Introduction To Business

3
Introduction to
Business
Editor
Prof.Dr. Güneş Nezire ZEYTİNOĞLU
Authors
CHAPTER 1 Assoc.Prof.Dr. Vichuda POLATOĞLU
Prof.Dr. Kadir VAROĞLU
CHAPTER 2 Prof.Dr. Cenk SÖZEN
CHAPTER 3 Prof.Dr. Güneş Nezire ZEYTİNOĞLU
CHAPTER 4
Prof.Dr. Deniz KAĞNICIOĞLU
CHAPTER 5
Assoc.Prof.Dr. Berna TARI KASNAKOĞLU
CHAPTER 6
Prof.Dr. Celal Hakan KAĞNICIOĞLU
CHAPTER 7
Prof.Dr. Saime ÖNCE
CHAPTER 8 Asst.Prof.Dr. Özlem SAYILIR

T.C. ANADOLU UNIVERSITY PUBLICATION NO: 3537
OPEN EDUCATION FACULTY PUBLICATION NO: 2371
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INTRODUCTION TO BUSINESS
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Contents
Foundations of
CHAPTER 1 CHAPTER 3 Management
Business
THE CONCEPTS OF BUSINESS..................... 3 MANAGEMENT – TERMS AND

Business – Terms and Definition.......... 3 DEFINITIONS................................................. 79
Benefits of Businesses........................... 5 Definition of Management................... 79
Types of Businesses............................... 5 MANAGEMENT FUNCTIONS....................... 80
Major Functional Areas in a Business... 6 Planning.................................................. 81
THE EXTERNAL ENVIRONMENTS OF Organizing.............................................. 81
BUSINESS........................................................ 7 Leading.................................................... 82
The Economic Environment................. 7 Controlling.............................................. 82
The Technological Environment.......... 8 MANAGEMENT STRUCTURE....................... 83
The Social Environment........................ 9 Management Levels.............................. 84
The Legal Environment......................... 9 MANAGEMENT SKILLS................................. 86
The Market Environment..................... 9 Management Skills by Managerial
The Global Environment....................... 10 Levels...................................................... 86
UNDERSTANDING THE BASICS OF MANAGERIAL ROLES.................................... 88
ECONOMICS................................................... 10 Interpersonal Roles................................ 88
Factors of Production............................ 11 Decisional Roles..................................... 89
Economic Systems................................. 12 Informational Roles............................... 90
Forces of Demand and Supply.............. 15 LEADERSHIP................................................... 90
Market Competition.............................. 18 Management and Leadership............... 91
Economic Indicators.............................. 19 Anatomy of Leadership......................... 92
Government’s Role in Managing the COMMUNICATION IN ORGANIZATIONS... 96
Economy................................................. 23 Communication Process........................ 97
SMALL BUSINESS, ENTREPRENEURSHİP, Forms of Organizational
AND BUSINESS OWNERSHIP...................... 24 Communication ..................................... 98
Small Business – Definition................... 24 Non-verbal communication.................. 100
Entrepreneurs........................................ 25 Technology and Communication......... 101
Starting a New Business........................ 27 Effective Communication..................... 101
Types of Business Ownership............... 29
BUSINESS ETHICS AND CORPORATE
SOCIAL RESPONSIBILITY.............................. 33
Personal Ethics....................................... 34 Managing
Ethics and Businesses............................ 34
CORPORATE SOCIAL RESPONSIBILITY....... 35 CHAPTER 4 Human
Resources
THE CONCEPT OF HUMAN RESOURCE
Business in the MANAGEMENT.............................................. 115
CHAPTER 2 ENVIRONMENT OF HUMAN RESOURCE
Global Context MANAGEMENT.............................................. 116
Internal Environmental Factors
INTERNATIONAL TRADE............................. 53 Affecting Human Resource
Globalization ......................................... 54 Management.......................................... 117
Balance of Trade.................................... 56 External Environmental Factors
Multinational Corporations.................. 57 Affecting Human Resource
International Competition.................... 59 Management.......................................... 117
Emerging Markets................................. 61 HUMAN RESOURCE MANAGEMENT
POWER TACTICS AND ORGANIZATIONAL ACTIVITIES TO GET THE RIGHT PEOPLE........ 119
SURVIVAL STRATEGIES IN FOREIGN Human Resources Planning ................. 119
MARKETS........................................................ 62 Recruiting .............................................. 122
Features of Multinational Competition... 62 Selection................................................. 126
Competitive Strategies in Foreign Orientation............................................. 128
Markets................................................... 65 HRM ACTIVITIES THAT MAXIMIZE
Strategic Alliances.................................. 66 PERFORMANCE............................................. 129
BUSINESS IN A MULTICULTURAL Training................................................... 129
ENVIRONMENT............................................. 68 Performance Appraisal.......................... 132
Cultural Diversity................................... 68 Compensation........................................ 136
International Management and Culture... 70
iii
Accounting
Marketing
CHAPTER 5 CHAPTER 7 and Financial
Management
Analysis
FOUNDATIONS OF MARKETING................ 149 ACCOUNTING – TERMS AND
Definition of Marketing........................ 149 DEFINITIONS................................................. 229
STRATEGIC MARKETING MANAGEMENT. 151 Definition of Accounting....................... 229
Generic Marketing Strategy.................. 151 Definition of Bookkeeping.................... 231
Strategic Segmentation and Target USERS OF ACCOUNTING INFORMATION.. 231
Customers .............................................. 153 Internal Users......................................... 231
MARKETING MIX........................................... 156 External Users........................................ 232
Product.................................................... 157 AREAS OF ACCOUNTING.............................. 232
Price......................................................... 159 Financial Accounting............................. 232
Place (Distribution)............................... 160 Managerial Accounting......................... 233
Promotion............................................... 162 ACCOUNTANTS AND ACCOUNTING
BRANDING..................................................... 164 PROFESSION.................................................. 234
Positioning.............................................. 164 Governing Organizations...................... 235
Key Issues in Branding........................... 167 Ethics in Accounting.............................. 235
NEW TRENDS IN MARKETING.................... 168 The Role of Auditors in Ensuring
MARKETING ETHICS..................................... 170 Proper Reporting.................................... 236
RECORDING BUSINESS TRANSACTIONS.... 236
The Accounting Cycle............................ 237
The Accounting Equation..................... 237
Production Transaction Analysis.............................. 238
Management Using Accounts to Record
CHAPTER 6 and Managing
Transactions........................................... 239
Debit-Credit Rules and Double Entry
Information Systems Accounting............................................. 240
Steps in the Recording Process............. 241
PRODUCTION, PRODUCTION SYSTEM, The Recording Process Illustrated........ 241
AND PRODUCTION MANAGEMENT.......... 183 Chart of Accounts.................................. 242
Production System................................. 184 BASIC FINANCIAL STATEMENTS................. 242
Production Management...................... 186 The Balance Sheet.................................. 242
TYPES OF PRODUCTION PROCESSES ......... 187 Income Statement................................. 247
Flow Process........................................... 187 Statement of Cash Flows...................... 250
Job-Shop Process.................................... 189 ANALYZING FINANCIAL STATEMENTS...... 250
Cellular Process...................................... 190 Measures and Evaluation of Liquidity . 251
Project Process....................................... 191 Measures of Efficiency ......................... 253
THE HISTORICAL EVOLUTION OF Measures and Evaluation of Long-Term
PRODUCTION MANAGEMENT.................... 191 Solvency .......................................................... 255
NEW TRENDS IN PRODUCTION PROCESSES.. 194 Measures and Evaluation of
Flexible Manufacturing System............ 194 Profitability ............................................ 256
Lean Production System........................ 195
Just-In-Time Production System ......... 196
Computer Integrated Manufacturing.... 196
Mass Customization.............................. 197 Managing
E-manufacturing.................................... 198 CHAPTER 8 Financial
THE SCOPE OF PRODUCTION MANAGEMENT... 198
Product Design....................................... 199 Resources
Capacity Planning and Process Design..... 200
Facility Location and Layout................ 200 OVERVIEW OF BUSINESS FINANCE........... 269
Aggregate Planning and Master Investment Decisions............................ 270
Production Schedule.............................. 201 Financing Decisions............................... 270
Inventory Management and Materials Operating Decisions............................... 271
Requirement Planning........................... 202 FINANCIAL MARKETS................................... 271
Quality Management............................ 203 Functions of Financial Markets............ 272
Supply Chain Management................... 204 Structure of Financial Markets............. 272
MANAGING INFORMATION........................ 205 SHORT-TERM FINANCIAL
Data and Information............................ 207 MANAGEMENT.............................................. 273
Databases, Data Warehousing, Working Capital Management............. 273
and Data Mining.................................... 208 Short-Term Financial Planning............. 273
INFORMATION TECHNOLOGY.................... 209 LONG -TERM FINANCING ........................... 274
Hardware................................................ 210 Basic Tools of Long-Term Financing.... 274
Software................................................. 210 CAPITAL INVESTMENT DECISIONS ............ 276
Computer Networks.............................. 211 FINANCIAL RISK MANAGEMENT................ 278
INFORMATION SYSTEMS............................. 212 Risk and Return...................................... 278
Operations Support Systems ................ 213 Enterprise Risk Management............... 279
Management Support Systems............. 213 SHAREHOLDER VALUE MANAGEMENT .. 280
INFORMATION SYSTEMS FOR DECISION Financial Decisions in Value Creation . 280
MAKING............................................................. 214 Value-Based Methodologies................. 280
Management Information Systems..... 214 ETHICS IN FINANCIAL MANAGEMENT..... 281
Decision Support Systems..................... 215 Corporate Governance.......................... 282
Executive Information Systems............ 216 Ethics and Corporate Social
Expert Systems....................................... 216 Responsibility......................................... 282
Internal Controls.................................... 282
iv
Preface
Dear Reader,
Doing business is one of the most ancient of The introductory chapter covers the founda-
human relationships. It is the connective tis- tions of business which are critical, especially
sue of local and national economies and the for entrepreneurs and business owners as
global market place. Although businesses are they relate to the environment of business,
vital parts of national economies, the term bu- economic systems, ethics and responsibility
siness as it is known in the first quarter of the in the work place.
21st century is not just confined to boundari-
Business of any kind is a mixture of functional
es that separate one country from another.
operations which in number and scope change
The meaning is much broader and is therefore
by specific environments and types of orga-
conceptually complex. Business has become a
nizations. This book addresses main business
dispersed operation reflecting the economi-
functions that take place whether in manu-
es, politics, social, and cultural dimensions of
facturing or service sectors as noted by the
global integration. Today’s conception of busi-
following topics: management; human reso-
ness is therefore dynamic, flexible, innovative,
urces management; marketing management;
and connected to the world in ways that were
production management and management
inconceivable just a generation ago.
information systems; financial accounting
The scope of business goes beyond the com- and financial analysis; and managing financial
mon notion of private enterprise or corporate resources. Today’s business challenges require
companies. It includes all sorts of organizati- international monitoring and a global mind-
ons that provide a service or a product. Even set. It is critical for business owners and ma-
governments have much in common with nagers as well as employees to acknowledge
business, though profitability is not one of the dynamics of the international business en-
them. Moreoever, business is more than just vironment and design strategies accordingly.
an abstract entity. Business is palpable. It is The key aspects of business in the global con-
about individuals--consumers of goods and text is briefly described and explained in the
services on one end of the continuum and the second chapter.
providers on the other end. From electronics
Business topics are best digested when com-
to tourism, from fashion to the automative in-
bined with the study of practical applications.
dustry, goods and services fulfill all types of in-
This book also blends business topics with
dividual needs and create jobs. Business adds
real-life examples and case studies either ge-
value to the world through acts of social res-
nerally or specificaly from Turkey and other
ponsibility and by pumping new ideas and pro-
countries. In addition, key terms are defined
ducts into the economies of the world. Thus,
and emphasized throughout the text; readers
this textbook’s content targets those who sha-
are challenged by commentary and test ques-
pe business and those who are affected by the
tions; and answers are provided for checking
conduct of business in countless ways.
their responses.
The objective of the overall content of this
We hope that this book will be more than sa-
book is to provide a brief approach to business
tisfactory for students as well as all interested
in general and business functions in particular.
readers for educational and training purposes.
This book, therefore, aims to be as lean and in-

formative as necessary. It is intended to be an
introductory and fundamental source for bu- Enjoy!
siness students at all levels as well as readers The Book Team
with a desire to learn about the fundamentals
of business.
Editor
Prof.Dr. Güneş Nezire ZEYTİNOĞLU
v
Chapter 1 Foundations of Business
After completing this chapter, you will be able to:
1 Define the basics of business, the benefits of

2
Learning Outcomes
Describe the external environments of

business, the types of business, and functional
business and how they affect organizations.
areas of a business.
Define the basics of economics, explain the
3 different economic systems and supply and

demand concepts, and identify the degrees
of market competition and major economic
indicators.
4
Define small business and explain
entrepreneurship, outline issues involved with
starting a new business and explain various
types of business ownership.
5 Define business ethics and discuss corporate

social responsibility with various approaches
for major stakeholders.
Chapter Outline Key Terms

The Concepts of Business Business
The External Environments of Business Business environments
Understanding the Basics of Economics Factors of production
Small Business, Entrepreneurship, and Economic systems
Business Ownership Market competition
Business Ethics and Corporate Social Entrepreneurship
Responsibility Business ethics
Corporate social responsibility
2
1
Introduction to Business
This first chapter’s aim is to give readers solid foundations for the understanding of the business world.
Whether you are a student majoring in business study or an aspiring entrepreneur wanting to start a
business for yourself, business is a useful and exciting area to study. As you must have realized, business
affects all of us in major ways during the course of our day-to-day living. We start with the concepts
of business including an overview of what businesses do. Then we look at the external environments in
which businesses operate.
Since the elements in an environment change constantly (think about changes in technologies,
in particular those in information and communications technologies or ICTs, the Internet and
mobile technology), business owners/managers must constantly keep up to date and adjust their
businesses accordingly. We discuss the basics of economics, the types of economies, and economic
forces that affect business (including individuals like us as consumers of products and services).
Then we look at small business and forms of business ownerships. Lastly, we will discuss business
ethics and corporate social responsibility (CSR) as they are important issues for all of today’s
businesses large and small.
THE CONCEPTS OF BUSINESS

In this section, we will discuss basic concepts of business which are applied to organizations of all sizes.
Although we focus on profit-making organizations, most of the concepts included here also apply to not-
for-profit organizations as well.
Business – Terms and Definition

A business is any organization that provides goods or services to satisfy customers’ needs and wants for
a profit. In this text, a business is also referred to as an organization, a firm, a company or an enterprise. A
business must be organized to provide products by combining resources such as materials, human, financial
and information resources. For a patisserie, material resources
include flour, eggs, sugar, butter and other raw materials
A business is any organization that provides used to produce cakes and cookies. Human resources such as
goods or services to satisfy customers’ needs bakers provide labor to produce the products. The patisserie
and wants for a profit. is organized by the owner/manager to produce tangible
goods. A business can also produce services which are
intangible products such as dental services and financial
advice. Some businesses like restaurants offer both products (food and drinks) and services (preparing
and serving food and drinks). Although there are organizations that are not-for-profits, most businesses
operate to earn profits. Not-for-profit organizations often service local communities through educational
and social means such as public schools, charity groups, and government agencies. Profits are earned when
a firm gets larger revenues (the money it brings in from the sales of its goods and services) than expenses
(the money it pays out to labor, raw materials and others). If the expenses exceed revenues then the firm
experiences a loss.
An entrepreneur is an individual who starts a business
and risks losses (in terms of money, time and reputation)
An entrepreneur is an individual who starts for profits. Therefore, profits are the rewards entrepreneurs
a business and risks losses for profits. receive for producing goods and services that consumers
want. Keep in mind that profits generated by businesses
also benefit various stakeholders. Stakeholders are the
Stakeholders are the groups of people groups of people that have a stake in or are affected by the
that have a stake in or are affected by the decisions, activities and policies made by an organization.
decisions, activities and policies made by an Major organizational stakeholders are owners (shareholder/
organization. stockholders), customers, employees, investors, suppliers
3
1
Foundations of Business
and communities (shown in Figure 1.1). Stockholders or shareholders own

a part of a company through ownership of a company’s stocks or shares.
Owners benefit from profits while shareholders receive dividends. Suppliers
Most businesses
are businesses that supply material resources or services to other businesses.
should attempt to
be responsible for all
groups of organizational
stakeholders especially
Suppliers are businesses that supply material
the ones that are the
resources or services to other businesses. most important to the
organization and try to
address their needs well.
Figure 1.1 Major Stakeholder Groups
Owners
Stockholders
Shareholders
Communities Customers
Suppliers Employees
Investors
Businesses must create value-added products

in order to attract and satisfy customers. People
Competition is the rivalry among
generally buy goods or services to satisfy certain
businesses for the same resources, customers
needs. The baker made delicious cakes from raw
or markets.
materials and in the process, added value to the
final products. We may seek valuable advice about
financial products from a financial consulting Keep in mind that other firms are also trying to
service firm because we want to grow and protect sell their products and services, often to the same
our money and investments. They can give expert groups of customers. The result is competition
advice on where to among those firms. Competition is the rivalry
put our money and among businesses for the same resources, customers
which stocks to buy or markets. In an economic system such as Turkey,
Competition is a crucial and how much, in consumers have choices to buy from few or several
element for businesses in order to maximize the competitors in terms of price, level of customer
market economies like the gains and minimize service and product quality. Since consumers have
Turkish economy. potential losses. limited resources (i.e. money), companies therefore,
need to focus on what customers want in order to
be successful and make profits. A firm that is able
4
1
to offer products that are more appealing or less expensive to its target customers has an advantage over
its competitors. Competition benefits consumers as firms are motivated to offer varieties of products and
services at reasonable prices. We will discuss how firms convince buyers that they should choose one
company’s products over another’s in Chapter 5 (Marketing Management). Table 1.1 summarizes why
competition is also good for business.
Table 1.1 The Reasons Competition is Desirable for Businesses
Innovation:
With several companies competing to win over customers, a firm can succeed with innovative products.
Innovation can come from technology, product modifications or by improving customer experience. Further,
firms would need to consistently better themselves and to encourage employees to push themselves also.
Customer Service:
If a product on offer is similar from one firm to the next, each firm is forced to improve customer service
to compete.
Education:
Competitors can teach each other about the business, the state of the markets and what does and does
not work in the marketplace.
Source: Reasons Why Competition is Good for Your Business. Forbes. Retrieved from http://www.forbes.com/
pictures/5-reasons-why-competition-is-good-for-business
Benefits of Businesses
Businesses contribute to a society in several ways. A successful business not only generates income
from its sales for the owner(s), it also employs working people with wages and salaries and other potential
benefits such as health care, training and retirement. Businesses produce most of the goods and services
that we consume, generate income and spending in an economy. A healthy and successful business climate
contributes to the quality of people’s lives.Therefore, businesses are one of the critical elements that
contribute to our standard of living. We can generally define the standard of living as the degree of wealth
and material aspects (i.e. the quantity and quality of goods and services) available to a person, a family or
groups of people in an economic system.
Businesses support governments at the local and
national levels by paying taxes. A government then spends Standard of living is the degree of wealth
the money on building a country’s infrastructure such as and material aspects available to a person, a
transportation and communication systems, water and family or groups of people in an economic
electric; improving public safety and national defense; and system.
funding the educational system for the country’s citizens.
Many companies also support charities and engage in the
improvements of local communities they belong to. However, businesses do not always operate in
ways that benefit the general public. For example, a business can operate in such a way as to leave lasting
harmful effects on our natural environment. Some employees need to take risks where business may operate in
an unsafe workplace. Unfair or fraudulent business practices harm consumers, stockholders and ultimately
the society’s interests.
Types of Businesses
One important characteristic of a business is its type. The differences between them reflect their differing
goals and concerns while they would face different kinds of challenges because of differences in business
scope. In general, we can define a local business as the ones that serve a limited geographical area and rely on
local consumers.1 For example, a small family-owned restaurant that may have one or few outlets operating within
a town or a city and surrounding area with small numbers of employees is a local business.
5
1
Regional businesses would serve a larger movement toward more interaction, integration,
geographical area like Southern Turkey or the and interdependent world economies through
Black Sea region. However, they do not extend a process called globalization. The concept of
their businesses to the whole country. Successful globalization (used here) means the tendency of
local businesses may want to expand to larger businesses and investment funds to move to other
regional areas but still stay within their capabilities markets around the world, increasing international
as business conditions may not be all that different trade and the culture exchange.2 Firms looking to
from each other. broaden their markets often look to international
National businesses on the other hand serve the markets as a way to grow. We will further discuss
whole country and provide products or services to business in the global context in the next chapter.
the majority of its people. Many successful regional Table 1.2 summarizes different types of businesses.
firms expand their businesses nationally by having
locations in most parts of a country with each store
having a similar format, offering similar goods Globalization means the tendency of
or services. As a business expands, the operations businesses and investment funds to move to
would be more complex to support and manage. other markets around the world, increasing
Lastly, international or multinational businesses international trade and the culture
operate, make, and/or sell goods or services in exchange.
more than one country. These firms lead the
Table 1.2 Types of Businesses
International or
Local Business Regional Business National Business
Multinational Business
Serves a limited Serves a larger area such Serves the whole Operates in more than
geographical area as the Southern or Eastern country one country
such as a town or a city part of a country
Major Functional Areas in a Business

In a typical business, there are five major activities or functions. Most of these will be discussed in
detail in the following chapters: Human Resources or HR (Chapter 4), Marketing and Sales (Chapter 5),
Production, Manufacturing, or Research and Development (Chapter 6), and Finance and Accounting
(Chapter 7 & 8) areas. The human resources function deals with HR planning, staffing, training,
and developing employees for the whole company.This function concerns various aspects of employees
and employee relations including workplace safety and health issues. The focus is on maximizing the
productivity of employees while minimizing negative issues stemming from the workforce.
According to the American Marketing Association, the marketing function involves activities to
create, communicate, deliver and exchange offerings that have value for customers.3 This function provides
customer service and customer support including advertising to potential customers. To provide goods and
services that satisfy customers, marketing activities also include market research, product development and
pricing. Production or manufacturing function for both goods and services involves making products
or creating services for customers which include activities such as purchasing (of material resources) and
logistics (incoming and outgoing flow of material resources and products).
Finance and accounting functions are there to ensure that a company has necessary funds to operate
sufficiently and to collect and report financial information to various stakeholders. Like the HR function,
financial and accounting specialists would work closely with other functional areas to ensure profitability
6
1
of the organization as a whole. Lastly, the research and development

function is necessary for firms to develop new and innovative products
to meet customers’ needs or to exceed their expectations. Many firms
1
are also involved with using new technologies such as the use of
Identify and describe the information and communications technology and the Internet in their
benefits of a business that operations.
produces beverages which you
Table 1.3 shows a list of major functional areas of a business. Keep in
can purchase from a grocery
mind that not all companies would formally have all of these functional
store, including the benefits
areas especially in small businesses. For example, a tax accountant may be
you receive from the company’s
hired part-time by small firms only during the tax season. However, large
marketing function.
companies would probably have many more activities or functional
areas such as information technology and legal functions. In the next
section, we will look at the external environments of business.
Table 1.3 Major Functional Areas of Business
Human Resources or HR:

Deals with planning, staffing, training, and developing employees for the whole company.
Marketing and Sales:

Involves the exchange and delivery of goods and services; the communication and interaction with
customers or potential customers.
Production or Manufacturing:
Involves making products and creating services for customers.
Finance and Accounting:

Ensures necessary funds for operations and reporting of financial information.
Research and Development:

Develops new innovative products for customers.
THE EXTERNAL ENVIRONMENTS OF BUSINESS

It is important that we understand the external environments that businesses operate in as each
dimension or force has the potential to affect a company and whether it will succeed or fail. There are six
major forces of the environment: the economic environment, the technological environment, the legal and
political environment, the social environment, and the global environment.
The Economic Environment

Every business has limited resources; therefore, managers/owners must take into consideration
economic conditions when making business decisions. In particular, companies should be concerned with
economic forces that impact the cost and the availability of products, services
and labor which shape the actions of both the firms and their customers.4
For example during an economic crisis, material resources from suppliers may
Business owners and not be readily available or too expensive. When costs increase firms often pass
managers must take into them on to the customers. As a result, customers may not be willing or able
consideration current to buy the products or services, which lowers the profitability. Economic
(and future) economic conditions in general affect how a firm must do business. Other factors such
conditions when making as labor market, stock market and financial market also vary with economic
business decisions. conditions. We will discuss in more detail economic systems and forces in
the next section.
7
1
The Technological Environment It is important for the marketing and sales

Technological forces from the practical applications function, for example, to understand how consumers
of information and communication technologies behave in the new environment. This is especially
and other by products of scientific research have crucial for e-commerce firms. E-commerce is the
led to innovations in goods and services. The term use of networks (primarily the Internet) to conduct
technology does not only mean physical equipment, trade between business-to-consumer (B2C),
machines and computers but also includes work business-to-business (B2B), and consumer-to-
methods, techniques and knowledge used in a consumer (C2C). Figure 1.2 Illustrates Amazon.
business. Therefore, technology would also lead to com which serves all 3 types of e-commerce: B2B,
the improvements of business processes or business B2C and C2C. Note that e-government has also
practices. Mobile technology platform has led to become an important platform for information
fundamental changes to companies and industries; exchanges and interactions between a government
giving rise to a large number of opportunities and and its citizens. Market outlook for Turkey in
also challenges for all. For example, the share of total 2017 for e-commerce is estimated at 5.85 Billion
online time spent using USD, up from 4.39 Billion USD known statistics
mobile platform such in 2015.6 Note that these numbers include only
as smartphones (instead B2C figures as B2B market data is more difficult
Technology also includes of desktop or laptop to estimate. However, the majority of e-commerce
work methods, techniques computers) has risen to transactions have been among businesses.
and knowledge used in a more than 70 percent
business. in the U.S., Mexico,
Brazil, and China
Mobile technology
while 91 percent of online users in Indonesia use mobile
platform has seen
devices to be connected to the Internet.5 More and more
fundamental changes
business transactions will occur on mobile devices.
to organizations and
industries. More and
more business transactions
E-commerce is the use of networks with customers will occur
(primarily the Internet) to conduct trade on mobile technology
and transactions. platform.
Figure 1.2 Amazon.com e-commerce
AMAZON.COM
• Amazon is the world’s
B2C largest online retailer
including its affiliates
• Amazon AWS offers new

startups to large firms
B2B access to infrastructure for
computing, database and
application servies
• Amazon Marketplace lets
individuals & businesses
C2C to sell their products on
Amazon to reach hundreds
of million of customers
Source: Retrieved from https://www.amazon.com/p/feature
8
1
The applications of tools and technology in what companies can do, cannot do or must do. For
business have resulted in increasing productivity example, in order to support competition among firms
which is a major factor in economic growth globally. in our economy, the Turkish Competition Authority
Productivity is a measure of the amount of output put in place a Competitive Act to prevent any threats
generated given the amount of input. In other to the competitive process in the markets and to ensure
words, goods or services are produced using the the efficiency in allocation of resources in the country.8
least amount of resources. For example, production Government agencies are tasked to regulate
machines along with computer technology components important business activities such as employees’
are used in modern manufacturing firms to automate health and safety, product safety, environmental
tasks and to give intelligence to machines. This way, regulations and practices to safeguard consumers.
the outputs (goods or services) are generated
much faster with less errors while using less inputs
(e.g. man hours, materials used). Consumers also
The Market Environment
benefit as prices of products are likely to decrease Every firm operates within a particular market
with the same or better product quality. environment in which revenues are obtained.
Important groups here include customers,
employees, suppliers and competitors. Customers
Productivity is a measure of the amount expect to receive value from a firm’s products.
of output generated given the amount of This means that a firm should offer products that
input. have certain level of quality, at reasonable prices
along with good customer service compared to
its competitors’ products and customer service.
The Social Environment Companies should establish close relationships
with their suppliers because product quality, price
The social environment refers to the trends and
and timeliness of delivery depend on material
forces in a society under which all businesses operate.
resources provided by suppliers.
Its elements include demographic factors, customs
and values, and social and economic movements Employees are very important in helping firms
of the society. Demographic characteristics such to become more effective. Frontline workers (those
as age, gender, lifestyles and income distributions, who have direct contacts with customers such
along with the values and norms acceptable to a as salespeople) should be given responsibility,
society, impact organizations from what kinds of authority, and freedom to do their jobs in order
products to offer consumer to the ways in which to quickly meet customers’ needs and expectations,
they conduct their businesses. For example, the U.S. i.e. to empower employees.9 Empowerment in the
is facing aging of its population and people also live context of business refers to giving an employee or
longer and healthier. Therefore, businesses can offer a team the power, information, responsibility and
products and services that are geared toward this shift. accountability to do the job well. In the market
However with an older population, firms may face environment, firms need to be able to compete
a shortage of younger incoming workers. Turkey on effectively and to distinguish themselves from their
the other hand, has a growing and young population competitors to drive enough revenues for their
which contributes to a strong labor pool, where half survival and to prosper.
of its population was under the age of 31 in 2015.7
Empowerment refers to giving an

The Legal Environment
employee or a team the power, information,
The legal environment affects businesses responsibility and accountability to do the
through all the laws and regulations imposed on job well.
them. This also includes political forces such as
their policies, transparency and stability, and the
relationship between government and business.
The laws and regulations establish in some ways
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The Global Environment

