one extra unit
of production will have on sales
❯ Cost-plus pricing Product price
business costs that can be is based on direct and indirect
costs, plus mark-up percentage
accounted for by indirect costs
Full cost pricing Direct costs Share of indirect costs
Direct costs can be measured in terms ❯ Materials ❯ Production and service
of how materials and labour are used ❯ Direct labour overheads
to produce each unit. Indirect costs ❯ Administrative
❯ Direct expenses
(overheads) are harder to assess but also and management
need to be factored in so that the full cost of ❯ All used exclusively to
overheads
each product can be calculated. Managers create a product or
service for sale ❯ Sales and distribution
and accountants must apportion indirect overheads
costs to reflect their contribution to the cost
of creating a single product. Once this is
ascertained, the full cost of that product can
be determined. In general terms, the price is
worked out by adding the direct and indirect
costs of production with a
profit margin that gives an
appropriate selling price.
HOW FINANCE WORKS
Management accounting 142 143
JOB COSTING
Used for a CONTRACT COSTING
customized order
made to a client’s BATCH COSTING
£ Used for a large one-off job, often
the result of a tender process (when
specifications – for Used when a batch of identical a company bids for work) and
example, a printing products is made – for example, carried out at the client’s site – for
company that an electrical goods company example, a construction company
prints brochures manufacturing television sets erecting houses on a new residential
for a client development
£
£
Profit margin Selling price
❯ Must be able to generate profit ❯ Low: in order to gain market
£
for the company share, or to match competitors
❯ Must be in line with how the ❯ Cost-based: recover
product has been direct and indirect
marketed costs and profit
SE
❯ Must be HOU margin that the
RY E
XU R SAL
pitched market will accept
LU ❯ Service-based:
realistically FO
so that flexible since no
customers manufacturing or
will buy distribution cost
Measuring
performance
There are two main ways of measuring a company’s performance: financial
and non-financial. To assess financial performance, a company calculates
financial ratios. To assess other areas of the business, a company examines its
key performance indicators (KPIs), which help management and staff evaluate
performance and how it can improve. KPIs also enable interested outsiders, such
as investors, lenders, or analysts, to decide whether to invest in the business.
n- cial s
nc res
N an ure
l
69%
slump, and what prospects ❯ May be calculated daily or
it has for future growth even more frequently for
❯ Standard set of ratios used internal use
by the financial industry ❯ Companies can set diverse
❯ Calculated based on figures
provided in financial reports
KPIs to reflect future goals
❯ Unique to each company
of multinationals
See pp.148–149. See pp.146–147. link performance
measures to
future financial
results
Key performance
indicators (KPIs)
Key performance indicators (KPIs), or key success indicators (KSIs),
are based on a company’s goals and vary depending on the company
and industry. KPIs are usually stated in a company’s annual report.
Corporate KPIs
KPIs can be set up as dashboards on computers
so that they can be checked frequently. These
dashboards show examples of KPIs specific Accounts
to departments in a company. Having
set their KPIs, the departments are
subject to managerial review,
which could result in
action if KPIs are
sub-standard. ¥
Number of retrospectively raised
d market purchase orders; finance report
es an ing tomer services
Sal
error rate (measures the quality
Cus
of report); average cycle time
of workflow; number of
duplicate payments
31%
of companies
BALANCED SCORECARD SYSTEM
This strategic system offers a different
way of monitoring a company’s
performance. It was proposed by
Robert Kaplan and David Norton at
❯ Learning and growth
Employee training and
corporate culture
❯ Business
use a computer the Harvard Business School in the
1990s, and Harvard Business Review has
processes
Includes specific
dashboard cited it as one of the most influential
business ideas of the last 75 years; it
measurements for
monitoring daily performance
is estimated that over 50 per cent of
to monitor KPI large companies in the US, Europe, and
❯ Customer perspective
Customer satisfaction
Asia use the approach. The Balanced
measurements Scorecard consists of four ways to view ❯ Financial perspective
Traditional financial data
an organization’s performance:
Operations
ity
En
WARNING
Investors beware
Ratio analysis must be used over
time – at least four years – to
understand how a company
10–14%
the minimum return
has reached its current position,
not just what the position is. For
on investment (ROI) needed
instance, if debt has suddenly
gone up it could be because the to fund a company’s
company is branching out into new
areas of potential profit or to limit future growth
the damage of a poor past decision.
YEARLY
CURRENT TOTAL DIVIDEND
ASSETS DEBT TO DIVIDEND
WORKING = = LIABILITIES = PER SHARE
EQUITY PAYOUT
CAPITAL CURRENT RATIO SHAREHOLDERS’ RATIO EARNINGS
LIABILITIES EQUITY PER SHARE
Other liquidity ratios Other solvency ratios Other investment valuation ratios
❯ Cash ratio is measured as total cash ❯ Equity ratio is measured as ❯ Net profit margin ratio is measured
(and equivalents) / current liabilities. shareholders’ funds / total assets. as profit after tax / revenue. Another
It shows whether a company’s short- It indicates the company’s long-term measure of a company’s profitability, it
term assets could repay its debts. or prospective solvency position. is also useful for comparing a company
A high ratio is seen as favourable. A high ratio is favourable; a low ratio with competitors. The higher the ratio,
❯ Quick ratio (acid-test ratio) is can signal high risk for creditors. the more profitable the company.
measured as current assets minus ❯ Debt ratio is measured as total ❯ Price to earnings ratio is measured
inventories / current liabilities. It shows liabilities / total assets. It indicates as market value per share / earnings
how easily a company can repay short- the percentage of the company’s per share. It indicates the value of the
term debt from cash. The higher the assets that are financed by debt. A company’s share price. A high ratio
ratio, the more easily it can pay. low ratio is considered favourable. demonstrates good growth potential.
Forecasting
Predicting future business performance is necessary to estimate
probable sales, income, costs, and profitability, and so gain investment
and maintain confidence in the company.
How it works operation and can be tracked over time. The tracked
Forecasting success or failure relies on historical and monitored data can provide an early warning
data – financial statements, financial ratios, and system for potential problems. For small businesses
key performance indicators – that reflect business and start-ups, accurate forecasts provide a basis for
HMS Success
Finding the Z score
Each of the above ratios is multiplied by
a specific value, to give them weighting;
results are added together to give Z score.
❯ A score of 0.2 or lower means the
company is highly likely to fail.
❯ A score of 0.3 or higher means
the company is unlikely to fail.
HOW FINANCE WORKS
Measuring performance 150 151
High borrowing,
high interest paym ility, seen in
continue
d ents Low profitab
w, seen in holdings and dwindling reve nslide in profit
Low c a s h fl o
in cash
nue consistent dow from
f decline e years loss statements
pattern o t over consecutiv on profit-and-
ars
ce sh e e consecutive ye
on balan
Tracking fraud
For keen observers of financial statements, warning signs that
indicate fraudulent business activities may be detected in overly
optimistic statements and evasive attitudes of senior management.
89%
compared to base salary
of US corporate
fraud cases in
2010 typically How to detect fraud
Applying ratio
involved the Procedures should be in place to
hold anyone who handles expenses
analysis to
reveal key
company’s accountable. When these fall short,
internal and external auditors need
long-term
trends (see
CEO or CFO to take more drastic measures. pp.148–149)
HOW FINANCE WORKS
Measuring performance 152 153
CEO behaviour Technicalities
❯ Evasive behaviour by executives ❯ Late lodgement of sales or
over important financial details earnings adjustments
❯ Attempts by CEO to steer auditors ❯ Missing approvals or signatures
away from certain documents ❯ Photocopied documents presented
in place of originals
is the most
INTEREST
important factor PAYMENTS
Institutional lenders
in deciding how Money lent by large financial bodies,
much debt the such as banks. See pp.158–159.
company takes on
HOW FINANCE WORKS
Raising finance and capital 154 155
££
payable. So although this
❯ As a general rule, companies with more equity company may be more
than debt are considered less risky to invest in risky, it may also have
because their assets outweigh their liabilities. greater potential for
So a company with significantly more equity growth – this is known as
than debt has a low debt-to-equity ratio and “gearing”. See pp.174–175.
is generally seen to be a low-risk investment.
Equity
FUNDS FROM
SHARE ISSUES
AND RETAINED
PROFIT £ £ £ £
Company
Bonds
Investor
lenders
FUNDS FROM Payments made
BONDS SOLD £ by bond-holders.
See pp.170–173.
How it works
When a business needs funds, or capital, to pay for
expansion or investment in order to maintain its Raising internal finance
current operations, it is faced with two choices: either
Whether a company’s need for additional funds
find the money from external sources, or it must find
is long- or short-term, steps can be taken to
the money from within the organization itself. Since
increase the level of funds within the company.
there are costs attached to bringing in funds from
outside sources, such as interest that has to be paid
on a bank loan, the business managers must weigh up
the opportunity cost of using its own funds – that is,
Short-term finance
the profit it could earn by investing those funds – For businesses keen to raise funds without recourse
against the cost of financing. to external sources, there are three main strategies
they can implement to maximize the amount
of cash available for day-to-day operations and
capital expenditure.
10
8
DAYS IT Delay payment
TAKES
CLIENT 6 Large suppliers may offer a
TO PAY discount for early payment,
4 but they may also allow a
2
$ company longer terms for
payment, boosting cash
levels in the short term.
0 1 2
WEEKS IT TAKES TO SEND INVOICE
HOW FINANCE WORKS
Raising finance and capital 156 157
USING PROFITS TO
Company FUND EXPANSION
A company seeking to grow may
choose to fund the expansion with
its profits. This option offers both
advantages and disadvantages.
Pros
❯ The use of profits means that no
interest payment has to be made,
Long-term finance unlike on money that is borrowed.
For a business needing long-term ❯ Existing owners and directors are
financial help, its own resources able to retain full control over the
should act as the primary support. business, rather than sharing it
with new investors.
❯ The company is able to keep a low
debt profile, which will appeal to
Reduce inventory $ future investors and lenders.
$
It is expensive for a business Cons
to retain a large inventory ❯ Profits can take time to build up
of unsold goods. Cutting Retained profits sufficiently to fund expansion.
back the inventory reduces ❯ Withholding dividends may upset
storage costs, the cost of A portion of profits may be
some shareholders who prefer to
production, and replacement pumped back into the business.
receive the profit as dividends.
of goods that go out of date A company may also decide to
or become redundant. sell assets to raise cash. ❯ Opportunity to earn funds
from investing profit rather
than spending it can be lost.
al
nc
fina e for t
44
the average
n
he
Total inter
busi ss
number of days
ne
it takes a limited
company in the
UK to pay a
30-day invoice
External finance
When business growth or unforeseen expenses cannot be met using
internal sources of finance, such as retained profit, organizations
must rely on finding funds from lenders or investors.
Debt factoring
80%
of external
€
Sell unpaid invoices to an external
source for an agreed fee in order to
recieve immediate payment, paying
commission upon payment.
domestic banks
HOW FINANCE WORKS
Raising finance and capital 158 159
€ €
Company negotiates Company sends out Factor pays company Customer pays Factor pays remaining
an agreement in which invoices to customers, an agreed percentage factor the invoice invoice amount to
its unpaid receivables and copies these to the of the invoices (typically amount after 30 days company, minus a fee
(invoices) are sold at a factor. Customer now 80–90 per cent) within (or more if terms of (usually 2–5 per cent of
discount to a “factor”. owes payment to factor. a few days of receipt. payment are longer). the invoice amount).
Shares
Raise capital by issuing shares to finance
growth. The company then retains less
profit, as it pays dividends to shareholders,
who also benefit from any capital gains in
the company’s value . See pp.164–165.
Borrowing
€
Secure long-term loans from banks and
other financial institutions, usually on
l finance for better terms than a bank overdraft.
na t
he
Total exter
Finance leases
business
How it works
The flotation of an organization
Ways to list on a stock exchange
(also known as going public)
marks the beginning of its life There are three primary ways to float a company, each
as a public company, after which of which have different associated costs. The method of
it is no longer privately owned by
flotation that a company chooses will be determined by
its size and how much capital it needs to raise.
a small number of shareholders or
company members. A company
may choose to float when it needs tion A company joins a new stock exchange
capital to finance growth. The uc without raising capital, but by trading its
od
several months: the company puts per cent of the shares must already
legal and financial preparations in be in public hands (on other stock
place before the final stage when exchanges) and no one shareholder
it releases company shares for can own a majority of shares.
sale, either to selected investors,
or to the general public, or to a
combination of both. Each share
represents a “stake” in the
company, and the money that Select groups of institutional investors
the company receives from the
g are invited to buy shares. This involves
in
❯ Overestimation If underwriters
overestimate the value of shares company issues. This is the most
newly on the market (new issue) expensive way to go public, but
it may flop due to lack of demand allows for a company to raise
large amounts of capital.
❯ Volatility Share prices in the first
Ini
1 Pre-tax earnings
above a certain
2
Meet the level
qualifications
Three years of
The specific audited financial
requirements are set statements
by the stock exchange
where the company Ability to pay the
annual listing fee
plans to list. Listing Appoint underwriters
conditions vary
between exchanges, These financial professionals will be
but typically demand: responsible for buying and selling
the shares to the public.
HOW FINANCE WORKS
Raising finance and capital 162 163
trillion
market capitalization of more
than US$10 billion
❯ Mid cap Listed company with
market capitalization of between
US$2 billion and US$10 billion
❯ Small cap Listed company with
the total market capitalization market capitalization of between
US$250 million and US$2 billion
of companies listed on the
New York Stock Exchange* * as of October 2014
4 6
Promote the share offering
Company representatives, as well as
the underwriters, visit national and
$
international destinations to pitch $
to potential investors.
$
$
$
$
Sell on the stock market
The IPO is officially declared a few days
after potential investors receive the final
prospectus. The declaration is made on
5 a set day after the exchange has closed,
Set the final offer price and the shares are available for trading
the following day.
After ascertaining market conditions
and the anticipated demand, the
company decides the price and the
number of shares to issue. It is then
ready to launch the offering.
7 8 9 +
Shares and dividends
When a company goes public, it sells shares to investors who become
part owners in return for capital investment. The number and type of
shares bought by each investor determine the size of their ownership.
Management shares
Issued (usually given not sold) to
owners and members of company
management, who have:
✓Extra voting rights, so control
of company stays in the same
hands Iss
ue
d dir
ec t
ly
Non-voting shares
698%
So
ld
via
Preference shares
Shareholders:
Exchange, in 1999
✓Receive fixed dividend, paid
ahead of any dividends paid RAISING MORE SHARE
out to ordinary shareholders
CAPITAL
✓Take priority in receiving a share
of any assets left after debts are
After the initial sale of shares, when a company
paid if company is insolvent
goes from private to public, the business can
✗ Have fewer, if any, voting rights raise additional funds by issuing more shares.
There are three main ways to do this:
❯ Rights issue entitles existing shareholders
to buy additional shares from the company
within a set time frame, before they are
offered to other buyers.
❯ Public issue is a process by which the
company issues a new allotment of shares
to sell to the public on the stock market.
❯ Private placing is a practice by which the
Deferred ordinary shares company sells its shares (or other securities)
directly to private investors, usually large
✓Shareholders receive company institutions, bypassing the stock exchange
dividends and share of assets, but all together.
only after other shareholders
SHARES AND DIVIDENDS
Rising value of
shares
VALUE
Financial market observers believe (INDEX
that the emphasis on optimizing the POINT)
value of shares for shareholders came
in 1976, when the idea of maximizing 4,000 198
profit for shareholders became a 19 7
priority. Since then, the market has MO OCTO
ND BER
3,500 AY
experienced a general upward trend CR : BLAC
AS
with occasional deep dips. The graph H K
tracks the average value of all shares 3,000
on London’s FTSE from 1964 to 2013.
2,500
$3 1,000
$1.5
0
$ 3 2,000 $1.5
0
SHARE PRICE TOO HIGH SHARES SPLIT SHARE CERTIFICATES ISSUED SHARE VALUE ALIGNED
A company listed on the stock The company decides on a share It issues new share certificates to The value of shares is now
exchange has seen its share price split. It halves the price of each holders, doubling shares held: a similar to that of competitors.
increase so that its shares now existing $3 share, so each share shareholder with 1,000 shares at The price encourages new
cost more than its competitors’. is now worth $1.50. $3 each now has 2,000 at $1.50 investors to make a purchase.
The high price puts off investors. each. Total worth is still $3,000.
19 20
9 20 F 10
HE 9 A 07 DE EBR
DO IGHT CR UGU BT UA
T.C OF ED ST CR RY
OM TH IT : G IS : EU
BO E CR LO IS R
OM UN BA OZ
CH L ON
E
1997
JULY:
A
FINAN SIAN
CIAL C
RISIS
2
00
–2
2001
ST
BU
00
OM
9/11
20
ATTA TERRORI
T.C
ST
IN N CK
DO
EW Y
ORK
How it works
Shareholders usually receive a dividend if the company in which they hold
shares has retained enough profit in that financial year to make the payment.
The decision to make a payment is taken by the board of directors. The dividend
might be paid every quarter (four times a year), or in two parts – an interim
dividend may be made part way through the year, with the final dividend paid
just after the end of the financial year.
$
$
$
$ $
$
HOW FINANCE WORKS
Raising finance and capital 168 169
$
$
$
1602
the year the Dutch East
Keeping funds for growth
India Company became
The company keeps some of its profit to put back into the first company to
the business. It needs to strike a balance between
pleasing investors and expanding its operation. issue stocks and bonds
Paying tax
Shareholders must
$ declare dividends on $
their tax return and
pay tax on them.
The structure
The capital market encompasses the debt capital market,
ital mark
where bonds are sold, and the stock exchange, where shares
are sold. Both have a primary and a secondary market.
p
Ca
et
Primary market
The market issues new bonds and shares, with
investment banks overseeing the trading. It is also
known as the new issue market (NIM).
£
COMPANIES
GOVERNMENTS SELL BONDS SELL BONDS
AND SHARES
BONDS SHARES
Sold on debt capital Sold on stock
market (bond exchange (equity
market) capital market)
INVESTORS
HOW FINANCE WORKS
Raising finance and capital 170 171
WHAT IS A BOND?