The global environment has seen larger influences on companies around the world, even those that operate
only domestically (i.e. local, regional, and national types of business). Factors such as global economic and
political conditions, international competition, a country’s exchange rate, and international trade alliances
and agreements affect firms in various ways. Those factors impact a firm’s internal operations, potential
customers and the level of profitability. For example, global oil prices which recently have fallen benefit business
through lower energy prices and transportation costs. Lower oil prices also benefit consumers through lower energy
prices as they pay less to heat their homes or drive their cars.10 Table 1.4 summarizes the dimensions of the
external business environments. In the next section, we will look at basic concepts in economics.
Table 1.4 Dimensions of the External Business Environments
Economic Environment:
Conditions in an economy in which an organization operates.
Technological Environment:
The use of various technologies to create value for stakeholders.
Social Environment:
Demographic characteristics and social forces of the society where a company functions.
Legal and Political Environment:
Laws and regulations imposed on businesses by a country’s legal system and the relationship between
business and government.
Market Environment:
Domestic business environment where firms operate.
Global Environment:
Global business environment that impacts companies.
use resources or the study of decision-making.11

Resources are required to produce goods and services
that consumers need or want. However, resources
2
are limited or there is a scarcity of resources so
Discuss elements of the businesses (and individuals) need to make choices
technological environment within their limited resources. Economic studies
that are important to a large range from the study of choices by individuals like
manufacturing company. what to buy from the money earned each month
(called microeconomics) to the study of industries,
governments and the overall economy (called
macroeconomics). Next we will look at the factors of
UNDERSTANDING THE BASICS
production which is a term that describes various
OF ECONOMICS resources used to produce goods and services.
Economic forces affect all aspects and types of
businesses, from the largest to the smallest firms.
In this section, we will review from a business
perspective, the elements which are concerned Factors of production describes various
with the process of decision making. According resources used to produce goods and
to the American Economic Association, economics services.
can be broadly defined as the study of how people
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1
Factors of Production
Businesses focus on five essential elements of the factors of production: labor, natural and physical
resources, financial capital, entrepreneurship, and information resources as shown in Figure 1.3. The
ways that these resources are used and managed differ between economic systems which reflect a country’s
way of allocating resources for the production of goods and services and distributing resources among its
citizens and organizations.
Figure 1.3 Factors of Production
• Land
Natural and Physical
• Offices
Resources
• Computers
Labor • Employess
• Managers
Financial Capital • Credits

• Money
Entrepreneurship • Entrepreneurs
• Business Owners
Informations • Knowledge
Resources • Data & Information
Natural and physical resources

Businesses use natural resources such as land, oil, minerals, water, and trees. Physical resources include
raw materials used by businesses such as equipment, machines, offices, factories, and computers. Some
countries have rich natural resources such as land and oil while others (e.g. Japan) have to import oil from
elsewhere. Saudi Arabia, on the other hand, is one of the major exporters of oil for export around the world.
Labor
Labor is the human resource which contributes time and effort (physically or intellectually) to
produce goods and services. Labor has been a major source of input for all types of businesses especially
for firms in the service sector such as in education, health, financial and entertainment industries. In
economically advanced nations, labor tends to be more expensive as their wages and salaries reflect
high standard of living. As an economy develops, labor costs tend to rise as well. Manufacturing sector
on the other hand consists of firms that produce physical goods such as food, electronics goods and
machinery. The use of various technologies in this sector has seen reductions in the use of human
resources over time.
Financial capital
Financial capital refers to money or funds used to create and operate a business. It can come from one’s
personal savings, from friends and family, via business loans, from investors and through other forms of
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fund-raising such as crowdfunding. Crowdfunding distributing books because of their low cost and
is to raise capital for a new business venture from a universal demand. As for his role as an innovator,
large number of individuals who often contribute Mr. Bezos has continued to innovate and has started
small amounts of capital.12 It is made possible different business ventures. Amazon has been named
by the easy access of networks of people through as one of the top 15 in Forbes lists of the World’s Most
social media and crowdfunding websites to bring Innovative Companies in recent years while making
investors and entrepreneurs together. him one of the richest people on the planet.15 Note
that entrepreneurship encompasses tech geniuses like
Mark Zuckerberg of Facebook and Jeff Bezos, and also
Crowdfunding is to raise capital for a new small business owners sharing commitments for new
business venture from a large number of businesses anywhere in the world.
individuals who often contribute small
amounts of capital. Information resources
Information resources play a major role
in enabling a business to use knowledge and
Jeff Bezos started Amazon as an online Internet
information effectively; to help make better
retailer in 1994 from his garage (selling books online)
decisions, to manage more efficiently, to gain
with financial capital from his parents’ personal
specialized knowledge, and to understand the
savings.13 Later on, the company raised a series of funds
external environments. For example, Amazon is
the following years and eventually went public in 1997
known for its high level of customer service leading
for additional capital. Going public means a firm
to high level of customer satisfaction and loyalty.
(privately held) starts to first sell company’s stocks to
Existing customers keep coming back to buy from
other investors to raise money through a stock exchange
Amazon while gaining new customers globally. To
market (becoming publically held). Today, Amazon is
be able to give excellent customer service, Amazon
the world’s largest online retailer with a market value
must understand them and improve their experiences.
of over 292 Billion USD as of May 2016.14
Amazon has gained this knowledge from keeping and
analyzing huge amounts of information from millions
Entrepreneurship of customers. Information and communications
Simply put, entrepreneurship is the process of technology advances a firm’s ability to create and
starting one’s own business. As mentioned earlier, an use information for managers and employees alike.
entrepreneur is a person who creates and operates We will discuss the details of ICT in Chapter 6.
a new business. S/he is willing to bear the risk of
a new venture like Jeff Bezos who took the risk of Economic Systems
losing most of his parent’s life savings on a new type
An economic system is a country’s organized
of venture (as an early e-commerce firm). One of
way for allocation of its resources among its citizens.
an entrepreneur’s roles is to act as an innovator who
One major way that economic systems differ is the
markets his/her innovation such as a new innovative
question of who has the ownership of the factors of
product or using a new process or method. It cannot
production. For example, ownership can be held by
be overstated how important entrepreneurship is to
entrepreneurs, by investors, or by businesses which is
the economic wellbeing and growth of a country.
called private ownership. In certain economic systems
however, all or some of the major factors of production
are owned and controlled by the government.
Entrepreneurship is the process of starting
one’s own business.
An economic system is a country’s

Jeff Bezos did not invent books; he saw the huge organized way for allocation of its resources
growth in the Internet usage very early on and quit among its citizens.
his Wall Street job to start an Internet company
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Another essential way that economic systems key industries that are vital to the economy.
differ has to do with the allocation of the factors of It combines this with private ownership and
production and the decisions about production. For operations of less important industries. For
example, the decisions of what goods and services to be example, a government would tend to own and
produced, how they will be produced and how much operate transportation, health care, utilities (water
would vary in different types of economic systems. and electric) and communications industries. Some
Economic systems are generally categorized as advanced economies such as Italy and England have
either a planned economy or free-market economy; incorporated some degrees of socialism especially in the
although the distinctions between them tend to be health care sector. Communist China is sometimes
blurry as most nations rely on the combination of labelled as a strictly controlled kind of socialism as
the two called a mixed economy. the Chinese government owns almost all factors of
production with highly centralized planning while
at the same time encouraging entrepreneurship with
Planned economic systems some privately owned companies.16
The government in a planned economy exerts
a significant role in determining most or all of
the decisions regarding production and allocation Free-market systems
of goods and services such as which products to We can define a market as a medium or
produce, how and how much. The centralized mechanism that facilitates an exchange of a specific
government would also control most or all of good or service between buyers and sellers.17
the factors of production. Examples of planned Markets can be physical market places or online
economic systems are communism and socialism. market places. A free market system is characterized
Communism is a political and economic system by a system where production and allocation
in which the centralized government owns and decisions (such as what to produce and product
operates all of the factors of production. It would prices) are largely determined by buyers and sellers.
also make production and allocation decisions. It allows both the buyers and the sellers to sell and
Communism exists in very few countries in the buy largely what they choose, i.e. buyers and sellers
world such as Cuba, North Korea and China. As are free to make their own decisions. This freedom
an economic system, communism has largely failed of choice defines a market economy.
though the idea exists in many countries. Although
China is still governed under its communist party
as a political system, its economic system has A market is a medium or mechanism that
functioned more as a mixed economy. facilitates an exchange of a specific good or
service between buyers and sellers.
Communism is a political and economic

system in which the centralized government
owns and operates all of the factors of Capitalism or private enterprise are terms
production. used to describe the free-market system
which allows freedom of choice and also
private ownership of the resources used to
produce goods and services.
Socialism is an economic system
characterized by government control and
ownership of selected key industries that are Capitalism or private enterprise are terms used
vital to the economy. to describe the free-market system which allows
freedom of choice and also private ownership of
the resources used to produce goods and services.
Socialism is an economic system characterized The operation of a market determines prices of
by government control and ownership of selected those goods and services under demand and supply
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conditions (see the next section). The incentives for

entrepreneurs and businesses to engage in this market
system are that they can earn and keep profits or
Majority of the world’s
other benefits derived from the exchange. Employees
nations rely on some
benefit from the wages and salaries (which are also
degree of mixed market
based on the free market system) while consumers
economy where some
can buy what they want at the best prices.
economies strive to be
In summary, private enterprise under the more free and open while
free-market system requires the existence of four others less so.
conditions:18
• Private property - individuals have the
right to own private property and resourc-
es that are used to create wealth.
Privatization is the transfer of ownership of
• Freedom of choice – employees can work
government enterprises to the private sector.
where they choose, consumers can buy
what they want, and firms can hire people
and produce what they choose.
One of the tools for economic reform to
• Profits – owners can keep the profits for
bring a country closer to free-market economy is
themselves as rewards for taking risks.
privatization which is a process that is thought
• Fair competition – free and fair competi-
to bring more efficiency to a government-owned
tion is the basis for a free-market system to
enterprise. In short, privatization is the transfer of
operate efficiently.
ownership of government enterprises to the private
sector. In Turkey, as in several countries elsewhere,
Mixed market system a series of privatizations began in the late 1980’s
In practice, neither the free-market nor the and is likely to continue for the foreseeable future
planned economic systems lead to optimum with a focus on energy projects and other heavy
conditions in most countries. For example, those who industries like construction and commodities.20
are poor, elderly and disabled are thought to not be well Socialism can also be thought of as a form of
taken care of in free-market economies.19 Planned mixed market economy as a government would
economies have not been able to create enough own and operate selected major industries in such
wealth for their citizens as a whole. Therefore, a system. It is common to call a country’s system
most countries rely on the mixed market system as capitalism if the dominant market processes and
that combines characteristics of both planned and mechanisms tend toward a free-market system.
free-market economies. Allocation of resources and Table 1.5 summarizes three major economic systems.
production decisions are made by both the market
and some by the government in the mixed market
system. For example, a government may distribute Socialism can also be thought of as a form
some goods and services such as social programs like of mixed market economy as a government
social security, health care and welfare programs along would own and operate selected major
with various regulations to protect the environment. industries in such a system.
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Table 1.5 Major Economic Systems
Planned Economic
Free-Market Systems Mixed Market Systems
Systems
Ownership Completely or partially Owned and controlled Blend of individuals and

and control of owned and controlled by businesses and businesses with some
the factors of by centralized individuals with the government involvement
production government focus on profitability and with the focus on a balance
freedom of choice between private and
public elements
Business decisions Mostly made Individuals and Blend of individuals and

about: products, by centralized businesses make the businesses with some
production, and government with decisions under demand government involvement
prices emphasis on equality and supply conditions depending on the degree
of free market activities
Forces of Demand and Supply

In a market economy, consumers have choices about what to buy, from whom, and at what price.
To win customers, businesses must meet their needs. Companies also need to know how much of their
goods or services to produce and what prices to charge.These decisions are determined primarily by two
fundamental concepts of economics: supply and demand. The supply of a particular product refers to the
quantity of the product available for purchase at various
prices at any given time. Supply is determined by factors
The supply of a particular product refers such as price, the cost of the resources required (such as
to the quantity of the product available for labor and capital) to produce the good or service, and the
purchase at various prices at any given time. availability and price of substitute products or services.
Substitute products are those that customers perceive
as alternative, similar or comparable such as tea and coffee
or butter and margarine. However, if we hold all these
Substitute products are those that factors constant then supply is directly affected by price.
customers perceive as alternative, similar or Generally, producers would offer more of a product for sale
comparable such as tea and coffee or butter as the price increases because they can make more money
and margarine. and higher profits; and to offer less of the product at lower
prices. This is based on the assumption that a producer’s aim
is to make
as much profit as possible, i.e. to maximize profits. So
the amount of a product supplied will increase as the price The law of supply - the amount of a
rises; and if the price drops then less of the product will be product supplied will increase as the price
supplied. This is the principle of the law of supply. rises; and if the price drops then less of the
The law of supply - the amount of a product supplied product will be supplied.
will increase as the price rises; and if the price drops then
less of the product will be supplied.
The demand for a particular product refers to the
The demand for a particular product refers
amount of the product customers will buy at various prices
to the amount of the product customers will
at a given time. Demand is also not only determined by
buy at various prices at a given time.
price. Other factors that determine how many units of
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1
a product customers will buy include, for example, taste,

The law of demand states that customers
income, and the price and availability of substitute products.
will demand more of a product as the price
We can also hold these factors constant and look at the
drops; and if the price increases then less
relationship between price and demand. Customers will
will be demanded.
demand more of a product as the price drops; and if the price
increases then less will be demanded. This is the principle of
the law of demand.
To illustrate the law of supply and demand in action, let’s look at a very simple example of a market for
burgers at a café in a small town. If a burger price is 2 TL, the café might be willing to supply only 50 burgers.
On the other hand, if the café can sell them for 20 TL each then it might be willing to supply 500 burgers. This
relationship between price and supply lets us determine how many burgers will be sold at different prices. The
same example can be used to show the relationship between price and demand to determine how many burgers
will be demanded at different prices. These two relationships represent the demand and supply schedules as
shown in Table 1.6.
Table 1.6 Supply and Demand Schedule
Price (TL) Number of Burgers Supplied Number of Burgers Demanded

2 50 500
4 110 450
6 150 350
8 180 300
10 250 250
12 290 200
14 350 140
16 415 100
18 450 75
20 500 50
We can illustrate the demand and supply schedules with a graph that is called supply and demand
curves as shown in Figure 1.4. The supply curve is upward sloping reflecting the law of supply: the
quantities of burgers supplied increase as prices rise. The demand curve is downward sloping reflecting the
law of demand: the quantities of burgers demanded increase as the prices drop. Because the relationships
reflect the opposite directions between price and supply versus demand, what determines the final price of
burgers? Again, holding all other factors constant, prices are set at which supply equals demand which is
shown in Figure 1.3 where the supply and demand curves intersect.
Figure 1.4 Demand and Supply Curves
Demand and Supply Curves

20
15
10
5
0
0 100 200 300 400 500
supply demand
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One of the dangers of a shortage situation is that

customers may get upset or that the unmet demand
The market price (equilibrium price) at
would encourage other businesses to come into the
which the quantity supplied is equal to the
market. We should stress that there are other key
quantity demanded.
determinants of supply and demand (other than
price), as shown in Table 1.7. For example, the
We call this intersection the market price or the price and availability of substitute products also affect
equilibrium price at which the quantity supplied is demand while the number of suppliers affect supply.
equal to the quantity demanded at 10 TL each at the Therefore, supply and demand forces are dynamic and
amount of 250 burgers. At any other points not on together would impose constant changes on businesses
the supply and demand curves, there may be a surplus in free-market economies. Also, the example given here
or a shortage situations of burgers. For example, if the is very simplistic as in the real world market economies,
café produces 300 burgers while still selling them at 10 there would be much larger numbers of businesses that
TL, then it won’t be able to sell 50 burgers because only would offer many different types of products every day.
250 burgers are demanded at that price. We call this
situation a surplus where quantity supplied is larger
than quantity demanded. The café would lose money
A surplus is when quantity supplied is
by spending more for those extra but unsold burgers.
larger than quantity demanded.
However, if the café is willing to lower the price then
additional customers will want to buy more burgers. For
example, if the price is lowered to 8 TL then the demand
would be so great that the café would run out of burgers
before it can satisfy all customers who want them. We call A shortage is when quantity demanded is
this situation a shortage where quantity demanded is larger than quantity supplied.
larger than quantity supplied. Therefore, the market
price reflects the profit-maximizing price where there
is no shortage or surplus.
The market price reflects

the profit-maximizing
price where there is no
shortage or surplus.
Table 1.7 Determinants of Demand and Supply
Source: https//www.thebalance.com/five-determinants-of-demand, http://www.boundless.com/economics
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Market Competition
Free-market systems with the existence of private enterprises must rely on various types of competition
which are also essential to the understanding of the behavior of the overall market economy. The nature
or degrees of competition vary widely by characteristics of industries, categories of products, and also
by geography. Four degrees of business completion are identified as: pure competition, monopolistic
competition, oligopoly, and monopoly. Keep in mind that these are not absolute measures but are degrees
of or points along a continuum. For this reason, many industries may fall somewhere in between.
Pure competition
Pure competition exists when no single supplier is large
enough to influence prices. Therefore, prices are largely Pure competition exists when no single
determined by supply and demand conditions. There are supplier is large enough to influence prices.
many small suppliers in the market and it is easy for them
to enter or exit the market. Suppliers produce products that
buyers view as virtually identical. There are a few examples of products that appear to be identical such as
agriculture products like fruits, vegetables and grains.
Monopolistic competition
Most of the competitions that exist today in free-market economies fall in this category where firms
have unrestricted freedom of entry. Monopolistic competition exists when there are many buyers and
suppliers and the products are similar although buyers perceive them as different. For example, there may
be several stores in a shopping mall that sell cotton t-shirts.
Buyers often see differences in the product and prefer one over
Monopolistic competition exists when another. Therefore, suppliers have some control over prices.
there are many buyers and suppliers and Businesses try to differentiate
the products are similar although buyers the products through brand
perceive them as different. names, advertising, design and
styling. Product differentiation Companies must
will be discussed in the differentiate themselves
Marketing Management chapter. So a white cotton t-shirt from a street market from the competitors to
may sell for 15 TL while a comparable t-shirt from a well-known chain store can attract customers in a
easily sell for twice as much or more. crowded market.
Oligopoly
An industry where only a few suppliers exist, each with a large share of the market, is called an
oligopoly market. Typically, these firms are fairly large, and often require a high investment of financial
capital to enter the market. Therefore, entry into the market
is restricted. Examples are the steel, telecommunications and
An industry where only a few suppliers exist, automobile industries. Competition is high as goods or services
each with a large share of the market, is can be similar (e.g. mobile phone services from Türkcell, Avea or
called an oligopoly market. Vodafone). With few suppliers and similar products, prices
tend to differ only slightly. When one firm lowers its price,
then others would also do the same in order to protect their
market share. To avoid a price war, oligopolies often try to differentiate their products to stand out from
competitors. In a globalized world, oligopolistic industries are more common. In some markets, there exist
as few as two suppliers that have dominant control of the market.21 We called these duopoly such as Boeing
and Airbus (in commercial aircraft market) and Coca Cola and PepsiCo.
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Monopoly
A monopoly exists when a supplier of goods or services has control of all (or nearly all) of its market.
Here, only one supplier dominates the market such that others are not able to compete. Therefore, the
firm has considerable control over prices. However, the
firm may not be able to increase prices as much as possible
because demand for its products will fall as price increases. A monopoly exists when a supplier of goods
Not withstanding, the firm can still charge high prices. or services has control of all (or nearly all) of
Monopoly lacks the important element in a free-market its market.
economy which is competition, therefore governments
do have laws to forbid many monopolies. In the case
of natural monopolies where one firm can most efficiently serve the whole market, then it is often
regulated by the government.
For example, a company like an electric or a natural gas utility can hold monopolies to conserve resources
and to supply those resources more efficiently (one town doesn’t need more than one natural gas company). In
these cases, prices are regulated by governments for fair pricing to citizens. As mentioned earlier, the Turkish
Competition Authority is tasked to enforce competition laws and regulations to prevent practices and operations
by businesses that would distort competitive conditions.22 It is there to ensure free competition for social
justice and economic efficiency. Table 1.8 summarizes the degrees of competition along important market
characteristics: barriers to entry into the market or industry, numbers of buyers and buyers’ choices in the
market, numbers of suppliers in the industry and price competition.
Table 1.8 Degrees of Competition
Monopolistic
Pure Competition Oligopoly Monopoly
Competition
Many buyers and Many suppliers offering Few suppliers offering One supplier in a market
suppliers of virtually similar goods; some similar or different with unique products;
identical products; no control over prices; goods; some control entry into the market
control over prices; no many buyers’ choices; over prices; high barriers and prices charged
barriers to market entry some barriers to entry to entry into the market often are regulated by
or industry the government
Economic Indicators
In the previous sections, we have discussed the basic understandings of an economy including economic
systems, supply and demand and market competition. In a business world, manager, owners and investors
need to gauge the economic health of a country. They want to know if the economy is expanding or
contracting in response to various changes in the external environments such as technology, consumers’
taste or the changes in economic forces. They also want to know about the business cycle which refers to
short term fluctuations in the general economic activities
(ups or downs, expansion or contractions). An economy
The business cycle refers to short term expands when it experiences growth and consumers
fluctuations in the general economic spend more money. Higher spending stimulates a higher
activities. level of economic activity and in turn, stimulates more
buying. Economic contractions occur when an economy
experiences a period of decline in economic activities. We
can use various statistical economic indicators to measure and monitor economic activity and performance.
A key indicator of economic expansion and contraction is a country’s Gross Domestic Product or GDP.
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Gross domestic product

Gross Domestic Product (GDP) refers to the total value of a country’s overall economic output it
produces during a given time period (usually one year) through its use of domestic factors of production. In
this case, the output from locally-owned or foreign-owned
companies located within the country’s boundaries are
Gross Domestic Product or GDP refers
included in its GDP. Generally, a rising GDP indicates that
to the total value of a country’s overall
businesses are doing well. In order to compare one economic
economic output it produces during a given
output of one country to another, GDP per capita which
time period through its use of domestic
is GDP divided by total population, is often used as it is
factors of production.
more useful for comparisons. For example, GDP of China in
2015 was $11,064 Billion which is much larger than Japan’s at
$4,383 Billion.23 However, GDP per capita in Japan was more
than four times higher than that of China because China is one
of the most populous countries in the world.
GDP per capita is GDP divided by total
population. GDP per capita reflects the standard of living which is
the value of all goods and services produced in an economic
system that people can purchase, reflecting the level of
material wealth and comfort of its citizens. Higher standard
of living results from economic growth. Since Japan’s GDP
per capita is 4 times higher than China’s, therefore Japanese Standard of living is the value of all goods
citizens on the average have more goods and services available and services produced in an economic system
to them and they are in a better position to buy those goods and that people can purchase, reflecting the level of
services than Chinese citizens. However, very high GDP figures material wealth and comfort of its citizens.
mean that China is one of the largest economies in the world and
is an economic powerhouse to be reckoned with.
GDP figures are reported in nominal terms called
nominal GDP meaning that the total output or GDP
Nominal GDP - GDP is stated in today’s is stated in today’s currency value and at current prices.
currency value and at current prices. Nominal GDP figures can increase from year to year even
when the total output of an economy stays the same. This can
happen when prices of the output increase over the given
period although the amount stays the same. Therefore,
Real GDP - GDP adjusted for price higher nominal GDP doesn’t necessarily mean the country
changes. has economic growth. For comparison purposes, we can
use the real GDP (instead of nominal GDP) which is
GDP adjusted for price changes. An economy experiences
an economic growth when its total output increases faster than its population. We can look at the real
economic growth rate (of GDP adjusted for price changes) which is expressed as a percentage showing
the rate of change for a country’s real GDP from one year to the next.24 Table 1.9 shows Turkey’s GDP
for the year 2006-2015.
Real economic growth rate is expressed as

a percentage showing the rate of change for
a country’s real GDP from one year to the
next.
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Table 1.9 Turkey GDP Statistics
Year GDP1 GDP per capita2 Real GDP: growth rate (%)
2015 1.882 24,309 3.97
2014 1.780 23,236 3.02
2013 1.690 22,314 4.19
2012 1.539 20,549 2.13
2011 1.443 19,517 8.77
2010 1.263 17,298 9.16
2009 1.106 15,349 -4.83
2008 1.130 15,901 .66
2007 1.033 14,710 4.67
2006 937 13,504 6.89
Source: OECD Data, Retrieved from data.oecd.org

1Billion of U.S. dollars
2U.S. dollars
During a period of contraction in the business cycle, a

Recession is a significant period of weakening significant period of weakening in economic activity that
in economic activity that spreads across the spreads across the economy in which real GDP declines is
economy in which real GDP declines. called a recession. From Table 1.9, we can see that Turkey
experienced a negative growth rate of -4.83% in 2009,
with a drop in GDP and GDP per capita. In fact, most
economies experienced declines from the effects of the U.S. financial crisis in 2008-9 which spread across
the world’s economies. Nominal GDP has been increasing every year (except during the recession) along
with GDP per capita although the rate of growth varies from year to year. A deep or severe recession that
lasts for a long period of time is called a depression. Fortunately, a depression doesn’t happen often in
relatively stable economies. However, economies that are relatively unstable may face repeated recessionary
periods over time.
Inflation
Another important economic indicator is inflation Inflation occurs when there is a widespread
which occurs when there is a widespread price increase price increases throughout an economy.
throughout an economy. Businesses and consumers have
major concerns over inflation because it affects their buying
power for a given amount of money. When prices rise then buying power drops as people can get less for
their money. If employees’ wages and salaries do not increase as fast as the rise in prices, then they can buy
less goods and services. Economists use price indexes to monitor inflation and measure price increases.
The consumer price index or CPI is used to measure the
weighted average of prices of a basket of typical consumer
Consumer Price Index (CPI) is used to goods and services purchased by households (living in urban
measure the weighted average of prices of a areas). The basket includes common products such as food and
basket of typical consumer goods and services beverages, housing costs, apparel, transportation and medical
purchased by households (living in urban areas). care.25 CPI is expressed as a percentage of price as compared
to a baseline historical value measured monthly. Table 1.10
shows 10 years inflation rate (CPI) for Turkey from 2007–2016
21
1
with 2010 as the base year. During the 10 years shown, the highest inflation rate is over 10% at the time of
the economic downturn in 2008. Large changes in inflation create instability for an economic system, but the
increases also indicate that the overall economy is growing in general (but in an erratic manner).26
Unemployment
Unemployment is another important indicator of the
Unemployment occurs when a person
health of an economy that businesses and investors focus on.
seeking employment is unable to find work
Unemployment occurs when a person seeking employment
in an economic system.
is unable to find work in an economic system. There are
various categories of unemployment:27 28
• Frictional unemployment results when a person
is in-between jobs, careers and locations. This is a Frictional unemployment results when
temporary unemployment and always present in an a person is in-between jobs, careers and
economy, therefore is not considered serious. locations.
• Cyclical unemployment occurs due to the busi-
ness cycle, i.e. economic fluctuations. It rises during
economic downturns as businesses cut back their
workforce. It declines during periods of economic Cyclical unemployment occurs due to the
growth when firms begin to hire again. business cycle.
• Structural unemployment occurs when peo-
ple lose their jobs when an industry experiences
structural changes such that employees’ skills
Structural unemployment occurs when
are outdated. In other words, there is a mis- people lose their jobs when an industry
match between what is needed by businesses and experiences structural changes such that
the kinds of workers’ skills that are available. employees’ skills are outdated.
This can be readily seen from unemployment
through technological advances for example, the
use of computerized technology like machines and robots to replace very large numbers of factory
workers. Further, employees needed to operate more complex technology must also be highly skilled
themselves.
• Seasonal unemployment occurs when workers get laid off during the off or low-season. For example agri-
culture workers are hired only during the products’ season or workers in tourism are not needed during off-season.
A high unemployment rate in an economy can negatively
affect its citizens who rely on jobs for their well-being.
Seasonal unemployment occurs when Prolonged unemployment may lead to crime and social
workers get laid off during the off or low- unrest. Table 1.10 shows unemployment rate for the year
season. 2007 to 2016. Notice that during an economic downturn
staring in 2008 when inflation rate went up, following in
2009 when unemployment rate was the highest at more
than 12%. In a declining economy, businesses tend to reduce their workforce as a way to reduce cost, as
labor often is the major expense for them. On the other hand, when an economy grows and experiences
a labor shortage with a drop in unemployment rate, businesses need to compete for workers resulting in
wage increases. Businesses often offset the rise in costs by passing them on to consumers in term of higher
product prices. Ultimately, price increases will lead to a
higher rate of inflation which is undesirable. Governments
need to keep both unemployment and inflation rates low
which is a difficult task as they tend to have an inverse internet
relationship to each other. Readers can find all sorts of http://www.turkstat.gov.tr/Start.do
economic statistics from the Internet address.
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Table 1.10 Inflation Rate (CPI) and Unemployment Rate: Turkey
Inflation Rate1 Unemployment Inflation Rate1 Unemployment

Year Year
(%) Rate (%) (%) Rate (%)
2016 7.8 10.8 2011 6.47 8.81
2015 7.67 10.24 2010 8.57 10.68
2014 8.85 9.88 2009 6.25 12.58
2013 7.49 8.74 2008 10.44 9.73
2012 8.89 8.17 2007 8.76 8.89
Source: Inflation (CPI). Retrieved from https://data.oecd.org/price/inflation-cpi.htm, http://data.oecd.org

unemployement-rate.htm.
1CPI (2010=100)
Government’s Role in Managing the Economy