A bond is a debt security that time the interest is paid US$100
trillion
a company issues to investors. to the investor annually. When
By buying bonds, an investor the bond matures, the issuer
is effectively loaning money to repays the original sum of the
the issuers, who in return agree loan to the investor. Companies
to pay interest to the investor. or governments issue bonds to
A bond has a set term of raise money that can then be
maturity (a limited number of
years of validity) and until that
put back into the business or
pay off government debts.
the estimated value
of global debt markets
Bonds and shares: pros and cons
Shares (equity)
✓Buyers of shares gain a stake in the company
✓Sellers of shares have to pay dividends,
BONDS SHARES although these can be reduced or suspended
if the company feels it is necessary
✗ Shares are more risky: changes in company
profit and in the economy as a whole can cause
share prices to rise and fall; if the company fails,
the shares become worthless
BOND
£100
BOND
£100
10 YEARS
£100
7%
interest
TYPES OF BOND
Government bonds Corporate bonds
re d re d
cu cu
Se Se
Unsecured
Government bonds are the safest Debentures are secured on the assets Subordinated
type of bond since governments of a company, making them a less debentures are unsecured and a
in developed capitalist economies risky investment than shares – if the riskier investment – if the company
are unlikely to default on interest company becomes bankrupt, these fails, investors are paid only after
payments on the loan or on the bonds will be paid out first. secured bonds have been paid
principal sum. These bonds are also out. Because they are more risky,
known as “gilt-edged” because they investors expect a higher return
used to be issued with gilded edges. (interest) on their investment.
INTEREST PAID (%)
100
90
80
70
60
£70
over 10
50 years
10 YEARS
40
30
20
10
0 1 2 3 4 5 6 7 8 9 10
YEARS
£100
£7
Investors receive annual interest Mature bond is repaid
Each year, the company pays an investor £7 Once the bond reaches its date of maturity, in this
(7 per cent of £100) for each bond bought, in case 10 years, the original sum of money, £100, is
return for using the principal sum as capital to repaid to the investor. So the investor receives a
fund its business. After 10 years, the investor has total of £170, including interest, over the full term,
received a total of £70 interest per bond. in return for the original £100 investment.
Gearing ratio and
financial risk
Capital gearing is the balance between the capital a
company owns and its funding by short- or long-term
loans. Investors and lenders use it to assess risk.
Low
How it works
Most businesses operate on
Equity finance (shares) gearing
some form of gearing (also called
Pros
financial leverage). They partly
❯ Does not have to be repaid Company has
fund their operations by borrowing
❯ Shareholders absorb loss
less debt
money, via loans and bonds, on the
condition that they make regular ❯ Good for start-ups, which may
repayments of a fixed amount to take a while to become profitable
Company has
the lender. If the level of gearing is ❯ Angel investors share expertise
more equity
high (in other words, the business ❯ Low gearing seen as a measure
Low proportion of
has taken on large debt), some of financial strength
debt to equity, also
investors will be concerned about ❯ Low risk attracts more investors described as a low
its ability to repay and see this as and boosts credit rating degree of financial
an insolvency risk. However, if the Cons leverage. Equity
amount of operating profit is more comes from:
❯ Shared ownership, so company
than enough to repay interest, high has limited control of decisions ❯ Reserves (retained
gearing can provide better returns profits)
❯ Shared profit in return for
to shareholders. The optimum investors risking their funds ❯ Share capital
level of gearing for a company also ❯ Legal obligation to act in the
depends on how risky its business interests of shareholders
sector is, how heavily geared its ❯ Heavy administrative load
competitors are, and what stage ❯ Complex to set up
of its life cycle it is at.
LONG-TERM DEBT
× 100 €1.2 MILLION
SHARE CAPITAL + × 100 = 21.2%
€2 MILLION + €2.455 MILLION +
RESERVES +
€1.2 MILLION
LONG-TERM DEBT
HOW FINANCE WORKS
Raising finance and capital 174 175
High gearing
25%
the ratio at
A water company is the only water provider in the area, with several
million customers. The ratio of 64 per cent is acceptable for a utility
or below which
company with a regional monopoly and a good reputation.
a company is
traditionally
€360 MILLION
× 100 = 64% said to have
€82 MILLION + €120 MILLION +
€360 MILLION low gearing
£
HOW
SALES AND
MARKETING
WORK
Marketing mix ❯ Marketing approaches
Outbound marketing ❯ Inbound marketing
Business development ❯ Information management
Marketing
mix
The successful marketing of a product depends on the consideration of four key
elements – the product itself, its price, how it is promoted, and where it is sold.
This combination is called the marketing mix, and it is used as a tool for planning
product launches and campaigns. Before focusing on the marketing mix, marketers
need to define the target market for their product by determining which groups of
customers are most likely to purchase it.
❯ Identifies gaps in the market for the ❯ Breaks down the market into smaller
harvests launch of new products customer groups with similar needs
Price Cost
❯ What is the value of the product ❯ How much will the product cost
to prospective customers? the customer, and will it be seen
to represent good value?
❯ What is the usual price point
for this type of product?
How it works Marketers identify the goods and services they sell in
Consumers can be said to buy benefits rather than three or five product levels, with the benefit at the core.
products. For the marketer, the product itself is that The marketer’s job is to translate and communicate
benefit, as packaged and presented to the consumer. each product level as an offer to the consumer.
Actual product
Packaging, brand name,
quality level, design, and
additional features that set
it apart from rival products
eco
s
hi-tech tyre
free delivery •
e service
-friendly •
Takes rider
from A to B
s’ fre
•
th
tra
Augmented
s
di
ar
on
product tio e
3g
pa
nal
6m
design •
yi
42%
of new product
NEED TO KNOW
❯ Personal branding Promoting oneself
as a product with a brand personality
❯ Fast-moving consumer goods (FMCGs)
Goods that are sold quickly at fairly low unit
launches can be cost, such as food and household products
expected to fail
Expected
product
Additional
desirable
benefits
Takes Augmented
rider from product
A to B Extra features
kes
2w
and benefits
ra
ee
•b
h
ls •
3 gears
ur
st
de
ligh
dy ri
t io
• re th
li a b l e • s m o o
te r
Potential
ec
de
nd
ig a
ot
s
r product
f ra
n
nb
pr
•c
m
olo w Future,
n
• no s io
e
au u r ch ell-k improved
to o i c e • w o l li
lo c nc version
k to lt-i
prevent thef t • bui
Product positioning
A vital step in the process of deciding how to market a product is
defining how it is distinct from the competition – what is unique about
it and what are the qualities that make it better than rival products.
How it works brand, and clarify how it is different from similar types
Before a company launches a product, the marketing of products offered by competitors. They also need
department has to decide how best to position it in to identify those criteria that customers are most
the marketplace compared to its competitors. To likely to use when choosing a particular product or
determine this, marketers must define the most brand. With this information the marketers can then
important features and values of the product or create a product positioning matrix or map.
HIGH PRICE
Competitor
STRATEGIES Competitor
LOW PRICE
Competitor brand
brand brand
❯ Value positioning A product
plotted on the map so that it can
Brand’s
offer best value for money, and current
deliver good functional qualities. position
❯ Quality positioning A product
that is located on the map on
the basis of its perceived quality
or superiority.
❯ Demographic positioning
A product mapped according to
its appeal to a specific population
segment, such as consumers with
a particular occupation. LOW QUALITY
❯ Competitive positioning Product positioning template
A product that is very similar to
those of competitors, relying on The map shows how marketers position competing products
correct pricing to find a viable in the marketplace according to the price/quality variables (the
position in the marketplace. most commonly used) to identify a gap for the new product.
HOW SALES AND MARKETING WORK
Marketing mix 182 183
EXPENSIVE
nt
i ssa
ro
C
bacon
s and An expensive
gg A breakfast dish breakfast food
E
ereal
ldc
o
C
Centrally
positioned,
cereal is the
most popular
breakfast food.
QUICK
SLOW
es
ncak With a slow cook time,
a
pancakes occupy a
P
reakfas
a nt b t
e al t
cer s
In
ot
H
Students make
the ideal target
Older people market for
and children instant breakfast
provide strong products.
demand for
hot cereals.
INEXPENSIVE
Breakfast positioning map
The positioning of the various breakfast foods
“Positioning is not what you do
has been determined by the speed at which
the food is prepared, measured from slowest
to a product. (It) is what you
to fastest, and the price of each food type, from
the least expensive to the most expensive.
do to the mind of the prospect.”
Al Ries and Jack Trout
Product life cycle
Every successful product launched on the market experiences growth
followed by decline. To maximize profitability, business managers
must recognize and manage each stage of the product’s lifespan.
Growth Saturation
Sales increase and the cost per Sales peak and the cost per
customer falls as profits rise. customer is at its lowest.
There are more customers – Profits are now high and
and more competitors. competition is intense.
Launch
Decline
SALES
TIME
HOW SALES AND MARKETING WORK
Marketing mix 184 185
months
EARLY ADOPTERS
measuring a company’s products
EARLY MAJORITY
LATE MAJORITY
by growth rate and market share
INNOVATORS
to determine marketing spend
LAGGARDS
❯ Product life cycle management
(PLM) Managment of a product
from inception to withdrawal
the length of time
a product can be
PORTFOLIO ANALYSIS
labelled as “new”
34% 34% Rising stars
Products with a high
market share in a
high-growth market;
Withdrawal they require a big
marketing spend to
The product is phased out keep them growing.
as sales stall or continue to
fall. The business introduces
a replacement product before Cash cows
the old one is withdrawn. Products with a high
market share in a
low-growth market;
they generate money
to support rising stars.
16%
Problem children
Products with a low
market share in a
13.5%
high-growth market;
they need a big
marketing spend.
Dogs
Products with low
market share and low
growth; they may stay
in portfolio to keep
2.5% customers happy.
Price
Price is a crucial variable of the marketing mix as it generates revenue
while product, promotion, and place yield costs. Pricing may also be the
marketer’s most potent tool because even minor tweaks affect returns.
Pricing strategies
Low quality
A number of different strategies can be
used to determine the price of a product.
Economy
Low price
Skimming
€€€€
5%
increase in price
❯ High launch price Charge more
than usual in the short term while
a product is seen as unique.
❯ Correct timing Set a higher price
when the business has a temporary
advantage within the marketplace,
High price
250–300%
to avoid the cheapest item.
of cost
Premium €
Geographic pricing
€€€€ ❯ High price Charge as much as
Charge different prices
for the same product
the market will pay for an item. in different locations.
❯ Unique value Apply premium
prices to products that have no
comparable substitute, such as
famous brand-name goods.
Non-pricing
❯ High production cost Charge
?
strategies
a premium price because a product
is customized and so offers no Avoid adjusting the
savings on volume manufactured. price to attract sales,
promoting superiority
of product instead.
Place
Knowing where customers shop, where a product is sold, and how
efficiently goods can be delivered to the consumer – called “place”
in marketing terms – are essential to sales success.
70.5%
How it works A sales outlet is the place where
Whether a company sells goods a product is sold, such as shops,
or services, customers must be catalogues, or e-commerce sites.
able to find and buy those products Sales channels are the merchants,
as easily as possible. Businesses
have to decide on the best sales
agents, and distributors who take
a product from the seller and
of device sales by
outlet and sales channel to get
their products to customers in a
bring it to the consumer.
2017 are forecast
way that benefits both parties. to be smartphones
Selling through
wholesalers and retailers
Products are distributed in two
stages: by producer to wholesaler
and then to retailer.
Example
E-commerce site selling
vitamins; they are sent
to customer by post
or courier.
Consumer
Example
Electronics company
distributes its television
sets to a chain of
retail stores.
Retailer Consumer
Example
Farmer sells apples to
wholesaler who sells
them on to grocery
shops and supermarkets.
Wholesaler Retailer Consumer
Example
Chocolatier in France
uses import agent in
Japan to sell its products
to wholesalers and on
to retailers. Agent Wholesaler Retailer Consumer
Promotion
Promotion is necessary for generating interest in and sales of a product
or service. A complex and expensive part of the marketing mix, it involves
communicating to customers and influencers, such as peer groups.
How it works
The primary purpose of promotion
is to boost sales by attracting new
customers, while enticing existing
ones to try out something new. Personal
Most companies use a number of selling
communication activities to inform Interact with customers
and remind their target audience of face to face and tailor
a product’s benefits (see pp.196–231).
Co sales messages to
nsu
One of the long-term benefits of mer bee their needs.
communicating with customers is
that it helps to build brand loyalty.
NEED TO KNOW
❯ Integrated Marketing Customer
Communication (IMC) service
Promotion of same brand Provide customers with
message across all media channels information about the
❯ MarCom (Marketing product; offer updates
Communication) Full range and special deals.
of promotional activities used
to reach out to the market
25%
the percentage of
Below the line (BTL)
Describes promotional
activities a business carries
out in-house, such as direct
mail or telemarketing, to
reach customers directly.
digital promotion
budgets spent on
mobile advertising
in 2013
HOW SALES AND MARKETING WORK
Marketing mix 190 191
Advertising Direct
Run ad campaigns marketing
through media channels
Send product offers and
most likely to reach target
information directly to
market, and stick to Interactive
the potential consumer,
budget appropriate marketing
via mail or email.
for the product.
Build long-term
relationships with
customers using two-
way communication,
especially online.
Sales
promotion
Entice customer with
offers, free samples, gifts, Public
competitions, packaging, relations
and point-of-sale Generate positive interest
displays. in the company by
sponsoring events and
charities, or pitching
news content
to media.
Above the line (ATL)
Refers to online/offline
advertising a business
pays for in order to
target customers.
Market research
Asking customers what they think about a product is a vital part of the
decision-making process for marketers. Research offers insight into how
a product might perform and lowers the risk of marketing ventures.
“Research + Intuition
= Decision”
Primary data
collection
New research to answer
specific question
CASE STUDY
?
Marketer Marketer
Coca-Cola launch
In 1985, the Coca-Cola company launched a new kind
of cola. The launch followed two years of taste tests,
costing US$4million, to refine the product. However,
the drink failed and had to be withdrawn in the face
has a reaches a of overwhelming disapproval from the public. In the
marketing post-mortem, analysts concluded that the
question decision company’s researchers had failed to ask customers a
DATA REQUESTED
DATA RETURNED
Secondary data
collection
Published material
on a subject
Agency
Organization that carries
out original research and
organizes research data into
meaningful results
32%
Internal sources External sources
❯ Web usage data (for example ❯ Industry reports by trade
browser logs and online bodies, institutions, and
sales records) private research companies
❯ Customer profiles with buying ❯ Reports by broadcast,
the projected history and demographic data print, and internet media
increase in the ❯ Accounting records, such as
statements and balance sheets
❯ Academic papers, university
thinktank reports, and
hiring of market ❯ Original data from past
market-research reports
research library holdings
❯ Government surveys,
research analysts reports, and statistics
in the US by 2022
Market segmentation
In order to make decisions about who to sell their product to,
marketers try to identify distinct groups of consumers with similar
wants and habits – who together form a “segment” of the market.
“Market segmentation
is a natural result of
the vast differences
among people.”
Donald Norman
194 195
Sociographic Psychographic
Identifies individuals’ connections Focuses on a consumer’s interests, values,
on social media, or membership of and opinions, which can help marketers
political and other groups, helping develop relevant messages and find the
marketers learn about consumers’ right media channels to target a segment.
passions and interests. Potential Potential focus areas include:
focus areas include: ❯ Risk-taking behaviour
❯ Group memberships ❯ Charitable giving
❯ Number of friends on social media ❯ High achieving
❯ A tendency towards
expensive tastes
❯ A preference for
email contact
Geographic
Concentrates on a
customer’s place of
residence, so that any
product launched is
made relevant to their
environment. Potential
focus areas include:
❯ Post code
❯ Continent
❯ City
❯ Neighbourhood
Demographic
❯ Population density
Uses basic consumer
data, such as age or gender, ❯ Climate
as a means of categorizing
needs and targeting products
appropriately. Potential focus
areas include:
❯ Income
❯ Nationality
❯ Family size and age
❯ Ethnic background
❯ Occupation
❯ Religion
Marketing
approaches
Every product launch requires strategic planning to make sure messages about
a new product reach the right types of consumer, are communicated through
the most effective combination of channels, and have the most relevant content
and style. Once marketers have researched the market and defined their target
audience, they face several key decisions on how to make their approach.
Types of approach
Whom to target and how to go about it are crucial to Rather than sending the same message via different media,
success. Marketers may use several complementary they usually mould the tone and style of the marketing
approaches to different groups of potential consumers. pitch to suit the channel as well as the target consumer.
85%
of all purchasing
decisons in the US are Engagement
made or influenced marketing
“Come and
by women dance with me.”
It entices the
customer to
collude in
product sales.
See pp.204–205.
Sensory marketing
“Wake up and smell
Traditional the roses.”
channel allied It seduces the
with a dominating customer with sights,
style. “Let me tell sounds, and smells.
you,” it blares. See pp.206–207.
See pp.200–201.
Relationship marketing
“Let’s be friends.” It builds a rapport with its
audience of consumers. See pp.208–209.
20%
low-volume sales at a premium price
to a specific group of consumers,
while a mass approach tends to
use heavy promotion to a wider
audience and aims to achieve
high-volume sales.
of sales can
In reality, businesses tend to mix
up both approaches, launching a
make up to
niche product and then expanding 80% of profit
NEED TO KNOW
Long-tail marketing
Coined by Wired magazine editor Chris Anderson, the term “long-tail
marketing” takes its name from a demand curve (see below) depicting
products with low demand or sales volume – niche products – that
continue to sell and make profit over time.
PRODUCTS
HOW SALES AND MARKETING WORK
Marketing approaches 198 199
Niche market
HYBRID APPROACHES
Using social media to identify and reach
more than one target market, marketers have
developed hybrid approaches that are more
flexible than conventional niche or mass-
market positioning of products.
Mass market
An unfocused strategy that aims at
the broadest customer base.
Large segment
Mass market Channels marketing resources to one
large segment of the mass market.
Who and how Adjacent segment
❯ Business targeting a large group of consumers Once large segment is fully penetrated,
with generalized wants and needs. product expands into related segment.
❯ Requires high marketing spend to promote Multi segment
products, which must be widely distributed.
Markets to several segments at once,
❯ Marketplace often crowded with other with a customized strategy for each.
competitors selling a similar product.
Small segment
Markets to a small segment with few
competitors, if resources are limited.
Niche segment
Focuses marketing resources on a
specific group of customers.
Mass customization
Customizes a strategy for each
sub-segment within the mass market.
Traditional marketing
Before the digital age, marketers relied exclusively on non-digital
channels, such as TV, radio, and print media, as well as direct mail,
events, and cold-calling, to convey their message to the consumer.
How it works
Traditional marketing encompasses
a number of tried-and-tested ways
of building a brand and pushing
a product to sell more. It remains a
key facet of marketing. Nowadays,
however, most businesses use Events
a mix of traditional and digital Staging sports activities,
marketing methods. One of the themed displays, parades,
advantages of traditional marketing or exhibits to promote a
is that companies have face-to-face product, cause, or brand.
contact with customers through TV
person-to-person selling, special Promoting sales through TV
events, and event sponsorship. ads, programme sponsorship,
or product placement.
Traditional
marketing process
Small and large businesses use
a range of conventional marketing
channels, and often integrate them
with digital marketing strategies.
Direct mail
Mailing catalogues or circulars
to a targeted list of consumers,
often promoting special offers
on products.
Face-to-face Telemarketing
Approaching customers directly Phoning potential customers who
to create brand awareness or have an identifiable need for a
persuade them to buy a product. product to give a sales pitch.
HOW SALES AND MARKETING WORK
Marketing approaches 200 201
Product samples
Offering free samples of a product to customers, giving them the
opportunity to try it before making a purchase – an effective way Billboards
to launch new products and build customer base. Renting large outdoor advertising
spaces to market products. Hiring
cost dependent upon the size of
space, its visibility, and the amount
of traffic that passes the location.
Radio
Using commercial slots on radio
to promote the products either
locally or nationally, depending 25%
on the station’s reach. Newspapers and
magazines Traditional
marketing
Hiring space in print media to Digital
run advertisements, or creating marketing
advertorials to market products 75%
or services.
25%
of US companies
surveyed in 2012
valued traditional
marketing while
75% valued
Brochures and flyers Networking
Promoting through mailing or Interacting with other people
digital marketing
hand-distributing pamphlets at specialist events to develop
locally to promote businesses. professional contacts.
Digital marketing
By using the internet, marketers can connect directly and instantly
with current and potential customers to build brand recognition,
collect data, and encourage word-of-mouth recommendations.
How it works
Unlike traditional offline
e xperien
marketing, digital marketing
gives a business direct, two-way er ce
m
communication with customers.
Digital marketing employs some Consu
conventional approaches, such Customer blogs
about the gym
as “pop-up” or “banner” ads
on web pages, but it also relies
Q
R
CUSTOMERS VISIT THE GYM
co o
heavily on the power of social
de n
Bl we
er s
to
i s mo
om c t
media for raising awareness of
og b
t a bi
s t re
lin site
ke le
c u Di
a product or brand. This makes
ks
to
to
it harder to measure return on
gy
m
investment. Digital marketing
Customer takes voucher to gym
Cu
techniques, a hybrid known
sto
m
as “tradigital” marketing.
er
s c on
he w
du e b
le s i t
sa e
fr
ee
POSTER WITH
w
or
QR CODE FOR
Tradigital
ko
g
TRIAL
u t
tin
in practice QR code is
scanned
A new health club is launched with mobile
nal marke
PRINTED AD
using a tradigital approach to WITH TRIAL phone
marketing. TV adverts are aired VOUCHER to
er
$
gym’s website and schedule
us
POSTER IN GYM
sc
% SHARE OF GLOBAL
Digi AD SPEND BY MEDIUM
tal
ma The internet is the fastest-growing
ng
6%
7%
Fe i a
e d so
v
ba c i a
9%
Directs wifi user to
ck l m
2012
40%
is e d
gi i a
$
ve
n
19%
18%
Feedback is given
LANDING PA 1%
IFI GE via social media
W
6%
7%
$
user to
16%
@
23%
t t ail n s
KEY
g
w e m r si
TV Radio
n e to e
er
up t om
Newspapers Cinema
Cu
Magazines
eb
m aw
g y es
h e do
the percentage
rt r
f o me
ch to
ar u s
e-commerce
market forecast
to be held by
China by 2016
Engagement marketing
By involving customers directly in the development of a brand,
marketers hope to build a strong two-way relationship with
customers and win long-term loyalty.
How it works
Engagement marketing harnesses
several online and offline strategies Start with a “wow”
to draw a customer’s interest and experience
get them talking about products
Provide interesting, informative, or
and services on offer. This contrasts
entertaining content to draw potential
with the more traditional style customers to a web page.
of marketing in which a brand
concept and product proposal are
presented to the customer as fixed,
to be either accepted or rejected.
Engagement marketing, on the
other hand, encourages customer
input so that they feel closer to the
brand. The aim is to lure potential
customers to the website with
an initial experience, and then
work hard to keep them there.
End with
a sale €
€
Follow up purchase with
after-sale call, full of feel-good €
reinforcement.
PURCHASE
NEED TO KNOW
❯ “Sticky” customers Consumers
New prospects
who are loyal to a company and
return to make more purchases Offer incentives to existing
❯ Decision simplicity Ease
customers for recommending
with which consumers can product or sharing content.
find trustworthy information
about a product
❯ Churn rate Percentage of
customers that cut ties with the
company in any given time period
❯ WOM Word-of-mouth Social visibility
marketing, which relies on Post interesting and relevant
satisfied customers who content on social media, and
COMMENTS
recommend product to others AND SHARES encourage dialogue.
HOW SALES AND MARKETING WORK
Marketing approaches 204 205
Virtual engagement
Design every aspect of a
website to maintain visitor
interest so people return for
new content.
IN-STORE PROMOTION
SOCIAL MEDIA
Actual engagement
Events
Encourage customers in the
Use previous customer real world to use product, meet
feedback to decide on best and speak with sales staff, and
content for publicity events. interact with other customers.
Sensory marketing
Sensory marketing targets multiple senses to sway purchasing
decisions. Based on research showing how the brain responds to
sensory input, this type of marketing acts covertly on the customer.
How it works
Sensory marketing is most obviously
used by the food and drinks Sight
industries, but its use extends Technology is making advances
to diverse products and services: with this, the most stimulated
computers designed with tactile sense in marketing, by using
materials, hotels scented to relax optical illusions, digital effects,
customers, and even firework 3-D, and 360-degree photography.
displays featuring edible confetti.
Typical channels for sensory
marketing include field marketing –
in-store events, samples, and
person-to-person sales – direct mail,
and product delivery. For online
businesses, however, finding a
way to use it remains a challenge.
Touch Smell
Marketers use 2-D and 3-D Customers are willing to
textural print techniques for pay more for a product
promotional materials and sold in an environment
packaging, as well as to sell that is scented appealingly.
products with tactile appeal.
81%
of consumers
born from 1980 Taste
to 2000 value Taste sensations
can be enhanced
experience over or subtly altered by
combining them with
material items touch, sight, and especially the
closely linked sense of smell.
HOW SALES AND MARKETING WORK
Marketing approaches 206 207
Hearing
Sound is more
effective than sight
in triggering the
brain areas that
process emotions.
Relationship
marketing
The strategy of relationship marketing is to develop and
manage a trusting, long-term association with customers
and other markets that have links with the company.
How it works
Relationship marketing aims to corporations have now changed
replicate the type of interaction their focus from making the
old-fashioned village shops have sale to relationships; from
with their customers, offering a short-term reward to long-term
high level of personalized service gain. The marketer can extend Supplier markets
to win them over for a lifetime. the network beyond the engaged Building a relationship
While small, local businesses customer to include employees, of collaboration with
naturally work this way, large suppliers, and others. suppliers makes good
commercial sense.
CASE STUDY
Starbucks
The strategy of coffee-shop chain Marketing internally
Starbucks exemplifies effective ❯ Barista training
relationship marketing. Centred on
❯ Tech development opportunities
core customer and internal markets,
it also involves suppliers, referrals, Marketing via referrals
and recruitment (employee) markets. ❯ Word of mouth
❯ Social media shares
Marketing to customers Marketing to employees
❯ Social media ❯ Stock options
Influence markets
To maintain good PR, the
❯ Business crowdsourcing ❯ Medical insurance company works closely with
❯ Familiarity with customers ❯ Partnership regulators and consumer or
❯ Loyalty programme Marketing to suppliers environmental groups.
❯ Reward card app ❯ Fairtrade programmes
❯ Mobile payment ❯ Quality control
HOW SALES AND MARKETING WORK
Marketing approaches 208 209
Referral markets
“Ignore the human
Customers can be word-of- element of marketing
mouth advocates for a company.
Related businesses may also at your own peril.”
refer trade. Bob Garfield
NEED TO KNOW
❯ Key account managment (KAM) System
that coordinates all departments in a business-
to-business (B2B) company to ensure big clients
are well served
❯ Frequency marketing Promotion aimed
CV CV CV at increasing repeat sales by rewarding
customers for repeat purchases
❯ Direct response (DR) Marketing that
Recruitment markets invites consumers to respond directly to
advertiser, by mail, telephone, or email
To attract the best
employees, a company may ❯ Transaction marketing Strategy that aims
market itself by offering to persuade customers to make additional
one-off purchases at the point of sale
incentives to staff.
Outbound
marketing
Also called interruption marketing, outbound marketing involves a marketer
pushing a message to consumers. With this type of marketing, businesses typically
reach out to a wide audience by paying for advertisements to feature on various
media channels. Although the audience may have no interest in the advertisement,
outbound strategy relies on delivering a high-impact message and generating
a response by creating familiarity through repetition.
32%
of UK brands cut
outbound marketing TYPES OF OUTBOUND MARKETING
spend in favour of Offline
spending more on ❯ Cold calling Campaign can be more effective
if conducted at the right time of day to suit target
content marketing, audience; message should be scripted carefully and
delivered in a genuine tone. See pp.218–219.
in 2013 ❯ TV commercials Although many consumers now
switch off TV advertisements, they are familiar with
and open to this type of media, and repetition gets
the message across. See pp.212–213.
❯ Radio This medium is the world’s most popular
mass communication channel with a global reach,
and is ideal for outbound messages aimed at an
international market. See pp.212–213.
Analyse
❯ Guerrilla marketing The use of a creative
Marketers monitor the and unconventional approach in high-traffic
progress of outbound public places can be a cost-effective way to raise
campaign and adjust the mix of brand awareness. This is a form of engagement
media or other paid-for channels, marketing. See pp.204–205.
then measure campaign results.
Actions Online
❯ Run control and test streams to ❯ Social media The types of advertising on social
compare the success of different media sites are increasing and include sponsored
media or campaign strategies. posts, promoted pins, and direct forms, such as
❯ Examine click-through-rate banner ads. See pp.228–229.
analytics, which look at how many ❯ Mobile technology Advertising that is tailored for
customers have clicked through to mobile devices takes the form of text and images, or
find out about or buy product, both, to offer special deals to users; promotions are
to determine online ad success. also made via apps. See pp.214–215.
❯ Measure direct mail response ❯ Social lead targeting This strategy taps into
rates, including breakdown individual profiles from social media and tailors
of different mailing lists or messages, which are sent via online networks, such
target demographics. as Twitter and LinkedIn.
❯ Analyse sales by outbound ❯ Search engine optimization (SEO) keywords
spend to establish which Paying for popular SEO keywords relevant to a brand
channels offer the best return can improve exposure by raising them in the internet
on marketing investment (ROMI). search engine listings page. See pp.230–231.
Traditional offline
advertising
Offline advertising uses traditional media channels, such as magazines,
TV, radio, and billboards, to market a product or service. Although online
advertising is growing fast, globally most advertising is still offline.
How it works
83%
Marketers choose different
The common criteria for both channels according to the target
online and offline advertising market defined for the product
is that businesses pay for ads or service being advertised. The
which are intended to catch a choice may also be based on the
consumer’s attention with ROI that a company has previously of all advertising
a brand or product message.
Businesses calculate the
experienced for that channel.
However, tracking the response
in India in 2013
success of their advertisement
by looking at the return on
rate of offline advertising is more
difficult and less accurate than
was via television
investment (ROI) for every ad
“dollar” spent. To maximize
that of online advertising (see
pp.214–215).
or print; digital
the ROI, they must ensure they comprised just
choose the right channel for
their target audience. 6.5% of the total
44.3% One of the most important set of figures for a marketing KEY
department is return on investment (ROI) for advertising Share of
spend, which indicates the success of its campaigns. Data overall offline
compiled by the Radio Advertising Bureau, UK, in 2013 ad budget
showed that TV and radio boasted the best ROI. Average return
on investment
per £ spent
18.1%
11.7%
£8.70 £7.70
£5.80 5.8%
£2.00
Newspapers
Fast publication process; Ads compete for attention
S themed newspaper with other material on
N EW sections allow for more page; usually black and
targeted advertising white, and text only
58%
Magazines
May remain in circulation Real circulation figures
for months; niche trade hard to source; securing
and special-interest titles ad slot requires planning
allow focused advertising months in advance
of marketers’ ad
Direct mail
Cost-effective; delivered May be perceived as junk budget globally
straight to people’s homes mail and instantly thrown
and offices; targets away; response rate was spent on
specific markets usually low
TV advertising
Billboards
High reach makes channel Heavy competition
in 2010, although
cost-effective; advertiser’s
message visible 24 hours
for prime sites; format
limits message length
86% of people
a day and complexity skip television ads
Cinema
Potential to impress with Audience numbers
sophisticated, creative limited; members may
production; it has captive choose to enter cinema
audience members after ads are shown
Online advertising
Marketers are increasingly advertising online to push marketing
messages to consumers. Online channels include display and mobile
technologies, email, search engine, and social media marketing.
210%
How it works engine queries. While display
When marketers advertise on the advertising is likely to get more
internet, they have to choose both views overall, search advertising
the form of the ad and a location has a better chance of reaching
that has an audience matching the target audience.
their target market. There are Other forms of digital advertising the growth
several advertising channels, but
the two most often used are display
include mobile advertising, which
embeds advertisments in mobile
rate of mobile
advertising and search advertising.
Display advertising includes
content viewed on smartphones
and tablets, or sends text messages;
advertising
banners with text and images, email, which delivers ad copy in China,
which appear on websites known directly to an email address; and
to be used frequently by target social media advertising, which a between 2013
consumers, such as news, social company uses to promote products
media, or video content sites. via its social media profile. and 2014
Search advertising is a method A major advantage of online over
of placing ads in the web pages offline advertising is that response
that appear in the results of search rates can be tracked effectively.
40%
32%
30% 28% 27%
20%
20%
11% 10%
10%
0%
Would unsubscribe from Would respond Would stop using Would protest on
a brand’s promotions negatively to future the brand’s product social media sites
brand messages or service
HOW SALES AND MARKETING WORK
Outbound marketing 214 215
CASE STUDY
Mobile Cheaper to develop Different screen sizes
content for mobiles than and systems can distort Click fraud and botnets
for computers; easy ad layout; user may feel With pay-per-click (PPC) advertising,
to track ad effectiveness annoyed by interruption a business pays a website for every
click made on one of its ads, but click
fraud has become a serious issue.
Fraudsters set up a website and sell
PPC advertising, then infiltrate the
Email Offers means to reach Recipient may delete computers of unsuspecting users
millions of potential email without reading it, with a computer virus known as
customers, especially and is more likely to do a “botnet” to generate fake traffic
46%
of e-commerce sales in 2014
came from the Asia–Pacific region
Direct mail
By targeting a large number of potential customers via post or email,
marketers hope to convert some into actual customers. This is
achieved through the timing, design, and wording of the message.
Group A
WEEKDAY Responds with two
MAILING
clicks on the company’s
See response
from email hit website
APPROACH A on Monday
@
Acquire names Send mail WEEKEND
Set size of sample APPROACH B MAILING
and split in half See response
from email hit
on Saturday
3.42%
was the average response rate to
Group B
Responds with
20 clicks on the company’s
website
1 2 3 4 5
A B
A B
How it works
60%
makes an outbound call, it is
Telemarketing works in either to sell additional products or
two directions: inbound and services to an existing customer, or
outbound. A customer making to entice a new customer to make a
a call to a business (with either a purchase. Telemarketing sales can
question or complaint, for example) be monitored in orders per hour – of all call-centre
is referred to as an inbound call.
It gives the business a chance
for example, agent A may make
140 calls per hour and generate
staff in France
to retain a customer who may
be dissatisfied with a product
£400. A more effective measure is
revenue per call – if agent B makes
and India have
or service, or to win over a new
customer contacting the company
60 calls per hour but £450 worth of
sales, the conversion rate per call is
college degrees
for the first time. When a business higher for agent B than agent A.
INBOUND
Customer
telephones
call centre
WARM OUTBOUND
Customer enquiry Call made to promote
The customer may have a new products/offers
query about service to existing customer
or billing.
COLD OUTBOUND
Call made to establish
first-time contact with
prospective customer
HOW SALES AND MARKETING WORK
Outbound marketing 218 219
A B
Evaluate effectivness
Telemarketers constantly evaluate the
effectiveness of calls.
Customer
The person who decides
whether to buy
a product.
Agent A Agent B
May adopt a May use a different
particular sales communication or
strategy or have a selling technique.
personal approach.
Outcome
AGENT A Gatekeeper At the conclusion of a marketing drive,
AGENT B
The person who answers telemarketers appraise strategies and styles
the call and decides to to help them decide on future campaigns.
pass it on.
Inbound
marketing
Inbound marketing lures customers by offering them appealing content, and
engaging with them. The approach pulls customers into a relationship with a
brand rather than “pushing” them into making a purchase, which is how
advertising works. Inbound marketing is also known as permission marketing as
potential customers are giving a business permission to communicate with them.
In other words, they are actively interacting with the company or brand.
Decision-making
NEED TO KNOW Ensure content captivates potential customers or solves
❯ Top of funnel marketing (TOFU) problems for them; encourage two-way communication
Offers content to grab the initial
attention of potential customer
❯ Middle of funnel marketing Purchase
(MOFU) Offers more detail Entice interested site visitors to become customers;
and encourages participation make shopping online an easy and positive experience
❯ Bottom of funnel marketing
(BOFU) Attempts to win a
sale with low pricing, offers, or Advocacy
via customer recommendations
Provide excellent customer service; spur customers to make
recommendations and share on social media
HOW SALES AND MARKETING WORK
Inbound marketing 220 221
41%
of marketers surveyed in
2013 believed inbound INBOUND MARKETING
STRATEGIES
marketing produced Offline
measurable return ❯ Optimize retail space
Provide a well-designed physical
on investment (ROI) environment that will both draw
customers in and encourage them
to come back.
❯ Engage media Generate press
releases to gain media coverage.
Focus on topics of real interest,
especially ones that can be backed
up by stats and research.
❯ Interact face to face
Conduct events in-store that
provide a new experience/benefit
@ to customers; hire a stand at a trade
event and offer key information.
COMPANY
Pros Cons
nd
ou ❯ More likely to draw ❯ Response from market
Inb
$
Integration of channels
By coordinating the message on all
channels, businesses can optimize
the impact of a marketing campaign.
Blogging process
Marketers may use SEO tools (see pp.230–231) to gain insight into what’s being
talked about online, which helps them to determine the most suitable topics
for blogs. Many companies have the in-house talent to create blog content.
Post
Publish blog entry on
Select key word internet using web software
or question or specialist corporate
blogging platforms.