In every type of economic system, governments have various roles in
managing the economies. The extent of their involvement though may not
be agreed upon by the stakeholders within the countries.29 Governments can
Even in a free-market
place laws and regulations to protect various stakeholders. For example, a smoke-
economy, the government
free area in restaurants to protect customers’ health, financial regulations to protect
investors’ and individuals’ investments, and health care standards for all citizens. has various roles in
Government agencies such as the Turkish Competition Board are established managing the economies
to protect and foster competition in free-market economies. Governments are in order to bring stability
also expected to encourage economic development in responsible ways. This to the economy.
includes stimulating and stabilizing the economy generally through two sets
of policies: fiscal and monetary.
Fiscal policy
A government manages its collection and spending of its revenues using fiscal policies. Major sources of
revenues come from taxation including income taxes earned by businesses and individuals, property taxes
and sales taxes. Governments policies such as spending on the goods and services, tax cuts or tax increases,
and distributions of various payments are examples of
fiscal policies. A government can stimulate the economy
A government manages its collection by increasing its spending such as spending on a nation’s
and spending of its revenues using fiscal transportation infrastructure like railways and highways.
policies. Therefore, discussions of fiscal policy are generally focused
on the effects on the economy of the overall levels of
government spending and taxation.30
Monetary policy
Monetary policies involve a government’s control of the nation’s money supply. These often mean targeting
an inflation rate or interest rates (increasing rates or decreasing rates). In Turkey, the TCMB or Türkiye Cumhuriyet
Markez Bankası or the Central Bank of the Republic of Turkey (CBRT) is responsible for implementing monetary and
exchange rate policy. It has an inflation targeting framework to reach
its primary objective of price stability with measures to maintain the
stability of the financial system.31 Together, monetary and fiscal
Monetary policies involve a government’s
policies are used to help stabilize an economy such as to smooth
control of the nation’s money supply.
out fluctuations of a nation’s output level, unemployment and
inflation.
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“Money supply is the total stock of money circulating in

an economy including currency, printed notes, money in
the deposit accounts and other forms of liquid assets” .32
3
Discuss how current economic
indicators in your country
affect employees.
SMALL BUSINESS, ENTREPRENEURSHIP, AND BUSINESS

OWNERSHIP
The presence of small businesses are pervasive in our everyday life, whether one lives in a small town or in a
big city around the world. Although many products we consume come from large businesses, the majority of our
interactions with firms are with small businesses. Also, most large companies often start small.
Small Business – Definition

Generally, a small business is independently owned and operated and not dominant in its field of
operation, i.e. with little influence in its market.33 We can measure the size according to the number
of employees or the monetary value of a business such as its balance sheet total. Business size standard
varies widely according to the industry and geography. For
example in the U.S., the Small Business Administration (SBA)
considers a company with fewer than 500 employees to be a
A small business is independently owned
small business, although a company of 1,500 employees can be
and operated and not dominant in its field
labeled small in several types of manufacturing sectors.34
of operation.
However, the European and Turkish standards are
quite different as shown in Table 1.11 in which a small
company has less than 50 employees.35 There are slight differences in the standards in terms of monetary
value in respect of balance sheet total in Euro (European standard) and net sales figures in Turkish Lira (TL)
(Turkey standard - 2012).36 The issue of size is important in most countries especially when dealing with
governmental agencies. There are laws and regulations, programs and benefits that are specifically aimed
at small businesses. For example, there are governmental loans and credits for those who qualify as small
businesses.
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Table 1.11 European and Turkey Small and Medium-Sized Enterprise (SME) Size Standard
Company Category Staff1 Balance Sheet Total2 (€) Net Sales3 (TL)
Medium-sized <250 ≤ 43 m ≤ 40 m
Small <50 ≤ 10 m ≤8m
Micro <10 ≤2m ≤1m
Source: https://ec.europa.eu/growth/smes/business-friendly-environment/sme-definition_en and http://www.

hurriyetdailynews.com/definition-for-smes-broadened.asp
1Total number of employees
2European standard
3Turkey standard
The importance of small business

Small businesses are very important to most economies, even in advanced economies like the U.S.
and the U.K. For example, 99.7% of the U.S. firms are considered to be small businesses in 2012 (less than
500 employees).37 For Turkey, 99.8% of all enterprises in Turkey are made up of SMEs or those with less than
250 employees which employ more than 73% of the workforce.38 The importance of small businesses can be
summarized below.
Job market. Small businesses are the major source of new jobs. Smaller firms are relatively more flexible
in terms of hiring than large firms such that they often hire employees at a faster rate during economic
growth. However, they also fire or cut jobs at a faster rate during an economic downturn. Many small
businesses especially in advanced economies also engage in import (product made in foreign countries but
sold domestically) and export (product made domestically but sold internationally) of goods and services.
Innovation. Small business flexibility also tends to favor innovations in terms of new products or
introducing new business processes or methods. The SBA reported that among high-patenting firms (15
or more patents in 4 years), small businesses had 16 times more patents per employee than large patenting
firms in the U.S.39 During the past several years, small companies and individuals in the computer
technology sector have made a very large impact not only on businesses but on larger societies as well, for
example, the invention of personal computers, the World Wide Web (WWW), Google search and Facebook to
name a few.
Contributions to other businesses. Small businesses provide goods and services to other small and
large companies. For example, large firms like Nike and Toyota have thousands of small suppliers for parts and
other input resources. Many small retailers sell products or services to consumers for larger firms. Nike
products can be found in many smaller retailers around the world. More than half of all exports from
Turkey in 2015 were exported by SMEs such as textiles, chemicals products and machinery which are used
by other businesses.40
Small businesses often focus narrowly; selling a few types of goods and services, selling in a few market
segments or specialized in niche markets. These markets are often too small with too few customers for
large firms to enter. They have much more limited financial resources than larger companies. However,
they have the freedom and flexibility to do things (e.g. make decisions) quickly as small firms have much
simpler structures than the more complex large organizations.
Entrepreneurs Entrepreneurs are people who start,

People who start, organize, and operate a business and organize, and operate a business and assume
assume risks are called entrepreneurs. We should emphasize risks.
that entrepreneurs are not only small business owners. They
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are seen as innovators who market innovations and as change agents (i.e. search for change, respond to
change and exploit change as opportunity).41 Small business owners, on the other hand, start their own
businesses instead of working for somebody else to make a living for themselves and their families. Many
do not want to develop the businesses beyond what they can manage themselves.
The aim of an entrepreneur is to grow the business, and if successful for it to become a large enterprise.
Although some hugely successful entrepreneurs may not have envisioned their business as they have become
today (think about Mark Zuckerberg of Facebook or Jeff Bezos of Amazon). We often call new businesses that aim to
grow large and fast as new ventures or start-ups. Whether starting a small business or a start-up, we can agree that
entrepreneurship is an important process for economic growth and well-being for all market economies.
Traits or characteristics of entrepreneurs

Most successful entrepreneurs share certain personal characteristics such as being innovative and
creative. They have ideas and imaginations to come up with innovative products or services or creative
solutions to problems and opportunities. In other words, they possess the entrepreneurial spirit or the
mindset, an attitude and approach to thinking that seeks
change and embraces critical questioning, innovation and
continuous improvement.42 Some large firms try to express Intrapreneurs are employees working
and maintain entrepreneurial spirit through individuals or in large companies who behave like
teams by what is known as intrapreneurship. Intrapreneurs entrepreneurs.
are employees working in large companies who behave like
entrepreneurs.
Entrepreneurs are willing to work hard with dedication and determination for long periods of time.
They are self-motivated; money is not a major motivation for them. Success is the motivator and money is
the reward for success.43 They are highly energetic and believe in what they are doing. They have the self-
confidence from their expertise with passion to succeed and high tolerance to risks and uncertainty that
come with change. Fortunately for potential entrepreneurs who may lack some of these traits; many skills
can be learned. Also, success can happen regardless of education level and economic background. Findings
show that based on the attitudes of Turkey’s population and the growing rate of entrepreneurship in the
country, Turkish citizens have potential for entrepreneurial opportunities and advancement especially with
improvements in the procedures to start a business and the reforms within Turkey’s financial sector.44
Entrepreneurs are very important to the market economies. They start new businesses, accept the risks, create jobs,
and contribute to innovation. Dynamic economies are seen as those with many successful entrepreneurs, working
in a supporting business environment that encourages and motivates entrepreneurs’ activities.
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Starting a New Business

Small businesses are seen as the engine of job creation and income growth especially for emerging
economies like Turkey. There are advantages for individuals to own a new business: to be one’s own boss
and the ability to develop close personal relationships with customers and employees.45 The relationships
also extend to the social life of the communities they belong to. Also, being small gives businesses the
ability to evolve at a faster pace and to adapt to change (i.e. flexibility).
Unfortunately, the failure rate for small businesses is fairly high as the majority do not have long-term
success. For example, only slightly more than half of new businesses survive after 5 years in the U.S. and the
survival rates continue to drop with time.46 Money is almost always tight in the beginning as most new
businesses have limited resources and lack the ability to raise more financial capital. Some entrepreneurs
and business owners may not be competent or not have enough experience managing and operating day-
to-day activities. Highly successful entrepreneurs in the technology sector for example, are seen as having
both technical knowledge and also having managerial competence (or at least know how to find the
competence in others).
Business plan
To increase the chance for success, entrepreneurs should
come up with a comprehensive business plan which defines A business plan defines the vision, the
the vision, the strategy and the implementation for the new strategy and the implementation for the new
business. A good business plan can assist with making business.
good business decisions, goal-setting, long-term planning
and help to attract investors and employees for the new
venture. Writing up a plan also helps entrepreneurs to crystallize their ideas and the actions needed to start
a successful business. Table 1.12 lists the elements of a business plan.
Table 1.12 Elements of a Business Plan
• INTRODUCTION: Basic information such as the name, address, dates including a title page.
• EXECUTIVE SUMMARY: Overview of the entire plan including the technical, marketing, financial, and
managerial details. This section is important in that it should convince the investors that the new ventu-
re is a worthy investment.
• COMPANY DESCRIPTION: Highlights the entrepreneur’s dream, vision, and goals including the industry
and legal status of the new venture.
• PRODUCT/SERVICE: Details of the products or services, benefits, competitive advantage, and price.
• MARKETING PLAN: Details of the industry, competitors, and target market including results from mar-
ket research.
• OPERATING PLAN: Details of daily operation of the business including the location, machines, equip-
ment, people, and processes including suppliers.
• MANAGEMENT AND ORGANIZATION: Roles and responsibilities of the people.
• FINANCING: Expenses involved (including startup and ongoing expenses) and capital needed.
Source: Principles of Entrepreneurship. U.S. Department of State, Bureau of International Information Programs.
Retrieved from http://www.ait-org.tw/docs/enterp.pdf; Business Plan Translate for a Startup Business. Retrieved from
http://www.score.org/resource/
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Entry options
There are basically three major options to start a new firm; to create a new business, to buy an existing
business, or to buy a franchise system.
Creating a new business. This first option is to create a new, independent business. Depending on the
type of business, some can be started with little cash but some like those in manufacturing may need a lot
of financial capital to begin with. Since the founder/owner can make all the decisions, s/he can have a lot
of independence. For example, decisions such as location, equipment, suppliers and employees can be made to
create all new business systems from scratch. The risks, however are high as success or failure depends on the
business prospect and entrepreneur’s projection about his or her business potentials (such as the number
of customers, sales figures and reputation).
Buy an existing business. Unlike the first option, buying an existing business is easier as the business
should already have a customer base, employees and other support networks like suppliers. Therefore,
business potentials are easier to estimate correctly as the existing business has a track record with business
systems already in place. The startup costs may be considerable as the previous owner would sell the
business at a profit, especially if it has been proven successful in the past. Another disadvantage for this
option is that the business may suffer from the effects resulting from the previous owner’s actions such as
bad reputation for customer service and any other business processes and systems errors.
Buy a franchise system. Franchising is an attractive way to start a business without having to start
it from scratch. A franchise is a type of arrangement where the local owner (called franchisee) acquires
a license to have access from the parent company (called
franchisor) to its business proprietary knowledge and
processes in order to sell the products or to provide services
A franchise agreement is where a franchisee
under the franchise’s brand name or trademarks.47 In short,
buy the right to sell and use the franchisor
a franchise agreement is where a franchisee buys the right
good or service.
to sell and use the franchisor’s good or service. Well known
international franchises in the world are mostly in the fast food
sector such as McDonald’s, KFC, Subway, and Burger King.
Franchises are a popular way to start a business because of
several advantages; most notably the expertise, experience
and established names of the franchisors for the product
internet or service on offer. Expertise especially in management and
http://ufrad.org.tr/anasayfa marketing that can be included in franchise agreements is
very helpful to new business owners who often lack these
skills. Franchising is similar to being a part of a larger firm
but with the freedom of working for one’s own business. Depending on the franchise, franchisees may
get support networks along with ready-made and viable business systems. For example, a franchisor may
help pick the best business locations, given market research, as well as training and other necessary assistance in
starting up a successful business.
The franchisor or the parent company also benefits from some form of payments: upfront fee for the
rights to use its brand name or trademark, payments for training, equipment and other business services,
payments for ongoing royalties or a percentage of the business’s sales revenues.48 There are also disadvantages
to franchises as the franchisors can retain considerable control over the franchisees. For example, franchisees
may need to follow the exact business format of the franchisors. Therefore, decisions to respond to any changes
in the business environment (such as consumer tastes) cannot be made independently. The most significant
disadvantage for a franchisee is the high initial start-up costs; especially if the franchisor is one of the
well-known and popular international brands. Readers may take a look at the Internet website for further
information about franchising in Turkey.
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Types of Business Ownership

Entrepreneurs must decide on which forms of ownership is best for their companies and their goals.
There are several factors to consider including:49
• Liability – A debt or obligation as a result of business
operations. Owners may have limited or unlimited
liability. Unlimited liability means that the legal Unlimited liability means that the legal
owners are liable (or responsible) for all business debts owners are liable (or responsible) for all
and obligations. Limited liability means that the business debts and obligations.
partner is liable only to the extent of investment s/he
contributes to the company.
• Tax – Tax rates vary on sales revenues that a busi-
ness generates and also whether the tax is personal Limited liability means that the partner is
or business. liable only to the extent of investment s/he
• Start-up requirements – The rates of capital contributes to the company.
required to open up a business also vary with the
forms of ownership.
• Management and Control – According to the type
of ownership, management and control structure can rest with the owners, partners or with the
board of directors (is a group to oversee corporate management, who are elected by stockholders).
• Capital – The ability to raise initial and operating capitals differs including the sources of invest-
ment or fund.
• Succession – The ability to pass on or to sell the ownership to others, including when the deaths
of owners occur, must be considered.
Keeping these factors in mind, entrepreneurs can then choose the best form among the three major
forms of legal ownership: sole proprietorships, partnerships, or corporations as shown in Figure 1.5 forms
of legal ownership.
Figure 1.5 Forms of Business Ownerships
SOLE PROPRIETORSHIPS
• Business owned and often operated by one
person who is liable for all debts and
obligations from the firm’s operations. CORPORATIONS
JSC Joint Stock Company

• Equivalent to a • Equivalent to a public limited liability company
General collective company P • Managed by a board of directors
partnership • 2 or more partners A
sharing operations LLC Limited Liability Company
and liabilties
R
T • Formed by a maximum of 50 real persons or legal
entities
N
E Cooperative
• Equivalent to a R
commandite company • Individual, companies, municipalities, and
S associations to operate commercial activities as
• Limited partners with
Limited
limited liability
H legal entities.
partnership
• Active partners I
manage the firm with P
unlimited liability S
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Sole proprietorships and obligations incurred by the firm’s operations.

A sole proprietorship or sole trader is a business There is no minimum share capital for the partners
owned by one person, therefore is suitable for a as in sole proprietorship.
small business. It can be established easily in Turkey
by filing an application with the Trade Register
and registering with the local tax authorities before A general partnership (a collective
operating.50 There are no start-up requirements and company) means that the partners can
owners are free to hire personnel. Tax laws permit invest equal or unequal sums of money
sole proprietorship to pay based on individual or but are equally liable for the debts and
personal income tax. The control and management obligations incurred by the firm’s operations.
are entirely by the business owner so that a separate
professional manager or director is not needed. One
major disadvantage is that the owner has unlimited Commandite companies. A commandite
liability for all the debts and obligations incurred by company is equivalent to the limited partnership
the business. When not enough cash is generated in which the partners can be active (called general
by the business, the owner must pay out of his or partner) or dormant (called silent partner).52 Active
her own money. Further, the ability to raise funds partners manage the firm and have unlimited
from banks and other financial institutions is very liability while silent partners have no role in the
limited. The sources of funds primarily come from management of the firm but have limited liability.
personal funds, friends and family. It is also more There is no minimum share capital required for
difficult to sell a sole proprietorship. The business any partners. The partners can jointly operate the
ends with the passing of the owner. company unless stated otherwise in a legal contract.
Each partner pays separate personal income tax.
Note that the commandite or limited partnership
A sole proprietorship or sole trader is a company can be used by foreign individuals or
business owned by one person, therefore is companies seeking a joint venture in Turkey.
suitable for a small business.
A commandite company is equivalent

Partnerships
to the limited partnership in which
A partnership is a non-corporate business that the partners can be active (called general
is owned by two or more people. In Turkey, non- partner) or dormant (called silent partner).
corporate forms of ownership may be established as a
collective company or a commandite company as legal
entities.51 Both of these forms are the equivalent of
partnerships in other countries and are appropriate
(but not limited to) for SMEs. Major issues involve
who manages the company and how much liability Active partners manage the firm and have
each partner faces. unlimited liability.
A partnership is a non-corporate business

that is owned by two or more people.
Silent partners have no role in the
management of the firm but have limited
Collective companies. A collective company in liability.
Turkey is the same as a general partnership which
means that the partners can invest equal or unequal
sums of money but are equally liable for the debts
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With partnerships, businesses have better chances to grow and to add resources (like money and
employees) as they do not depend only on one person. Partners can also rely on complimentary skills that
each brings in to the partnership. Partnerships are relatively easy to start
as legal requirements are few. However, the major drawback for a general
partnership with unlimited liability is that all partners, regardless of
their roles in the business operations, are equally liable. Therefore, the If an entrepreneur decides to
limited partnership may be used instead. Other disadvantages, similar team up with others and form
to the sole proprietorships are the issues of succession and the difficulty a partnership, make sure to
in transferring ownership to others. Lastly, the chances for disagreement consider each partner’s personal
and conflict rise with the number of partners. Conflicts range from qualities and skills. Each must
simple interpersonal disagreements between partners or more significant be able to make a significant
issues such as business strategy, operational procedures and division of contribution to the new venture.
profits and losses. Partners should learn conflict resolution skills as they
will be needed at some point in time!
Corporations
The Turkish Commercial Code (TCC) states that
corporate forms may be established under Joint Stock Company
(JSC), Limited Liability Company (LLC) and Cooperative The Turkish Commercial Code (TCC)
Company.53 JSC and LLC are the most common types in states that corporate forms may be
Turkey and globally and are appropriate (but not limited) for established under Joint Stock Company
large businesses. Most large and global businesses take this (JSC), Limited Liability Company (LLC)
corporate form. Although large businesses are much fewer and Cooperative Company.
in numbers in typical free-market economies, given their
size (in terms of personnel and sales revenues), they have
significant impact on most economies. For example, although less than 1% of the total number of enterprises
in Turkey were considered as large (greater than 250 employees in total); they employed about 26% of total
workforce, gave 46% of total wages and salaries and made 62% of total imports.54 All types of corporations
have legal status under TCC as separate entities and each has property rights and obligations.
Joint stock company. A joint stock company (JSC)
in Turkey (referred to as A.Ş.) is equivalent to a public limited
liability company as the shareholders or stockholders are liable A joint stock company (JSC) in Turkey
only for the amount of capital each contributes. There are some (referred to as A.Ş.) is equivalent to a public
additional requirements; a corporation is required to have at limited liability company.
least one shareholder who can be a real person or a legal entity,
a small deposit to the Competition Authority as a percentage
of the company’s capital, and a deposit with the minimum amount of 25% of the startup capital in a bank (i.e.
minimum share capital requirement).55 Further, a JSC must be managed by a board of directors. Although
shareholders are not required to be in the board, they have the
right to appoint one. A board of directors can be made up of
one or more persons or companies. A corporation that is privately held and
A corporation that is privately held and whose shares whose shares or stocks are not available
or stocks are not available for sale to the public, is called for sale to the public, is called a closed or
a closed or private corporation. Stockholders may be private corporation.
a family or a management group. On the other hand, a
publically held or public corporation is a corporation
whose ownership (shares or stocks) is dispersed and available
for sale to the public. Investors can buy stocks from some of A public corporation is a corporation
these corporations at a stock exchange such as the Istanbul Stock whose ownership (shares or stocks) is
Exchange or Borsa Istanbul. If a public JSC has more than dispersed and available for sale to the public.
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250 shareholders then it is further subjected to the Alternatives in business ownership

regulations imposed by the Capital Market Board In addition to the types discussed above,
of Turkey.56 branches and liaison offices can be used as
Limited liability company. A limited liability alternatives to setting up a business. Foreign
company (LLC) in Turkey (referred to as LTD) is companies based outside of Turkey may only set up
a company formed by two or more real persons branches and liaison offices. Branches set up by a
or legal entities (maximum of 50 such persons or foreign based JSC must be approved by the Ministry
entities).57 It can be 100% foreign owned. An LLC of Industry and Trade and must set up a legal entity
would have a predetermined or fixed capital and to employ staff and must be in the same scope of the
limited liability to the corporate assets (resources parent company.60 Their profits are subjected to
or things that have economic value that are owned corporate tax in Turkey. Liaison (or Representative)
by a corporation). Shareholders have limited offices of foreign companies which are under the
liability according to their capital contributions. authority of Ministry of Economy do not perform any
A minimum share capital is required although the commercial activities that generate revenues; they only
amount is relatively small. It is governed by directors supply information about the companies to suppliers
of LLC and professional managers. Compared to a or customers.61 Recent important issues in the area
JSC, the procedures to start an LLC are simpler of business ownership include strategic alliances
and the amount of minimum share capital is less. and joint ventures, and mergers and acquisitions.
For these reasons, an LLC is appropriate for SMEs
and also is popular among foreign investors.58
A strategic alliance is an agreement
between two or more companies to pursue
A limited liability company in Turkey common goals such as project development
(referred to as LTD) is a company formed by of new products, while still remaining
two or more real persons or legal entities. independent organizations.
Cooperatives. A cooperative form of business Strategic alliances and joint ventures. A

ownership allows individuals, companies, strategic alliance is an agreement between two or
municipalities and other associations to operate more companies to pursue common goals such as
commercial activities as a legal entity.59 In advanced project development of new products, while still
economies like the U.S., cooperatives make up remaining independent organizations. For example
only a small percentage of the economy. It is most ICICI Bank, the largest private sector bank in India
prevalent in the agriculture sector. In Turkey, and Vodafone India announced a strategic alliance to
the number of shareholders in a cooperative is launch a mobile money transfer and payment service
unlimited and there is no minimum share capital for Indian customers in 2013.62 As in most alliances,
requirement. Further, regulations of cooperatives’ both parties contribute for mutual gain. In this case,
business activities fall to the ministry in charge. For Vodafone India offers significant reach of mobile
example, the Ministry for Agriculture would regulate service distribution as being one of India’s largest
activities of agricultural cooperatives. Procedures to telecom service providers. At the same time ICICI
set up are quite simple compared to the other types Bank provides a large customer base under the security
of corporate ownership status. of its financial transactions.
A cooperative form of business allows

individuals, companies, municipalities and
other associations to operate commercial
activities as a legal entity.
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A joint venture on the other hand, is a form of strategic alliance where the ownership of a new venture is
shared among the partner firms. A new company is formed and owned jointly by partner firms. For example,
the automotive industry has seen several joint ventures, many of
them internationally. In Turkey, the joint venture between Koç
A joint venture is a form of strategic Holding and Ford Motors (U.S.) was formed as Ford Otosan to
alliance where the ownership of a new manufacture a few models or vehicles and related services under
venture is shared among the partner firms. the Ford brand name.63 This joint venture generated around
$16.7 billion in sales in 2015 and is one of the top 10 largest
A merger means a combination of two companies in Turkey.64
corporations to form a new company. Mergers and acquisitions. Mergers and acquisitions
(M&A) are often used for corporate expansion by adding
An acquisition occurs when one firm new product lines or new markets in different locations
completely buys another outright. or in a related or different industry. Therefore, M&A
can lead to changes in the nature of businesses or their
competitive positions. A merger means a combination of
two corporations to form a new company. For example,
Disney and Pixar merged to create one of the best known collaborations in the entertainment industry of hugely
successful movies and animations such as Frozen (an animation targeting young children) which became the 5th
largest grossing movie ever made in 2015.65
An acquisition on the other hand, occurs when one firm completely buys another outright. Often a
larger firm would have the ability to buy out and absorb the other smaller firm. For example, Microsoft
acquired LinkedIn (the social networking firm) for over $26 billion in 2016.66 For large technology firms like
Microsoft, Apple and Google, they often use acquisitions in order to gain new complementary computer
hardware and software technologies from small innovative firms. M&A is one important strategic tool for
corporate expansion. In Turkey (and other countries), M&A has often been
used by foreign investors to enter the Turkish market which made up as
much as 70% of the total annual M&A deal volume in 2015.67 It should
4 be noted that many M&As are not successful as these deals are complex
Compare and contrast involving every aspect of both companies. Successful M&As that create
different entry options when value for the companies involved, often lead to radical improvements
starting a new business. of the firms’ performance such as cost reduction or removal of excess
capacities such as obsolete factories and surplus human resources.68
BUSINESS ETHICS AND CORPORATE SOCIAL RESPONSIBILITY

We have been discussing the fundamental elements of business and we can realize that business
organizations have significant effects on our everyday lives and well beings. Therefore, the issues of business
ethics and corporate social responsibility (CSR) should be front and center almost as much as issues
such as sales and profits. Ethics is a system of moral principles (what is right and wrong) that governs
a person’s behavior. The concepts of ethics have been derived from philosophy, religions and cultures,
therefore, individual’s moral values and behaviors are determined within his or her social context. Business
or corporate ethics examines moral or ethical issues in a
business environment such as ethical or unethical behaviors
by managers and employees in the workplace. Note that Ethics is a system of moral principles (what
unethical behaviors are not necessarily illegal under a is right and wrong) that governs a person’s
nation’s law; although the behaviors are seen as wrong and behavior.
undesirable in the social context.
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Personal Ethics Ethics and Businesses

Ethics are based on personal beliefs within the People in business often face practical ethical
social context, therefore, they differ from person dilemmas within their professions. Business or
to person, from situation to situation, and from corporate ethics involve ethical or unethical behaviors
culture to culture.69 Since personal ethics guide by employees in a business environment. Managerial
each of us in making various decisions in our daily ethics on the other hand, involve managers’
life and our work life, we need to ensure those principles or standards of behavior in an organization.
decisions are right and proper. We can use five Ethical issues regarding financial and accounting
sources of ethical standards to help us make good practices are for example, one of the major issues
ethical decisions as suggested by the Markkula for most companies. These issues relate to financial
Center for Applied Ethics:70 reporting, trading, compensation and payment
• The Utilitarian Approach - an ethical policies.72 Desirable values in financial reporting
behavior that delivers the most good or does would be to make moral choices in regard to the
the least harm for all who are affected by it. preparation, presentation and disclosure of financial
• The Fairness or Justice Approach – an information.73 Therefore, creative accounting and
ethical behavior that treats people equally misleading financial analysis would violate desirable
or fairly. values such as honesty and integrity and may cause
• The Common Good Approach – an ethical harm to investors or creditors who are affected by
behavior that is based on the benefit of all them. Ethical dilemmas occur in every functional
in a community and welfare of everyone. area of a business including human resources, sales
• The Virtue Approach – an ethical behavior and marketing, production and others.
that is consistent with desirable values like
honesty, courage, generosity, tolerance,
fairness and integrity. Business or corporate ethics involve ethical
• The Rights Approach – an ethical behavior or unethical behaviors by employees in a
that respects the rights of those affected business environment.
such as the right to choose freely one’s own
choice.
Managerial ethics involve managers’

principles or standards of behavior in an
organization.
internet
https://www.sabanci.com/tr/sabanci-
toplulugu/is-etigi-kurallari/is-etigi-
kurallari/i-16 A situation where an employee’s personal interest
is at the cost of others in the company would result
in a conflict of interest. For example, a conflict of
An individual, whether as a manager, an interest arises when an employee uses confidential
employee or an owner in a business should be able information that is collected by the company for
to determine the most appropriate moral approach financial gains. Also a bribe, favoritism, nepotism
or approaches based on all the facts involving and self-dealing are considered unethical (and in
the decisions to be made. The more difficult some cases, such as bribes, are illegal). Self-dealing by
the decisions, the more we should also rely on an employee is the conduct that consists of taking
discussion with others about the dilemma, along advantage of his or her position in a transaction
with careful exploration of the problem and the rather than for the interests of the company.
situational context.71
A situation where an employee’s personal

interest is at the cost of others in the company
would result in a conflict of interest.
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Corporate Social Responsibility