Determine key word, phrase,
or question that appeals
to the target audience.
Create content
Base content on key word/
KEY WORD question, and ensure it gives
readers valuable insight into
the chosen topic.
Add links
Cite industry experts and
research reports; add photos
or videos, and provide links
to the original sources.
85.2%
NEED TO KNOW
❯ Disclosure Disclosure of whether
blog is sponsored, or if reviewed
products are given to blogger
of internet users or were independently bought
❯ Splog Spam blog containing
in Brazil visited fake articles designed to increase
search engine rankings of
blog sites in 2011 specific websites
NG VITAL STAT
I IS
Syndicate/share GG
TI
O
Submit blog to syndication
CS
BL
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
BLOGGING
Capture content
Decide on topic, and create an outline,
then film video for vidcasts or record
audio material for podcasts.
Process content
Edit video footage or audio track to rid
background noise, mistakes, and repetitions.
Test and edit further, if necessary.
Publish content
Embed and publish content on new
post. Use app to generate feed address;
submit to iTunes or other platform.
Tracking
Count number of subscribers; use web
feed services to access user location, level
of interaction, and other statistics.
YES
NO YES YES NO
£ £
NO YES
KEY
Business potentially Blog generates revenue
influences blogger for blogger/business
Blogger operates
independently of business
Social media
marketing
By posting content on social media, marketers try to attract website
traffic and draw attention to their products and services. Occasionally,
interest in the posted content can multiply rapidly across these channels.
Content
37%
of businesses
NEED TO KNOW
❯ Social graph Internet graph that
maps connections between user
groups, such as Facebook friends
created ❯ Social media optimization
in Germany (SMO) Use of online communities
to maximize social media coverage
used social of product or event
❯ Social media monitoring
media in 2013 Process of tracking number
of mentions a brand or company
receives on social media sites
Content is Tweeted
to 460 followers #
of the company. # #
# #
#
#
#
#
# # #
#
#
#
#
Content is
re-Tweeted
to 750 other
followers.
# #
# #
#
#
Content is posted
on Facebook by
one Twitter user.
SEO process
These tools can be used regularly in a
continuous attempt to move a website
higher up the listings. Keyword selection
Use a combination of intuition
and analysis to choose words.
Reporting and
tracking
Use tools to track traffic and
report on website ranking.
Collaborative process
Marketing departments generate
brand identity while sales teams do
the selling. Working together, they
Live events Face-to-face
aim to take potential customers on Social communication
a journey from brand awareness media
to repeat sales, communicating the
message through various channels.
Public Telemarketing
relations Email blasts
Advertising
HOW SALES AND MARKETING WORK
Business development 232 233
15%
of companies have
BUSINESS DEVELOPMENT
STRATEGIES
Business development is reliant on growth. Sales and
marketing teams can increase long-term profitability by
building up a customer base and then trying to retain it.
specialist business There are several ways to ensure the customer base
remains buoyant.
development staff who ❯ Chart customer journey from before to after sale.
❯ Think of ways to reduce cost of sale and increase
are not involved in sales customer satisfaction.
❯ Integrate sales processes with marketing to gain
and retain customers; think about ideal customer.
❯ Monitor and evaluate these processes regularly.
$
Follow up sales with effectiveness intellectual
efficient delivery, Track marketing capital
excellent customer spend on each Nurture talent
$
REVENUE
service, and channel and analyse and foster
personal contact results to gauge creativity in
to reinforce return on marketing order to
$
positive customer investment (ROMI). optimize ongoing
relationships. See See pp.242-243. marketing efforts.
pp.240-241. See pp.244-245. $
Special
Return on
offers and Traffic- Innovation
investment
updates driving
(ROI)
to website
Branding and
rebranding
A brand is defined by the characteristics that mark a particular
product. Branding is used to communicate a product’s qualities to
a consumer, and create a lasting bond between supplier and customer.
How it works The brand works for both supplier and customer, aiming
When a supplier develops a brand it creates a defined to eliminate uncertainty and risk, and to convey key
set of values, expressed in product imagery, colours, attributes. These days, social media helps to promote
logo, slogan, jingles, promotional imagery, and an brands – for example, 29 per cent of Facebook users
association with high-profile individuals or characters. follow a brand and 58 per cent have “liked” a brand.
Develop the
concept
Marketer focuses on
positioning (where Sincere Down-to- Rugged Tough, Sophisticated
brand sits among earth, honest, kind, strong, outdoorsy, Exclusive, romantic,
competition in terms thoughtful masculine elegant
of function and look)
and building a clear and
consistent personality.
Competent
Bold Reliable,
Carefree, intelligent,
spirited, authentic,
youthful successful
HOW SALES AND MARKETING WORK
Business development 234 235
Apply marketing mix
NEED TO KNOW
Product Price Promotion Place ❯ Brand equity Power of
well-respected brand to generate
more sales than competition
❯ Brandwidth Measure of
effectiveness with which brand
connects across a wide range
of consumers
❯ Brand architecture Overarching
plan to develop one or more
brands and create a hierarchy
The consumer
nd
Bra au
Research
di
t
Rebrand
Lead-generation process
Generating leads is a multi-step process that involves sales,
marketing, and customer-service teams working together
to plan, design, produce, test, and refine a campaign.
Produce campaign
Create and deliver materials
for each medium involved in
the campaign.
RESEARCH
Ascertain which
Plan the approach media and customer SEO/PPC
touchpoints are Integrate search
Set goals and parameters, including most effective. engine optimization EMAIL BLASTS
expected return on investment (ROI) (SEO) efforts and
and number and quality of leads. Include a benefit
pay-per-click spend for the recipient
(see pp.230–231). and a call to action
BIG IDEA
REVIEW (see pp.216–217).
Devise a compelling
OBJECTIVES PLANNING message to engage
Check they are Ensure sales, and entice leads.
realistic; marketing, and
compare with customer service are TELEMARKETING
previous efforts. working together. Review key
TRADE SHOW
message and
AUDIT Invite potential leads
SYSTEMATIZE call script
Assess current to visit the company’s
Integrate customer with customer-
lead generation. stand and meet face
relationship management service team.
to face.
(CRM) software to
manage the leads. ADVERTISING
Generate broad
interest with ads
on selected media.
Identify target customer Design campaign
Define the characteristics of the Craft a multi-channel message
customer the business is aiming to to entice the lead to opt in and
capture in as much detail as possible. give contact information.
HOW SALES AND MARKETING WORK
Business development 236 237
ANALYSE
QUALIFIED LEADS PERFORMANCE
Determine percentage Identify adjustments
of initial contacts with needed to keep campaign
purchase capability. on track.
Refine
RESPONSE RATES Fine-tune the filtering process to
Tally how many ensure leads being generated are
leads have been ONLINE high quality and likely to buy.
generated so far. CONVERSION RATES
Calculate percentage of web
visitors converted to leads.
How it works
Sales and marketing departments
are responsibile for generating sales
income for a company. The first Raw lead
step is to locate or identify potential Potential customers –
customers – lead generation. The perhaps a website visitor,
second step is to make contact or a suitable person who Pitch Find precise needs
can be approached by of suspect; show product’s
with those potential customers
cold calling qualities and unique values
and entice or persuade them to
buy – lead conversion. to counter objections.
A sales pitch is used to convert
leads into customers. However,
nowadays the stereotypical spiel
delivered by an overzealous
salesperson has been largely Pitch Reinforce product’s
replaced by more sophisticated value to prospect; offer
tactics, such as live chat on Prospect payment options; highlight
shopping websites, which inform One step away from becoming customer satisfaction policy.
customers and invite them to a customer, prospects need a final
participate in a dialogue, rather enticement to convince them to
buy the product.
than simply pestering them.
Visitors to
website 3,000
Suspect
Raw leads show their interest
by remaining on website or by Leads click on
not ending phone conversation call to action 600
with cold caller.
Leads interact
with company 150
Leads qualified
by company 50
Sales closed 10
Inactive
Prospect is not ready to buy
immediately, but shows enough THREE CLASSIC SALES PITCHES
interest to suggest they might
buy in the future. High concept
Catchy introduction that captures the vision or key idea of a
product or business; intended to grab attention and interest
Elevator
Short précis (under a minute long) that explains the why,
what, and how of a business or product
20-minute deck
Dead lead Presentation that explains the product or business in detail;
Lead will not convert, but may be how it can serve the need a prospective customer may have
worth trying to revive in future.
Customer retention
Given that existing customers help businesses generate the majority
of profit and growth through making additional sales and referrals,
retaining these customers is a huge priority for marketers.
+ Identify satisfied
customers
Customer referral
Introduce retention
improvement strategy
Monitor and measure
by analysing
Customer feed-
back surveys
Listen to
Identify the customers and
Attrition rate
dissatisfied identfiy those at
risk of defecting. Calculate the number of customers
Defection retained (existing), lost (exiting), or
Find out why certain gained in a given period.
customers have left Loyalty
and which competitor programmes
loyalty card
they have gone to. Reward customers
Complaint analysis with improved
incentives for
Examine written staying loyal.
customer complaints
and call-centre records.
Boost customer ¥ ¥ ¥
service
Offer employees Revenue targets
incentives to build Measure revenue targets against
customer relations.
–
cost of customer-retention efforts.
HOW SALES AND MARKETING WORK
Business development 240 241
Unhappy
1-2 3-4 5-6
with price
7-8
Net promoter score
Gauge how likely a customer
is to recommend the company
9-10
Lured by
5%
reduction
to others. competition ¥
in customer
defection
rate can
Natural
increase
attrition (death,
relocation)
profits by
Customer retention savings
Calculate savings made in
25–125% ¥
marketing spend by retaining
existing customers.
Return on marketing
investment (ROMI)
Many organizations gauge the effectiveness of the amount they
spend on marketing campaigns by measuring the return they make
on marketing investment, which is commonly known as ROMI.
ROMI in practice
The diagram shows how a commercial air-conditioning
company might use ROMI to measure the performance
of a marketing campaign. The company spends US$2,100
on a direct-mail promotion, which it aims at offices in three
major cities to generate sales leads and secure new contracts.
The direct-mail flyer contains a contact form offering
@
a 10 per cent discount to new clients who respond to
the promotion within a specified period of time.
TOTAL REVENUE
= ROMI
MARKETING BUDGET
HOW SALES AND MARKETING WORK
Business development 242 243
63%
of chief
LONG-TERM BENEFITS OF MARKETING INVESTMENT
Some aspects of marketing investment are difficult to measure immediately. The benefits
of providing excellent customer service, for example, or investing in research to help
marketers retain customers, may not be evident right away but will reap long-term profits.
officers
believe ROI
will become $ Run marketing campaigns
the leading
Cost of market investment
Results
Total new customers = 3
Average customer spend = US$6,500 (after 10%
discount deducted from average US$7,222 total spend)
Revenue from marketing = US$19,500 (3 x US$6,500)
Campaign spend = US$2,100 + US$2,167 (3 x US$722)
14 qualified leads 3 of these cost to company of promtional discount = US$4,267 total
(who are become ROMI = US$4.57 per customer / per US$ spent on
a good fit for the customers the campaign
product) become
sales opportunities
US$19,500
= US$4.57
US$4,267
Intellectual capital
The knowledge within a company that is
used to improve business performance P TALENT
TO
is known as its intellectual capital.
No. 1
How it works
Every business has capital, NTELLE
AN I CT
which refers to the physical, UM
H
tangible assets that appear Difficulty
on the balance sheet of its
financial statements.
A business also has Human capital
intellectual capital – the The combined talents of the staff and
knowledge and skills inside executives employed by the business.
the company. This collective It includes skills and abilities, drive,
VO L U
CE
know-how is hard to quantify creativity, and innovativeness, all of
IE N
and measure, but it is essential M which can be quite hard to measure.
ER
E OF
to a company’s ability to generate PR XP
AC TIC AL E
revenue. For instance, management
must provide training and a
handover period for new staff
so that human capital does not
go down when people leave the Difficulty
company, taking their expertise
with them. Management academics NAL LINK
have identified three main kinds EX
TE R S Customer capital
of intellectual capital: human, Goodwill developed between a company
structural, and customer. and its customers, reflected in customer
loyalty to the business and its products.
This relational capital can be extended
to suppliers, but is very hard to quantify.
NEED TO KNOW
ELATIONS
TR HI
❯ Strategic capital Company’s KE
R
PS
MA
AS
SL
O
L
IN
A
ES
8am
developed to quantify and measure a
company’s intellectual capital.
9am
FIVA
Framework of
intangible value
areas (FIVA): an eight-
step system used to
“The only irreplaceable calculate the worth
of a company’s
capital an organization intellectual capital.
possesses is
the knowledge Knowledge capital
scorecard
and ability of Method developed
by New York University
its people.” professor Baruch Lev
to rate a company’s
Andrew Carnegie
intellectual capital and
assess its contribution
to a company’s success.
Information
management
Monitoring the marketplace and making sense of the vast quantities of data
available has become a priority for businesses; the data is crucial for digital
marketing, which is taking on increasingly sophisticated forms. Nowadays,
most businesses have a system in place for managing information – the most
successful organizations use data not only to monitor day-to-day performance
at every level, but to predict future outcomes and plan accordingly.
External Internal
Outside the business, data flows in Within the business
from production, supply chain, sales itself, data feeds into
outlets, partners, and customers. the marketing and IT
teams from operations, Executives
finance, and HR.
oduction
Pr
Forecast Analysis
n
ply chai
Marketing and IT
DATA
up
S DATA
DATA DATA
DATA DATA
They are responsible for collecting and
analysing data, and then reporting their DATA
al
7%
of organizations
TRANSFORMING DATA
INTO DECISIONS
With relevant data easily accessible (see pp.262–263)
a business can identify its strengths and weaknesses
employ a chief in order to improve its processes and operations, as
well as customer relationships (see pp.264–265).
digital officer
LEGAL COMPLIANCE
Le g
al
Operations
system
HR
Cu
sto
Make decisions
mers
CUSTOMER EXTERNAL
RELATIONSHIP DATABASE Historical data
Information Creates data archives
MANAGEMENT
(CRM) gathered from
Data from CRM sources outside
sources the company
HOW SALES AND MARKETING WORK
Information management 248 249
Digital dashboard
14%
the increase
Displays regularly updated business results using customized graphics.
employee if Mon
Tue
OPENS
Wed
data usability Thu
Fri
is improved Sat
Sun
Mon
by 10% Tue
Wed
CLICKS
Thu
Fri
Sat
Sun
Retrieve and analyse Mon PURCHASES
Staff can fetch data to answer Tue
specific questions about what Wed
Thu
is happening in the company. Fri
Sat
Sun
SPREADSHEETS
Form primary BI
tool to display data
(basic or advanced)
OLAP CUBES
Online analytical
processing cubes
58%
enable 3-D analysis
Actual sales: £4,700,000
of three variables
Expected sales: £8,125,000
on spreadsheet
BUSINESS INTELLIGENCE
AND BUSINESS ANALYTICS
The example of a 5 per cent sales dip shows how BI and
BA can be used to examine and understand the situation.
Business intelligence
93%
of IT executives
❯ Type of data investigation Results reveal past and in Brazil say
current events in the business
❯ Questions answered What has happened in the that their
business in the past and what is happening currently?
❯ Tools used Reporting, dashboards, scorecards, business could
online analytical processing (OLAP)
Business analytics
be improved
❯ Type of data investigation Examines past event in
the business, and applies the patterns discovered to
by using big
a future scenario data analytics
❯ Questions answered Why did it happen? Will it happen
again? What can we do to stop it happening again? or intelligence
❯ Tools used Statistical analysis, data mining, pattern
matching, predictive modelling solutions
HOW SALES AND MARKETING WORK
Information management 250 251
Pattern matching
Predictive analytics
Process of trawling through large Program that conducts
quantities of data to find patterns advanced analysis of data
between variables, which can be to forecast future outcome.
applied to other sets of data.
Monitoring
Data mining Process that uses software
to show what is currently
Use of computerized processes happening in a business,
and software programs to find providing real-time results
relevant patterns in large sets to help key operations
of data. make decisions.
Statistical analysis
Software that organizes and
investigates every piece of
relevant data and interprets
t
Raw data Analysis Reporting
This includes company records Software tools are used to Method that draws on
historical data to provide
(past and current customer data process and study raw data.
a general overview, revealing,
and transaction histories) and Analysts interpret results and
for example, how the business
external data (economic, trade, make forecasts that help future performed in a given year.
and industry reports). business decisions.
Marketing and IT
The rise of digital marketing strategies means that marketers are
working more closely with IT specialists to develop the best ways
of launching and managing online publicity campaigns.
78%
of marketing
NEED TO KNOW
❯ MarTech Annual business
conference that focuses on
overlap of marketing strategy
and technology
executives ❯ Actionable metrics
Measurement of campaign
believe that results which enable businesses
to make informed decisions
digital strategies ❯ Vanity metrics Measurements
of campaign results that appear
will transform positive but are not meaningful
❯ Growth hacking Low-cost
marketing online marketing techniques,
such as using social media to
IT person by 2020 improve sales
Must find or develop
software tools to
implement and
manage online RISE OF THE MARKETING TECHNOLOGIST
campaigns.
Online marketers rely on software to monitor and analyse campaigns, generate
content, and extract data. The job of the marketing technologist, who has
knowledge of both marketing and IT, requires a broad knowledge base.
WEBSITE
ARCHITECTURE
SOFTWARE MARKETING
PROGRAMMING SOFTWARE
SOCIAL AND
DATA AND
MOBILE
ANALYTICS
PLATFORMS
IT CONTENT
OPERATIONS MARKETING
AND SEO
Collecting
consumer data
Capturing key data is a priority for any business seeking to understand
the marketplace. However, the task requires the use of innovative
strategies to circumvent consumer sensitivity about privacy issues.
Surveys
Gather customer
How it works feedback via
There are a number of methods
Collecting data to create email, text/SMS,
that companies use in order to or postal, and
collect customer data. When there consumer profile face-to-face
is contact between a customer Digital marketing and e-commerce have questionnaires.
and the company, marketers can use accelerated the rate at which customer
the opportunity to gather as much information is gathered. Some methods
information as possible. This might require the customer’s input, such as
happen at the point of sale in-store questionnaires that appear online. Others,
or online, where marketers are able such as website tracking, are possible
to observe customer behaviour. without the need to contact the customer.
Marketers may also choose to solicit
information directly by asking their
customers to fill in registration forms
and conducting telemarketing calls Observations
or customer surveys. Study customer’s
behaviour while they
shop in-store or online.
WARNING
Customer
Data collection errors research
❯ Barraging Using a customer’s data Conduct research on existing
to bombard them with information customers or on those who
on products viewed or sites visited fit the customer profile.
❯ Overlooking technical flaws
Failing to integrate apps properly
so that there is inconsistency (and
errors) in collecting customer data Contact centre
❯ Using only automated systems Monitor customer
Neglecting the opportunity to calls and store data
strengthen relationship with on preferences and
customer by communicating purchase history.
with them personally
HOW SALES AND MARKETING WORK
Information management 254 255
Social media
View customer’s
profile information
58%
of marketers
TECHNOLOGY AT
THE CHECKOUT
In this technological age, businesses have
the means to learn about their customers without
bombarding them with questions. Retailers, for
on social media.
could link data example, typically use three methods in the shop
to capture information about the customer.
to an individual
Loyalty programme
customer A company may collect
by 2012 loyalty card
information by inviting
customers to register
for a loyalty programme
that offers an incentive.
loy
a lt y
c ar
A loyalty programme
d also helps track customer
preferences.
Website trackers
Track website visitor’s
movement around site and
Point-of-sale
see what attracts interest.
software
Computer software
programs that track a
customer’s purchases
are available, allowing
marketers to tailor offers
Competitions to their spending habits.
Use competitions to collect
information, from opinions
to demographic data.
Mobile technology
The use of smartphones
enables marketers
to compile data, for
example the frequency
Transactions of customer visits and the
Ask questions at amount of time they
checkout – in-store, spend in the store.
online, or on the phone.
Data warehousing
The process of data warehousing involves information from a company’s
internal system, such as invoices and sales logs, as well as data
from outside sources, being filed away in an electronic vault.
50%
How it works The data is often used to prove
The data warehouse is a repository beliefs and intuitions about
that holds the company’s sales the business. For example,
and operational history, as well the marketing manager of a
as relevant economic and trade power tools company might
information from other sources. presume that 25–35-year-old of companies
The data goes through three stages
before it is stored in the warehouse,
men are more likely to purchase
their products than women in
surveyed in 2011
which makes it usable for analytical
purposes. Once stored, the data
the same age bracket. The manager
would be able to prove this belief
were not sure their
may be accessed by all areas of
a company – from accounts and
by analysing the sales data and
customer records accessed from
data warehouses
operations to sales and marketing. the data warehouse. were future-proof
Warehousing process
The data stored is regularly updated. When the business requires information
from the warehouse, it is transformed into an accessible format and analysed
using software tools.
EXTERNAL USABLE
DATA FORMAT
Includes
government
statistics on EXTRACT,
business LOAD,
TRANSFORM USABLE
(ELT) FORMAT
HOW SALES AND MARKETING WORK
Information management 256 257
HR
“How much have we spent
on contract staff this year?”
Storing data
The data is stored in three
sections: metadata, summary
data, and raw data.
Accessing data
Using software programs,
METADATA the data can be analysed and
Information retrived in three ways: via online
relating to the analytical processing (OLAP),
data itself
reporting tools, and data mining.
SUMMARY OLAP
DATA Accesses data to
Business activity answer specific
information questions
Sociographic
Shares with 125 friends on social media
variables
Psychographic
Wants to get fit on holiday
variables
Behavioural view
❯ Shopping location Prefers
to shop in smaller stores
❯ Purchase habits Buys in Sociographic view
75%
of marketers say
bulk to be thrifty, responds
to discounts
❯ Social media Actively shares
interests with connections
personalization
❯ Degree of loyalty Faithful
to a brand, but open to
❯ Community Influential could have a
member who socializes and
better offers
contributes to neighbourhood significant effect
❯ Groups and clubs Member of
bird-watching and hiking group on customer
retention
Geographic view
❯ Continent North America
❯ City Booming metropolis with
Demographic view
❯ Age group 35–54 (helps
gauge family priorities and
income)
❯ Status Married (children affect
spending choices)
❯ Occupation and salary
Teacher, US$65,000
CUSTOMER PROFILING
WEBSITE DATA
WWW How often do they visit the site?
Which web pages do they look at?
SOCIAL DATA
Which social media networks are they
connected to? Do they share links?
TRANSACTION DATA
How much have they spent, how
often, and on which products?
CRM DATA
What’s their contact history with call
centres? How have they responded
to campaigns?
Customer
LOYALTY DATA
How loyal are they to the company? Do
they use the company loyalty scheme?
profile
MAIL DATA
What email contact has there been?
@ What has the response rate to emailed
content been?
£ POINT OF SALE
What observations have sales staff
made from interacting with customer?
HOW SALES AND MARKETING WORK
Information management 260 261
Middle class
B Intermediate managerial,
professional/administrative
NEED TO KNOW
❯ Omni-channel customer
Three ways to use a customer profile Consumer who shops using
multiple channels, including
2
Sell more to existing customer Mining customer
profile to see their spending habits, likes, and interests to a provider and champion them,
enables marketers to make personalized offers. bringing in other customers
in the process
Reward loyal customers Identifying good customers
3 and offering gifts and incentives tailored to their tastes
increases customer lifetime value.
❯ 360-view Profile that gives
marketer a complete picture
of customer, enabling them to
predict their needs and behaviour
Big data
Business is trying to harness the huge amount of consumer data now
available online. This information can be analysed and used to create
detailed profiles to target customers more precisely.
Social media
Data monitors what people are saying about
the organization and its products.
Audio
Data includes news broadcasts, interviews,
call-centre recordings, and podcasts.
38%
of marketers had a
NEED TO KNOW
❯ Apache Hadoop Open-source software
library for storing and processing big data
❯ Terabyte One trillion bytes
❯ Petabyte Unit of digital data equivalent
centralized database for to 1,024 terabytes (Facebook stored 100
petabytes in 2012)
customer data by 2014 ❯ Exabyte Unit of digital data equivalent
to 1,024 petabytes (five exabytes equates
to all words ever spoken by human beings)
Log data
❯ Customer reviews DATA MANAGMENT
❯ Customer service
Organizations can choose either offline or
❯ Audio files of customer online options to store big data and various
service calls, for example software for access and analysis.
❯ Big storage hardware Servers; storage
and network equipment capable of
supporting many terabytes of data
Emails ❯ Software Includes programs for research
@ ❯ Internal communications
❯ Customer contacts
❯ Email campaigns
and analysis, storage and access, and
graphic visualization of data
❯ Cloud services Third-party providers
that offer storage networks for big data
management and access
Customer relationship
management (CRM)
CRM is a computerized system that a company uses for managing and
coordinating marketing, sales, and customer-support data. The data is
used to maintain good customer relations, which improves profitability.
How it works of ways: the sales team may use it to find new business
CRM is a software tool in the company’s IT system leads and improve relationships with current customers,
that records all interactions the business has with the marketing team may use it to reward loyalty, and
customers. The information can be used in a number customer service may use it to deal with any issues.
AUTOMATION
CRM can use automation as a tool to respond to customers who visit and use their website.
@ @
age
Age Location
sp on
inte ecial ssi
re s ofe
ts pr @ @
@
e ge Gender Family size
siz nd
ily er
location
f a m
@ @
Profession Special interests
HOW SALES AND MARKETING WORK
Information management 264 265
871%
Marketing
Target groups for special
campaigns; monitor and
Sales
reward loyalty; generate leads
Convert new leads; find
the average return new prospects; cross-sell
and up-sell opportunities;
on investment customize pitches
delivered by CRM
Customer contact form
CRM uses the information to group
customers according to their
buying behaviour.
Quote request
The company sends a quotation in
response to the customer’s interest
in their product.
Customer feedback
The company asks questions to
glean information about the
customer’s views.
E-commerce transaction
The customer pays for the product
via the internet.
Support ticket
An automated ticket allows
the customer to track delivery
of the product.
Finance
Operations Generate invoices in a timely
Improve efficiency of manner; manage payment
manufacturing, product Customer service process
delivery, ordering, Respond to service issues
and tracking immediately; manage
customer cases; gather
feedback
Compliance
In most countries, companies have to adhere to laws and industry
regulations that govern how they can sell and market their products.
The rules are there to make sure that businesses operate fairly.
Marketing regulations
To protect the consumer, regulatory bodies produce guidelines
instructing companies on how they should market their products.
Marketing to children “Roll up, roll up, enter the house of toys...”
NEED TO KNOW
66%
of all email traffic
❯ CAN-SPAM Act International legal ruling
that sets out commercial email requirements
and penalties for violation
❯ Phishing Fraudulent sending of emails
while pretending to be a genuine entity, to
gain the recipient’s bank details, for example
in 2014 was spam
A marketer promoting a product with a special offer must set out the terms and
conditions in writing. In the UK, use of the word “free” is subject to regulation.
Telemarketers must promptly disclose key facts of the proposed sale, including
cost and quantity, restrictions and conditions, and refund policy.
Marketers must refrain from sending bulk unsolicited emails, the most
common form of spam, or other types of unrequested message.
Any item offered alongside the main product purchased must be presented
as an option to buy, not an item the consumer must take action to refuse.
HOW
OPERATIONS
AND
PRODUCTION
WORK
Manufacturing and production ❯ Management
Product ❯ Control ❯ Supply chain
Manufacturing
and production
Once a firm has decided what goods or services to make, its directors have to
choose a method of production that best suits consumer demand, the product,
and the market, as well as the one that will be the most profitable. Companies
work in three general areas of industry, which together form a production chain
to provide consumers with finished goods or services.
Production methods
Before the Industrial Revolution, products were made Primary production
by craftsmen. Then factories brought people together to The acquisition and processing of raw materials – in this
work on machines. Typically, this was job production, with case, haricot beans, as well as tomatoes for the sauce
one person making one item. Economist Adam Smith first
introduced the concept of division of labour, which led to
mass production, with car-maker Henry Ford bringing in
the moving assembly line at the start of the 20th century.
Today, manufacturers can combine the best of all methods,
with large-scale production of personalized products.
Production typically involves three stages – here, from
haricot bean to baked beans sold in supermarkets. PRODUCTION IN PRACTICE
Native to South America, haricot beans are grown either
for the immature green pods, eaten fresh as green beans,
or for the beans themselves. These are dried and used most
commonly in baked beans, a dish that originally came from
Boston in the US.
trillion
several resources
❯ Capital Finance invested in business, including
money spent on production tools, such as
equipment, machinery, and buildings
❯ Land Natural resources used to create goods
and services – for example, physical land or
the value of China’s annual extractable resources such as minerals, timber,
oil, or gas
manufacturing output in 2011 ❯ Labour People employed in a business to
produce the goods and services
– the largest in the world ❯ Enterprise Entrepreneurs and/or leaders
who bring the factors of production together
to make the whole process happen
The raw beans are mixed with tomato The labelled tins are transported to warehouses and
sauce, sugar, salt, and secret spices. The from there to supermarkets and other outlets ready to
ingredients are cooked in vast pressure be sold. Several brands vie for market supremacy of this
cookers, ensuring consistent texture and popular convenience food, using advertising, price, and
a long shelf life, and then sealed in tins. taste differentiation.
Job production
In job production, items are made individually. Each item is one job,
which is usually finished before another is started. This method is
typically used for small-scale production or for large one-off projects.
Prove dough
The dough is left to
rise (prove) in tins.
Batch 1
Batch 2
HOW OPERATIONS AND PRODUCTION WORK
Manufacturing and production 274 275
million
❯ Economies of scale: low unit ❯ Repetitive work, so workers
costs, as large number is made may be less motivated
❯ Customer offered choice ❯ Costly because may require
of, for example, size, weight, storage of raw materials, work
and flavours in progress, and finished items
loaves of bread ❯ Output and productivity (see p.139)
increases with use of specialist/ ❯ Requires detailed planning
were sold every day dedicated machinery and scheduling
Bag up to complete
All the rolls finish the production
process together.
Bake rolls De-pan and cool rolls
The whole batch is The rolls are removed from
baked at the same their tins.
time at the same
temperature.
PARTS ASSEMBLY
CAR ASSEMBLY
HOW OPERATIONS AND PRODUCTION WORK
Manufacturing and production 276 277
Ready for
customer
When customer
Door assembly Finishing Inspection demand is high,
car companies
may run their
production lines
continuously.
Mass customization
Sophisticated technology and manufacturing developments enable mass
products to be personalized. The low unit costs of mass production
combine with the marketing opportunities of custom-made.
Lace colour
million
B. Joseph Pine II outlines four distinct types:
s
lace
t e r ned d sole fit
Pat hione arrow
Cus 7.5, n
Size
Continuous production
During continuous production, a product is made 24 hours a day,
seven days a week. The production line runs continuously to cope
with demand and staff work round the clock in shifts.
Wood Papermaking
Timber is a renewable resource In this continuous process,
and logs are stockpiled. Trucks automated machinery runs
make constant deliveries to 24 hours a day, 365 days a year.
processors for pulping.
Recycled paper
HEADBOX
Recycled paper pulp is Fibre and water are fed
an important resource onto a moving wire mesh.
for the paper industry.
WIRE SECTION
Some of the water is
sucked away to leave wet
fibres that form paper.
HOW OPERATIONS AND PRODUCTION WORK
Manufacturing and production 280 281
4 billion
trees are cut down every
TYPICAL USES
Continuous production is used for undifferentiated
commodities required in large and constant amounts.
LEC
TRICIT Y
S AND CHEM
year to make paper :E A IE I
GY
CA
ER
ND
ENER
REFIN
L PLANTS
GAS
OIL
PRODUCT OD
R S PR UCTI
PE I AS
ON
ON
PA
GL
DRYING
The paper is dried off.
COATING AND
CALENDERING FINISHING
PRESS SECTION
The paper is coated, AND SUPPLY
More water is
compressed, and The finished paper is
squeezed off
smoothed. constantly supplied
the wet sheets.
to printers, packers,
and newspapers.
Hybrid processes
Manufacturing firms may adapt existing processes or combine two
production methods for optimal performance, particularly if they make
a wide range of products.
WORKER 3 WORKER 4
HOW OPERATIONS AND PRODUCTION WORK
Manufacturing and production 282 283
WORKER
CELL 3 CELL 4
Management
Every manager in a business, particularly in manufacturing, has to
ensure that all resources – from materials to equipment and staff –
are used efficiently, while keeping the customer continually in
mind. Managers make key decisions to lay down procedures
and set standards and then work continuously to improve
processes to ensure that the company remains profitable.
Which approach?
How people and processes are organized in making and delivering the product
to the customer is critical if a company is to survive fierce competition and rapidly Agile
shifting consumer demands in a global market. In making decisions about how production
a business can meet its goals, managers may combine a number of approaches How can we be more
as many are interlinked and achieve similar outcomes. responsive to shifts in
customer demand?
See pp.296–297.
MANAGER OR LEADER?
Management and leadership are not the same, but are Time-based
closely linked: management
❯ Managers plan, organize, and coordinate; leaders How can we use
also galvanize and motivate. time effectively?
❯ Managers organize workers to maximize efficiency; See pp.294–295.
leaders also nurture skills and develop talent.
❯ Managers focus on the bottom line; leaders also
look to the horizon.
❯ Managers tell people what to do; leaders also
ask questions.
❯ Managers make sure workers are doing everything
that needs to be done; leaders also inspire workers
to want to do more than needs to be done.
The following classic distinction has been attributed to
two different business leaders and writers, Peter Drucker
No. 1
country for
and Warren Bennis: management is doing things right;
leadership is doing the right things.
innovation in
2014: South Korea
HOW OPERATIONS AND PRODUCTION WORK
Management 284 285
¥ ¥
Economies and
diseconomies of scale
Kaizen
What scale of operation is best
How can we drive for us? See pp.286–287.
continuous
improvements?
See pp.298–299.
Lean
INNOVATE production
How do we
INVOLVE
EMPLOYEES
FOCUS
ON VALUE ¥ minimize
resources to
reduce costs?
See pp.288–289.
STRATEGIC
ALLIANCES WITH MINIMIZE
SUPPLIERS WASTE
CUSTOMERS
Just-in-time
UNINTERRUPTED AT THE HEART How can we meet customer
WORKFLOW OF WHAT demand and minimize stock?
WE DO
See pp.290–291.
Total quality
managment
How do we improve customer
satisfaction? See pp.292–293.
Economies and
diseconomies of scale
Economies of scale are one of the advantages of large-scale production
and result in a lower unit cost of each item produced. However, costs can
also go up as the operation grows, resulting in diseconomies of scale.
Economies of scale
While it may be inefficent for a small dairy to supply milk to a supermarket, it is
cost-effective for a concern running to thousands of bottles. Make the delivery
too large, though, and wastage creeps in due to associated costs.
SUPERMARKET
AVERAGE COST AND REVENUE
DELIVERY
OF 100 1 VEHICLE
BOTTLES
DELIVERY
OF 10,000
BOTTLES
£
Few economies of scale Economies
HOW OPERATIONS AND PRODUCTION WORK
Management 286 287
NETWORK ECONOMY
Online networks, such as eBay and Facebook,
150
million
rarely stray into diseconomies of scale. They
can deliver economies of scale even at an
international level: the cost of adding one
more user to a network is almost nil. However,
the resulting benefits may be huge, because
each new user in the network can interact or
trade with other members of the network. the number of eBay
users worldwide in 2014
DELIVERY
OF MORE
THAN
10,000
BOTTLES
Non-value-added processing
Waste Waste
Transportation in stages
Waste Waste
Poor workflow, Underutilization of
poor layout, employees’ mental,
Underused people
5
NEW STOCK IS DELIVERED TO
benefits of reduced inventory SHOP TO REPLENISH SHELVES
are balanced against the cost
JUST-IN-TIME
PROS AND CONS
Pros
❯ Lower stock so less storage space
and less working capital needed
❯ Demand-pull avoids obsolete,
out-of-date stock
❯ Staff spend less time checking
and moving items
4
Cons SYSTEM
TRIGGERS
❯ No room for error – for instance, DELIVERY FROM
if there are any faults in the SUPPLIER WHEN
MINIMUM STOCK
stock delivered, the whole LEVEL REACHED
day’s production is halted
❯ Operation is reliant on suppliers
❯ No cushion for sudden upsurge
in demand
HOW OPERATIONS AND PRODUCTION WORK
Management 290 291
1
CUSTOMER
SELECTS
ITEM FROM US$62
billion
SHELF
the value of
Just-in-time in retail Dell computers
To reduce stockholding, many supermarkets
now use just-in-time deliveries, relying on
sold in 2012
computer data systems. In manufacturing,
systems are often based on Kanban cards –
dockets for withdrawing and ordering items at
each workstation of the production process.
2
ASSISTANT SCANS
BARCODE
CASE STUDY
3
COMPUTER SYSTEM
SIGNALS WAREHOUSE
Dell’s just-in-time computers
Computer produced when customer orders it:
❯ Customer’s individual specification is sent
straight to factory floor.