A code of ethics is a formal document that Corporate social responsibility (CSR) is the
companies use to guide employees to conduct concerns and obligations businesses have for the
business fairly, honestly and with integrity. welfare of their stakeholders and the larger society.
CSR goes beyond being ethical, beyond what is
required by law and beyond the pursuit of profits.
One of the best ways for a company to support
The obligations of businesses are often described by
ethical behavior is by the actions of its top
management. Top managers must act ethically, their commitments to various stakeholders such as
make ethical decisions and support ethical standards customers, employees, investors and communities.
for all employees. Companies can encourage ethical We will discuss CSR according to these major
behavior by establishing a code of ethics and by stakeholder groups.
instituting ethics programs. A code of ethics is
a formal document that companies use to guide
employees to conduct business fairly, honestly and Corporate social responsibility is the
with integrity. It often includes a firm mission, core concerns and obligations businesses have
principles and organizational values which identify for the welfare of their stakeholders and the
the firm’s expectations of all employees or specifies larger society.
behavioral requirements.
Upper management ethical CSR goes beyond being

principles and actions help ethical, beyond what
direct lower level managers’ and is required by law and
employee’s decisions when facing beyond the pursuit of
ethical dilemmas. profits.
A code of ethics creates an ethical awareness

and consistent ethical standards for all employees. CSR and consumers
For example, Iş Bank which is the leading bank in A movement by individuals, groups, and
Turkey stated its values as:74 governments to put pressure on businesses to help
• Honest and trustworthy, protect consumer rights and interests is called
• Leading, pioneering and innovative, consumerism. The steady rise in consumerism in
• Customer oriented with a strong focus on Turkey has resulted in higher consumer protection
high quality, standards in order to meet the EU levels.75 The law
• Respectful to society, human rights and which came into force in 2014 concerns all kinds
environment, of consumer transactions and practices such as
• Transparent. protection from unfair business practices, defective
Moreover, Iş Bank has also formally adopted goods and availability of reliable information for
the Code of Banking Ethics published by the Bank consumers. In general, the purposes for consumer
Association of Turkey. protection focus on the health, security and
As people learn ethical behaviors through economic benefits of the consumer.
their experiences, businesses should encourage
employees by initiating ethics programs such
as ethics training. Such programs enable
A movement by individuals, groups, and
employees to recognize ethical dilemmas and have
opportunities to practice applying ethical values to governments to put pressure on businesses
those problems or situations. Further, companies to help protect consumer rights and interests
can have ethics help lines to discuss and to report is called consumerism.
ethical concerns and situations they or others in
the company face at work.
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1
CSR and the environment

Price fixing or collusion is an agreement The environment and environmental protection
among competitors in the same industry to have become major issues not only for governments
increase or decrease prices to interfere with but also for businesses around the world as well.
competition. The public, concerned governments and socially
responsible businesses have led significant efforts to
tackle global warming, to reduce pollution and to
An important issue for consumers concerns
fight resource depletion. Pollution is the process of
unfair pricing of goods or services such as price
injecting harmful substances into the environment
fixing. Price fixing or collusion is an agreement
among competitors in the same industry to increase and making land, water, air or other parts of the
or decrease prices to interfere with competition. environment dirty, unsafe or unsuitable to use.79
The agreement may only be in verbal terms or
even inferred from conduct among competitors
(i.e. when one firm decreases/increases its prices, Pollution is the process of injecting harmful
other firms follow). As mentioned earlier, the substances into the environment.
Turkish Competition Authority has an obligation to
prevent and to enforce business practices that distort or
interfere with competitive conditions in the economy. Land pollution. Land can be polluted by
industrial waste from businesses and by household
garbage. Industrial waste is composed of waste
CSR and employees
materials after production which can be hazardous
The basis for CSR toward employees concerns to human health and the environment, for example,
human resources activities such as recruiting, hazardous waste from chemical production. The
hiring, training, promoting and compensating.76 A issue is to prevent this hazardous waste before it
company has obligations to fairly reward employees causes problems and also to clean up afterwards.
for their hard work, to have a chance for promotion Toxic waste disposal is a preventive response,
while being treated with respect. Governments along with improvement to production processes
should take an active role in preventing unjust in order to decrease the amount of toxic waste.
business practices and in supporting employees. Another method is recycling which is the process
Common issues in Turkey involve contributions to of converting waste materials into new and useful
social security and unemployment social security materials and objects. It reduces the amount of
fund, overtime pay, work week, minimum wage, waste, conserves natural resources and help sustain
annual leaves, and termination of employment.77 the environment for future generations.80 Local
Workers also have the rights to form unions, to and national governments play important roles in
become members and to freely withdraw from preventing pollution through laws and regulations
the memberships. Another employee related issue while they can also set examples as illustrate below.
concerns the whistleblower, an employee who
reports information or activity that is illegal or
unethical within the company; for example, activities Recycling is the process of converting waste
that harm the environment and other violations materials into new and useful materials and
of laws or regulations. Companies may retaliate objects.
against whistleblowers by demoting or firing them.
In the U.S., there are various whistleblower protection
programs to protect employees from retaliation as firms
cannot take adverse action against them.78
Whistleblower refers to an employee who

reports information or activity that is illegal
or unethical within the company.
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1
“In 2016, a large German city has banned single- been working to improve the air quality management in
serve coffee pods in all government-run buildings and Turkey. Laws and legislation must be put in place and
institutions across the city. Coffee pods are expensive enforced on businesses as air pollution (and all other
and they are not good for the environment as there is forms of pollution) has serious adverse impacts on
a lot of packaging for just a little bit of coffee. They people’s health, the environment and the economy.
compose of plastic and aluminum therefore, are very
difficult to recycle effectively. Many items that are the
CSR and investors
sources of environmental pollution like plastic water
bottles are also banned. The city sends out an important Business managers are responsible to investors
signal for individuals and businesses to take a look at and stockholders by providing them fair return
the consequences of their purchasing decisions.” on their investments. Managers need to maintain
a responsible use of the firms’ financial resources.
Irresponsible use of financial resources lowers
shareholders’ earnings and dividends. Excessive
salaries, bonuses and other benefits to managers are
signs of financial mismanagement. These actions
may not be illegal but probably unethical.
Managers need to maintain complete and
accurate financial records and follow proper
accounting standards and procedures. Further, they
should provide accurate and appropriate information
to investors about the health, future growth and
Source: Doezema, M. (March 12, 2016). A German City
profitability of the company. Misrepresentation of
Has Banned Single-Serve Coffee Pods and Plastic Water
financial situations such as inflated profits or hidden
Bottles. Retrieved from https://news.vice.com/article/a-
losses are also unethical. Managers should also avoid
german-city-has-banned-single-serve-coffee-pods-and-
other potential legal issues such as manipulation of
plastic-water-bottles
stock prices and insider trading. Insider trading
involves the use of private or special company
information for financial gains, often in the form of
Water pollution. Water pollution is caused by buying or selling of stocks.
chemicals or dangerous foreign substances which
For example, if a manager has confidential
are introduced to water such as sewage, pesticides
and fertilizers and metals.81 Water pollution is a information that the firm’s major client is not renewing
significant problem in the world as many people the contract and that its stock price will significantly
do not have access to clean fresh water supply. drop when this information becomes public and
Streams, lakes, rivers, waterways and oceans can the manager goes ahead and sells his shares before
be contaminated and have large effects on their the information becomes public knowledge to avoid
ecosystem such as plants, animals and other losses. Since the manager has inside information and
organisms that live in the water. benefits from it then this is insider trading which is
Air pollution. Air pollution occurs when several not only unethical but also illegal.
elements that are not normally in the air are released
into the air to lower air quality; particles (e.g. from
burning fuels) and gases (e.g. sulfur dioxide and carbon
monoxide). Air pollution is an important risk factor Insider trading involves the use of private
for health worldwide. According to a 2015 study, Turkey or special company information for
had one of the highest rates of premature deaths due to financial gains.
air pollution in Europe.82 Governmental agencies such
as the Ministry of Environment and Urbanization have
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1
“Many people need to walk around with face masks associated with firms that have seen increasing
on, as air pollution worsen. For several weeks in involvement with global business activities. Firms
January of 2017, Northern China has been covered intend to benefit as well as positively impact the
in a thick toxic smog, one of the worst episodes of air environment or communities they belong to.
pollution the country has seen, which affected over 460 Benefits include cost reduction and enhancing
million people.83 It was estimated that air pollution relationships with various external stakeholders.
has killed an average of 4,000 people a day in China, Firms can concentrate on three CSR strategies:
mostly from coal-burning use.” 84 operations-driven, compliance-driven, and
customer-driven: 87
• Operations-driven – Firms can engage

in actions that would directly influence
the competitive nature of the goods and
services with this strategy. For example,
a manufacturing firm can improve its
operational efficiency by using new technology
solutions to improve production processes
(hence lower costs), to lower production waste
of both hazardous and non-hazardous waste,
and to decrease materials and energy usage.
All these would minimize negative impacts
Approaches to CSR on the environment while improving its
Traditionally, companies often view social operational efficiency and lowering costs.
responsibility as philanthropic activities involve
giving money (to causes like education, charitable,
and humanitarian), time (such as employee Philanthropic activities involve giving
community service projects), and goods and services money (to causes like education, charitable
donations by businesses. Although businesses and humanitarian), time (such as employee
may not receive direct benefits for philanthropy, community service projects), and goods and
many see it as a good thing to do as all firms are services donations by businesses.
part of the community/society. Philanthropy can
enhance a firm’s reputation and brand awareness;
i.e. improving its social capital or goodwill • Compliance-driven – Firms can focus
within their communities. For privately held on achieving high levels of compliance
corporations, philanthropic activities are usually required under a country’s laws and
determined by their owners. On the other hand, regulations with this strategy. The
boards of directors and executive management requirements are aimed at issues such as
influence organizations’ philanthropic priorities.85 the environment, health, work safety and
Governments can encourage philanthropy using product safety. For example, factories should
tax incentives (such as tax deductible contributions not only follow minimum requirements
to social causes) or by instituting a mandate. For for workers’ safety and health regulations.
example, the Companies Act (2013) by the Indian They can further implement training and
government mandates that large profitable Indian education to update workers’ skills and offer
firms must contribute at least 2% of average net supplementary health plan which exceed the
profits from the 3 preceding years to CSR activities.86 minimum compliance requirements.
Instead of generic philanthropy, companies that • Customer-driven – Firms can focus on
align CSR initiatives with business objectives and its customers, employees (as internal
overall business strategy follow a more strategic customers) and communities to promote
approach to CSR. A firm’s strategic CSR is often their environmental and social initiatives
38
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with this strategy. A firm that has a significant footprint in its community should especially
emphasize its involvement to positively impact the community such as providing fair wages,
producing quality and affordable goods and services, and supporting other activities to improve
living conditions locally.
Table 1.13 summarize the three strategies. CSR ultimately reflects the companies’ values, ethical
standards, and their relationship to the communities they belong to and depend upon. Strategically
managing CSR activities enables firms to maximize benefits to society and the environment and at the
same time create value for all the stakeholders. Many businesses large and small, should consider socially
responsible actions and behavior not only because they are the right things to do. Potential advantages to
firms can be seen in several areas: 88
• Create new business or market opportunities
• Increase a company’s social standing, social capital, brand reputation and brand awareness
• Improve a company’s environmental impact and operational efficiency
• Increase employees’ motivation
• Reduce operating costs
• Protect important resources that a company depends on.
Table 1.13 Strategic Approaches to CSR
Operations-driven Compliance-driven Customer-driven

Firms can engage in actions that Firms can focus on achieving Firms can focus on its customers,
would directly influence the high levels of compliance employees and communities to
competitive nature of the goods requirements under a country’s promote their environmental and
and services with this strategy. laws and regulations with this social initiatives with this strategy.
strategy.
Source: Which Corporate Social Responsibility Strategy is Right for Your Company? Retrieved from http://hr.blr.com/
whitepaper/hr-administration/workplace-ethics/
5
Discuss ethical behaviors and
social responsibility in small
businesses.
The “In Practice” section below illustrates a case for CSR practices by a large successful company in Turkey
that reflects the topics discussed in this section.
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1
Further Reading
A Journey of a Locally Operated Small entered into more than 30 countries around
Business to Become a Domestic and Global the world with its existing product lines; the
Market Leader in its Sector majority of the business currently comes from the
Akarmak, founded in 1990 in Eskişehir European market. It has now over 120 employees
was a typical small local business started by and has become a medium-sized enterprise. The
two brothers and their relatives as a partnership success is due in large part to management and
service business offering small machinery the technical competences of the owners to
maintenance services with few employees. Many organically grow by penetrating new markets.
people who pursue these kinds of enterprises do Akarmak has become the market leader
not necessarily want to grow much beyond their domestically and continued to expand abroad.
capacity to manage them. Though the owners The firm is not competing directly with the
have independence by working for themselves low-cost Asian-based companies as operating
and achieved some level of financial security, cost has continued to rise in Turkey. Instead,
after 10 years in business, there was a change in over time the company has gained expertise by
the partnership. Akarmak owners then aspired to hiring highly qualifed engineers to efficiently
grow beyond their current situation. produce high quality products with certifications
They were able to identify a new product of international standards in product quality.
offering and got into an expanding business of The success (or failure) of businesses therefore
tire retreading which is a niche market in which depends on several factors such as knowing who
consumer demand was not met. In addition are the customers, where they are located, and
to the tire retreading machinery and turnkey understanding the competitors and competition.
plant solutions, Akarmak has developed other This course should help readers build deeper
highly engineered and technological machinery understanding of business and its various business
of autoclaves/pressure vessels and medical functions discussed in the remaining chapters of
waste sterilization systems. The autoclaves are this text.
widely used in various industries including
glass, composite, building material, rubber, etc. Source: Interview with a founding member of
The company took advantage of the distinctive Akarmak (May 8, 2017). http://www.akarmak.
competencies of small businesses by identifying com.tr; http://www.autoclave.com.tr
new market niches. Generally, small businesses
have competence in three areas: an ability to
identify new niches in established markets or
industries, an ability to identify new markets, and
an ability to quickly exploit a new opportunity.89
Small businesses like Akarmak have the flexibility
and responsiveness to customers, unlike large
firms which may not have the ability to make
quick decisions, or take risks.
Akarmak continued to grow and successfully
entered into new related markets. From being a
small machinery maintenance service firm with
few employees, the firm started production
facilities to meet growing demand. During the
past ten years, Akarmak has also aggressively
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In Practice
Doing Well by Doing Good low cost (economic benefit) and also help reduce
Eti Company was founded in 1962 by Mr. traffic congestion and therefore, air pollution.
Firuz Kanatlı in Eskişehir, Turkey. It is one of the
largest firms in its sector (biscuit and chocolate sector
or baked goods industry) with a reported 2.3 billion
TL in net sales, ranking as the 54th largest company
in Turkey in 2015.90 Recent consumer surveys of
the brand indicate that Eti is a respected and leading Source: http://www.etietieti.com/eti-sari-
brand of Turkey.91 Ethical behaviors and social bisiklet-projesi
responsibilities on the part of most companies start
at the top level. The following is a quote from the Eti’s philanthropic activities for local
current Chairman of the Board of Directors at Eti community include opening of high schools
Companies, Mr. Firuzhan Kanatlı:92 for thousands of young people, supporting the
“As Eti Companies, we are aware of our Archeology Museum, and the Aquarium in
responsibilities to the society. For many years, we have Eskisehir among others. On the operational
endeavored to fulfill our duties towards our country side, CSR practices guide Eti business processes
and the society through numerouse social responsibility and procedures such as in its manufacturing
projects that we have directly undertaken or supported. operations which also include many of its supply
We have adopted a social responsibility understanding chain partners. For example, multiyear projects with
of investing in our children who will play a key role in the World Wildlife Fund (WWF-Turkey) has been
building a bright future for our country; therefore we aimed at Eti’s supply chain partners like farmers.
have developed many projects for them such as “Yellow Projects include modernization of farming methods,
Bicycle”, “Cultural Ambassadors”, “Children’s Theater”, preservation of water sources and agricultural land
and workedwith Civil Society Organizations in order use, and adaptation to future climate changes.
to maximize the social benefit. I believe wholeheartedly Internally, production operational targets and
that we expand our children’s horizons and invest in logistics are made to be above and beyond
the future of our country with these projects. One of governmental regulations including reduction of
the most important points for us in social responsibility energy usage, waste and carbon footprint.
projects is continuity. It gives us happiness to know that As a result of the firm’s commitment to
our long-term work will have lasting effects on future CSR, the company’s definition of success is more
generations....” than creating value for internal stakeholders. To
With strong leadership in CSR practices on be successful, a company should define its role
the part of its Board of Directors (including the and position in a society by carefully manage its
owners) and top management, Eti has continued impact on the people, the environment and the
to not only delight customers with the products economy. A part of every employee’s job is to
but also to involve with several social responsibility understand the firm’s socially responsible policies
projects. For example, the Yellow Bicycle project and actions, i.e. to make CSR and business ethics
was started to encourage more active life style based parts of its organizational culture.
on physical activities which is very important to
Discuss:
the protection and development of physical and
mental health of children and adults alike. The 1) Which CSR approaches does Eti follow? Explain.
use of bicycles is not only for health reasons, it is 2) How can external stakeholders such as local
to bring more people and family members together and national governments, consumers and
and have fun.93 Additionally, bicycles are used for communities encourage ethical and social
transportation around the world because of the responsibility behaviors by businesses?
41
1
LO 1 Defining the basics of business, the benefit of business,

the types of business, and functional areas of a business
A business is any organization that provides goods or services

to satisfy customers’ needs and wants for a profit. Profits are
earned when a firm gets larger revenues than expenses. An
individual who starts a business for profits and risks losses is
called an entrepreneur. Profits generated also benefit various
stakeholders who have a stake in or are affected by the
Summary
decisions and actions made by an organization such as investors,

employees and customers. In a market economy like in Turkey,
consumers have choices of what to buy and whom to buy from.
Therefore, there is a competition among firms for the same
customer group. Businesses contribute to society in several
ways such as generate income for owners and wages and salaries
for employees. There are four different types of business: local,
regional, national, and international or multinational. The
types depend on which geographic markets a business serve.
Major functions or activities in a typical business are human
resources, marketing and sales, production or manufacturing,
finance and accounting, and research and development. Keep
in mind that large firms would include all of these areas and
probably more such as information technology and legal
functions. Small firms may not formally have all of those
major functions.
LO 2 Describing the external business environments and

how they affect organizations
All businesses large and small, regardless of where they are

located must operate within the external environment. There
are six major forces or dimensions in the business environment.
The economic environment where the conditions in a
country’s economy affect how a firm must do business. The
technological environment includes physical equipment and
machines, knowledge and work methods which affects the
ways that companies create value for their stakeholders. The
social environment refers to trends and forces in a society such
as demographic, customs and values characteristics where a
business must function and operate. The legal environment
affects businesses through the laws and regulations imposed
on them. The market environment refers to the environment
where a firm conducts its operations and where revenues are
obtained. The global environment refers to the global forces
that affect a business; which has seen increasing importance as
a result of globalization.
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Defining the basics of economics, explaining the different economic

LO 3 systems and supply and demand concepts, and identifying the degrees
of market competition and major economic indicators
Economics can be broadly defined as the study of how people

use resources or the study of decision-making. Resources are
required to produce goods and services to meet customers’
needs and wants. These resources or the factors of production
are: labor, natural and physical resources, financial capital,
entrepreneurship, and information resources. An economic
Summary
system is a country’s organized way for allocation of its resources
among its citizens. It has three major categories as planned
economy, free-market economy, and mixed-market economy
The supply of a particular product refers to the quantity of the
product available for purchase at various prices at any given time.
The law of supply states that sellers will offer more of a product
as price increases and vice versa. The demand of a particular
product refers to the amount of the product customers will buy
at various prices at a given time. The law of demand states that
buyers will purchase more of a product as price decreases and vice
versa. The market price is the profit maximizing price in which
the quantity of goods supplied is equal to the quantity of goods
demanded; there is no shortage or surplus. There are four degrees
of competition in a free-market economy: pure competition,
monopolistic competition; oligopoly, and monopoly.
A business cycle refers to short term fluctuations in
general economic activities. Businesses should know whether
an economic system is expanding or contracting. The primary
measure of growth (economic expansion) is gross domestic
product (GDP). GDP refers to the total value of all goods
and services during a given period through its use of domestic
factors of production. GDP per capita is GDP divided by the
total population and is a reflection of the citizens’ standard of
living. Standard of living is the value of all goods and services
produced in an economic system that people can purchase.
Real GDP is GDP adjusted for price changes which shows
real economic growth rate, expressed as a percentage rate of
change of real GDP from one year to the next. Recession is a
significant period of weakening in economic activities in which
real GDP drops. Inflation occurs when there is a widespread
price increase throughout an economy.
43
1
Defining small business and explain entrepreneurship, outlining issues

LO 4 involved with starting a new business, and explaining various types of
business ownership
A small business is independently owned and operated, and

not dominant in its field of operation. In Turkey, a firm with less
than 50 total employees or net sales of less than 8 million TL
is considered small sized. Small businesses are very important
to most economies as they are the major source of new jobs.
They are more innovative and flexible and more responsive
Summary
to customers. They also contribute to other businesses (e.g.

as suppliers). In Turkey, 99.8% of all enterprises are made up
of SMEs. Entrepreneurs start small businesses, new ventures
and startups. Small businesses are seen as the engine of job
creation and income growth with several advantages. However,
their failure rate is also relatively high. To increase a chance for
success, an entrepreneur should come up with a comprehensive
business plan which defines the vision, the strategy and the
implementation for the new business.
There are several factors to consider before deciding which
forms of ownership that is best for entrepreneurs such as liability
and tax issues, management and control issues. There are three
major forms of legal ownership: A sole proprietorship is a
business owned by one person, therefore is suitable for small
businesses. A partnership is a non-corporate business that is
owned by two or more people. A general partnership (called
a collective company in Turkey) is a partnership where partners
can invest equal or unequal sum of money; all partners are
equally liable for its business debt and obligation. A limited
partnership on the other hand, can have active partners (called
general partners) who manage the business and have unlimited
liability; and dormant partners (called silent partners) without
a role in management but have limited liability. In Turkey, a
limited partnership is the same as a commandite company.
A corporation is considered a legal entity with property
rights and obligation. This form of legal ownership can be
established under a Joint Stock Company (JSC), a Limited
Liability Company (LLC) and a Cooperative Company. A
corporative form of business allows individual, companies,
municipalities and other associations to operate commercial
activities as a legal entity. This form is popular in the agriculture
sector. Other issues important to corporate ownership include
strategic alliances and joint ventures, mergers and acquisitions.
In a strategic alliance, two or more companies agree to pursue
common goals. An arrangement where partner firms share
ownership of a new enterprise is called a joint venture. A
merger occurs when two firms combine to form a new company
while an acquisition happens when one firm buys another firm
outright.
44
1
Defining business ethics and discuss corporate social responsibility

LO 5 with various approaches for major stakeholders
Ethics are a system of moral principles that govern a person’s

behavior. They are based on personal beliefs within the social
context. Business or corporate ethics involve ethical or
unethical behaviors by employees in a business environment.
Managerial ethics involve managers’ principles or standards of
behavior in an organization. A situation where an employee’s
Summary
personal interest is at the cost of others in the company would
resulted in a conflict of interest. Firms can support ethical
behaviors by the actions of its top management. Companies can
established a code of conduct which is a formal document that
companies use to guide employees to conduct business fairly,
honestly and with integrity.
Corporate social responsibility (CSR) is the concerns and
obligation businesses have for the welfare of the stakeholders
and for the larger society. CSR and consumers often involve
with consumerism which is a movement by individuals, groups
and governments to put pressure on businesses to help protect
consumer rights and interests. CSR and employees concerns with
human resources activities such as recruiting, hiring, training,
promoting and compensating. CSR and the environment
involves with efforts to tackles pollution by businesses.
Pollution is the process of injecting harmful substances into the
environment and making land, water, air or other parts of the
environment dirty, unsafe or unsuitable to use.
Companies traditionally view social responsibility as
philanthropic activities that involve giving money, time, and
goods and services donations. Governments can encourage
philanthropy using tax incentives. Firms concentrate on three
CSR strategies: operations-driven CSR, compliance-driven
CSR, and customer-driven CSR.
45
1
1 What is the term used to describe the diffe- 6 A franchise agreement is a popular way to
rence between revenues and expenses? start a business because;
a. Sales a. It is the least expensive way.
b. Asset b. The franchisee retains considerable control.
Test yourself
c. Interest c. The franchisee can quickly change with the bu-

d. Profit siness environment.
e. Income d. The franchisor offers expertise such as marke-
ting and management skills.
2 Competition among businesses is desirable e. There is no start-up costs.
because it contributes to ____________.
7 The market price reflects__________.
a. Profits
b. Price a. A shortage
c. Innovation b. The profit-maximizing price
d. Sales c. A surplus
e. All of the above d. The law of supply
e. The law of demand
3 The conditions in a country’s financial market 8 A source of ethical standard that is ba-
are a part of a company’s __________environment.
sed on the benefit of all in a community is cal-
a. Regulatory led________.
b. Social a. The common good approach
c. Market b. The strategic approach
d. Economic c. The virtue approach
e. Political d. The rights approach
e. The justice approach
4 Which of the following is an element of the
market environment where each business operates? 9 An advantage of a limited partnership over a
a. Product innovation general partnership is
b. Environmental regulations a. That partners do not incur debt and obligation
c. Competitors from the firm’s operation.
d. Demographic characteristics b. That active partners do not need to invest in the
e. International trade agreements firm.
c. That all partners are liable for all debt and obli-
gation.
5 In a ________, companies can decide what d. That partners are liable only for the amount of
to produce at what price and whom to hire.
investment contributions.
a. Planned economy e. There is no advantage.
b. Socialist economy
c. Privatization process 10 _________involves giving money, time and
d. Communist economy goods and services donations.
e. Free-market economy a. Philanthropy
b. Whistleblower
c. Insider trading
d. Strategic CSR
e. Consumerism
46
1
1. d If your answer is incorrect, review “The 6. d If your answer is incorrect, review “The
definition of a business and profits”. franchising system”.
Answers for “Test yourself”

If your answer is incorrect, review “The
2. c 7. b If your answer is incorrect, review “The
reasons competition is desirable for
market or equilibrium price”.
businesses”.
3. d If your answer is incorrect, review “The 8. a If your answer is incorrect, review “The
economic environment”. sources of ethical standard”.
4. c If your answer is incorrect, review “The 9. d If your answer is incorrect, review

market environment”. “Partnerships”.
5. e If your answer is incorrect, review “The 10. a If your answer is incorrect, review
free-market economy”. “Approaches to CSR”.
Identify and describe the benefits of businesses that produces non-alcoholic

beverages which you can purchase from a grocery store; including the
benefits you receive from the company’s marketing function.
Suggested answers for “Your turn”

Non-alcoholic beverage industry produces ready to drink beverages such as
soda drinks, sparking water, iced tea, fruit juices etc. that consumers can buy
from grocery stores. Businesses produce various types of products that we can
buy from one place, in convenient packages that last for many months, and
your turn 1 at reasonable prices. Each type or drink category, for example fruit juices, is
offered in various flavors such as apple, orange, grape and various mixes. There
are also choices for consumers to buy from different companies. Marketing
function of those firms develop products to fulfil consumers’ wants and taste;
distribute products to many stores we can buy from easily; communicate to
consumers through advertising and informing about the products’ features.
Discuss elements of the technological environment that are

important to a large manufacturing company.
Technology for a manufacturing firm includes physical equipment, machines,

computers, work methods, techniques and knowledge used in the company. A
large and modern manufacturing firm uses modern production technologies
your turn 2 and computer technology components in order to produce quality products
while minimizing costs. That is, technology should lead to improvements in
the firm’s production processes. This way, it can be more competitive in the
marketplace. The company can also use technology to make products that are
unique or differentiate from their competitors.
47
1
Discuss how current economic indicators in

your country affect employees.
Important current economic indicators that affect employees are inflation,

unemployment and economic downturn (low real growth rate) in the economy.
Inflation occurs when there is a widespread price increase throughout the
economy. This means that buying power drops especially when wages/salaries
stagnate in recent years. Therefore, employees can buy less goods and services
your turn 3
for their money. Due to the downturn in the business cycle, businesses may
cut back their workforce. Therefore, some employees will lose their jobs and
people entering the workforce may not be able to find work. People have
less money to spend which may in turn, negatively affect businesses in the
economy.
Compare and contrast different entry options when starting

a new business.
There are three options to start a new business: to create from scratch, to buy
an existing business or to buy a franchising system. Starting a new business
from scratch is risky as the business depends on correct estimations of business
prospects and potentials by the entrepreneur. For example, the owner may
overestimate the number of potential customers or underestimate initial startup and
operating costs. Buying existing business is therefore less risky as the business
your turn 4 should already have a customer base, employees and other support networks like
suppliers with business systems already in place. However, successful existing
businesses may be expensive to purchase. Also, any negative effects from the
previous owners’ actions can decrease the chance of future success. Buying a
franchising system can also be expensive especially the well-known international
ones. However, franchisees would get ready-made and viable business systems
from the franchisors along with other supporting assistance.
Discuss ethical behaviors and social responsibility in small

businesses.
Although the focus of corporate social responsibility is on large businesses

including multinational corporations, small businesses should also participate.
Small businesses are located everywhere and in many locations there exists only
small businesses. They are also much closer to customers as they have higher
interactions with them and often with the local communities where they are
located. Therefore, the issues of ethical and CSR that apply to large firms also
your turn 5 apply to small firms. The difference would be the scale and the scope of the
issues. Also the issues of ethics primarily rest on individuals in a company so
the size of the firm is not critical. Top management in large firms and owners
in small firms would have in large part to do with how employees behave and
how to deal with ethical problems. For large firms, ethical and CSR can be
institutionalized while in small firms, it can be less formal.
48
1
endnotes
1Solomon, M. R., Poatsy, M. A., & Martin, K. (2016). 20The Legal Framework for Privatization in Turkey
Better Business. Pearson Education Limited, pp. – Government, Public Sector (March 2010).
46-49. Retrieved from http://www.mondaq.com
2What is Globalization? Retrieved from http://www. 21Duopoly – Wikipedia. Retrieved from https://
investopedia.com wwwen.m.wikipedia.org/wiki/duopoly
3American Marketing Association. Retrieved from 22Turkish Competitive Authority, op. cit.
http://www.ama.org/about-ama/marketing- 23Gross Domestic Product (GDP). Retrieved from data.
definition
worldbank.org/indicator
4Bovee, C. L. & Thill, J.V. (2017). Business in Action
24Real Economic Growth Rate. Retrieved from
(8th ed.). Pearson Education Limited, pp. 56-59.
h t t p : / / w w w. i n v e s t o p e d i a . c o m / t e r m s / r /
5Chaffey, D. (April 11, 2017). Mobile Share of Online realeconomicrate.asp
Time Percent 2017 – US, UK, China, Canada, Mexico. 25Consumer Price Index – CPI. Retrieved from
Retrieved from http://www.smartmsignts.com
h t t p : / / w w w. i n v e s t o p e d i a . c o m / t e r m s / c /
6E-Commerce – Turkey Statista Market Forecast. consumerpriceindex.asp
Retrieved from https://www.statista.com/ 26Ebert, op. cit., p. 56.
outlook/turkey
27Solomon, op. cit., pp. 46-49.
7Demographics – Invest in Turkey. Retrieved from
http://www.invest.gov.tr/ 28Unemployment. Retrieved from http://www.
8Turkish investopedia.com/terms/u/unemployment.asp
Competition Authority. Retrieved from
http://www.rekabet.gov.tr/...../pages/turkish- 29Bovee, op. cit., pp. 85-87.
competition-authority 30Weil, D. N. The Concise Encyclopedia of Economics
9Dias, L. P. & Shah, A. J. (2009). Introduction to Fiscal Policy. Retrieved from http://www.econlib.
Business. McGraw-Hill Higher Education, pp. org/library/Enc/FiscalPolicy.html
22-23. 31Monetary Policy. Retrieved from http://
10Bowler, T. (January 19, 2015). Falling oil prices: w w w. t c m b . g o v. t r / w p s / w c m / c o n n e c t /
Who are the Winners and Losers? Retrieved from TCMB+EN/TCMB+EN/Main+Menu/
http://bbc.co.uk MONETARY+POLICY
11What is Economics? – American Economic 32Definition of Money Supply. Retrieved from http://
Association. Retrieved from http://www.aeaweb. http://economictimes.indiatimes.com/definition/
org/students/what-is-economics money-supply
12Crowdfunding. Retrieved from http://www. 33SmallBusiness Size Standard. Retrieved from http://
investopedia.com www.sba.gov/size
13Amazon Startup Story. Retrieved from http://www. 34Ibid.
fundable.com/startup-stories/ 35What is an SME? Retrieved from https://ec.europa.
14The Forbes World’s Most Innovative Companies. eu/growth/smes/business-friendly-environment/
Retrieved from http://www.forbes.com/ sme-definition_en
15Ibid. 36Definition for SMEs Broadened (November 5, 2012).
16Pride, W. M., Hughes, R. J., & Kapoor, J. R. (2009). Retrieved from http://www.hurriyetdailynews.
com/definition-for-smes-broadened.asp
Introduction to Business. Cengage Learning, p. 15.
37Small Business and the Economy. Retrieved from
17Market – Investopedia. Retrieved from http://www.
http://sbecouncil.org/about-us/facts-and-data/
investopedia.com/terms/market
38Definition for SMEs Broadened, op. cit.
18Ebert, R. J. & Griffin, R. W. (2017). Business Essentials
(11th ed.). Pearson Education Limited, p. 50. 39FAQ (2014). Retrieved from http://www.sba.gov/
19Dias, advocacy/.../FAQ-March-2014.pdf
op. cit., p.53.
49
1
40Small and Medium Sized Enterprises Statistics, 62India Infoline News Service – Mumbai. Retrieved
2016. Retrieved from http://www.turkstat.gov.tr/ from http://www.indiainfoline.com/article/news/
PreHaberBultenleri ICICI-bank-and-vodafone-india-announces-
41Principles strategic-alliances-to-launch-m-pesa
of Entrepreneurship. U.S. Department
of State, Bureau of International Information 63Articles of Corporation. Retrieved from http://www.
Programs, Retrieved from http://www.ait-org. fordotosan.com.tr/en/articles-of-corporation.htm
tw/.../docs/enterp.pdf 64Fortune 500 – Turkey. Retrieved from http://www.
42Smith, J. (October 22, 2013). How to Keep Your fortuneturkey.com/fortune500
Entrepreneurial Spirit Alive as the Company You 65Ruesink, M. (September 28, 2015). Top Corporate
Work for Grows. Retrieved from http://www.
Mergers: The Good, The Bad, & The Ugly. Retrieved
forbes.com/sites/jacquelynsmith/2013
from http://www.rasmussen.edu/degrees/
43Principles of Entrepreneurship, op. cit. business/blog/best-and-worst-corporate-mergers/
44Tracy, M. (May 1, 2013). The State of Entrepreneurship 66Chen, L. (June 13, 2016). These Are the 12 Biggest
in Turkey. Wilson Center for Social Entrepreneurship. Mergers and Acquisitions of 2016. Retrieved from
Retrieved from http://digitalcommons.pace.edu http://fortune.com/2016/.../12-biggest-mergers-
45Pride, and-acquisitions-of-2016
op. cit., p. 144.
67Annual Turkish M&A Review 2015 – Deloitte
46Survival Rates of Establishments, 1994-2015. Bureau
(2015). Retrieved from http://www2.deloitte.
of Labor Statistics. Retrieved from http://www.
com/content/deloitte/tr/documents/mergers-
bis.gov/bdm/entrepreneursips/
acquisitions/annual-turkish-ma-review=2015.pdf
47Franchise.
Retrieved from http://www.investopedia. 68Goedhart, M., Koller, T., & Wessels, D. (May
com/terms/f/franchise.asp
2017). The Six Types of Successful Acquisitions.
48Ibid. McKinsey&Company.
49Dussean, D. & Wilson, D. (2013). Introduction to 69Ebert, op. cit. p. 70.
Business (8th ed.). Pearson Education Limited, p. 70A Framework for Ethical Decision Making (August
169.
1, 2015). Retrieved from http://www.scu.edu/
50Types of Turkish Companies (April 4, 2017). Retrieved ethics/ethics-resources/ethical-decision-making/
from http://www.companyformationturkey.com a-framework-for-ethical-decision-making
51Establishing a Business in Turkey. Retrieved from 71Ibid.
http://www.invest.gov.tr/en-us/investmentguide/ 72Dussean, op. cit., p. 163.
establishingabusinessinTR.aspx
73Freedman, J. What is an “Ethical Issue” in Financial
52Types of Turkish Companies, op. cit.
Accounting? Retrieved from http://smallbusiness.
53Establishing a Business in Turkey, op. cit. chron.com
54Small and Medium Sized Enterprises Statistics, op. cit. 74Vision and Objectives. Retrieved from http://
55Ibid. www.isbank.com.tr/en/about-isbank/investor-
re l a t i o n s / c o r p o r a t e - ove r v i e w / c o r p o r a t e -
56Ibid. information/vision-and-objectives/
57Mavioğlu, O. Y. Turkey Forms of Doing Business. 75Lachman, G., Hamevi, H., & Mutaf, F. (May 30,
Retrieved from http://www.adnrdlaw.com/ 2014). Turkey: Enhanced Protection for Consumers:
turkey-forms-of-doing-business The New Turkish Consumer Protection Law.
58Ibid. Retrieved from http://www.mondaq.com/turkey/
consumer-law/
59Types of Turkish Companies, op. cit. 76Ebert, op. cit., p. 84.
60Branches and Liaison Offices of Foreign Companies in 77Bereket & Baltaci (January 7, 2016). Turkey:
Turkey. Retrieved from http://www.turkishlaborlaw.
Overview of Turkish Labour Code and Employment
com
in Turkey. Retrieved from http://www.mondaq.
61Ibid. com/turkey/employee+rights+labour+relations/
50
1
78WhistleblowerProtection Program. Retrieved from

http://www.whistleblowers.gov
79Bradford, A. (October 2015). Pollution Facts &
Types of Pollution. Retrieved from http://www.
livescience.com/22718-pollution-facts.html
80Recycling Basic. Retrieved from http://www.epa.gov/
recycle/recycling-basics
81Bradford, op. cit.
82Air Pollution and Health in Turkey: Facts, Figures and
Recommendations (February 2015). Retrieved from
http://env-health.org/img/pdf/150220-factsheet-
air-and-health-turkey.pdf
83Carney, M. China’s Air Pollution Crisis Shows No
Sign of Ending As Nation Fails To Lower Coal
Use. Retrieve form http:// http://www.abc.net.
au/news/2017-01-08/chinese-air-pollution-crisis-
caused-by-ongoing-coal-use/
84Morales, A. (August 13, 2015). China Air Pollution
Kills 4,000 People a Day: Researchers. Retrieved
from https://www.bloomberg.com/news/
articles/2015-08-13/china-air-pollution-kills-4-
000-people-a-day-researchers
85Rangan, K., Chase, L., & Karim, S. (April 2012).
Why Every Company Needs a CSR Strategy and
How to Build It. Working paper 12-088, Harvard
Business School.
86Jayakumar, T. (2016). From philanthropy to
strategic corporate sustainability: a case study in
India. Journal of Business Strategy, 37, pp. 39-50.
87Which Corporate Social Responsibility strategy is Right
for Your Company? Retrieved from http://hr.blr.
com/whitepaper/hr-administration/workplace-
ethics/
88Rangan, op. cit., p. 23.
89Ebert, op. cit., p. 112.
90Fortune 500-1015: Turkiye’nin En Büyük 500 Şirketi.
Retrieved from http://www.fortuneturkey.com
91Message from the Chairman of the Board. Retrieved
from http://www.etietieti.com/eti-message-from-
the-chairman-of-the-board/
92Ibid.
93Eti Yellow Bicycle. Retrieved from http://www.

etietieti.com/eti-yello-bicycle
51
Chapter 2 Business in the Global Context
Learning Outcomes
1 Understand basic aspects and important

issues that need to be considered for
international trade. 2 Explain power tactics and organizational
survival strategies in foreign markets.
3 Identify important and relative aspects of

management in different cultures.

International trade
International Trade Globalization
Power Tactics and Organizational Survival in Economies of scale
Foreign Markets Competitive strategies
Business in a Multi-Cultural Environment Joint ventures
Multinational corporations
Emerging markets
Cross-cultural differences
52
2
“...Advancement and victory field for us is in economics and trade.

If you appreciate this, you have to work a lot. Otherwise you cannot
persuade anybody even if you indicate that you are the owner of this
country....” Mustafa Kemal Atatürk / A speech in Mersin, 17. 03.
19231
It is evident from the relevant literature that firms show a tendency to access foreign markets via joint
ventures, mergers, acquisitions, and various types of trade agreements after reaching a certain organizati-
onal size. New specialized trade ventures may also be established to meet the export and import demands
of various groups. High profit potential of the emerging international markets may motivate local entrep-
reneurs to organize their business abroad. Becoming an international player may contribute to reputation,
power, legitimacy, and brand image of a company. International business environment comprises of tho-
usands of multinational corporations, different types of economic systems, restrictive regulations, various
cultural features, and changing competitive requirements. Therefore an entrepreneur who wants to expand
his business to international markets must be equipped with sufficient knowledge and skills to survive and
to compete in such a complex business context.
This chapter aims at defining necessary knowledge and skills that will be required to manage business
in global context. The topics such as globalization and trade, balance of trade, multinational organizations,
and emerging markets will be explained initially. Differences between local and international competiti-
on, legal and political barriers, export versus import, social and cross-cultural factors, and adaptation to
technological change will be discussed later. Dimensions of power tactics and organizational survival will
also be examined. Information regarding international trade agreements will be provided for the potential
readers. Finally, contingencies concerning management in a multi-cultural business environment are emp-
hasized at the end of the chapter.
INTERNATIONAL TRADE
Rapid developments during the recent years in communication and transportation technologies have
increased the tendency of firms to search for the low cost production alternatives around the world.2
Besides that, local firms had several opportunities for marketing their products globally after the free
trade agreements signed by the numerous countries during 90’s. Collapse of the Eastern Block has also
increased international trade possibilities and several new
markets have emerged in such countries which were in the
initial stages of adopting free market economy. The the- The theory of international trade suggests
ory of international trade suggests that increasing number that increasing number of countries
of countries participating in international trade serves to participating in international trade serves to
socio-economic expansion of these countries.3 Therefore socio-economic expansion of these countries.
local entrepreneurs have to find ways to expand their busi-
ness abroad. However, this is a challenging process due to
complex nature of the global business life.
A firm that is involved in international trade must cope with several factors:
• Role of state as a regulatory institution and level of state intervention in a target country have to
be analyzed carefully.
• Managing interactions among geographically dispersed firms is another aspect of involving global
business.4
• Marketing goods and services in different countries and working with local employees require
examining values, norms, beliefs and expectations of foreign cultures.
53
2
Business in the Global Context
• Working in a business ecosystem consists of big

and small players may also require development of
Entrepreneurs as well as managers who have
unique strategies for organizational survival.
an intention to carry out firm’s operations
• Entrepreneurs as well as managers who have an
abroad have to understand and examine the
intention to carry out firm’s operations abroad
concept of globalization carefully.
have to understand and examine the concept of
globalization carefully.
Globalization
Globalization refers to the integration of economic,
political, technological, social, and cultural systems aro-
und the world, also discussed in Chapter 1. Globalizati- Globalization differs than the
on differs than the internationalization process which is internationalization process which is
basically described as operating across national borders. basically operating across national borders.
The story of globalization begun with the tendency of first
industrial firms to market their goods to other countri-
es during the late 19th century.5 Modern organizations,
which emerged after the first industrial revolution to
Globalization begun with the tendency of
meet the consumption demands of the increasing urban
first industrial firms to market their goods
population, had to find ways for marketing excess suppli-
to other countries during the late 19th
es to other countries. Western economies that were in the
century.
initial phases of capitalism developed tools and regulati-
ons to meet international trade needs of their industries.
Some authors highlight that history of globalization over the past 100 years has revealed some realities:6
1. Context-specific political approach to economies has supported phases of globalization since the
beginning of globalization in late 19th century. Thus, intentions of countries to open-up their
borders and to engage in cross-border and international trade have been inconsistent.
2. Whenever countries have integrated their economies with the others, the speed of economic
growth within the participant countries was increased compared to the periods consisting of rare
trade interactions with other economies.
3. At the early stages of globalization pioneers and beneficiaries were the Western countries.
However, the advantages of globalization have shifted to the non-Western developing countries.
The dissolution of Soviet Union countries in the early 90’s was the mi-
lestone of globalization. The sharp difference in terms of organization of the
economic regime between East and West has begun to disappear after 90’s.
Low raw material and labor costs in the new economies attracted foreign The collapse of Eastern
investors. Western multinational corporations have shifted their production Block and the emergence of
operations to Eastern part of the world and they inevitably transferred tech- new independent countries
nical know-how to their new local partners. Western countries, which are in the early 90’s was the
the pioneers of globalization currently, deal with research and development milestone of globalization.
activities, strategic management and organization of international operati-
ons instead of production.
The story of globalization in Turkey is quite different from industrialized Western countries. The state
financed the industrialization processes through public
banks and import substitution policies that shaped the
economic activities until 1980s.7 Turkey had adopted a Import substitution is an economic policy
state-dependent and a closed economic regime during these which defends replacing foreign imports
years. The frequency of global interactions was very low. with domestic products.
However, liberal reform policies, which were adopted after
54
2
1980, have enabled global trade relations and the flow of foreign investments into the country (see Table
2.1). The decisions concerning liberalization of the economic regime in Turkey have involved the removal
of control from the exchange rates (and the creation of regulatory changes) to attract foreign investments
and liberalization of the financial system.8
Turkey has converted its economic strategy from a
protectionist model to a market oriented and an open
perspective during the recent decades.9 Turkish state has Turkish state has signed several agreements
signed several agreements concerning free trade between concerning free trade between European
European Union and Turkey after mid 90’s. Union and Turkey after mid 90’s.
The liberal reform policies

in Turkey were adopted
after 1980, thus have
enabled global trade
relations and flow of
foreign investments into
the country.
Table 2.1 1980–1990 Direct Foreign Investments to Turkey in USD (1980-1990)

Permitted Direct Investments Real Direct Investments
Annual Cumulative Annual Cumulative
1980 97.0 97.0 35.0 35.0
1981 337.5 434.5 141.0 176.0
1982 167.0 601.5 103.0 279.0
1983 102.7 704.2 87.0 366.0
1984 271.4 975.6 162.0 528.0
1985 234.5 1,210.1 158.0 686.0
1986 364.0 1,574.1 170.0 856.0
1987 536.5 2,110.6 171.0 1,027.0
1988 824.5 2,935.1 406.0 1,433.0
1989 1,470.5 4,405.6 738.0 2,171.0
1990 1,784.0 6,419.0 739.0 2,910.0
Source: Öniş, Z. (1999). State and Market: The Political Economy of Turkey in Comparative Perspective. Bogazici
University Press.
Various developing countries such as Turkey are still trying to integrate their economic systems with
the rest of the world to benefit from economic advancement opportunities brought by global trade.
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Balance of Trade
Balance of trade (BOT) is the difference between a country’s imports and its exports for a “given time
period”.10 BOT is an important indicator showing strength of a country’s economy. A country that ex-
ports more than it imports has a trade surplus. On the contrary, if a country imports more than it exports
has a trade deficit.
Balance of trade (BOT) is the difference

between a country’s imports and its exports
Balance of trade is an for a given time period.
important indicator
showing strength of a A country that exports more than it imports
country’s economy. has a trade surplus. On the contrary, if a
country imports more than it exports has a
trade deficit.
Figure 2.1 Balance of Trade (USD)
Source: The World Bank, 2014.
Figure 2.1 shows trade of balance ranking of countries. It is surprising to see that leading economies such as
United States, United Kingdom, France, Canada, Japan, and Australia have considerable levels of trade deficits.
Countries like China, Russia, Germany, Italy, and Nordic nations have trade surpluses. It will be quite normal
to expect high levels of trade surpluses from all developed countries. However,
this controversial situation reflects reality of today’s globalization. Developed
nations have shifted their production operations to abroad – especially to the Far
East- because of cost factors as mentioned before. Multinational corporations of
these countries have decided not to outsource only their production activities Industrialized Western
but also other functions such as customer services. This has contributed to the countries are dependant
export performance of the emerging Eastern countries but has increased imports on energy sources which
of the developed Western countries. The dependence of industrialized Western leads to trade deficits in
countries on energy sources is another factor which leads to trade deficits. these countries.
Therefore Russia, Iran, and Arabic countries as major energy suppliers of the
world have trade surpluses.
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Figure 2.2 Exports and Imports - Turkey

Turkey Export-Import
300,0
250,0
Billions USD
200,0
150,0
100,0
50,0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Export
73,5 85,5 107,3 132,0 102,1 113,9 134,9 152,5 151,8 157,6 143,8 142,6
(Billion USD)
Import
116,8 139,6 170,1 202, 140,9 185,5 240,8 236,5 251,7 242,2 207,2 198,6
(Billion USD)
Source: www. morevance.com/turkey_economy-review/
Despite holding a critical position between East and West in terms of

trade routes, the data in Figure 2.2 highlight that Turkey is among the 1
countries which have major trade deficits. Turkey needs raw materials, What are the realities of
energy sources, and technical know-how from other countries to sustain globalization?
its economic growth.
Multinational Corporations
A multinational corporation (MNC) is an organizational form, which has operations in more
than two countries and it consists of a central firm – usually in the home country- and branches or
subsidiaries in foreign countries.11 The convergence of customer demands, business routines, and socio-
demographic characteristics in many nations due to globalization have relatively enabled operations of
MNCs in foreign countries.12 MNCs vary in terms of the number of countries in which they operate.13
Today exceptionally large MNCs can operate in over 100 countries and may have hundreds of thousands
employees.
A multinational corporation (MNC) is an

organizational form, which has operations in
more than two countries, and it consists of a
central firm – usually in the home country- and
branches or subsidiaries in foreign countries.
Large MNCs face various problems due to organizational complexity. These organizations have to transfer the
knowledge concerning managerial principles, company policies, production techniques, brand image, company
specific institutionalized norms, and values to their branches located in numerous numbers of countries. Top-
level managers of these organizations also face the problem of finding the appropriate geographical design for
their companies. Figure 2.3 shows organizational design of Pepsi Company for international operations. As it
can be seen in the organizational chart Pepsi as an American company, has primarily focused on its operations
in North America and then in neighboring countries and overseas locations.
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Figure 2.3 Geographical Design of Pepsi Company
PepsiCo
PepsiCo PepsiCo
PepsiCo
Americas Americas
International
Food Beverage
(PI)
(PAF) (PAB)
Quaker Latin Pepsi Pepsi United Middle

Frito-Lay
Foods Americas Americas Bottling Kingdom East,
North
North Foods Bottling Group and Europe Africa, and
America
America (LAF) (PAB) (PBG) (UKEU) Asia
(FLNA)
(QFNA) (MEAA)
Source: https://www.slideshare.net/abdulhadi9998/pepsico-2014-presentation
The intention of Pepsi to give priority to organize business

operations in close and neighboring countries is a common tactic The initial steps towards internationalization
of MNCs. The initial steps towards internationalization of MNCs usually start with entering markets
of MNCs usually start with entering markets that are most that are most familiar to the home markets.
familiar to the home markets.14 It is easier to analyze and to
organize operations in close regions that are familiar in terms
of consumer behavior, economic system, trade regulations, and
logistics. Therefore it would be a good decision to decrease the risk for a MNC
to start with neighboring countries. International operations of
The critical success factors for MNCs emphasized in the literature are:15 MNCs in various countries
• Entering into complex markets to gain new knowledge. may help to transfer
knowledge gained through
• Recognition and reputation. the experiences into their
• Key strategic partnerships. country of origin.
Ali Haydar Bozkurt, CEO - Toyota, Turkey
International operations of MNCs in
various countries may help transferring
knowledge gained through the experiences
into their country of origin. Thus, a MNC
contributes to innovation capacity, cross-
cultural business connections, and global
awareness in its home country by gathering
valuable context specific information
throughout the world. A MNC must
be perceived as legitimate by a society to
sustain its operations in foreign nations.
Many MNCs derive required guidance
concerning value system and norms of the
foreign cultures by hiring local employees
even to the strategic positions. Ali Haydar
Bozkurt who is the CEO of Toyota Turkey states: “Turkey’s geographical position provides advantage to the
firms. Turkey may become automotive base of the region with facilitation”. (http://www.dunya.com/gundem/
turkiye-bolgenin-otomobil-ussu-olmaya-aday-haberi-147356).
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Corporate social responsibility (CSR) is explained in Chapter 1. Organizing or giving support to corporate
social responsibility (CSR) projects is another way to build recognition and reputation in foreign cultures. These
CSR projects may involve being sponsors of important sports events or famous teams, providing scholarships to
the poor students and supporting development of fine arts or music. MNCs’ decisions to choose key strategic
partners among local companies in the target countries also determine the future of international investments.
Key strategic partners act as brokers or mediators between MNCs and local authorities. It is important to seek
for a trustworthy, legitimate, established and a powerful partner in the target country.
Corporate social responsibility (CSR)

Strategic partners projects are a way of building recognition
abroad act as mediators and reputation in a foreign country. It
between MNCs and local is important to seek for a trustworthy,
authorities. legitimate, established, and a powerful
partner in the target country.
Table 2.2 Local Partners of some MNCs in Turkey

MNC Local Partner Sector
Ford Koç Group Automotive
Coca Cola Anadolu Group Food and Beverages
Pierre Cardin Zorlu Group Textile
Carrefour Sabancı Group Retail
Hyatt Hotels Doğuş Group Tourism
Intergen Enka Group Energy
Unicredit Koc Group Finance
Estee Lauder Vepa Group Cosmetics
Baxter Eczacıbaşı Group Health
Armani Doğuş Group Fashion Industry
As shown in Table 2.2 some well-known multinational corporations have preferred to work with large, old,
well-known, and powerful local partners in Turkey. Turkish companies’ interaction with foreign MNCs is not
limited with establishing partnership in the local market. There are also Turkish MNCs that have internation-
al operations in several countries by establishing partnership with the local companies or MNCs.
International Competition
It is not so meaningful to think about a strict distinction
between national and international competition in
today’s global economy. A local entrepreneur who owns a It is not so meaningful to think about a
small market may anytime face with competitive pressures strict distinction between national and
of international retail chains. There are important facts international competition in today’s global
that should be considered by an organization, which has economy.
an intention to compete in international markets: size and
production capacity are some of these factors.
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The idea of creating a local automobile brand has been one of the well-known debates in Turkey. State officials
have several times announced that they are going to support the local entrepreneurs who will invest in this project.
However, the efforts to find an appropriate candidate have failed due to lack of interest of the Turkish businessmen
to invest in such a project. Why Turkey hasn’t been able to create a national car brand despite intensive efforts of state
officials?
Devrim was the first automobile designed and produced in Turkey, in 1961.
We should examine the realities of international competition to find some answers to this question.
There are several active international car brands in Turkish automotive market and these are linked to MNCs.
These MNCs are not only manufacturing cars for Turkish market but also for their branches in other countries.
MNCs generally have an advantage to achieve economies of scale. Economies of scale is the cost advantage
that arises with increased output of a product.16 Therefore an entrepreneur to be involved in such a project
has to reach millions of production capacity per year to compete with the international automobile firms
and has to find ways to market the new national car brand globally. This project requires huge investments
and involves several risks for potential entrepreneurs. The case stated above is a typical example defining an
important aspect of international competition. It is not possible to think about independent competition
of firms in the global context. Firms have to find partners, collaborate, and cooperate with each other to
compete with big players, which have dominated international markets. So, international competition
refers to a complex network of multiple types of relations and interactions.
Economies of scale is the cost advantage International competition refers to a

that arises with increased output of a complex network of multiple types of
product. relations and interactions.
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Figure 2.4 Interorganizational Relationships and International Competition
* Black lines represent strategic partnerships, red lines represent investment relations among international firms.
Source: Daft, R. (2008). Organization Theory and Design. South-Western Cengage Learning, p. 178.
As illustrated in Figure 2.4 even very large and well-known MNCs engage in strategic partnerships and
collaborate with the others to compete and to survive in global business arena. It is possible to observe that
some MNCs prefer to collaborate with their rivals. An entrepreneur or a manager has to examine complex
collaborative and rival networks very carefully to compete in such an integrative business environment.
Otherwise international entrepreneurial decisions based on assumptions of classic competition may lead
to failure.
Emerging Markets
Scholars and practitioners have frequently used the concept of “emerging markets” within the last three
decades. It is important to understand what this term means and why it entered into the international
trade literature. Dutch-born American banker Antoine
van Agtmael created this term in 1981 to avoid negative
perceptions towards the terms such as “the third world” and
Emerging markets are the transition
“developing countries”. 17 18 Emerging markets are the
economies such as Brazil, Russia, India,
transition economies such as Brazil, Russia, India, Mexico,
Mexico, Nigeria, and Turkey that are
Nigeria and Turkey that are characterized by high levels
characterized by high levels of growth
of growth despite insufficient infrastructure.19 Emerging
despite insufficient infrastructure.
markets are quite different from western countries in terms
of their cultural context, regulations and institutional
arrangements.20 Regardless of challenging conditions to penetrate and to survive in emerging markets,
firm managers in industrialized western countries have focused their attention to benefit from high rates
of growth in these economies.21
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Table 2.3 Average Annual Percentage Growth of Real GDP in Major Advanced Countries in 2009-2015 and Forecast
for 2016-2017
FORECAST
Nation/Area 2009 2010 2011 2012 2013 2014 2015 2016 2017
China 9.2 10.6 9.5 7.7 7.7 7.3 6.9 6.5 6.2
India 8.5 10.3 6.6 5.6 6.6 7.2 7.3 7.5 7.5
Russia -7.8 4.5 4.3 3.5 1.3 0.7 -3.7 -1.8 0.8
Brazil -0.1 7.5 3.9 1.9 3.0 0.1 -3.8 -3.8 0.0
South Africa -1.5 3.0 3.2 2.2 2.2 1.5 1.3 0.6 1.2
Indonesia 4.7 6.4 6.2 6.0 5.6 5.0 4.8 4.9 5.3
Mexico -4.7 5.1 4.0 4.0 1.3 2.3 2.5 2.4 2.6
Argentina 0.1 9.5 8.4 0.8 2.9 0.5 1.2 -1.0 2.8
Turkey -4.8 9.2 8.8 2.1 4.2 2.9 3.8 3.8 3.4
Source: International Monetary Foundation, 2016
Table 2.3 shows growth rates of leading emerging markets. As manufacturing has shifted from west to
the eastern parts of the world, especially India and China have significantly increased their growth rates
among all other emerging markets. Turkey was also classified as an emerging market with positive rates of
economic growth.
The literature on emerging markets suggests two ways to become successful in a target market:
1. By establishing managerial ties and networks,
2. By achieving superior customer value.22
It seems alternative managerial techniques and strategies are required