❯ Just-in-time manufacturing sees deliveries
of supplier parts arriving at one side of the
factory and unloaded directly into bins to
build customer order.
❯ Inventory and costs are reduced.
Total quality
management
Success though customer satisfaction is the ethos of total quality
management (TQM). Everything a company does is relevant, and the
focus is on managing and improving processes rather than outcomes.
philosophy for
managing an Involve everyone Perfect processes
in quality Walt Disney viewed the theme
organization to Founder Walt Disney firmly parks as factories producing
believed in quality and saw it delight. He built quality by
meet stakeholder as everyone’s job, something designing processes and
that could not be delegated. repeating them at scale.
needs without
compromising
ethical values.”
Chartered Quality Institute
HOW OPERATIONS AND PRODUCTION WORK
Management 292 293
12,000
Disneyland cast members are
NEED TO KNOW
❯ American customer
satisfaction index (ACSI)
Cross-industry benchmarks for
employed to make guests happy customer satisfaction in the US;
NCSI is the UK equivalent
❯ Net promoter score (NPS)
Metric for company performance
Employees Exceptional service from the perspective of customers,
Disney calls its employees Cast members (employees) who are divided into promoters,
“cast members”. They are are focused on delighting the passives, and detractors
trained in every aspect of customer – their sole job is to
delivery, including posture, make visitors happy.
gestures, facial expressions,
and tone of voice.
Suppliers Continuous
Disney collaborates with improvement
suppliers – for example, its Walt Disney saw the theme
partnerships with McDonald’s parks as an incomplete
and Coca-Cola – to ensure product; today, improvements
consistent quality. come from the bottom up.
Case study:
managing time in
Ford Electronics INVENTORY
Between 1988 and 1994, Ford US$200 MILLION
Before
PRODUCTION CYCLE
1 DAY
HOW OPERATIONS AND PRODUCTION WORK
Management 294 295
70%
of companies use
PART OF PROJECT MANAGEMENT
Time-based management is a critical
part of project management. Timing
aids include:
❯ Tools such as Gantt charts show
❯ Methodologies such as Agile
help project managers working
in software development
respond to the unpredictable;
formal project- the project schedule as a bar chart,
making it easy to plot and monitor
they are often implemented via
the Scrum framework, in which
one person takes charge of constant
management daily progress and targets.
❯ Project management systems
reprioritizing. Based on the premise
that software cannot be built up like
methodologies methods such as PRINCE2 (PRojects
IN Controlled Environments) help
a product on an assembly line, as it
would be out of date before it was
to structure projects step by step in
released, every area of development
logical, organized ways.
is constantly reappraised.
2 1 3
Regularly finding extra
floor space was a necessity
due to high inventory.
POOR STAFF LESS COMPETITIVE PROFIT LESS THAN
MOTIVATION US$100 MILLION
Measuring by cycle
$ $
Simply measuring performance
in a different way – over a shorter
production cycle – allowed people
to see new opportunities.
$ $
NEW FACTORY
How it works
The goal of agile production is to stay ahead of the
competition. Often incorporating concepts of lean
production (see pp.288–289), agile has an extra
dimension: meeting customer demand rapidly and
effectively. It relies on flexible and collaborative workers
who can deliver swiftly and effectively. The company
has to be able to change or increase production quickly. Rapid response
Design of products might incorporate modular concepts, Company set-up allows it to
allowing for customization, and strong relationships respond quickly and effectively
with suppliers are essential. to customer and market demands
stomer
u
C
Customer
demand is
Agile manufacturing
trigger to start The organization has to create a position
production from which it can alter course as nimbly and
swiftly as a cheetah. It needs to be able to
retool facilities quickly, modify agreements
with suppliers, and continually introduce
new ideas and improvements.
Integrated
Product
technology
reaches Effective information
consumer systems, often linked
to suppliers
Continuous innovation
Constant search for new and better
ways to deliver for customer
HOW OPERATIONS AND PRODUCTION WORK
Management 296 297
3 months
the time it took Wikispeed Strategic partnerships
Supplier collaboration rather
to develop a revolutionary than contract negotiation
Flexible
workforce
Self-organizing,
adaptable teams
Kaizen
Started in Japan, kaizen is a system of continuous improvement that
involves all employees. From senior managers to workers on the shop
floor, everyone is encouraged to suggest improvements day to day.
How it works
The kaizen philosophy is “to do it better, make it better, standards and then looks for ways to continually
improve it even if it isn’t broken, because if we don’t, improve those standards. It is supported by
we can’t compete with those who do”. Kaizen is rarely a framework of training, communication,
about ideas for major change but is more to do with and supervision, and results in improved
ongoing, systematic, incremental improvement. A efficiency, productivity, quality, lead
relentless attempt to eliminate unnecessary activities, time, and customer loyalty.
delay, or waste (muda), kaizen starts by setting high
Innov
known as plan, do, check, act. Central to kaizen are quality,
ongoing effort, involvement of every employee as part of Quality
their daily work, willingness to change, and communication.
70
after World War II. It comes increase productivity.
from the Japanese words kai,
which means “change” or “to
correct”, and zen, which means
“good”. Companies such as Effort
Toyota and Canon have seen
significant improvements by
suggestions per
employee were
Gauge
FIVE FOUNDATIONS
The five steps of workplace organization,
known as 5S, are the foundations for
ze
S
Seiri (Sort)
Keep only essential
items in the work area.
Standardize operation Remove and store all
and activities; make unnecessary items.
each improvement
standard practice,
enshrined in the five
foundations, or 5S.
Willingness Seiton (Streamline)
to change Retrieve ordered
items swiftly and
easily to create
efficient workflow.
M clean, as cleanliness
leads to efficiency.
ea
sure
Seiketsu
(Standardize)
Keep consistent work
practices, tools, and
workstations, and
Measure the make roles clear.
People operation – for
involvement example, the length
of the production Shitsuke (Sustain)
cycle and amount of
The four cornerstones
in-process inventory. above become the
standard way to
operate all the time.
Product
The items that firms sell to satisfy a consumer need and to make a profit for the
business are broadly termed product, whether they are something tangible like
toothpaste or an intangible service such as an insurance policy. In a typical life
cycle, a product is developed and launched, and a few customers take it up. The
domino effect causes wider distribution. Growth eases as the market becomes
saturated, and sales flatten and decline until the product is no longer viable.
Product evolution
From start to finish, every product,
such as a tube of toothpaste, goes
through a process of testing,
innovation, and quality control to
ensure that it will make the biggest
impact on release and throughout
its lifespan. Successful companies
understand the limited lifespan of
products and so invest in the early
stages to maximize growth later on.
trillion
Home entertainment offers different products to
consumers. These are four examples of products at
different stages in their life cycle (see pp.184–185):
❯ Introduction 3-D televisions – only recently
available for the home
❯ Growth Blu-ray players – steady increase in sales
the value of goods because of enhanced viewing experience
❯ Maturity DVD players – challenged by more
traded between EU sophisticated technology
member states in 2013 ❯ Decline Video recorders – cheaper and more
modern viewing formats now available
B
Process
1 2 3 4
Product
generati
a o
de
n
I
HOW OPERATIONS AND PRODUCTION WORK
Product 302 303
Test concept
Feedback from consumers, via focus groups,
interviews, or online evaluation, determine
whether an idea is worth pursuing.
Analyse market
Analysis of opportunity,
influenced by predicted
growth and trends,
helps build a picture of
potential sales.
Test market
Product is tested on Develop products
section of market,
perhaps a selected
geographic area with
good representation of
target audience.
Launch
Innovation triggers
Shifts in society, such as leaps in IT
and growing concerns about climate
change, as well as internal company
developments, create new needs.
gy
t
ci
vi
ag
Crea
Ef fi
ng
ed
£
blem/cris
ro
is
P
ds
ir
-t
ra
su
Env
Cross
tion
es
HOW OPERATIONS AND PRODUCTION WORK
Product 304 305
Brainstorm Action
Individuals and The culture and processes of the
teams need the time company have to be favourable
and mental space to for testing the viability of ideas.
think originally.
ng at all le lea
r missio rrectly m
ni co
n
ea
C
e
t
ve
List
Impac
sured
ls
w
d
Flat m
cture
Design
Any product has to be well designed to succeed. Excellent
designs for everyday items – from the Anglepoise lamp to
reflective road signs – have shaped our modern world.
How it works
H ME R S
The starting point for design is RC TO
S
an idea for a product that fulfils
CU
RESE
a need, whether it is a specialist
item or something in day-to-day
use. The designer has to think of
ways in which a product can serve
its purpose and meet other criteria, IDE
AS
O GY MING
including aesthetics, cost, OL
N OR Explore concept
durability, and environmental
NEW ECH
T
BR AINS
considerations. The design may From scribbles on a piece of
T
CONSIDERATIONS
FOR DESIGN SUCCESS
❯ Functional Serves a purpose
❯ Aesthetic Pleasurable to use
❯ Innovative Different and
new, possibly using innovative
technology
❯ Easy to use Understandable,
and with useful features
❯ Simple Unobtrusive, subtle
❯ Long-lasting Sustainable, not Redesign
too fashion-sensitive Next year, the
❯ Environmentally friendly product may End product
Minimizes resources and pollution need revamping. The final version of the design
that goes on sale may look
very different from the
initial concept.
HOW OPERATIONS AND PRODUCTION WORK
Product 306 307
10–18%
of the budget for bringing
Feedback
Now is the time to find
out what people think
of the product and how
a new product to market it could be improved.
is spent on design RS
(EX TERNA
L TU
RING
E
C
)
CUSTOM
MANUFA
Design decisions
Before full-scale
production begins, INTERNA
G( L
all decisions have N
)
I
MARKET
to be made and
paperwork, such as
intellectual property
rights, finalized.
Quality management
For businesses, quality is not a vague term but a philosophy of going
beyond consumer expectations. Excellent quality management can
give a company a key competitive edge.
Cost of quality
Quality management is essential to ensure
COST OF DEFECT
During production,
that any defects are nipped in the bud – the quality management
earlier the better – and definitely before involves testing,
they become apparent to the consumer. evaluating, and
inspecting quality.
Defective items may
be scrapped.
Quality management at
CUSTOMER FIRST the product-design stage
is low cost and integral to
Before the 1970s, quality was seen the process because it
prevents issues further
as something to be inspected and down the line.
corrected. Then US businesses
began to lose out to Japanese
companies – for example, Toyota
and Honda were able to produce
cars at lower cost and with a much
higher quality. The difference
was that quality had a strategic
meaning for Japanese firms – they
made the customer their priority
and were the first companies
to define quality as meeting or
exceeding customer expectations.
£2.18 million
the annual saving Singapore
NEED TO KNOW
❯ ISO 9000 Set of international
quality standards and certification
demonstrating that companies
have met standards specified
❯ Malcolm Baldrige National
supermarket NTUC FairPrice Quality Award Annual award
Service industry
❯ Getting the desired result
Once the product is with
the customer, the cost of ❯ Consistency
correcting defects is
❯ Responsiveness to
significant. Financial cost
includes returns, repairs, and customer needs
recalls, but the impact on the ❯ Courtesy/friendliness
company’s reputation may
be even more damaging. ❯ Promptness
❯ Psychological factors,
such as good atmosphere
LOCATION OF DEFECT
Product
increasing standardization and
Low volume
mechanization to full automation. Low standardization; unique,
Companies in the top right-hand one-off products
corner of the matrix have high-
volume products and a small range,
so continuous flow production is
the best option for them.
EVOLVING PROCESS
1
The product-process matrix
was first introduced by Harvard
5
academics Robert H. Hayes and
Steven C. Wheelwright in the
Harvard Business Review in 1979.
Dressmaker
Since then, some companies
have worked out the apparent
contradiction of how to customize China accounts
high-volume products (mass
customization). Nevertheless, the
product-process matrix remains
for one-fifth
relevant in many industries. of global
manufacturing
HOW OPERATIONS AND PRODUCTION WORK
Product 310 311
Process
Sugar refinery
Mass
production
Continuous
flow; non-stop
process
(see pp.280–281)
Car assembly
Assembly line
RARELY VIABLE
Connected line
An assembly line is not normally
flow; process
a suitable process for making
repeated for
multiple products at low or
each product
medium volume.
(see pp.276–277)
Batch
production
RARELY VIABLE
Disconnected
Batch production is not normally
line flow;
Bakery a suitable process for making
similar process
standardized products at
adjusted for
high volume.
each batch
(see pp.274–275)
Job
production
Jumbled flow;
complex, unique NOT VIABLE
process design
for each order
(see pp.272–273)
Control
Essential in any type of organization, control is fundamental when the primary
goal is to generate profits. Control needs to cover costs, resources, and quality
of the product or service to ensure that the operation runs smoothly. As well
as crossing departments, control has to run from top to bottom, with directors
formulating strategy while managers allocate resources, people, materials,
and equipment, and oversee the work of individuals and teams.
FUNCTIONS ALONG
THE CHAIN Investment relies Policies on, say, Processes Procurement
While directors work on cash flowing maintaining the are in place to purchases raw
on strategic investment, back into the optimum level control costs, materials from
policy, and process business from of inventory, with continual companies
control, management the cupcake are supported reviews of the that meet its
may use tools such sales, balanced along the chain most efficient use stringent
as Six Sigma to perfect by the cost of by finance, HR, of resources. standards.
operational control. production. and IT.
See pp.320–321.
HOW OPERATIONS AND PRODUCTION WORK
Control 312 313
LEGALLY IMPOSED
CONTROL
130:1
the average ratio of CEO
Many industries are subject to
external controls as well as their own:
❯ Financial institutions National and
international regulatory controls
❯ Advertising industry National
regulation to protect public interest
to employee pay of FTSE 100 ❯ Health and social care National
laws to protect vulnerable members
companies in 2014 – compared of the public
❯ Manufacturing National
with a ratio of 47:1 in 1998 regulations on health and safety
ABC
ABC CAKES Task control
CAKES
Metrics and key performance indicators
are set for each task. They control, for
example, how long it takes to ice and
decorate a batch of cupcakes.
PANY
K E S C OM
ABC CA
Capacity decisions
The fundamental decision is whether to compromise
on demand or capacity – whether to put customers or
the streamlining of operational costs first.
Customer focus
The company, in this case a car dealer, keeps Manage capacity Increase demand
more cars in stock than required so it can – raise prices To use up stock, pricing
always satisfy customer demand. Customers are happy to have a policies increase demand
product immediately but must by encouraging customers
pay a higher price to cover the to buy fast – for example,
cost of holding excess stock. offering on-site deals
for older car models.
€
€€
€
€€
€
€€
€
€
€€
€
€€
SALE
HOW OPERATIONS AND PRODUCTION WORK
Control 314 315
Resource focus
The company uses resources as efficiently as
possible. Wastage is kept to a mimimum, but
90 million
the number of iPhone 6 units
satisfying demand is hard because work is at
full capacity and output cannot rise. made by one manufacturer
to meet demand in 2014
Manage capacity – keep stock low
It produces stock according to demand and holds low inventory
to minimize unnecessary spending and storage costs.
Inventory management
Successful inventory management is a fine balance between satisfied
customers and minimizing the risk of holding too much stock. In this
example, the clothing company is managing the supply of blue T-shirts
for a range of sites and for direct delivery to customers.
Smaller storage
Firm may use smaller facilities to hold
buffer stock, for example, to meet
seasonal demand.
HOW OPERATIONS AND PRODUCTION WORK
Control 316 317
NEED TO KNOW
❯ First in, first out (FIFO) Sale of oldest
inventory items first (or recording them as
sold for accounting purposes)
❯ Last in, first out (LIFO) Sale of most recently
produced items first (or recording them as sold)
142,000
different items were
❯ Stock-keeping unit (SKU) Distinct item that
has its own stock code handled by US company
❯ RFID tag Chip that enables remote tracking
of an item by radio sensors Walmart Supercenters in
any one branch in 2005
Main warehouse
Company may have one main warehouse or a number Delivery to customers
of warehouses as hubs for smaller storage facilities. Efficient and timely delivery is part
of the overall customer experience,
especially as online shopping grows.
Stock is checked in by scanning
barcodes or RFID tags.
Customer returns
Returns are checked out by scanning
barcodes or RFID tags. Batch number
and other data can be monitored.
Quality control
There is a series of processes to ensure that a business maintains a
prescribed level of quality in its products or services. Quality control
is particularly important in industries where safety is an issue.
THE CONSTRUCTION
INDUSTRY
Standard safety procedures are mandatory in
developed countries, including site organization
with suitable work gear, limited access, materials
storage, and traffic flow; working at heights using
appropriate ladders and scaffolds; and avoidance
of slips and trips with awareness of obstacles,
trailing cables, and uneven or wet surfaces.
£2.8
billion
Packaging station
Samples are tested to check
that sealing is accurate, labels
are correctly applied, and
overall presentation is good.
Storage Transport
The temperature is checked The temperature in
for accuracy and safety, and the vehicles and their
samples are tested for taste, delivery times are
texture, and contamination checked to ensure
by foreign objects. product freshness.
Six Sigma
Used in organizations to strive for near-perfect products and
services, Six Sigma is a disciplined, data-driven approach for
eliminating defects in any process.
US
projects; coaches project teams, Implement
assigning roles and responsibilities; improvements
trains green belts and so address
the root causes of
major problems.
Green belt Leads green-belt projects;
$320
helps with data collection and analysis
for black-belt projects
million
Champions Translate the company’s
vision, mission, and goals to create an
organizational deployment (OD) plan
and identify individual projects
1 CHAMPIONS
Mobile-phone maker
Motorola used Six Sigma
Define
quality as a goal for its
Define the project’s purpose and manufacturing operations;
scope; identify processes that need CEO and chairman Jack
improvement; determine customer Welch made it central to
needs and benefits. his business strategy at
General Electric in the
1990s; tech company Dell
has used a form of Six
²³
Analyse
billion
the cost of supply
❯ Adding value Companies may try to add value along
the chain, rather than just seeing it as a way to transport
a product from A to B. See pp.324–325.
❯ Delegating functions To save money and use
specialist expertise, the business can outsource activities
and/or have them done by local companies or a branch
chain transportation of its own company offshore. See pp.326–329.
❯ Returning goods Part of the supply chain involves an
in the US, in 2009 efficient system for dealing with goods returned by the
consumer. See pp.330–331.
❯ Competitive edge At every stage, the company
compares its performance with its competitors to see
how it can improve. See pp.332–333.
❯ Ethics and the environment Taking responsibility for
avoiding pollution and protecting workers’ rights is part
of the package. See pp.334–335.