2 to organize operations effectively in emerging markets. Scholars have
What are the critical success tried to provide information concerning context specific managerial
factors for multinational techniques and strategies. These techniques and strategies are discussed
corporations? later in this chapter.
POWER TACTICS AND ORGANIZATIONAL SURVIVAL STRATEGIES IN

FOREIGN MARKETS
Global market environment requires a strategic approach to business challenges as well as a global
managerial mindset. Powerful global actors either governments, MNCs, or international organizations shape
the direction of competition in the world to a large extent. Companies must formulate international strategies
in accordance with their resources, expansion goals, and anticipated key developments in international
markets.
Features of Multinational Competition

There are numerous ways that companies may work together in “You have no choice but
international operations, such as through joint ventures, licensing agreements, to operate in a world
management contracts, or long-term contractual arrangements.23 shaped by globalization
A global company integrates its operations that are located in different and the information
countries. A multi-domestic company, sometimes called multinational revolution. There are two
company, allows each of its foreign country operations to act fairly independent. options: Adapt or die.
Thus, a global company and a multi-domestic company differ in the degree of Andrews S. Grove
integration among company operations in different countries.
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In multinational competition, there are four issues that need to be considered:24

1. Whether to customize products or services in each local market or offer standardized products/
services.
2. Whether to employ the same generic competitive strategy everywhere or modify the strategy for
each country.
3. Whether to locate a company’s facilities, distribution centers, and customer services operations
for location advantages.
4. How to transfer a company’s resource strengths and capabilities among countries to secure
competitive advantage.
There would be many reasons for MNCs to expand into
foreign markets as a way of growth. There is a close link
The basic contributions of global business
between competitiveness and intentions of these firms
operations to a firm’s competitiveness
to globalize their operations. The basic contributions of
global business operations to a firm’s competitiveness are; are; cost reduction, spread of risk across
cost reduction, spread of risk across wider environments, wider environments, to capitalize core
capitalization of core competencies, gaining access to new competencies, access to new customers, and
customers, and valuable natural resources. valuable natural resources.
In the globalizing world, the business endeavor
necessitates to consider many diverse factors. For example, cultures and life styles differ remarkably among
countries. Other factors could be listed as follows:
• There are differences in market demographics and income levels.
• There are variations in research, manufacturing and distributing costs.
• Exchange rates are fluctuating.
• There are differences in host government, economic and political demands.
Considering the differences among markets; consumer tastes, preferences, and buying habits are
generally dissimilar. In addition, market size and growth potential, distribution channels, driving forces
in global context, and competitive pressures are changing from one country to another. When the
differences among markets are examined in detail, it is possible to observe significant variability in terms
of manufacturing costs. For example, wage rates, worker productivity, inflation rates, energy costs, tax rates,
and government regulations -sometimes interventions- would be different. Apparently, there is also variability
in the quality of business environment. There would be different types and levels of clusters bringing together the
suppliers, trade associations, and manufacturers of complementary products in different countries.
Fluctuating exchange rates affect the investment
decisions and company’s competitiveness. Basically,
fluctuating exchange rates affect exporters depending Exchange rate is the number of units of one
upon manufacturing country’s currency power in positive currency that must be exchanged for a unit
or negative ways. Host country trade policies are also of the second currency.
very important in the sense that for example, local content
requirements, restrictions on exports, regulations on prices
of imports, import tariffs, or quotas. There would be other
regulations like technical standards, product certification, Fluctuating exchange rates affect exporters
prior approval of capital spending projects, withdrawal of depending upon manufacturing country’s
funds and ownership by locals.25 currency power in positive or negative ways.
When companies buy and sell goods and services in
the global market place, they complete the transaction
by exchanging currencies. This is called foreign exchange.
Exchange rate means the number of units of one currency
internet
that must be exchanged for a unit of the second currency.
Exchange rates can dramatically affect a company’s financial https://www.weforum.org/reports/the-global-
results by increasing or decreasing the cost of supplies it competitiveness-report-2016-2017-1
imports and the price of goods it exports.
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Figure 2.5 The World’s Most Competitive Countries
Source: Courtland L. B. & Thill, J. V. (2017). Business in Action (8th ed.). Pearson, p. 96.
Figure 2.5 shows ranking of first ten countries in terms of competitiveness. When a government
believes that free trade is not in the best interests of its national security, domestic industries, workforce,
or consumers, it can intervene in a number of ways. Some of these methods are collectively known as
protectionism because they seek to protect a specific industry or groups of workers. Taxes, surcharges, or
duties arranged against imported goods are known as tariffs.
Exchange rates can

dramatically affect a
Taxes, surcharges, or duties arranged against company’s financial results
imported goods are known as tariffs. by increasing or decreasing
the cost of supplies it
imports and the price of
goods it exports.
There are two basic aspects of internationalization of

business and the competition: multicountry competition
and global competition. Multicountry competition and Two basic aspects of internationalization
market contest among rivals in one country are not closely of business and the competition are
connected to market contest in other countries. In other multicountry competition and global
words, the competitive environment in each country shows competition.
different and specific attributes. Buyers and sellers vary
from one country to other. Also, industry conditions and
competitive forces in each national market have different aspects. A firm’s competitive position in one
country can be affected by its position in other countries. In such cases, the competitive advantage is based
on a firm’s worldwide operations and overall global standing.
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Competitive Strategies in Foreign

Markets
Companies decide for going international as well Franchising has a better fit into global
as which strategies to follow based on the resources expansion efforts of service and retailing
they can allocate for international operations. companies.
Following strategy options are frequently used to
compete in foreign markets:26
• Exporting Franchising has a better fit in global expansion
• Licensing efforts of service and retailing companies.
• Franchising Franchisers expend only the resources to recruit,
• Global Strategy train, and support franchisees. Most of the costs
and risks of establishing foreign locations would be
carried by franchisee. The main disadvantage is how
to maintain cross-country quality.
Export strategies use domestic facilities as
a base for exporting to foreign markets.
The strategic choice for a global strategy is
Export strategies use domestic facilities as a base for to employ essentially the same strategy in
exporting to foreign markets. It is excellent initial strategy all countries.
to pursue international success. Basic advantages are that
exporting is a safe way to test in international environment; The strategic choice for a global strategy is to
to minimize both risk and capital requirements; and to employ essentially the same strategies in all countries.
minimize direct investments in foreign environments. For example: electronics such as smart phones; cleaning
On the other hand, export strategies are vulnerable when supplies, or hotel chains offer standardized products
the operation costs in home country are higher than in and service quality as well as price for sustaining
foreign countries; when the shipping costs are high; and brand reputation globally. Successful application of
adverse fluctuations happen in currency exchange rates. global strategies require competitive power in global
markets based on features such as price, product
quality, distribution channels, and/or local partners.
Licensing is an appropariate choice when a

firm has valuable technical know-how or a
patented product but lacking international Three options for dealing with these specific
capabilities positioning in foreign markets. conditions and buyer preferences. They are
“think local – act local”, “think global – act
global”, “think global – act local” options.
Licensing is an appropariate choice when a
firm has valuable technical know-how or a patented
product but lacking international capabilities for
There would be three options for dealing with
positioning in foreign markets. If a firm desires to these specific conditions and buyer preferences.
avoid risks of committing resources to unfamiliar, They are “think local – act local”, “think global –
volatile, unstable markets, licensing would be act global”, “think global – act local” options.27
a good start. Basic disadvantage is the risk of Think local – act local approach varies its offerings
providing valuable technical know-how to foreign and basic competitive strategy for different
firms and losing some control over its use. countries. Basic characteristics of this approach
are that local managers are given considerable
flexibility and that marketing and distribution are
adapted to fit local customs and cultures.
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There are significant differences in customer preferences and buying habits of countries. Host
governments enact regulations and strict manufacturing specifications or performance standards. Trade
restrictions of host governments are so diverse and complicated. Various countries do not provide uniform,
coordinated worldwide market approach. As a result, “think local act-local” approach brings problems
of transferring competencies across borders. And also it works against building a unified competitive
advantage.
The think global-act global approach necessitates the same basic competitive approach in all countries
where a company operates. In other words, same products under the same brand names are sold everywhere.
Same distribution channels are used in all countries. Competition is based on the same capabilities and
marketing approaches worldwide. Strategic moves are integrated and coordinated. Managerial emphasis
is placed on building a global brand name. Transferring ideas, new products, and capabilities among
countries are pursued.
Third option, which is “think-global, act local” approach, creates much
more convenient and culturally interoperable conditions. Glocalization is
a kind of synthesis between globalization and local responsiveness. Under Glocalization is a kind
these circumstances, a company uses the same basic competitive theme in of synthesis between
each country but allows local managers to be more flexible to: globalization and local
responsiveness.
• Incorporate whatever country-specific variations in product
attributes are needed to satisfy buyers.
• Make whatever adjustments in production, distribution and marketing are needed to compete
under local market conditions.
Companies operating internationally ultimately aim to take competitive advantage in foreign markets.
Competitive advantage is the superiority or an edge that a company gains over its rivals. For example: same
quality but lower prices; higher brand reputation; better quality; more efficient distribution mechanism; or
powerful local partners.
There would be three ways to gain competitive advantage:
• Locating activities among countries to decrease costs on high
product differentiation. 3
• Efficient and effective transfer of competencies and capabilities What are the best strategies to
from one country to another for companies. compete in foreign markets?
• Coordinating dispersed activities.
Strategic Alliances
In order to build a global competitive advantage, activities might be required to concentrate in certain
locations. For example, if costs of production or transportation are lower; if there is a possibility of scale economies
or if there is a steep learning curve effect in certain locations, it would be beneficial not to disperse the activities.
On the other hand, if it is necessary to be close to buyers; if transportation costs or trade barriers support
the decentralization or if fluctuating exchange rates, supply interruptions, and adverse politics should be
buffered, activities should be dispersed.
Global competition can be achieved via cooperation
and cooperative agreements with foreign companies. Purposes of strategic alliances are: joint
Purposes of strategic alliances are; joint research efforts, research efforts, sharing technology; joint use
sharing technology, joint use of production on distribution of production on distribution facilities; and
facilities, and marketing one another’s products and marketing one another’s products and services.
services.
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Figure 2.6 Global Business Icons
Source: http://www.istockphoto.com/tr/vector/line-global-business-icons-
gm596368340-102239397
Figure 2.6 shows the icons, which symbolize important business concepts. These icons summarize the
factors that should be considered for international entrepreneur. In international business environment
there are many appeals and advantages of strategic alliances. These are listed below:28
• Better access to feasible countries from host country to import and market products/services.
• Capture economies of scale.
• Fill missing information in technical expertise of local markets.
• Share distribution facilities and dealer network.
• Take advantage of partner’s local market knowledge and networks.
• Combine competitive energies toward defeating mutual rivals.
Under some circumstances, there would be pitfalls of strategic alliances such as:
• To overcome language and cultural barriers.
• To deal with diverse or conflicting operating practices of partners.
• To consume time for managers in terms of communication, trust building and coordination
costs.
• To create mistrust when collaborating in competitively sensitive areas.
• To clash in egos and company cultures.
• To deal with conflicting objectives, strategies, corporate values, ethical standards.
• To become too dependent on another firm for essential expertise in the long term.
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The characteristics of emerging international markets

may be different and as a result, competition in these
markets should be arranged accordingly. Companies have Companies have to attract buyers with bargain
to attract buyers with bargain prices and have to achieve prices and have to achieve a better fit to local
a better fit to local requirements. Specially designed or requirements.
packaged products may be needed to accommodate local
market circumstances. Management teams for these firms
must be consist of a mix of expatriate and local managers. For emerging markets, competition should be
based on low price. The companies aiming at emerging markets may need to develop new business models
to accommodate local conditions.
4
How strategic alliances
contribute to competitiveness
of MNCs?
BUSINESS IN A MULTICULTURAL ENVIRONMENT

In order to understand the multicultural aspects of business, it is necessary to analyze the international
dimensions of business and its key foundational concepts. If the objective is to deal with both globalization
and international environment; the firm should develop supportive corporate culture, the ability to
determine local needs, and gain access to worldwide information networks.
Cultural diversity is colorful!
It is about differing values, perspectives, styles, and Cultural Diversity
behaviors … The cultural, economic, social, and political
systems differ between countries. As culture is a
blend of values in a society, it shapes the way of
doing business in organizations. In this regard, it also
impacts the business environment and determines
the workplace attitudes and behaviors in a country.
There are diversities and cultural differences
among countries that affect companies’
international operations and strategies. Cultural
values and social structure play a significant role
in determining success or failure in international
management. Culture can affect how managers
lead, hire, and compete in various countries.29
These operations are direct impact of culture. Another words, the life is shaped by the cultural orientations
of people. For example, when establishing a company or a chapter of an established one in a different
country, talent management practices may need to be modified in order to suit local conditions. When
it comes to international business, it is remarkable to see
how different cultures approach management. There is
certainly no one way of doing business and as technology
Culture can affect how managers lead, hire,
narrows borders and globalization integrates the world’s
and compete in various countries.
economies, developing a sensitivity to how other cultures
operate, generally and in business, is becoming essential.
For cultural clusters see Figure 2.7.
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On the other hand, indirectly, culture even affects from country to country. In turn, such philosophies
the political and legal system in a country. Laws are the affect what people in different cultures think is ethical
written codes of conduct that constrain and guide the behavior. Finally, these perceptions can drive behavior,
actions of companies. There are many different legal such as questionable payments (bribery), human
systems used. At the same time, however, a law may rights at work, and standards for treating employees.
be constrained, altered or ignored totally because of Cultural relativism has become a popular alternative
political concerns. In other words, a legal framework to universalism. Cultural relativism refers to the
may be changed approach that a country’s own unique culture, laws,
if political power and business practices determine ethical behaviors in
changes. Although
there is a close relation Culture plays a significant
between a country’s role in determining Ethical values are individuals’ moral
legal framework and success or failure in judgments about what is right or wrong.
its typical political international business.
activity, each should be Universalism is widespread and objective
carefully monitored.30 sets of ethical guidelines exist across
Ethical values are individuals’ moral judgments countries.
about what is right or wrong. Culture is also affected
Cultural relativism refers to the approach
by the ethical principles and definitions of corporate
that a country’s own unique culture, laws,
social responsibility. The concept of business ethics is
and business practices determine ethical
not something universally and strictly defined. On
behavior in a country.
the contrary, ethics is already a complicated issue,
ends up being an even more intricate when we move
Figure 2.7 Ronen and Shenkar’s Country Clusters
NEAR EASTERN NORDIC

Turkey Finland
ARAB Norway
İran
Bahrain Denmark GERMANIC
Abu-Dhabi Greece
Sweden Austria
United Arab Emirates Germany
Kuwait
Oman Saudi Arabia Switzerland
Malaysia United States
Singapore Australia
Hong Kong Canada
FAR EASTERN France New Zealand ANGLO
Argentina
Philippines Belgium United Kingdom
South Vietnam Venezuela
Indonesia Ireland
Mexico Chile
Taiwan LATİN EUROPEAN South Afrika
Thailand LATİN AMERİKA
İtaly
Peru Spain
Colombia Portugal
İsrael
Brazil
İNDEPENDENT
Japan İndia
Source: Ronen, S. & Shenkar, O. (1985). Clustering countries on attitudinal dimensions: A review and
synthesis. The Academy of Management Review, 10 (3), pp. 435-454.
69
2
Even there are apparent rends for multinational examples of cultural studies for international ma-
companies to boost toward more competitive nagers. Country clusters show important factors to
market economies; the ethical issues of emerging be considered in investment decisions. The level of
countries converting to capitalism are still the development and technological progress, geographic
same. The reasons for this are week regulations, proximity, language, religious values, and beliefs are
poverty, social problems and so on. Then, the social basic criteria in understanding the cultural tenden-
responsibility is perceived in different perspectives cies of country clusters.
as a result of cultural diversities.
International Management and

internet
Culture
The implications for international management https://geert-hofstede.com/national-culture.html
could be explained through evaluating cultural
dimensions and categorizing by country clusters.
How countries are clustered based on cultural
values and to what extent cultural values affect
Culture can potentially impact just about
employee attitudes need to be considered primarily
everything, from how international business
in internationalization decisions. Culture impacts
strategy is formed to specific human resources
and shapes attitudes, beliefs, and behaviors. Since
management practices.
it is complex and rooted in history, traditions,
language, geography, economic development and
religion, the cultural conditions are dynamic and
Culture can potentially impact just about
constantly evolving. That is why international
everything, from how international business strategy
managers should consider the culture together
is formed to specific human resources management
with the basic managerial decision areas such as
practices. For successfully managing the impact of
employee motivation, human resource practices,
culture on international business, managers:
organizational structure, strategy formation and
implementation, conflict management, negotiation • Approach other cultures by changing your
tactics, and leadership styles. stereotypes and with caution.
• Find cultural informants and review
practices from unfamiliar cultures.
• Learn mental maps that will increase
International managers should consider the effectiveness in different cultures.
culture together with the basic managerial Likewise suggestions for international corporations:
decision areas.
• Appoint employees who have cognitive
complexity in international positions
The key point in managing multicultural and in- such as expatriates with cross-cultural
ternational business environment is to understand experience.
culture and turn it into an advantage. Most of the • Emphasize in-country training and
research results show that companies are more suc- schedule an orientation program for
cessful when investors and managers consider local international assignments.
methods. However, managing culture is not easy be- • Become a learning organization in relation
cause it is complex, dynamic and there are common to cultural understanding.
exceptions. There are many studies on culture, which
had provided results to be utilized in international
business endeavours. For example, Ronen and Shen-
5
kar (1985)31 as shown with Figure 2.7, Hofstede
How does cultural diversity
(1991),32 Trompenaars (1993),33 Trompenaars and affects international operations
Hampden-Turner (1998)34 are very comprehensive of firms?
70
2
Further Reading
International Integration of Turkish Economy

As was the case in many
developing countries, Turkey
consistently implemented a policy
of import-substitution. In the
1950s Turkey restricted imports of
merchandise for which domestic
production was considered adequate
(Krueger, 1995). Under the import
substitution regime, selected fields
including manufactured and
agricultural sectors were protected
from international competition by
imposing quantitative restrictions on
imports, controlling scarce foreign exchange, and providing substantial state aids for domestic enterprises
among others. After 1980s, an outward-oriented growth model was adopted to open Turkish economy
to international markets through several legal and institutional changes. Today, the Tenth Development
Plan (2014-2018), a top-level policy text, distinctly recognises that the deepening multi-dimensional
globalization process offers important trade and growth opportunities to a country, which can take measures
against risks and threats brought by the globalization. In this respect, Turkey has actively participated in the
work and negotiations of multilateral organisations and committed to their rules and remedies.35 Moreover,
post-1980 reform initiatives aimed at integrating Turkish economy with international markets through two
channels: first one is foreign trade, and the second is foreign direct investment. 36 37
In the course of the last two decades, trade-related policies of the country have been influenced by
the multilateral agreements of World Trade Organisation (WTO), provisions of the Custom Union
with the European Union (EU), Free Trade Agreements (FTA) and certain regional initiatives.38 Turkey
is a founding member of WTO. It is a single international institution with 164 members as of March
2017 so as to develop and enforce the rules of trade between member states since 1995, and a member
of General Agreement on Tariffs and Trade (GATT) since 1951. The country has acted in accordance
with rules and negotiations of WTO and continues to promote liberalisation at multilateral level as
part of its trade policy.39
Source: http://www.tim.org.tr/files/downloads/Reports
http://hbswk.hbs.edu/item/is-china-about-to-overtake-the-us-for-world-trade-leadership
71
2
In Practice
A Journey from Tokat to London: An while he was working there. He planned to open his
Interesting Story of a Turkish Entrepreneur own restaurant but he didn’t have enough money
for that. One of the chief cooks gave him financial
support to open his own workplace. Then he bought
the kebab shop, which he worked in as, an employee
and he turned it into a restaurant. He searched the
ways to refine Turkish cuisine that could be more
appropriate for local and international customers.
The first restaurant was located in bad district of
London. Therefore he decided to open another
restaurant in a popular region of London to serve
for high-class customers. However, he didn’t have
sufficient financial resources for that. He went to a
bank and applied for credit. The only property he
had was his first restaurant. Manager of the bank
approved the high-risk credit application after a visit
to his restaurant. He added extra security measures
– bulletproof windows- to his new restaurant
to give service to important individuals such as
ambassadors, royal family and state bureaucrats.
Mr. Özer had developed his own social network
The story of Huseyin Özer involves several
and had increased his reputation in the country.
aspects of how to become an international
After a while, UK and other countries faced with
entrepreneur. He was born and raised in a
bad consequences of economic recession. He used
village of Tokat in 1949. When he was a child
this period to create a chain of cafes to sell healthy
he was forced to leave his hometown because
food with reasonable prices. He also invested a
of problems with his family and he decided to
lot to corporate social responsibility projects. He
live in Ankara as a homeless child. He worked
gave financial support to local NGOs and acted
as a street peddler and then he found a job in
as an important figure in terms of trade relations
a bar. He slept in a depot and a communal
between Turkey and UK. Currently Mr. Özer owns
toilet when he was in Ankara. He never went
the only Turkish cuisine-focused restaurant, which
to school, he learned reading and writing by
recommended by Michelin Guide. He preferred to
his own during his childhood. Then he went to
downsize the restaurant chain because of financial
İstanbul to improve his career in gastronomy and
control problems but he got ideas to expand his
to gain experience in restaurant management. He
business worldwide after designing appropriate
worked in Istanbul as waiter and cook in various
auditing systems.
restaurants. He expanded his social network and
had a chance to learn how to cook when he was From an interview with Hüseyin Özer.
in Istanbul. He met with an army officer who
For further information look at the following
taught him introductory level English.
web page.
He decided to look for possible job opportunities
Source: http://huseyinozer.co.uk/tr/restaurants.aspx
in London and went there by bus instead of plane
due to his limited budget. He started to work in
a kebab shop and he tried to improve his English
72
2
Understanding basic aspects and important issues

LO 1 that need to be considered for international trade
The theory of international trade suggests that increasing

number of countries participating in international trade serves
to socio-economic expansion of these countries. The sharp
difference in terms of organization of the economic regime
between East and West has begun to disappear after 90’s.
Low raw material and labor costs in the new economies have
attracted foreign investors. Multinational corporations of these
countries have decided not to outsource only their production
Summary
activities but also other functions such as customer services.
It is not so meaningful to think about a strict distinction
between national and international competition in today’s
global economy. An entrepreneur or a manager has to examine
complex collaborative and rival networks very carefully to
compete in such an integrative business environment.
Explaining power tactics and organizational

LO 2 survival strategies in foreign markets
There is a close link between competitiveness and intentions of

these firms to globalize their operations. The basic contributions
of global business operations to a firm’s competitiveness are; cost
reduction, spread of risk across wider environments, capitalization
of core competencies, gaining access to new customers and valuable
natural resources. Frequently used strategies to compete in foreign
markets are exporting, licensing, franchising, multicountry versus
global, strategic alliances and joint ventures.
Identifying important and relative aspects of

LO 3 management in different cultures
There are diversities among countries and cultural differences

that affect the companies to become internationalize. There is no
doubt that culture plays a big role in determining success or failure
in international management. Culture impacts everything and
shapes attitudes, beliefs and behaviors. That’s why international
managers should consider the culture together with the basic
managerial decision areas such as employee motivation, human
resource practices, organizational structure, strategy formation
and implementation, conflict management, negotiation tactics
and leadership styles. The key point in managing multicultural
and international business environment is to understand culture
and turn it into an advantage. Most of the research results show
that companies are more successful when investors and managers
consider local methods.
73
2
1 Which one is not one of the critical success 6 Which one of the following options is
factors for MNCs? the best when more convenient and culturally
a. Enter into complex markets to gain new know- interoperable conditions are required?
ledge a. Think local-act local
Test yourself
b. Recognition and reputation b. Think local-act global

c. To hire the right employees c. Think global-act local
d. Key strategic partnerships d. Exporting
e. None of above e. Licencing
2 In which case a country has trade deficits? 7 Franchising has better fit into global expan-
a. When a country exports more than it imports sion of ________ .
b. When a country imports more than it exports a. Production facilities
c. When exports and imports balanced b. Service and retailing
d. When exchange rates increase c. Technical know-how
e. When exchange rates decrease d. Manufacturing activities
e. Transportation
3 Organizing or giving support to__________
projects is another way to increase recognition and 8 Which one of the following is the definition
reputation in foreign cultures. of universalism?
a. Corporate social responsibility a. Ethical principles of corporation
b. Research and development b. Unique culture and business practices of a
c. Local entrepreneurship country
d. Governmental c. Widespread and objectives sets of ethical
e. Marketing guidelines
d. Ethical issues of emerging countries
4 Which one of the following country cannot e. More competitive market economies
be defined as an emerging market?
a. Russia 9 Which one of the following would have
b. Brazil negative impact on international business?
c. Argentina a. Learning mental maps
d. Norway b. Having cultural informants
e. Mexico c. Changing the stereotypes
d. Becoming learning organization
5 Which one of the following is partner of e. Having in-country experienced managers
Sabancı Turkish in retail sector?
a. Baxter.
10 Which one of the following factor is not
affected by culture and business orientations?
b. Coca cola
c. Carrefour a. Computer technology
d. Armani b. Attıtudes of workers
e. Estee lauder c. Behaviours of managers
d. Leadership styles
e. Human resources practices
74
2
If your answer is incorrect, review

1. c If your answer is incorrect, review “Balance 6. c
“Competitive Strategies in Foreign
of Trade”.
Markets”.

2. b If your answer is incorrect, review 7. b
“Competitive Strategies in Foreign

“Multinational Corporations”.
Markets”.
3. a If your answer is incorrect, review 8. c If your answer is incorrect, review “Cultural

“Multinational Corporations”. Diversity”.
4. d If your answer is incorrect, review 9. e If your answer is incorrect, review

“Multinational Corporations”. “International Management and Culture”.
5. c If your answer is incorrect, review 10. a If your answer is incorrect, review

“Multinational Corporations”. “International Management and Culture”.
What are the realities of globalization?

Globalization has started in the late 19th century and intentions of countries to
engage in international trade have been relative due to their suspicious approach.
your turn 1 However, the numbers of countries that have trade interactions with the others
have increased because of high prosperity level brought by international business.
Only Western countries have benefited initially from advantages of globalization.
What are the critical success factors for multinational

corporations?
The critical success factors emphasized in the literature for MNCs are to gain
experiences from foreign markets, to increase legitimacy and to find key strategic
partners. Organizing or giving support to corporate social responsibility (CSR)
your turn 2 projects is another way to increase recognition and reputation in foreign cultures.
MNCs’ decisions to choose key strategic partners among local companies in the target
countries also determine the future of international investments. Key strategic partners
act as brokers or mediators between MNCs and local authorities. It is important to seek
for a trustworthy, legitimate, established and a powerful partner in the target country.
75
2
What are the best strategies to compete in foreign markets?
There are several contingencies that should be considered before deciding best
strategy in global arena. However, literature highlights some strategic options. Export
strategies use domestic facilities as a base for exporting to foreign markets. Licensing
your turn 3 is a good choice when a firm has valuable technical know-how or a patented product
but lacking international capabilities to get in foreign markets. Franchising has better
fit into global expansion efforts of service and retailing companies. Many forms of
strategic alliances may also help to increase impact in foreign markets.
How strategic alliances contribute to competitiveness of

MNCs?
Global competition would be achieved via cooperation and cooperative

agreements with foreign companies. Purposes of these alliances are joint research
your turn 4 efforts, sharing technology, joint use of production on distribution facilities,
marketing one another’s products and services.
How does cultural diversity affects international operations

of firms?
National culture determines attitudes, beliefs and values of societies. Culture is

formed through history, traditions, language, geography, economic development
your turn 5 and religion. Therefore international managers should consider the culture together
with the basic managerial decision areas such as employee motivation, human
resource practices, organizational structure, strategy formation and implementation,
conflict management, negotiation tactics and leadership styles.
endnotes
1http://www.estanbul.com/ataturkun-ticaret-ile-ilgili- developing countries, Competitiveness Review: An

sozleri-410553.html#.WPbzFzLBI_U International Business Journal, 21 (4), pp. 352-
2Choi, 368.
J. Y. (2016). International outsourcing, terms
of trade and non-immiserization. International 6Ibid.
Review of Economics and Finance, 43, pp. 222– 7Özcan, B. G. & Çokgezen, M. (2003). Limits to
233.
alternative forms of capitalization: The case of
3Niroomand, F. & Nissan, E. (1997). An inquiry Anatolian holding companies. World Development,
into openness in international trade. Journal of 31 (12), pp. 2061-2084.
Economic Studies, 24 (3), pp. 167-178. 8Öniş, Z., (1999). State and Market: The Political
4(2016). International trade and emerging markets: Economy of Turkey in Comparative Perspective.
the importance of managing the key strategy Bogazici University Press.
drivers. Strategic Direction, 32 (5), pp. 22-24. 9Buğra, A. (2003). The place of the economy in
5Kunnanatt, J. T. (2011). Global business chain Turkish society. The South Atlantic Quarterly, 2
and twin advantage: strategic opportunities for (3), pp. 453-470.
76
2
10http://www.investopedia.com 24Thompson, A. A., Strickland, A. J., & Gamble, J. E.

11Kogut, (2015). Crafting and Executing Strategy: Text and
B. (2001). Multinational corporations. In
Readings (15th ed.). Mc Graw Hill, Irwin.
N. J. Smelser, & P. B. Baltes (Eds.), International
Encyclopedia of Social and Behavioral Sciences, (pp. 25Bovee, C. L. & Thill, J.V. (2017). Business in Action
10197–10204). Elsevier Science Ltd. (8th ed.). Pearson.
12Cleveland, M., Rojas-Méndez, J. I., Laroche, M., 26Thompson, et. al., op. cit.
& Papadopoulos, N. (2016). Identity, culture, 27Ibid.
dispositions, and behavior: A cross-national
examination of globalization and culture change. 28Ibid.
Journal of Business Research, 69 (3), pp. 1090– 29Mc Farlin, D. B. & Sweeney, P. D. (2006).
1102. International Management: Strategic Opportunities
13Kogut, op. cit. and Cultural Challenges (3rd ed.). Houghton Mifflin
14 Company.
Callaway, S. K. (2008). Global corporate ventures: a
new trend of international corporate entrepreneurship. 30Ibid.
Multinational Business Review, 16 (3), pp. 1-22. 31Ronen, S. & Shenkar, O. (1985). Clustering
15Li, Q. & Deng P. (2017). From international new countries on attitudinal dimensions: a review and
ventures to MNCs: Crossing the chasm effect synthesis. Academy of Management Review, 10, pp.
on internationalization paths. Journal of Business 435-454.
Research, 70, pp. 92–100. 32Hofstede, G. (1991). Cultures and Organizations;
16http://www.investopedia.com/terms/e/economiesofscale. Software of the Mind. Mc Graw Hill.
asp 33Trompenaaars, F. (1993). Riding the Waves of
17Lozano, J.M. (2011). What emerges when a market Culture. Brealey.
emerges? Corporate Governance: The International 34Trompenaars F. & Turner, H. (1993). Riding the
Journal of Business in Society, 1 (4), pp. 315-326. Waves of Culture: Understanding Cultural Diversity
18Rottig, D. (2016). Institutions and emerging in Global Business. Mc Graw Hill.
markets: effects and implications for multinational 35Ministry of Development- MoD (2014). Tenth
corporations. International Journal of Emerging Development Plan, 2014-2018. http://www.mod.
Markets, 11 (1), pp. 2-17. gov.tr/Lists/DevelopmentPlans/Attachments/5/
19Tanusondjaja, A., Greenacre, L, Banelis, M, Truong, The%20Tenth%20Development%20Plan%20
O., & Andrews, T. (2015). International brands (2014-2018).pdf
in emerging markets: the myths of segmentation. 36Central Bank of the Republic of Turkey-
International Marketing Review, 3 (6), pp. 783-796. CBRT (2002). The Impact of Globalization
20Gruber-Muecke, T. & Hofer, K. M. (2015). Market on the Turkish Economy. http://www.tcmb.
orientation, entrepreneurial orientation and g o v. t r / w p s / w c m / c o n n e c t / 2 4 8 0 6 a 9 8 -
performance in emerging markets. International 8219-4717-a6be-d77eacf6539c/global.
Journal of Emerging Markets, 10 (3), pp. 560-571.  pdf?MOD=AJPERES&CACHEID=24806a98-
21Craig, 8219-4717-a6be-d77eacf6539c
C. S. & Douglas, P. S. (2011). Empowering
rural consumers in emerging markets. International 37World Trade Organisation - WTO (2016). Trade
Journal of Emerging Markets, 6 (4), pp. 382-393. Policy Review: Turkey. report by the Secretariat,
22Gruber-Muecke WT/TPR/S/331, https://www.wto.org/english/
& Hofer, op. cit.
tratop_e/tpr_e/s331_e.pdf
23Daniels, D. J., Radebaugh, L. H., & Sullivan, D. 38Ibid.
P. (2004). International Business: Environment and
Operations (10th ed.). Pearson Prentice Hall. 39MoD, op. cit.
77
Chapter 3 Management
1 2
Learning Outcomes
Explain the management process and the

Define management and relevant terms.
functions of management.
3 Describe the management structure. 4 Distinguish basic management skills.
5 Understand the managerial roles that

managers play in different settings. 6 Describe the leadership process in comparison
to management.
7 Identify the anatomy of leadership.

8 Explain the communication process and forms
of communication in organizations.

Management - Terms and definitions Management
Management Functions Manager
Management Structure Management functions
Management Skills Managerial levels
Managerial Roles Management skills
Leadership Managerial roles
Communication in Organizations Leadership
Communication
78
3
The concept of “management” is unavoidable in our daily lives and thereby is shaped by critical
processes in environments such as governments, business organizations, and civil society organizations.
Businesses—family owned or corporate entities, local or regional, national or multinational, depend on a
variety of management skills and approaches to function. How well they function, depends on a multitude
of factors, most of which will be discussed in this chapter.
The quickening pace of economic, political, social, and especially tecnological forces of change in the
21st century make this a vital question: How can we manage more effectively? There is no one single
answer. The best management practice changes from one set of circumstances to another. Although
management can be defined in simple terms such as “achieving goals through others”, it is in fact much
more complicated. We have witnessed extraordinary business success stories from Eti to Arcelik, from
Google to Virgin, from Alibaba to Amazon as well as examples of catastrophic mismanagement as poorly
managed busineses such as Eastman Kodak succumb to the forces of global change. We expect that
managers and leaders at all levels in different types of organizations strive to be ahead of others and to gain
competetive advantage by possessing distinctive skills, knowledge, experience, and motivation. But this is
not always the case. It depends on the environmental context that each managed entity finds itself. It is the
evolutionary biology equivalent of the survival of the most fit or the most fortunate.
Attaining the desired goals require efficient deployment of resources, effective planning, organizing,
a leadership process, and control of the actual results compared to the standarts or expected autcome.
This chapter composes the foundational topics of management: We begin by defining management and
manager; the management process and its functions of planning, organizing, leading, and controlling are
introduced; management structure and management levels as well as managers’ skills and roles are explained
in general terms; the basics of the leadership process is described; The chapter ends with explaning the
function and significance of communication process in organizations.
Management topics will be explained and discussed with more details in the Business Management book.
MANAGEMENT – TERMS AND DEFINITIONS

Managing is a complex task. It is critical to success and gaining competetive advantage. It is important
therefore to examine some of the many elements that comprise the content of the term “management”.
Definition of Management
Management or to manage can be defined in different terms. The simplest definition for management
is “achieving goals by the contribution of others” which applies to any formal and informal management
environment with a variety of goals.
Some definitions for management in the literature
include: “The design of an environment in which people
working together in groups can accomplish objectives”;1 Management is achieving goals by the
Mary Parker Follett stated that “Management is the art of contribution of others.
getting things done through people”.2
Management is also defined as a process which reflects a Management can be defined as a
more sophisticated task environment. It is “The attainment process: the attainment of goals by others
of goals by others through planning, organizing, leading, through planning, organizing, leading, and
and controlling activities”. This definition is about the controlling activities.
management functions which will be explained in the
following sections.
The above-mentioned definitions emphasize elements pertinent to the management environment.
These key elements are; goals, people, and activities relevant to the management environment.
79
3
Management
Another definition for management refers to key terms in business:

“Management is coordinating and overseeing the work activities of others
for completing their work efficiently and effectively”.3 This definition for
Organizational
management is a focus on organizational performance which is the ultimate
performance is the highest
goal of organizations of any type as well as the people managing these
when effectiveness and
organizations. Organizational performance is measured by effectiveness and
efficiency is well balanced.
efficiency. Organizational effectiveness is the degree to the achievement
of organizational goals based on the statements and expectations.
Organizational efficiency on the other hand is about the amount of
overall resources used for the achievement of an organizational goal.
Organizational performance is at the highest when effectiveness and
1
efficieny is well balanced. A company is effective when it manufactures
Compare the impact and role
high quality products regarding its core competition in the market, but
of effectiveness and efficieny on
not fully efficient if the costs such as raw materials and labor are higher
organizational performance.
than that of its competitors. Successful companies, managers, and high-
achiever CEOs are those who manage to balance these performance
indicators to reach various levels organizational goals.
Organizational effectiveness is the degree Organizational efficiency is about the

to the achievement of organizational goals. amount of overall resources used for the
achievement of an organizational goal.
MANAGEMENT FUNCTIONS
Management is a process through which required resources are utilized by a sequence of functions
starting with planning, followed by organizing, leading, and controlling for attaining organizational goals.
Although each of the functions takes part and contributes to the management process from a different
perspective, they are interconnected and complement each other (Figure 3.1).
Figure 3.1 The Management Process
Planning
Identifying goals,
reviewing the
alternatives, deciding
which alternatives to Organizing
Controlling employ Determining tasks
Monitoring,
and departments/
comparing what is
units, assigning work
planned and what is
force, obtaining the
achieved, taking
overalall work
corrective steps
Leading environment
Motivating and
guiding towards the
goals
80
3
Planning
Managerial planning is the guide function for
the management process. It provides managers the Management is a process through which
answers to: What? When? Where? and How? Planning
required resources are utilized by a sequence
is identifying goals and deciding which tasks that will
be performed and the resources that will be utilized of functions starting with planning,
for reaching these goals. In other words “Managerial followed by organizing, leading, and
planning defines where the organization wants to be controlling for attaining organizational
4
in the future and how to get there”. The planning goals.
process is carried out by identifying goal/s, reviewing
the alternative ways or methods including the resources Planning is identifying goals and deciding
involved, and deciding which alternative/s to employ. which tasks that will be performed and the
At the end of this process plans of different types resources that will be utilized for attaining
are generated, either short, medium, or long term as these goals.
well as strategic plans. Planning is often mentioned
with decision-making which is a process with similar
approaches and steps. Also, the planning process requires certain
decisions such as choosing the most applicable one amongst alternatives
for attaining goals.
The basic planning process applies to any type of organizational activity Managerial planning is
that requires planning for the success of near- and long-term outcomes: the guide function for
An investment, a new recruitment method; a new product; geographic the management process.
expansion, and similar outcomes are examples of activities that need to be It provides managers the
planned. Planning and decision making will be detailed in the content of the answers to: What? When?
Business Management course materials. Where? and How to do?
Organizing
The organizing function of the management process
follows planning and provides the appropriate work place Organizing is determining tasks relevant
for implementing the plans. In other words, organizing to goals; grouping tasks by departments;
the work place enables the managers to start the operations assigning the work force for specific tasks;
in alignment with the organizational goals and plans. The deciding the authority relationships, and
organizing process is determining tasks relevant to goals; preparing the work environment which
grouping tasks by departments; assigning the work force includes allocating equipment, technology,
for specific tasks; deciding the authority relationships, and and personnel.
preparing the work environment which includes allocating
equipment, technology, and personnel.
Organizational structures are formed depending on the sectors, goals,
resources, and environmental dynamics. For example, an advertising company
must be organized in a more flexible way than a construction company; a digital
start-up’s operational environment is technology based. Organizing the work place
enables the managers
to start the operations
in alignment with the
organizational goals and
plans.
81
3
Management
Leading
Leading, also referred to as directing, is more dynamic than A manager is the person who employs the
planning and organizing functions. Leading, in other words managing job.
the leadership process, is about guiding the organization and/
or the group towards the goals. Leading involves more complex A leader guides and motivates employees or
activities than what managers do.5 A manager is the person groups for attaining goals.
who does the managing job; a leader guides and motivates
employees or groups for attaining goals.
Leading involves influencing and motivating people as
well as being in constructive communication. Accordingly, Leading is about guiding the organization
“leadership is the ability to influence people for attainment and/or the group towards the goals.
of the organizational goals”.6 Leading styles differ by goals,
environmental factors and leaders’ choices. The leadership Leadership is the ability to influence people
process and styles will be discussed further in your Business for attainment of the organizational goals.
Management book.
Controlling
Managers are responsible for ensuring the achievement of goals. Controlling is the monitoring function
of the management process and is critical for the success of other management functions. The progress
towards the organizational goals of any type is monitored, measured, assessed, and if necessary modified
through the controlling function. Organizational performance and managerial activities, at any level, as well
as decisions must be measured by standards, plans, and expectations which is achieved by the control process.
The control process involves establishing standards and/or plans for the process/es subject to controlling;
measuring the outcome or performance; overseeing the match between the standarts and actual performance for
a given process; and applying corrective measures, maintaining a present course of action; or formulating a new or
modified plan of action as necessary. Therefore, the control process involves feedback activities which enable the
managers to maintain, develop, and dig into the sources of failure correlated with results (Figure 3.2). Various level
plans, departmental budgets, market share, or product quality are subject to the control process. Controlling is
about measuring the organizational performance which is mostly about financial performance.7 Types of control
utilized in organizations are multifaceted according to specific goals, including internal and external auditing.
Figure 3.2 Control Process
Compare what is
Set up goals, Measure outcome Take necessary
expected to what
plans, strategies /performance actions
is realized
Feedback
Send signals for more effective processes
The control function is not only necessary for monitoring the routine flow of operations but also
critical to responding to unexpected environmental developments or incidents such as unethical internal
actions, fraud, or manipulation. For example, the Volkswagen (VW) emissions scandal. It was a consequence
of the willingness to engineer false results in the testing of its diesel engines in an effort to eclipse Toyata as the
world’s largest car manufacture. This breach VW’s CEO Hans Dieter Potsch’s press meeting points out to a lack
of internal control. According to Mr Potsch, the problem was the “misconduct and shortcomings of individual
employees,” insufficient internal processes to detect such fraud, and “a mindset in some areas of the company that
tolerated breaches of rules”.8 This catastrophic breach of ethics and the control process has cost VW billions of
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3
dollars and billions remain to be calculated. British team-based approach of diffusing management
Petroleum’s fiasco in the Gulf of Mexico is another functions among teams of employees has gained
example of a catastropic failure of the control process. popularity in certain countries such as the United
States. It flattens out hierarchical structures of
decision-making, boosts the morale of professional
Control process involves establishing and blue-collar workers, and makes shared
standarts and/or plans for the process/ responsibility more timely and responsive to the
es subject to controlling; measuring the changing demands of a company’s services and
outcome or performance; overseeing the products.
match between the s and performance for Organizations are managed by different
the given process; and taking necessary approaches based on factors such as resources,
actions. sector, company type and size, sector, operational
field, goals, culture, and managers’ choice.
Different managerial styles lead to a range of
organizational structures from vertical or highly
hierarchical to flat or flexible work environments.
Controlling is the Although different managerial approaches affect the
monitoring function of organizational design, the management structure
the management process. in general terms is hierarchical and also referred to
as managerial pyramid or hierarchy. Managerial
hierarchy reflects the “chain of command and
the flow of coordination, communication, and
The practice of management is subject to change control” which is reflected in organization charts.10
based on the circumstances from one period of time An organization chart is a visual diagram that
to another. The evolution of the management thought shows the relationships among people and divides
and practice is analyzed in several periods: Classical the organization’s work.11 Managerial hierarchy
management; humanistic (neo-classical) approach; also identifies managers’ scope of authority and
quantitative approach; modern approach; and post- responsibility, power, and skills that vary by
modern management practice. For classical management hierarchical levels.
thought see Chapter 6. Also, the evolution of the
management thought will be explained in the Business
Management course and book.
Management structure in general terms
is hierarchical which is also referred to
as managerial hierarchy or managerial
2 pyramid.
Compare the management
functions. Which management An organization chart is a visual diagram
function contributes more to the that shows the relationships among people
management process? and divides the organization’s work.
Apple had to go through a reorganization process

MANAGEMENT STRUCTURE in the post-Steve Jobs era including the new CEO
The management structure indicates the Tim Cook’s responsibilities and authority relations.
hierarchical design of an organization. According to Tim Cook is placed in the CEO position in the new
a study by Zitek and Tiedens9 employees may prefer organizational chart which would appear to be in
hierarchical relationships to organizational equality, keeping with the more traditional management
which is based on the opinion that hierarchical pyramid.12
structures provide more clarity. Paradoxially, the
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Management
Management Levels
The management structure in traditional terms involves three basic layers: Top/executive, middle, and
first line/supervisory levels (Figure 3.3). At the base of the pyramid non-managerial or non-supervisory
employees reside. These three management levels are interconnected although each management level has a
different set of functions and requires different managerial qualifications.
Figure 3.3 Management Levels
Top/Executive management
CEO, COO, President, Vice-president, Rector,
Board of directors
Middle management
Division head, Plant manager, Dean
First Line / supervisory management

Section chief, Project leader, Supervisor, Office
manager
Non-managerial / Non-supervisory employees
The number, title, and functions of management teams at each level differ according to the administrative
choice with the highest authority as well as size and organizational or sectoral needs.
Top/executive management
Top management is at the highest level of the management structure of a corporation, a holding
company, or an institution. Top management involves key titles such as board of directors, chief executive
officer (CEO), chief operating officer (COO), rector, president, vice president, or executive director. Top
management teams are responsible for the entire organization and ensures the coordination of overall
activities aimed at the achievement of ultimate goals. The work teams at this level oversee a company’s
vision, monitor the environment, develop the strategic plans, represent the organization and establish
primary relationships in the external environment in keeping with organizational goals. Research points
out that top managers’, such as CEO’s individual reputation either positive or negative plays a significant
role in the overall reputation of the company and has direct impact on its standing in the stock market.13
Middle management
Middle managers are department heads, branch, or plant managers.
Middle level management is responsible for overseeing the contribution to Middle managers play a
the organizational goals and strategies developed by the top management. critical role as a bridge
Middle managers encourage and support their teams for establishing between top management
division plans and attain organizational performance at the highest and first-line management
level in compliance with the division or department goals as well as the for transferring messages,
organization’s ulitimate goals. A top management team for a food company sets reports, expectations, or
a strategy for increasing the market share for a given time;a marketing division directives.
employs market research for reaching a new customer groups as well as looking
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for new distribution channels; and a finance department

looks for addititonal and efficient sources for financing the
manufacturing and marketing of new products. Top management teams are responsible
Middle managers also play a critical role as a bridge for the entire organization and ensures the
between top management and first-line management for coordination of overall activities towards
transferring messages, reports, expectations, or directives. the achievement of ultimate goals.
Middle level management is responsible

First line/supervisory management for overseeing the contribution to the
First-line managers are supervisors, branch managers, goals and strategies developed by the top
section chiefs, shift managers, or project leaders. First management.
line management teams are primarily responsible for
implementing the operations in departments, divisions, or First line management team is primarily
any type of horizontal unit which they achieve by non- responsible for implementing the
managerial employees (Figure 3.3). A project leader in an production operations in departments or
R&D division or a shift manager in a plant work directly any type of horizontal unit which they
with non-managerial employees, guide, motivate, and monitor achieve by non-managerial employees.
their work. They are in charge of short-term action plans based
on the functional strategies and plans imposed by the middle
management in accordance with the ultimate goals of the
company or organization.
As the business environment changes towards more Organizational culture is shared values,
dynamic sectors and more flexible organizational cultures, beliefs, and attitudes that provides its
the hierarchical configuration becomes looser as well such members with a common understanding
as the team or project based structures. Accordingly, the of the organizational norms and their
management structure becomes more horizontal. roles.
An organizational culture is shared values, beliefs,
and attitudes that provides its members with a common
understanding of the organizational norms and their roles. “NASA (National Aeronautics and Space
Administration) is a space organization with a strong emphasis on equality in the work place and task orientation,
therefore is composed of teams or project groups”.14 Shein refers to organizational culture as a pattern of basic
assumptions that a group learns as it solves issues of external adaptation and internal integration.15
As the business
environment changes 3
towards more dynamic Compare the essentiality of
sectors and more different managerial tasks
flexible , the hierarchical based on the levels in the
configuration becomes hierarchical structure.
looser.
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Management
MANAGEMENT SKILLS
Management skill is a combination of knowledge, behaviors, and attitudes for performing a task.
The higher the quality level the more performance there is. Three basic skills were introduced by Robert
Katz as conceptual, human, and technical.16 Also management skills such as communication, decision
making, and time-management skills were added to the
traditional skills by Katz. We must emphasize that each one
Management skill is a combination of of the management skills is important for organizational
knowledge, behaviors, and attitudes for performance whether in a company, university, or a
performing a task. governmental organization.
Conceptual skills are related to seeing the organization
as a whole to reach, coordinate, and integrate resources to
attain established goals throughout the organization. These
Conceptual skills are related to seeing the
goal-oriented skills are especially critical for monitoring
organization as a whole to reach, coordinate,
as well as analyzing the organizational environment and
and integrate resources to attain established
developing aligned strategies which directly impact the
goals throughout the organization.
activities of various divisions or functions of an organization.
Human skills, also referred to as soft skills, are related to
Human skills also referred to as soft skills, establishing constructive relationships with other members
are related to establishing constructive of a group. Possession of such skills enables managers to
relationships with other members of a group. effectively motivate, communicate, coordinate, and lead.
Technical skills involve job-specific knowledge,
Technical skills involve job-specific experience, and ability for performing the tasks at a
knowledge, experience, and ability for proficient level. Technical skills are directly related to the
performing the tasks at a proficient level. use of technology, machinery, techniques, methodology, or
tests for performing a specific task with high performance.
Figure 3.4 Management Skills and Levels of Management

Management Skills by Managerial Levels Top / Conceptual skills
Skills that are most necessary for managers vary Executive Strategic, analytical, monitoring, decision making,
representing, resource allocation
according to managerial levels. Figure 3.4 shows Human skills
the correlation between the management level and Leading, inspiring, coordinating,
communicating, motivating, listening
the core skill/s expected to be possesed by a manager
Technical kills
at that level. It must be underlined that although Job specific knowledge,
each managerial level requires certain set of skills all experience, expertise
managers utilize a range of skills from conceptual Middle

to technical depending on the necessities of the Management Conceptual skills
tasks they are performing or activities that they are
managing. Human skills
Conceptual skills and managers

Technical skills
Conceptual skill, are most critical for top/
executive managers. Such analytical ability provides
First Line /
top managers with a strong understanding of Supervisory Conceptual skills
the internal and external environment of their Management
organizations and reinforces the quality of strategic

Human skills
decision policies. A CEO of a company, board of
directors, or a university rector has to have a long-
Technical skills
term vision, be innovative, coordinate the top teams’
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activities, and be able to see the big picture. In this the external stakeholders or a project leader who, as a
way, he or she creates an optimal and powerful first-line manager, is in charge of completing a group
position for the organization in the external of tasks at an optimum performance level must possess
environment. a blend of interpersonal competencies.
Yemeksepeti CEO Nevzat Aydın mentions about
“Leveraging 15 years of know-how and innovative Technical skills and managers
business approach to new regions with Delivery Hero”
Technical skills are directly related to the
which is one of the leading companies in online and
task itself and must be possessed by the first-line
mobile food ordering.17 Conceptual skills are also
managers whose task is to see jobs to completion.
important for middle management, as displayed
First-line or supervisory-level managers need
in Figure 3.4 Skills such as having a broad vision,
not only the technical knowledge relevant to the
monitoring, or analytical ability enrich the capacity
tasks they are supervising but also must be able
of middle management to adjust and develop the
to monitor the performance and quality of the
functional operations. Functional strategies and
employees’ jobs. The expert and efficient use of
goals set at the departmental level are critical for
technology, marketing research, HR training, or
the attainment of ultimate goals and therefore
the creation of software are just some examples of
support the success of the overall organization.
technical skills that first-line managers of related
departments are expected to possess.
Human skills and managers
Human skills (soft skills) must be most
mastered by middle level managers. The basic
function of middle management is leading their Conceptual skills are most critical for top/
departments’ activities and inspiring employees executive managers.
with high performance for contributing to the
ultimate organizational goals. Middle managers Human skills must be most mastered by
also play a critical role as a bridge between top middle level managers.
management and first-line management for
transferring messages, expectations, or directives Technical skills are directly related to the
from top to bottom and vice versa. task itself and must be possessed by the
first-line managers.
Human skills are

necessary for all managers
of any type or hierarchical 4
position. Discuss and compare
technical skills regarding
electronics and tourism
Human skills are about communicating and sectors.
working effectively with people from all types of
backgrounds, different personalities, and cultural
values. Therefore, other than middle managers,
this set of skills is necessary for all managers of
any type or hierarchical position. A CEO whose
responsibilities include establishing relationships with
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Management
complete the project on time at a given quality level.

This requires discipline and authority to a certain
extent. For the same purpose s/he needs to apply a
All managers utilize
motivating and inspiring approach as well as being
a range of skills from
a part of the team which this time requires a more
conceptual to technical
flexible management approach.
depending on the
necessities of the tasks
they are performing or
activities that they are
managing. A manager needs to find
her/his way out efficiently
and effectively in a
MANAGERIAL ROLES “management labyrinth”.
Managers at any level or position are responsible
for a variety of tasks, mostly during work hours but The basic managerial roles are described in
given the access to information and communication three groups as Interpersonal Roles, Decisional
technologies (ICT), any time or place. In order to Roles, and Information Roles.18 The significance
achieve high performance managers are demanded of different roles that managers perform is based on
to play a range of roles from adversely critical to management level, environmental circumstances,
complementary depending on the management and skill-sets.
level and specific factors such as the work
environment. A role is defined as behaviors and
applications expected of someone relevant with
her/his position. A manager’s most expected role A role is defined as behaviors and
is to achieve goals with and by others. However, applications expected of someone relevant
the term manager stands for an “authority”, a with her/his position.
“leader”, a “guide”, a “director”, a “representative”,
or a “negotiator” which is in most cases a blend of
expected roles. In other words, a manager needs to
find her/his way out efficiently and effectively in Interpersonal Roles
a “management labyrinth”. We can refer to this Based on the definition that “Management is
variety of roles as “wearing different masks”. attaining goals by and with others”, a manager’s
job is dealing with people inside and outside the
organization. The interpersonal roles of managers
are about relationships with internal and external
stakeholders such as employees, customers, relevant
interest groups, or suppliers - even communities
where a company has its headquarters or markets
its goods or services.
Interpersonal roles are about relationships

with internal and external stakeholders.
First of all managers are expected to act as

leaders, for being role models to motivate, support,
A project director is likely to play different roles and for guiding others in their self-development
through different styles. As a first-line manager her/ and, in effect, to become part of an inspirational
his primary responsibility is to guide his team to
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work force. The leader role is more attached to The entrepreneur as a decisional role is about
first-line managers who are in one-on-one work being innovative and of paramount importance in
relations with non-manager employees such as today’s competitive environment. A focus on the
members of a work team. Middle level functional entrepreneur role indicates the positive attitude
managers as well as top level management teams towards change in an organization. Entrepreneur
also depend on leadership skills. A charismatic role is employed at all levels of management but
executive is influental not only with the groups and given its importance to the organizational culture,
individuals throughout the organization but also it is promoted especially by top management teams.
affects the external organizational image. Amazon’s locker pick-up project which is referred
to as “delivery lockers”19 is an outcome of Amazon’s
innovative and entrepreneurial organizational
culture which is known to be encouraged by Jeff
The significance of Bezos, Amazon’s founder and the CEO who started
different roles that the company with his wife in their California garage.
managers are expected
to realize is based
on management
The entrepreneur as a decisional role is
level, environmental
about being innovative and of paramount
circumstances, and
importance in today’s competitive
managers’ skills.
environment.
Managers can act as representatives for a

corporation with outside stakeholders. A board Another role regarding decision making is
member hosting a prospective partner is acting as a allocating resources. New initiatives and current
representative of the company. operations need the allocation of resources in the
Interpersonal roles include acting as a liaison most efficient way. Allocating work force, funds, or
for establishing a respectful work atmosphere. technology in terms of expanding or contracting
The liaison role is carried out for negotiations operations requires intelligent and informed decision-
on partnerships, mediating between her/his own making because it impacts the efficieny and the
company and a trade organization, and for less motivation of the entire organization. The resource
formal dispute cases between employees. Top allocator role is reserved more relevant for the upper
managers and executives are expected to act as echelons of an organization because of the close
liaisons of their organizations more than middle approximation of authority to resources. Nevertheless,
and supervisory level managers. access to resources can be allocated as part of
decentralized activities of teams and departments.
Roles of negotiator and disturbance handler
Decisional Roles are also fulfilled as part of decisions. Decision-
Decisional roles are related to the decision making is at the heart of management - either
making behaviors of management teams. Decision autocratic to democratic or somewhere in between.
making is the fundamental function of managers Thus decisional roles inform the primary function
at any level. We can argue that decisional roles and of managers at all levels.
the relevant responsibilites are the most critical
compared to other group of roles that managers
have to fulfil. The resource allocator role is reserved
more relevant for the upper echelons
of an organization because of the close
Decisional roles are related to the decision approximation of authority to resources.
making behaviors of management teams
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Management
Informational Roles
This group of roles directs a constant flow of information throughout the internal organization as well
as transmitting information to and from the external environment. Managers play a vital role by keeping
various stakeholders connected by sharing information about developments regarding the organization.
Informational roles are designated through monitoring, disseminating, and providing information to the
external parties.
Informational roles aims a constant flow The monitoring role generates information
of information throughout the internal about the environmental developments,
organization as well as transmitting opportunities, or risks.
information to and from the external
environment. The disseminator role is about sharing
updated information with relevant
individuals, groups, or divisions.
Monitoring roles channel information about the
environmental developments, opportunities, or risks. The spokesperson role requires managers
Accumulation of such information is vital to connection of to reachout to the external parties for
the organization to the external environment. A marketing providing information about the recent
division manager, for example, needs to know the most recent developments, changes, or policies
developments in the marketing world as well as having regarding their operations.
information about changes in marketing practices of competitors.
The monitoring role also is vital for top management for setting
long-term goals and designing strategies.
The disseminator role is about sharing updated information with
relevant individuals, groups, or divisions. Efficient fulfilment of this
role enables managers to obtain a harmonized and well coordinated
organizational atmosphere. Managers at all levels are responsible for 5
disseminating information. Compare the managerial
The spokesperson role requires managers to reach out to the roles, similarities, and
external parties for providing information regarding their operations. differences between a small
Managers mostly at top level positions of large size companies serve as family business and an
spokespersons to inform customers, media, suppliers, or prospective international company.
investors about the recent developments, changes, or their future
strategies.
LEADERSHIP
Leadership is influencing a group of individuals
toward the accomplishment of common goals.20 Leader is the one who applies the
A leader is the one who applies the leadership process leadership process through inspiring,
through inspiring, motivating, encouraging, guiding, motivating, encouraging, and enpowering.
and enpowering. Atatürk at the nation-state level, Stephen
Hawkins at the cosmological science level, or Sakıp Sabancı Leadership is influencing a group of
at the CEO business level are just a few examples of leaders individuals toward the accomplishment of
setting examples for individuals and groups to follow. common goals.
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Leadership emerges through a synergistic and contextual combination of the following dimensions and
elements as noted above elements as noted above: goals; followers; circumstances; and personality.
Apple, today the world’s richest corporation,

faced external and internal threats of incredible
magnitude. But truth can sometimes be stranger
than fiction. Apple was just a few months away
from bankruptcy and utter destruction when
founder Steve Jobs rescued it and at a time
when Michael Dell urged Jobs to liquidate the
company. Steve Jobs, as the CEO of Apple had
a relentless drive and ambition for success. His
genius as a leader emerged in the worst of times
when his company was about to collapse. Jobs
did not live long enough during the best of times
to enjoy the fruits of his leadership.21
Management and Leadership