How it works of the value chain is that how activities are organized
Harvard Business School professor Michael Porter first and carried out determines a firm’s costs and thus
introduced the concept of a value chain in his book its margin (profit). Each link of the chain must
Competitive Advantage. Most organizations have communicate to other departments clearly and
numerous – possibly hundreds – of activities along the promptly. For example, marketing and sales must make
supply chain in the process of converting raw materials accurate sales forecasts and pass them on in enough
(inputs) to products or services (outputs). These can time for procurement to buy the correct type and
be classified generally as either primary or support quantity of raw materials, who in turn must liaise with
activities that all businesses must undertake. The idea inbound logistics so they can organize receipt of goods.
100
COMPANIES SURVEYED (%)
60
50
36% 36%
Lower costs Focus on core business
External provider often benefits Firm can identify and prioritize
40 from economies of scale its primary activity
30
13%
Improve quality
External organization paid
20 for delivering a quality
product or service
10
0%
HOW OPERATIONS AND PRODUCTION WORK
Supply chain 326 327
NEED TO KNOW
❯ Outsourcing Subcontracting work
to another company or buying in
components for a product rather
than manufacturing them
❯ Network structure Task
or operation is performed by
another firm – which may
be in same country, an adjacent
90%
of firms
❯ Offshoring Practice of moving
a company’s operating base to a
country, or overseas – within a
network structure of organizations
worldwide say
foreign country where labour costs
are cheaper
outsourcing is
crucial to growth
strategies
10%
Increase speed
to market 4%
External expertise
often brings shorter
Encourage innovation
Frees up internal capability
1%
lead times Save capital
and buys in knowledge
and ideas Frees up capital to invest
in areas for growth
REASON
Offshoring
Moving jobs outside the country where a company is based is called
offshoring. Either the company employs people overseas to perform
some functions or work is outsourced to a third party overseas.
Global expertise
Offshoring started in India and today it still leads the way.
The country’s IT and business processing outsourcing
export industries employ more than 2.2 million
people and are worth more than US$100
billion. Other regions have different areas
of expertise; for instance, Eastern Europe CANADA
specializes in IT services.
Examples of offshoring
KEY
CHILE
INDIA: OFFSHORING
WORLD LEADER
ESTONIA
POLAND The Americas and Europe are
IRELAND India’s largest customers and
account for 60 per cent and 31
per cent respectively of India’s IT
and business processing exports.
UKRAINE Services include financial services
CZECH (41 per cent), high-tech/telecoms
REPUBLIC (20 per cent), manufacturing (17
ROMANIA per cent) and retail (8 per cent).
RUSSIA
CHINA
INDIA
GHANA
MALAYSIA
£
SINGAPORE
SOUTH AFRICA
INDONESIA
£
Reverse supply chain
Supply chain takes a product to a customer. Reverse supply chain is
the series of activities it takes to retrieve an unwanted or used product
from a customer and dispose of it, recycle, or resell it.
Reverse logistics
The cost to companies of reverse supply is enormous.
For example, in the US, statistics from the Reverse
Logistics Association suggest that the annual volume of
consumer returns is estimated to cost US$150–200 billion.
This represents about 0.7 per cent of gross national
product (GNP) and 6 per cent of the US’s total annual Companies may have processes in place to
retail sales of US$3.5 trillion. collect used or unwanted items, whether
from the customer or retailer.
CUSTOMER RETURNS
US retailers Sears and JCPenney were the first
shops to allow consumers to return goods with
no penalty. This pioneering move in the late
19th century encouraged people to shop with
them and helped build a loyal following. British
retailer Marks & Spencer at one time had the
most lenient returns policy on the high street –
until 2005 they had no time period on returns,
as long as the customer could produce a receipt.
$
Disposal management
HOW OPERATIONS AND PRODUCTION WORK
Supply chain 330 331
NEED TO KNOW
❯ Electronic waste (e-waste)
Electrical or electronic devices
that are unwanted, do not work,
32%
of an item’s original product
or are obsolete
❯ Warehousing Administrative value could be reclaimed
and physical functions necessary
for storage of goods, either for as a result of a well-managed
selling or retrieval
reverse logistics system
Transport Receive
Items and components are sorted and Items are carefully checked on return.
separated, ready for reselling, recycling, If they are to be resold, they must be in
or disposal. pristine condition.
Sort Inspect
Benchmarking
Businesses use benchmarking to improve efficiency by comparing
their performance with that of other organizations. The goal is to
identify and learn from best practice within or outside the industry.
bu
pa
ild
Com
energy an eplaces l
itors dm any r igh
on p ti
m
m
Co
ng
on
ny
ey
Monitor value
Compa
saved
t sim
ilar buil ng is more
a din uildi en
s e
ok g sb
rg
s’
’
or
o
en
yl
y
tit
ef fi
Compan
erg
Compe
Analyse differences
cient
y use
or gaps C02
It sees that a comparable
company has a much lower C02
carbon footprint.
nergy au
ut e dit
so o
ie
fo
rr
ca
wn
building
How it works
For a business, CSR goes further than aiming to be
compliant with national or international regulations,
managing risks, or corporate philanthropy – it has
to be an integral part of every aspect of operations,
helping to create a sustainable business. A company
still has to be competitive and profitable, but must
avoid taking decisions merely for short-term gain.
Community
Instead, it has to consider the future impact on Housing; healthcare;
society, the environment, and a wide range of infrastructure; partnering with
stakeholders. Companies now report annually on local institutions; local supplier
how they have met their CSR and are benchmarked initiatives; education; training;
and ranked against competitors. local employment
97%
of UK FTSE 100
companies Environment
reported on Company’s carbon footprint
including recycling; water and
CSR in 2011 waste management; energy
usage; transport
HOW OPERATIONS AND PRODUCTION WORK
Supply chain 334 335
Workforce
Workplace safety, health, and
wellbeing; diversity; equal
opportunities; learning and
development; ethical policies Suppliers
and practices Fairtrade, supply-chain ethics,
and sustainability (including use
of child labour); code of conduct;
transport policies
CSR
stakeholders
A number of different
business areas have to be
considered when assessing
a company’s CSR, from how
it affects people working in
and for the company to
wider environmental and
community implications. Operations
Ethical trading including marketing
practices and pricing; managing
customers; financial reporting;
policies; values
CASE STUDY
Fairtrade
Many consumers expect the companies they buy their
latte from to uphold ethical practices. A US campaign in
2000 pressurized Starbucks to serve Fairtrade coffee.
The public wanted to understand the coffee giant’s
supply chain as there was concern for the livelihoods of
coffee farmers, many of whom are indigenous people.
Fairtrade is an organization that ensures coffee farmers
receive a fair price for their crop, plus a premium which
is invested in improving farming practices. Coffee was
one of the first products to carry the Fairtrade Mark.
How companies work
The legal system of England and Wales, Scotland, and Northern
Ireland allows for five business ownership structures: sole trader;
three types of partnership; and limited company.
Sole trader to the company, and directors are not held personally
An individual carrying out business as a sole trader responsible for paying them. Several different types
can take on staff but is personally responsible for of company are recognized under the UK legal system.
losses made by the business, payment of debts, Most companies are limited by shares. There are a few
and maintaining records of earnings and expenditure. other variations on the limited company:
Sole traders are taxed on business profits as a Private company limited by guarantee, in which
single entity after submitting an annual online the directors or shareholders agree to back the
self-assessment form. organization up to a specified amount;
Private unlimited company, which is set up
Partnerships in the same way as a limited company, but the
Under the law governing partnerships (the Partnership company members (usually shareholders) accept full
Act of 1890), every partner is equally liable for any responsibility for the company’s debts. The advantage
debts even if they own just a small percentage of is that annual accounts do not have to be registered;
the business. An alternative form of partnership is a Public limited company. Must have a minimum share
Limited Partnership, in which the existing general capital of £50,000, with at least a quarter of that paid
partners accept new partners with limited liability. up before it can begin trading on the stock exchange.
These limited partners are sometimes referred to as
sleeping partners because they have no involvement Societas Europaea (SE)
in the management of the business. Since 2004, UK businesses have had the option
One additional type of partnership is the relatively of setting up a legal entity known as a European
new (since 2000) Limited Liability Partnership, which Company or Societas Europaea (SE). An SE is a public
has members rather than directors or shareholders. limited liability company and can be established in any
The entity is liable to pay debt only to the amount that of the member states of the European Economic Area
the debt can be covered by the partnership’s assets. (EEA). The same regulations apply as to a public
Unlike a company, a Limited Liability Partnership can limited company – the share capital can be in any
trade in any category of business and is not restricted currency so long as at least £50,000 is in sterling
by a Memorandum of Association that specifies the or €57,100 is in euros.
type of business being carried out.
Reporting requirements
Limited company Each financial year, a company must generate
In terms of its legal status, a limited company is statutory accounts reflecting the year’s business
different from a partnership or sole-trader business activity, send an annual return to Companies House,
in two fundamental ways. First, a company’s assets and submit a company tax return to Her Majesty’s
belong to the company and not to its directors or Revenue & Customs (HMRC). If the company is
shareholders. Second, a company’s debts belong registered for VAT, it must also submit VAT returns
UK-SPECIFIC INFORMATION
How companies work 336 337
Limited companies must fulfil a number of duties financial statements to ensure they meet legislation
in order to lawfully meet their financial reporting and accounting standards for the UK and Republic of
obligations: Ireland. It lists the new accounting standards that
❯ Keep accounting records and make them available apply from 1 January 2015.
at all times for inspection – three years for private FRS 101 applies to companies reporting under IFRS,
companies, and six years for public companies; for example UK-based companies with subsidiaries in
❯ Circulate copies of annual accounts and reports; other European countries. The new standard introduces
❯ Submit the company’s accounts for tax purposes a less complex reporting system, meaning that not as
to HMRC at the end of the financial year; much data has to be provided.
❯ Submit the company’s financial accounts, also FRS 102 elaborates on the requirements for financial
called statutory accounts or audited accounts, to statements so that they accurately reflect the financial
Companies House at the end of the financial year. position of a business. It defines each component of the
Other aspects of financial reporting covered by the financial statement and explains how the value of
law include auditing requirements and procedures for each one should be measured.
companies, and exemptions and specific rulings for FRS 103 specifically deals with insurance contracts,
small companies, which are generally not required setting out accounting policies and measurement
to report to the same level of complexity and detail regulations for entities with insurance business.
as larger companies.
The UK law on financial reporting also integrates Accounting periods
the reporting requirements of European law, which For companies, the accounting period for tax purposes
means that all listed European companies must adhere is 12 months long and runs from 1 April to 31 March
to International Financial Reporting Standards (IFRSs). the following year. (For individuals, the financial year
Companies in the UK that are not listed can choose runs from 6 April to 5 April the following year.)
to report either under IFRSs or the UK’s own reporting A company’s accounting period usually matches the
code, UK GAAP, an abbreviation of Generally Accepted financial year but if, for example, a company has been
Accounting Practice. This code sets out how a dormant and starts trading again, the accounting
company’s accounts should be prepared, including period may differ from the financial year.
accounting standards and UK company law.
There are four financial reporting standards for Corporate fraud
the UK and Republic of Ireland, which come under The Serious Fraud Office (SFO) is an independent
the umbrella of UK GAAP. These recently revised government department charged with investigating
standards are issued by the Financial Reporting company fraud in England, Wales, and Northern Ireland.
Council (FRC), an independent body answerable to It identifies four main types of corporate fraud:
parliament and funded by fees from listed companies. Asset stripping, where directors transfer the assets,
FRS 100 sets out a framework on how to prepare but not the debts, of one company to another.
UK-SPECIFIC INFORMATION
How finance works 338 339
There are two legal regulations for advertising: one must reveal its identity and how the information
covers advertising to consumers and the other deals will be used. Consumers have the right to see any
with advertising to businesses. information about them that an organization may
The Consumer Protection from Unfair Trading hold, and to correct it if it is wrong.
Regulations set out the legal rules for advertising to
consumers. The key points of the regulations forbid Direct marketing
businesses from misleading or harassing consumers by Much of the direct-marketing industry is self-regulated
including false or deceptive messages, leaving out vital by the mandatory Code of Conduct written by the Direct
information, or using aggressive sale techniques. Marketing Association (DMA) and adhered to by its
For business-to-business advertising, the Business members. The DMA also sets out additional voluntary
Protection from Misleading Marketing Regulations guidelines. The Direct Marketing Commission (DMC)
covers rulings on ad content, especially to do with oversees the Code and investigates complaints, if the
competitors. Businesses should take care not to use complaint is covered in the Code.
a competitor’s logo or trademark, or anything that Legislation of direct marketing specifically concerns
looks similar. Nor should they compare their products data protection and unsolicited contact, and businesses
with competitors where there is no genuine similarity. must comply with a number of regulations. They must:
As well as the regulations, there are two codes ❯ Check if customers want to be contacted by fax,
of practice enforced by the Advertising Standards phone, post, or email, and allow them to object;
Authority (ASA). The Committee of Advertising ❯ Ask customers’ permission to send them offers;
Practice’s Codes cover non-broadcast advertising, ❯ Ask customers’ permission to share their details;
sales promotion, and direct marketing. It specifies ❯ Allow customers to opt out of contact – e.g., marketing
standards for advertising to children, anything that emails must offer recipients the option of opting out;
causes offence, and political advertising. The UK Code ❯ Check with the Telephone and Fax Preference
of Broadcast Advertising covers TV and radio. It sets Services to identify individuals who have asked not
standards to do with taste, decency, and product to be contacted. The fine for contacting anyone who
placements, including scheduling and timing for has registered is £5,000 for each unsolicited call;
certain content. Further regulations apply to food, ❯ Check with the Mail Preference Service to make sure
alcohol, cosmetics, environmentally friendly products, that mailing lists do not include individuals who have
pharmaceutical products, and tobacco. asked not to receive direct mail;
❯ Only send emails or text messages to individuals
Data protection who have given their permission. These emails or
The Data Protection Act incorporates a comprehensive texts must clearly state who is sending them, what
list of principles. The key concerns are making sure the is being sold, and any promotions or conditions;
information is accurate, up-to-date, and secure. When ❯ Inform website visitors how cookies are used and
collecting an individual’s personal data, the business ask if they will accept them.
UK-SPECIFIC INFORMATION
How sales and marketing work 340 341
E-commerce
In 2000, the UK government brought in the Consumer ORGANIZATIONS AND RESOURCES
Protection (Distance Selling) Regulations, which are
designed to protect consumers who are buying goods Advertising
and services from businesses who sell online or by The ASA provides details of the UK Advertising Codes,
mail order, where there is no face-to-face contact how to comply with them, and how to make a complaint.
with the seller. Distance Selling Regulations (DSR) http://www.asa.org.uk/Industry-advertisers.aspx
are enforced by the Office of Fair Trading in England, Consumer Protection from Unfair Trading Regulations
Scotland, and Wales, and by the Department of is a guide for businesses on consumer protection from
Enterprise, Trade and Investment in Northern misleading advertising and marketing.
https://www.gov.uk/government/publications/consumer-
Ireland. The basic DSR requirements include the
protection-from-unfair-trading-regulations-businesses
following key points.
❯ Consumers must have access to clear “prior Data protection
information”: any vital information in writing about The Information Commissioner’s Office is an independent
the product and seller, such as the business name authority responsible for upholding information rights in
and location of the seller (a PO box is not enough); the public interest. It offers guidance on adhering to the
data protection principles in the Data Protection Act.
the price of the product, including any additional
http://ico.org.uk/for_organisations/data_protection/
costs such as VAT and delivery; a satisfactory the_guide/the_principles
description of the product; cancellation and returns
policies; and protection from payment-card fraud.
Direct marketing
❯ Shoppers have the right to a seven-day cooling-off Gov.uk gives the main stipulations for companies
period, and if no cooling-off period is stated in the engaging in direct marketing, including telesales,
email marketing, text messaging, and direct mail.
terms and conditions, consumers are automatically
https://www.gov.uk/marketing-advertising-law/direct-
entitled to 90 days, during which they can change marketing
their mind. If consumers change their mind after
The DMA sets out its Code and provides guides to
examining the product during the cooling-off period, telemarketing, mobile marketing, and data usage.
they are entitled to cancel the purchase, return the http://www.dma.org.uk
product, and receive a refund within 30 days.
E-commerce and online shopping
E-commerce businesses must also adhere to the
2002 E-Commerce Regulations. All commercial This government website has the text of the Consumer
Protection (Distance Selling) Regulations 2000.
websites must state the name, registered address,
http://www.legislation.gov.uk/uksi/2000/2334/contents/
postal address, and email address of the business, made
along with the company registration and VAT numbers,
This website summarizes the key points of the DSR,
and details of any trade or professional association as well as articles on e-commerce regulations, returns
memberships. One further compliance under the policies, and protection from unfair trading.
Disability Discrimination Act 1995 is that websites http://www.onlineshoppingrights.co.uk/
are accessible to users with disabilities such as ConsumerRightsCategory.html
impaired vision and dyslexia.
How operations and
production work
The UK Corporate Governance Code spells out the standards of good
practice on board effectiveness, pay, accountability, and shareholder
relations for public companies.
Any public company with a premium listing of shares ❯ Food standards legislation is in place for labelling,
on the London Stock Exchange is required to state how composition, and safety parameters for specific
they have adhered to the Code in their annual reports foodstuffs which could potentially be replaced with
and financial accounts. Although the Code does not lower-quality alternatives, including bottled water,
specifically address corporate social responsibility bread and flour, fats and oils, fish, meat, and milk.
(CSR), it does advise that “the board should set the These regulations are set and enforced by the
company’s values and standards and ensure that its Department for Environment, Food & Rural Affairs
obligations to shareholders and others are understood (Defra), the Foods Standards Agency (FSA), and the
and met”. An addition called the Turnbull Guidance, Department of Health. Separate from UK legislation,
which covers risk assessment, notes the importance of the Food Information Regulation (FIR) provisions,
managing financial risk responsibly as well as health, introduced by the European parliament, include
safety, and environmental issues. several key rulings on labelling. In addition, there
The Companies Act 2006 also requires directors are standards called Codex Alimentarius, which are
to attend to community and environmental matters, being developed internationally with the World
and CSR is generally seen as a matter of commercial Health Organization, providing detailed codes of
survival, especially when it comes to the environment. practice for the food and agricultural industries.
The growing number of investors seeking to place their ❯ Preventing pollution from paper and cardboard
money in green and ethical investment funds has production is also governed by law. Adherence is
also spurred UK companies to implement proactive required to a number of guides and regulations on
environmental policies, especially in manufacturing. noise and vibration, cooling towers, and the types
and volumes of emissions during manufacture.
Manufacturing regulations
Comprehensive legislation is in place for producing Liability, warranties, and guarantees
materials, equipment, goods, or appliances for industry The UK Sale of Goods Act (SOGA) gives customers
or households. Some of the key regulations are: legal rights when buying products. Customers have
❯ Compliance with EU safety, health, and a legal right to a refund, repair, or replacement if an
environmental requirements, and the placing of a item does not match the description given by the
CE marking, which indicates that the product meets manufacturer or retailer, is not of satisfactory quality,
safety regulations in the EU and is mandatory for and is not fit for purpose. The right to make a claim
certain products with safety concerns such as toys, lasts for up to six years from the date of sale, or in
electrical goods, medical devices, and machinery. Scotland for five years after the discovery of the
Manufacturers whose products must carry the CE problem. However, during that time, a customer
marking are responsible for testing the products for cannot hold the manufacturer or retailer responsible
conformity, drawing up the necessary documentation, for wear and tear. Aside from the protection offered
and marking the product with the CE initials. to consumers automatically under this law, a
UK-SPECIFIC INFORMATION
How operations and production work 342 343
B
7-Eleven 23 business accelerators and
360-degree feedback 85 incubators 38–39
360-view customer profile 261 business analytics 250–51
B2B lead generation 237 business angels 35, 36–37, 174
A
back-up plan 33 business cultures 64–65
balance day adjustment 103 business development 232–45
balance sheet 116–19 business goals 78–79
A/B testing (mail marketing) 216 analysis 118–19 business intelligence software 248–49
absorption costing 142 current assets 138 business launch 27
accounting see financial accounting equation 116 business ownership 12–25
acid-test ratio 149 balanced scorecard 85, 147 business plans 32–33
acquisition of company 31, 41 Bank of China 161 business process reengineering
ACSI (American customer satisfaction bank overdraft 34, 133, 158–59 (BPR) 67
index) 293 Barings Bank 153 business-format franchise 23
actionable metrics 253 batch costing 143 buying and selling businesses 40–49
ACW (after-call work) 219 batch production 274–75
C
adaptive customization 279 bear market 166
advertising behavioural targeting 215
advertising to sales ratio (A/S) 213 benchmarking 326–27
ATL (above the line) 191 big data 262–63 call-centre locations, top five 219
BTL (below the line) 190 billboard marketing 201, 213 call to action (CTA) 239
online 214–15 blogging 224–27, 228–29 CAN-SPAM Act 267
traditional offline 212–13 board of directors 52–55 Canon 298
ageing schedule 135 board members, choosing 19 capacity management 314–15
agents, selling through 188–89 disclosures 107 capital investment and lump sums 132
agile business 74 body language in different cultures 97 capital markets and securities 170–73
agile production 296–97 BOFU (bottom of funnel marketing) 220 capital and reserves 117
Agricultural Bank of China 161 bonds 170–73 capital structure evaluation 155
AHT (average handling time) 219 book value 124, 150 cascading 76
AIDA (Attention, Interest, Desire, book-keeping 102–03 cash conversion 135
Action) 237 Boots 49 cash cows 185
Alibaba Group 161 bootstrapping 14 cash flow 132–35
Amazon 26 botnet virus 215 corporate failure signs 151
amortization and depletion 128–29 BP (British Petroleum) 62–63 and fraud 152, 153
annual review 100, 104–05, 106, 109 branding and rebranding 234–35 management 134–35
Apache Hadoop software 263 brand loyalty 240, 259 statement 120–21
Apple 20, 304, 306, 315 personal 181 see also cost accounting; financial
appraisal see staff evaluation break-even point (BEP) 141 accounting
HOW BUSINESS WORKS
Index 344 345
CEO (chief executive officer) 53, 54, cost accounting 130–43 quality (DQ) 248
55, 56, 57 see also cash flow; financial visualization 251
chamber of commerce 25 accounting warehousing 256–57
channel margin 189 cost per lead (CPL) 237 debentures 173
charitable donations 107 cost per thousand (CPT) 213 debt
charity 25 cost per touch (lead conversion) 238 bad 102
chart of accounts 103 cost-plus pricing 142 bonds as debt investments 171–72
checkout technology 255 costs, fixed vs variable 140–41 and business failures 14
children’s marketing 266–67 costs and pricing strategy 33 capital structure evaluation 155
Chrysler 59 credit and creditors 36, 109, 117, cash-flow reconciliation 120
churn rate 204 119, 156 corporate failure signs 151
cinema advertising 213 CRM (customer relationship debtor categories 119
Cisco 72 management) 264–265 factoring 158–59
cleaning (direct mail) 216 crowd funding 34, 35, 36 gearing ratio 174–75
clickstream 215 C-suite 54–55 loan interest 115
cloaking 231 current assets 117 loan note 158
cloud services 263, 264 current ratio 149 loan percentage payment and
Coach 44 customer amortization 128
Coca-Cola 193, 293, 306 acquisition cost (CAC) 241 ratio 149
cold calling 211, 218 behaviour 194–95, 258, 259 repayments 132, 133
collaborative customization 279 capital 244 utility company affordability 120
communication, art of 92, 178 churn rate 204 decentralization 67, 74
Companies Act 54 complaints 240 decision simplicity (consumers) 204
company hierarchy 56–59 consumer data collection 254–55 defect measurement 320–21
company shares 164–65 customer relationship management defensive merger 43
comparative claims regulation 266–67 (CRM) 264–65 deferred income 114
competitive product positioning 182 customer returns 330–31 deferred ordinary shares 165
competitor analysis 33 data regulation 266–67 delayed payment 156
compliance regulation 266–67 decision simplicity 204 deleverage 175
conglomerate 46 expectations, and quality 308 Dell 279, 291, 321
conservatism 113 feedback surveys 107, 240–41, 265 demand-pull production 290–91
consolidated financial statements 105 lifetime value (CLV) 243 demergers 44–45
consumer see customer loyalty programmes 240–41, 255, Deming Prize 309
content marketing 220–21 260, 261 departmental hierarchy 68–69
continuous production 280–81 personalized product design 278–79 depletion and amortization 128–29
contract costing 143 profiling 258–61 depreciation 124–27
control, chain of 312–21 retention 240–41 calculation 115, 118, 126–27
control systems 64 segmentation 264 Deutsche Telekom AG 161
convertible bond 172 selling direct to 188–89 Dia 23
cooperatives 24 service 146, 190, 265 differential costing 142
corporate bonds 173 “sticky” customers 204 digital asset management (DAM) 253
corporate failure signs 151 uptake 185 digital dashboard 249
corporate social responsibility digital marketing 202–03
D
(CSR) 334–35 direct costs 142
environmental accounting 122–23 direct mail marketing 216–17
corporate structure 66–77 direct response (DR) marketing 209
corporate success 150 data direct taxes 106
corporation tax 106 data to decisions transformation 247 directors 18, 19, 50, 53, 55, 115
cosmetic customization 279 mining 153, 249, 251, 257 disbursement quota 25
INDEX
F
divisional structure 66, 70–71 (FDD) 22
doing business as (DBA) 16 franchises 22–23
donations 133 fraternal organization 24
double-entry bookkeeping 102, 131 face-to-face marketing 200, 205, 221, fraud, tracking 152–53
due diligence 41, 43 260 frequency marketing 209
Dunkin’ Donuts 23 Facebook 161, 287 frugal innovation 305
factoring 34, 135, 159 full cost pricing 142
E
factors of production 271 full disclosure principle 112
Fairtrade 335 functional structure 68–69
fast-moving consumer goods funding 154–63
earn-out 48 (FMCGs) 181 external finance 158–59
EBITDA to sales ratio 148 finance and capital sources 154–75 flotation 160–63
eco-innovation 305 finance leases 159 internal finance 156–57
economic entity assumption 112 financial accounting 110–29 shares see shares and dividends
economic life 124 accounting cycle 102–03 start-ups 34–37
economies of scale 286–87 accounts payable and receivable
mergers see mergers
G
135, 148
economy pricing 186 accounts receivable turnover
effective capacity 315 ratio 148
efficiency 148, 150, 326–27 conventions 31 GAAP (Generally Accepted
electronic waste (e-waste) 331 international standards 112–13 Accounting Principles) 113
ELT (extract, load, transform) 256 KPIs 146 gearing ratio and financial risk 174–75
email direct mail marketing 216–17 see also cash flow; cost accounting Generation X and Generation Y 194
regulation 266–67 financial forecasts 33 General Electric (GE) 60, 320, 321
employee relations 92–93 financial management 100–09 general ledger 103
employment laws 80 financial performance measurement General Motors (GM) 59, 161
endorsements regulation 266–67 144–53 geographic pricing 187
Enel SpA 161 financial ratios 148–49 globalization 20, 105
engagement marketing 204–05 financial report types 100 Global Management Accounting
Enron 153 financial reporting 100–29 Principles (GMAP) 131
enterprise portal 30 financial risk and gearing ratio 174–75 going concern assumption 112, 131
environmental accounting 122–23 financial statements 104–09 goodwill 129
environmental concerns, KPIs 147 deconstructing 106–07 Google 26, 79, 304
environmental, social and governance fraud, tracking 152–53 government bonds 173
(ESG) criteria 60–61 for users 108–09 governmental accounting 101
equipment purchase 133 finished goods inventory 139 grants 35, 133
equity 149, 150, 155, 171, 174 first in, first out (FIFO) 317 green taxes 106
ERP (enterprise resource planning) FIVA (framework of intangible value greenhouse gas emissions 123
264 areas) 245
H
Eurobond 158 fixed/tangible assets 117–19, 124, 125,
events marketing 200, 205, 210 133, 138–39, 153
exabyte 263 flat lattice structure 76
expansion funding 157 flotation 160–63 haptic technology 207
Expedia 44 flow production 276–77 Hearst Corporation 18
expenses 115, 140, 152 flyers 201, 210 Hertz 279
HOW BUSINESS WORKS
Index 346 347
I
IT and marketing 252–53 lettershop 216
leverage 64
J
limited companies 16–17
IBM 72 line position 58
IKEA 18 line relationship 69
immediate capacity 315 JCPenney 330 LinkedIn 83
inbound marketing 220–31 job costing 143 liquidity ratios 149
income and expense statement 114–15 job production 272–73 listed company 163
incremental budget 137 John Lewis 93 loans see debt
increments 282 Johnsonville Foods 77 long-tail marketing 198
incubators 38–39 JPMorgan Chase & Co 153 long-term finance 157–59
indirect costs 142 just-in-time production 290–91 loyads 261
indirect taxes 106 loyalty programmes 240–41, 255,
K
influence markets 208 260, 261
information management 246–67 Lutron 279
infrastructure assets 118–19
M
Initial public offering (IPO) 160–63 kaizen improvement system 298–99
innovation and invention 304–05 Kanban cards 288, 291
intangible assets key account management (KAM) 209
amortization and depletion 128–29 key performance indicators (KPIs) MACRS (Modified Accelerated Cost
inventory 139 146–47 Recovery System) 124
intangible capital 244 KFC 23 McDonald’s 20, 23, 70, 292
integrated marketing knowledge capital scorecard 245 magazine marketing 201, 213
communication 190 management 284–99
L
integration, vertical vs management, and fraud 153
horizontal 46–47 management accounting 130–31
mergers and acquisitions 42–43 management buy-ins and
intellectual capital 244–45 labour costs 140 buy-outs 48–49
interactive marketing 191 labour practices, and management shares 164
interest cover ratio 175 environment 123 management/cost accounting 130–43
interest rates and dividends 169 large cap listed company 163 management/leadership
intermediaries, selling through last in, first out (LIFO) 317 differences 284
188–89 lateral integration 47 managing capacity 314–15
internal finance 156–57 lateral structure 76 manpower costs 115
INDEX
N P
manufacturing franchise 22
manufacturing and production 270–83
MarCom (marketing communication)
190 naming a company 13, 28 Pacman strategy 43
mark-up comparison 187 national employment laws 80 Panda and Penguin (Google) 231
market correction 166 negative-option billing 266–67 paradigm 64
market extension 46 negotiating strategy 96–97 partnerships 14–15
market penetration pricing 187 net assets 117, 118 patent 129
market research 192–93 net profit margin ratio 149 patent trolls 26
market segmentation 194–95 Net Promoter Score (NPS) 293 pattern matching (data) 251
market share 42 network structure 74–75 pay-per-click (PPC) advertising 215
market value of equity 150 networking 83, 201 peer-to-peer (P2P) lending 34
marketing approaches 196–209 new product development 302–03 Pemsel test 25
marketing and IT 252–53 newspaper marketing 201, 213 performance management 81
marketing mix 178–95 niche marketing 198–99 performance measurement 144–47
marketing regulations 266–67 Nike 20–21 and budgets 137
marketing technologist 253 non-governmental organization perpetual bond 172
Marks & Spencer 330 (NGO) 25 person culture 65
Mars 18, 279 not-for-profit organizations 24–25 personal branding 181
MarTech conference 253 NTT Group 161 personal selling 190
mass customization 278–79 NTUC FairPrice 309 personal warranty 48
mass marketing 198–99 petabyte 263
O
matching principle 113 philanthropic sector 25
materiality principle 113 phishing 267
matrix guardian 77 Pizza Hut 23, 324
matrix structure 72–73 OAO Rosneft 161 place and distribution channels 188–89
media engagement 221 offshoring 328–29 planning, programming, and
members (shareholders) 16 Ohlson O score 151 budgeting systems (PPBS) 137
merge/purge software 216 OLAP (online analytical processing) platform corporation 21
mergers and acquisitions 42–43 cubes 249, 257 podcasting/vidcasting 226–27
integration, vertical vs oligopoly 107 point of sale software 255
horizontal 46–47 OLTP tool (online transaction Ponzi/pyramid scheme 153
Merrill Lynch 70 processing) 256 portfolio analysis 185
metadata 231 omni-channel customer 261 potential capacity 315
microfranchising 22 online advertising 211, 214–15, power culture 64
micropreneur 30 260 predictive analytics 250, 251
mid cap listed company 163 online value chain 325 preference shares 165
millennials 194 operating profit 114–15 premium pricing 187
mobcast 226 operations 33, 121, 147 price and pricing strategies 186–87
mobile technology 215, 255 ordinary shares 165 price to earnings ratio 149
MOFU (middle of funnel outbound marketing 210–19 primary market 170
marketing) 220 outbound vs inbound marketing private companies 18–19
Mondelez 44 222–23 private foundation 24
monetary unit assumption 112 outsourcing 326–27 private limited company 17
monopoly 47, 107 overheads 132 private placing shares 165
motivation and rewards 86–87 overleveraged 175 process costing 143
Motorola 321 overtime pay 51 Procter & Gamble (P&G) 72
multinationals 20–21 overtrading 151 product
mutual organization 24–25 owned media 237 costing 142–43
HOW BUSINESS WORKS
Index 348 349
S
PwC 18, 145 skimming pricing 186
slice and dice data 248
Q
small cap listed company 163
salaries and wages 115, 132, 152 small and medium-sized enterprises
sales (SMEs) 38
quality control 318–19 and fraud 152, 153 social economic scale 261
quality management 308–09 KPIs 146 social enterprise 25
total quality management 292–93 pipeline 238 social graph 229
quality product positioning 182 pitch 239 social lead targeting 211
questionable costs 141 promotion 191, 205 social media marketing 228–29
revenue 132 and benchmarking 327
R
tracking 249 big data 262
salvage/scrap/residual value 124 and branding 234
search algorithm 231 see also blogging
radio marketing 201, 210, 213 search engine optimization (SEO) sole traders 14–15
raw data 251 230–31 solvency ratios 149
raw materials costs 140 Sears 330 spam use regulation 266–67
INDEX
T V
span of control 58
special offers regulation 266–67
spin-offs 44, 45
splog 225 tangible/fixed assets 117–19, 124, 125, valuation of company 18, 19
spreadsheets 249 133, 138–39, 153 value 186
staff evaluation 84–85 task culture 65 Value Added Tax (VAT) 106
performance–management cycle 64 tax accounting 114–15, 120 value chain 324–25
staff position 58 tax payments 106, 109, 115, 119, 120, value product positioning 182
stagging 165 133, 169 value-stream mapping 288
stakeholders 60–63 team-based structure 76–77 vanity metrics 253
and corporate social responsibility team-building leadership 90–91 venture capitalists (VCs) 35, 37
(CSR) 335 technology, mass customization vidcasting 226–27
and financial statements 108–09 278–79 virement 137
and share value 62 telemarketing 218–19 Virgin 15
Standard Oil 15 regulation 266–67 virtual business incubator 39
star schema data 248 terabyte 263 Visa 161
Starbucks 72, 208, 335 TERM (technology-enabled
W
start-up pivot 28 relationship management) 264
start-ups 26–39 term loan 34, 158
concept development 28–29 ticker symbols 19
funding 34–37 time-based management 294–95 wages and salaries 107, 132
incubators see business accelerators TOFU (top of funnel marketing) 220 Walt Disney 292–93
and incubators total quality management 292–93 warehousing 331
types 30–31 quality management 308–09 warrant 172
statistics 109, 251 Toyota 288–89, 290, 298, 308 waste elimination 288–89
“sticky” customers 204 tracking stock 45 Watson Wyatt index 245
stock exchange listing 160–61, 162 trade event marketing 200, 205, 210 Wessex Water 107, 109, 114–15,
stock exchanges, world’s top 162 traditional marketing 200–02 117–19, 122–23
stock-keeping unit (SKU) 317 traditional offline advertising 212–13 wholesalers, selling through 188–89
straight-line method of depreciation transaction marketing 209 who’s who 50–65
124–25 transnational corporation 21 Wikispeed 287
strategic capital 244 transparent customization 279 windfalls 133
structural capital 245 trending product claims 302 WIP (work in progress) 317
subsidiary company 105 trial balance 103 WOM (word-of-mouth) marketing 204
Subway 23 tunnelling 152 working capital/total assets 150
success metrics (marketing) 242 turnover 114–15 WorldCom 153
sunk costs 141 TV marketing 200, 210, 213
X
super angels 35 TVR (television rating point) 213
supplier markets 208
U
suppliers’ payments 133
supply chain 322–35 Xerox 70, 71
surplus management 135
Z
sustainability, KPIs 147 undertrading 151
sustainable investment 106 underwriters 162
swap ratio 43 unquoted/unlisted company 19
sweepstakes and contests useful/economic life 124 Z-score models, forecasting with 150
regulation 266–67 USP (unique selling point) 33 Zappos 77
SWOT analysis 33 utility company, debt affordability zero-based budget 137
synergy 47 120 Zeta analysis 151
HOW BUSINESS WORKS
Acknowledgments 350 351
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