Leadership and leader are terms that are often used as having the same meaning with management and
manager. However, beside the similarities of leadership and management there are differences regarding
the use of authority, relationships with subordinates, goal attainment attitudes, and the characteristics of
manager versus leader.
Management and leadership are similar in terms such as: focus on attaining goals; group function; and
process of interaction and influence.
Management and leadership

are analyzed differently regarding use of internet
authority, relationships with subordinates,
the goal attainment attitudes, and the https://global-leader-index.imd.org/
characteristics of manager and leader.
Beside similarities between the management and

leadership roles, there are also distinguishing characteristics. Few are:
• Management is based on position; leadership is about personal qualifications.
• Management is attaining goals through others; leadership is pursuing goals with others.
• Management authority is based on legal authority; leadership power comes from followers.
• Management produces order and consistency; leadership produces change and movement.22
As we compare management to leadership we can not assess whether one
is superior to another or one works better that another. Most managerial
activities require both management and leadership approach for obtaining a
A leader is a role model
productive outcome.
who earns the title.
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Management
Anatomy of Leadership
Leaders and the leadership process have been subject to scholarly research from different perspectives.
Leadership is analyzed by the traits approach, behaviorial perpective, contingency theory, and contemporary
approach.
Traits approach
The traits approach was one of the first attempts to study leadership and referred more to innate
characteristics of “great people”.23 Specific traits and characteristics can distinguish a leader from a manager’s
profile. The relevant studies show that the emphasis on distinctive and critical leadership traits changes by
periods. Traits of earlier periods such as initiative and sociability have expanded into traits such as self-
monitoring and problem solving. A business leader of the 21st century is challenged by a cyclical, multi-factor,
and world-wide interconnected environment. Therefore for
success, today’s business leader is a strategist, multicultural
cognizant, a visionary, innovator, developer, entrepreneur, The traits approach is based on the
coordinator, scanner, observer, a negotiator, and is expected thinking that “A leader with a powerful
to possess other skills to match a changing environment. The standing can be distinguished from non-
traits approach is based on a thinking that a leader with a leaders”.
powerful standing can be distinguished from non-leaders.
Behavioral perspective
The traits approach limits the analysis of leaders based on certain characteristics. This led researchers
to study other aspects and especially to focus on behaviors of that characterize the profiles of leaders.
Behaviors are also strong indicators of leaders’ efficiency and success. The behavioral perspective analyses
the leadership process with a focus on how leaders act and what they do.
The behavioral approach to leadership investigates the
basic features of leaders’ behaviors. The rationale was that
leaders behaved somehow distinctly than others in their The behavioral perspective analyses the
surrounding. During the mid-20th century, researchers leadership process with a focus on how
from Ohio State University and Michigan University leaders act and what they do.
conducted behavioral studies focused on certain leadership
and management characteristics.

The Michigan studies. Based on interviews with managers and employees the outcome of this group
of studies was two basic forms of leadership behaviors: Task/production oriented behaviors and people/
employee oriented behaviors. Task-oriented behaviors indicate a focus on production and technical aspects
of a job. Managers who were task-oriented were concerned about issues such as keeping low costs and
scheduling meetings. People-oriented behaviors indicate
a supportive approach to subordinates. Managers with this
type of orientation dealt with high performance goals and Task oriented behaviors indicate the focus
human needs. Today, we must suggest that the success and on production and technical aspects of a
effectiveness of different behaviors depend on the necessity job.
of the circumstances which is influenced by constant change.
People oriented behaviors indicate a
supportive approach to subordinates.
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The Ohio State studies. The results of this group of research were akin to Michigan studies.
The researchers from Ohio State University introduced two basic leader behaviors or styles: Initiating
structure behavior and consideration behavior. Initiating structure is parallel to the task oriented behavior
and shows the emphasis on formal processes such as designing roles and responsibilities. Consideration
behavior is a form of people orientation and indicates the extent of concern for the relationships with
subordinates and their feelings.

Initiating structure is parallel to the task
The composition of
oriented behavior and shows the emphasis
internal factors such as
on formal processes such as designing roles
financial, technological,
and responsibilities.
and human resources as
well as external factors
Consideration behavior is a form of
such as economic,
people orientation and indicates the extent
political, social, and
of concern for the relationships with
cultural dynamics shape
subordinates and their feelings.
the leadership style.
The Managerial Grid. This model, which was renamed as the Leadership Grid intersects two basic
leadership behaviors, concern for people and concern for production. It places the leader in one of the five
styles. The Managerial Grid composes five managerial or leadership styles through the combination of
these two dimensions: Impoverished management –low in both dimensions; Country Club management
– high in concern for people and low in concern for production; Team management – high in both con-
cerns; Authority compliance – high in concern for production and low in concern for people; and Middle
of the Road management – intermediate in both dimensions.
Above, early perspectives to leadership are briefly explained. Following sections comprise more flexible
and conformed leadership approaches.
Managerial Grid (Leadership Grid)

intersects two basic leadership behaviors,
Traits and behavioral
concern for people and concern for
approaches to leadership
production to place the leader in one of the
complement each other.
five styles.
Contingency approach
Leadership styles and the best managerial approach change according to environmental factors, which
means that there is no single “best style”. By definition the business environment is not stable. The composition
of internal factors such as financial, technological, and human resources as well as external factors such as
economic, political, social, and cultural dynamics shape the leadership style.
The contingency approach emphasizes that leadership
style and best managerial approach change according to
environmental factors. Different contingency theories The contingency approach emphasizes
examine the match between the leadership approach and the that leadership style and best managerial
environmental composition.24 Each of the theories attempts approach change according to
to answer “if-then” contingencies. Fiedler’s contingency environmental factors.
model and situational theory are amongst the models that
discuss the fit between the environment and leadership style.
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Management
Fiedler’s contingency model. Fiedler’s with the situational leadership process is the
model seeks for the appropriate combination bet- leader’s ability to know the approach of followers to
ween the leadership style and environmental cir- their work and how willing they are for contributing
cumstances with an aim to determine the most effi- to the organizational goals. The leader’s choice
cient leadership outcome. The model refers to two whether to apply the supportive or directive
main leadership styles: Task oriented and relations- approach as well as mild forms of the two, will be
hip or people oriented. The situation dimension is based on her/his judgment about the employees’
referred to as being a combination of situational readiness for performing the task effectively.
factors: the degree of task structure; the extent of Let’s observe the project manager mentioned above
leader’s authority; and the quality of relationship as an example to Fiedler’s model. S/he can delegate
between leader and followers. authority to a highly prepared group, meaning they
are experienced and competent enough as well as
being motivated to succeed; whereas s/he will be more
supportive and apply training with a group which is
Fiedler’s model seeks for the appropriate not as much ready for performing the tasks in order to
combination between the leadership style complete the project.
and environmental circumstances with
an aim to determine the most efficient
leadership outcome.
The critical issue with
the situational leadership
Think of a managerial situation in a project group
where the tasks are clear, the leader is respected and process is the leader’s
followed, and her or his relationship with employees are ability to know the
positive. This is a favorable management environment followers’ approach to
and the project leader can perform a task oriented work and how willing
style ensuring that all group members would fulfill they are for contributing
their responsibilities effectively. If the variables are not to the organizational
as favorable where one of the factors is relatively weak, goals.
e.g. the group is not coherent enough, then the project
leader might want to apply a more people oriented
approach for obtaining a motivated group atmosphere. Contemporary leadership
Leadership is a crucial process for successful
Situational theory. This approach also emp- accomplishment of organizational goals at all
hasizes that the leadership style is contingent. The times but more so in the 21st century. Research on
premise of the situational theory: Leadership is leadership has been continuous and has introduced
shaped by the demands of situations where emplo- a range of leadership styles. Different styles and
yees are the situational variables. approaches have emerged. They are aligned with the
recent developments in the business environment as
well as emerging social and psycholgical behavioral
The premise of the situational theory: insights. These new ideas of leadership towards
Leadership is shaped by the demands
the accomplishment of goals and strategies have a
focus on concepts such as motivation, inspiration,
of situations where employees are the
support, change, risk taking, participation, ethics,
situational variables.
and values. Some contemporary leadership models
are transformational - transactional leadership,
Situational theory was originated by Hershey charismatic leadership, team leadership, leader-
and Blanchard. This theory refers to two primary member exchange model, and authentic leadership.25
leadership styles which are directive and supportive. In this chapter, we will describe the transformational
A leader will decide whether to be supportive - transactional leadership briefly. Contemporary
or directive according to the competency and leadership styles will be explained furtherly in your
commitment level of employees. The critical issue Business Management course materials.
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Transformational - transactional leadership. Leadership environments vary according to the

internal and external factors and the leadership process is affected by the leadersip factors such as goals,
charisma, followers or the group, and circumstances.
Transcational leadership. This type of leadership

is employed where accomplishment of organizational goals Transcational leadership is employed
is the primary focus and the leader is fixed on the results. where accomplishment of organizational
These types of leader behaviors are pervasive in any type of goals is the primary focus and the leader is
organization at any managerial level. We may as well use fixed on the results.
the title manager in a transactional process rather than a
leader. A general manager asking employees to effectively fulfill
requirements of a task by promising a reward means she or he
is following a transactional routine. The rewards may be monetary inducement or a promotion, positive or ne-
gative appraisal, or organizational support. Therefore transactional leadership has a focus on the exchanges
between leaders and followers. Because of the mutual give and take relationship, transactional leadership
can be viewed also as motivating followers or subordinates through responding to their expectations.
Transformational leadership. This type of leadership occurs in an area that goes well beyond the
qualities of a regular leader – follower relationship. Transformational leaders are apart from others based on
their personality and charisma and the ability to inspire radical change, articulate a vision, transform the
thinking of individuals, bring out their creativity, engage in the organizational atmosphere, and empower
followers to accomplish goals, and moreoever reach their
full potential. Griffin refers to transformational leadership
as a “leadership that goes beyond ordinary expectations Transformational leadership goes
by transmitting a sense of mission, stimulating learning well beyond ordinary expectations by
experiences, and inspiring new ways of thinking”.26 The transmitting a sense of mission, stimulating
interaction between transactional and transformational has learning experiences, and inspiring new
been subject to research arguing that effective leaders utilize ways of thinking.
both leadership approaches. 27
Henry Ford completed first gasoline-powered motor

in 1896 at age 32 and first T-Model was sold in 1908 . Apple Store in Manhattan
Ford models evolved since then.
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Transformational leaders emerge in organizations, whether business or the nation state, during
periods of radical change brought about by invention or uncertainty, or upending threats in the external
environment. Atatürk, the founder of the Republic of Turkey,, Henry Ford, the founder of the Ford Motor
Company, and Steve Jobs, the founder of Apple Inc., are examples of men of courage and vision that characterize
transformational leaders.
Chobani yogurt sells in almost every grocery store in the US since its first launch in 2007. The founder
Hamdi Ulukaya initiated the business with the purchase of a plant in 2005. He was confident in his knowledge
of the manufacture of yogurt, which he learned in Turkey, would lead to his success. He inspired his workforce
by offering them 10% of the company which has resulted in the sustained success of the company. He credits his
employees for the success of the company.28
Donald Arnold, the CEO of Carnival Cruise Lines, is another example in business of how transformational
leaders make a difference. Formerly, he was the CEO of three different industries and created billions in value. He
turned Carnival around. His secret was diversity. He created diverse teams to think creatively, to think out of the
box and to focus on objectives and not their differences. The teams consequently were very innovative and created
value for the company’s shareholders. Arnold described his passion: “It’s bringing the world closer, it’s giving people
a broader view of humanity, it’s life’s little moments,” he said. “I really believe it. I’m not a snake oil salesman”.29
Transformational leaders
6
emerge in periods
of necessity such as
Discuss the applicability of
turbulence, uncertainty,
transformational leadership
transition, or rapid
in the global business
change.
environment.
COMMUNICATION IN ORGANIZATIONS
As we enter the third decade of the 21st century, well managed “Communication” is a vital necessity
for the conduct and even survival of a business. Business is now in the midst of a quickening phase
of the Information Age and it shows no signs of slowing down. We are in an era of communication
populated by supercomputers and vast social media networks connecting billions of people in the Internet
of All Things. While advanced technologies have at once provided managers with infinite opportunities
to recruit employees, raise capital, develop new markets, and connect virtual teams working 24/7 around
the globe, etc., it also complicates the work of managers. In this age of instantaneous communication, the
effective management of information and communication technologies (See: Chapter 6) has become a
critical component for gaining competetive advantage.The new work place has no boundaries, no time and
place constraints, it is multinational and dispersed. Moreover, communication is no longer a process that
is limited to face-to-face communication. In fact, business and social communication is being reshaped by
the forces of technology. Office meetings via Skype, Zoom, and other video conference technologies, e-company,
e-mail groups, Blogs, Facebook, and Twitter are key communication pathways in today’s work environment.
Business enterprises have developed communication strategies and redesigned organizational structures
to position themselves for the challenges as well as emerging opportunities in the uprush of technological
forces unleashed by this most recent phase of the Information Revolution. One of the recent posts added in
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senior management to adapt to the revolutionary advances in technology is the Chief Information Officer (CIO),
which is anchored in creation of information through digital communication.
Communication is critical to all managers at all levels
because it takes place whenever there is a managerial
process whether planning, organizing, or controlling. Communication can be described as the
Furthermore, management is about creating a common process of transmitting a message from a
understanding throughout the organization, in both the person, group, or unit to another.
internal and external environment: communication with all
stakeholders, communication with a diversified workforce,
and communication globally. Likewise, success can only be achieved by an
atmosphere of shared values, goals, policies, and strategies.
Managers utilize techniques and a variety of instruments for obtaining An atmosphere
a strongly shared organizational culture. An atmosphere of constructive of constructive
communication is one of the powerful tools that managers can employ for communication is a major
creating the sense of inclusiveness and belonging. Communication can be condition for creating a
described as the process of transmitting a message from a person, a group, or common understanding
a unit to another. The message in a business environment is mostly sent in throughout the
the form of a request, an appraisal, or a warning. organization.
Figure 3.5 Communication Process

Environmental affects
Encoded message Decoded message

Channel (Media)
Sender
(Source) Receiver
Environmental affects
Feedback message
Communication Process
The communication process can take place in any type of organization, with any group of people, and
towards goals of any scope. The organizational environment that communication occurs can be a regular,
unexpected, complex, dynamic, or stable one and affects how it takes place.
The communication process is composed of components
each of which is key to create an efficient process (Figure
3.5): the message, source/s (sender), encoding, channel The communication process is composed
(medium), receiver/s, decoding, environmental affects, and of components each of which is key to
feedback messages.30 A message, the main component and the success of the process: the message,
motive force of the communication is formed by a source source/s (sender), encoding, medium
(sender). The sender is someone occupying a managerial (channel), receiver, decoding, noise, and
position, a regular employee, or a group. The message is feedback.
encoded by the sender using words and/or symbols which
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may be based on an information, an idea, a reaction, or a feeling. The

message follows the communication channel which changes from face -to
-face to long distance digital medium. The communication channel is either
The efficient
fortified or distracted by the environmental elements. The receiver who
communication process
is a person and/or a group decodes the message which passes through the
is two directional that is
communication channel. The degree that the actual content of the message
the receiver becomes the
as initiated by the sender overlaps the content that is decoded by the receiver
sender with a feedback
is highly important for a penetrative communication process. The efficient
message which is a
communication process is two directional that is the receiver becomes the
response based on the
sender with a feedback message which is a response based on the receiver’s
receiver’s interpretation
interpretation for the message.
for the message.
Forms of Organizational Communication

Organizational goals are accomplished by the integrated contributions of internal and external parties.
Managers’ responsibility is to ensure the organizational adherence and that the parties stay connected.
Managers use varying forms of communication which depend on the context: the extent of
importance; urgency of the matter; distance; availability of technology; manager’s style; and the overall
organizational culture. Writtten and oral communication, vertical and horizontal communication,
electronic communication, personal networks, and nonverbal communication are some of the forms that
members of an organization choose to design the message for sharing an information, an idea, a reaction, or
projects. The management process involves different forms of communication through different channels.
The managers’ choice about the channel and the form of communication shapes the relationships with
individual or groups in the organization.
Forms of communication depend on the

context: the extent of importance; urgency
of the matter; distance; availability of
technology; manager’s style; and the overall
organizational culture.
Formal communication
Formal communication refers to communication Formal communication refers to
channels between formally designated positions and tasks communication channels between formally
which mainly forms at the vertical and horizontal levels. structured positions and tasks which mainly
The content of formal communication comprises tasks and forms at the vertical and horizontal levels.
processes in compliance with the organizational goals.
Vertical communication. Communication channels between hierarchical levels either in the

downward or upward direction are present in most of the organizations. Downward communication is the
channel from top managerial levels to the rest of the organization. Downward communication covers a
content such as the transmission of the rationale of organizational goals, directives, overall strategies, values,
principles, performance assessment results, developments in the external environment, and changes. Written
documents, emails, group discussions, in-person meetings, or handbooks are some of the channels that
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managers can utilize for downward communication. The constant flow of

downward communication is critical especially for a coherent operational
atmosphere and a transparent management image. Upward communication
follows a route from bottom to top, that is from employees to managers The efficient flow of
at any hierarchical level. The content of upward communication vary as two- directional vertical
suggestions, reports, demands, and complaints. Open door policy, project communication channel is
teams, online discussion groups, and suggestion boxes are examples of upward essential for managers to
obtain motivation in the
communication channels.
work place and to keep
The efficient flow of two- directional vertical communication channel is their “hands-on” status.
essential for managers to obtain motivation in the work place and to maintain
their “hands-on” status. Managers need to stay connected with employees
which requires two basic attitudes: Providing an organizational atmosphere that enables employees to utter
their opinions and listening to what they have to say.
Horizontal communication. Flow of

communication between positions and tasks at the Vertical communication refers to
same hierarchical level is referred to as horizontal communication channels between
communication. Managers and non-managerial hierarchical levels either in the downward or
employees at all levels are in need to contact each other for upward direction.
organizational and personal achievement.
Divisions and teams benefit from horizontal flow of Downward communication is the channel
communication by staying tangential to the others which from top managerial levels to the rest of the
supports horizontal coordination. Notably, this allows organization.
employees and divisions internalize overall goals and their
role in the accomplishment of ultimate goals. Marketing Upward communication follows a route
and production departments are horizontally attached for from bottom to top, that is from employees
responding to the market’s needs with the best possible quality to managers at any hierarchical level.
product/s. Likewise project based companies with continuous
R&D activities depend on the outcome that will be obtained
from efficient team work at the horizontal level.
On the other hand, managers who focus on vertical Horizontal communication forms
relationships face the risk of staying out of the formal between positions and tasks at the same
communication atmosphere occuring at the horizontal hierarchical level.
level as well as not being aware of conflicts that may arise.
To avoid such a negative impact, managers stay in contact
with their employees through open communication channels and approaches such as management by
wandering around (MBWA). MBWA applies to all types physically suitable organizations but even more in
certain sectors such as health organizations.31
Informal communication
Formal communication channels form based on the formal structure in an organization. Informal
communication occurs outside the formal communication based on personal relations in an organization.
Employees as well as managers create networks and groups for various reasons such as working on the same
project, sharing hobbies, and belonging to a social group in
any type of organization. Informal communication occurs
Informal communication occurs outside for satisfying social needs which may also strenghten the
the formal communication based on formal communication flow as well causing distraction.
personal relations. The informal communication in organizations include
channels such as personal networking and the grapevine.
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Personal networking. This type of informal Non-verbal communication

communication refers to establishing relationships Communication without words is a strong
in and outside the organization either directly medium either for formal or informal purposes.
related to formal tasks or only about being a part Non-verbal communication is a form of
of social incidents. Personal communication interpersonal communication, intentionally or not,
networks include relations with all stakeholders. conveyed by body movements, facial expressions,
These networks help managers and employees and gestures, explicit, or tenuous. Body language
to get complementary information about the is the most pervasive type of non-verbal language,
organizational environment as well as employees’ including natural and artificial scents, usually used
opinions and approach to work. as semaphores to emphasize or hide meaning orally
communicated.
Personal communication network refers

to establishing relationships in and outside Non-verbal communication is a form of
the organization either directly related to interpersonal communication, intentionally
formal tasks or only about being a part of or not designed by body movements,
social incidents. facial expressions, and gestures, explicit or
tenuous.
The grapevine is an informal formation
of communication that develops as people
interact in organizations.
Moreover, the increasing application of
electronic communication expressed symbols
and emoticons for transmitting reactions,
emotions, and thoughts. Although each expression
Grapevine. The grapevine is another infor- communicates an emotion or an opinion, non-
mal formation of communication that develops as verbal communication is more indirect and less
people interact in organizations. The metaphor gra- explicit than verbal communication. Thus, it is
pevine indicates the spontaneous nature. This type more subject to misinterpretation. Professional and
of communicational relationship can emerge at any experienced managers use non-verbal communication
organizational level, usually starting at lower levels, or body language for complementing and fortifying
including both managerial and non-managerial verbal or electronic messages.
employees. Grapevine exists in every organization The multinational work place reveals the
and due to its humane structure usually not tried importance of cultural differences regarding the use
to be sanctioned by formal authority. Sharing same of body language as much as verbal communication.
hobbies, family ties, projects, and other social rela- Eye contact, personal space, physical contact, or
tions cause the grapevine communication channels greeting style differ by cultures. It is critical at
flow around the organization. incidents such as negotiations to be knowledgeable
A major essential technology change is expected about other cultures’ body and facial gestures.
also to cause a change in the workforce of the Best A businessperson from United Kingdom, for
company. The rumors start at the non-employee and example may have a facial expression that can be
first-line level of the company spreading onto the distinguished from someone of a Mediterranean
upper levels. The company CEO becomes a part of the culture. Similarly, personal space is a gesture that
grapevine because of a club membership and grasps changes from Northern Europe to Latin American
the disturbance amongst the employees. Thereby, the cultures, from farther to closer distances, and even
CEO manages the crisis to minimize the negative more so among Arabic cultures.
impact of the technology change.
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Technology and Communication promote the timeliness and effectiveness of the

“Hello” is the motto of the electronic work place. It decision making process, the quality of products
gives start to an email between offices only few meters and services as well as the overall organizational
away from each other or in different parts of the performance in different sectors.
world, a WhatsApp call, a board conference between Anadolu University’s Electronic Information
partners in different continents, and more. Management System is a recent example of a formal
use of technology augmenting organizational
Companies use LiveChat for contacting communication. Documents of assignments, reports,
customers and potential customers from or announcements flow to and from all units of the
University. Anadolu
one software as an efficient tool for
University is mega
marketing.
university with two
main campuses besides Information and
the international communication
branches in Europe technologies (ICT) can
and the United States. promote the timeliness
As challenging as it was and effectiveness of the
to integrate the new decision making process,
electronic system in the the quality of products
entire organizational and services as well as
structure, it was the overall organizational
an instrument to performance in different
Rapidly advancing communication technologies create an efficient sectors.
not only altered the way we live but also the scope communication
of the organizational communication. The pace of network.
competititon in the global era requires a high-speed
organizational and work atmosphere which includes
relationships with all stakeholders. A skilled and well Effective Communication
equipped use of technology for communication, Amazon founder and CEO Jeff Bezos is one of
regarding different functions of a business, is the prominent CEOs who has a careful approach
a significant determinant of organizational to making the most out of meetings. He employs the
performance and adherence. Business processes “two pizza rule”in his company to emphasize that the
such as human resources, research and development, number of participants should be limited to ensure
accounting, production, supply chain and logistics, more productive meetings.32
and marketing benefit by the application of advanced
communication technologies and add value to the
ultimate organizational goals.
A successful and effective organizational
Businesses such as Uber car service use smart
communication process has certain features:
phone apps for accelarating the process that customers
the message should reach its destination in
access cab service in an increasing number of cities
the original form as much as possible; the
around the world. Similarly, businesses create blogs
message should reach the receiver on time;
or facebook pages for keeping customers attached to
their brands. For more examples check https://www. and the receiver is engaged in the process
marketingcloud.com/ sending acknowledgment of the receipt of
the message in the form of a feedback.
A tech-embedded workplace underscores the
vital importance of the investment in technology.
It links individuals and units in an organization,
internally and externally. The diffusion of A successful and effective organizational
technology in almost all operational processes has communication process has certain features: the
advantages as well as drawbacks. Information message should reach its destination in the original
and communication technologies (ICT) can form as much as possible; the message should reach
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the receiver on time; and the receiver is engaged in the process by sending acknowledgment of the receipt of
the message in the form of a feedback. Top level managers who value communication for goal accomplishment
reinforce a sustained communication atmosphere in their organizations whether a multinational corporation,
a hospital, or a university. Creating a culture of communication in an organization is a unifying process
initiated at the upper levels and shared with every level of the organization.
Employing an effective organizational process is an essential but
difficult task for managers at all levels. The flow of communication can be
subject to different effects: it can be strenghtened, encouraged, redirected,
The flow of
interrupted, or obstructed by a variety of environmental factors. Supporting
communication can
factors for an effective communication process can be: an inclusive
be subject to different
management approach; leadership skills; management by objectives as
effects: It can be
described in the above sections; coordination by top management; and
strenghtened, encouraged,
knowledgeable use of information and communication technologies.
redirected, interrupted, or
Obstacles for obtaining a desired level of organizational communication
obstructed by a variety of
can be: cultural differences, noise, timing, emotions, distance, ineffective
environmental factors.
media as Bezos pointed out, intentional distraction, misperception, lack of
language, and incomplete messages.
Two different communication approaches: a) The marketing division manager of the international Es
company holds weekly innovation meetings including Skype participation with those employees abroad, with
timing determined suitable for different time zones. Ms. Şen listens to her co-workers, encourages them to
generate and share ideas about how to increase customer loyalty, and makes comments if needed. She believes in
the “conversation style”. b) The head of the marketing division in company Zet, another international operation,
sends out messages to the division email group, whenever he needs to discuss a new development or a project. Mr.
Berke asks his co-workers to give him feedback about the applicability of a project or any matter of organizational
change. He believes that using communication technologies assures its quality, e.g. emailing engages everyone in
the discussion, and that he can keep records of the messages as well.
7
Why effective communicati-
internet on in a multicultural business
environment, with managers
https://www.youtube.com/watch?v=eVJuIZElOXEv
and employees from different
cultures, is of utmost impor-
tance?
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Further Reading
Technology will not render managers obsolete — but they will need to be more skilled than ever
before
“I’ve been thinking about technology and management for over a decade. In the process, I have
written two books describing some of the ways that the practice of management will respond to rapid
technological innovations. Looking back, I made four predictions about management and technology.
First, it was clear to me that the manager’s role as a coordinator of work would come under
increasing pressure. Constant improvements in robotics and machine learning, in conjunction with the
automation of routine tasks, make management a more unclear practice.
Next, I could see an inevitable shift in which a parent-to-child way of looking at the relationship
between the manager and his or her team would be questioned and ultimately superseded by an adult-
to-adult form. The nexus of this more adult relationship concerns how commitments are made and
how information is shared. When technology enables many people to have more information about
themselves and others, it’s easier to take a clear and more mature view of the workplace. Self- assessment
tools, particularly those that enable people to diagnose what they do and how they do it, can help
employees pinpoint their own productivity issues.
Third, it seemed to me obvious that technology would tip the axis of power from the vertical to
the horizontal. Why learn from a manager when peer-to-peer feedback and learning can create stronger
lateral forms of coaching? Moreover, technology-enabled social networking is capable of creating robust
and realistic maps of influence and power — so no more hiding behind fancy job titles.
Finally, the rise of platform-based businesses such as Uber Technologies Inc. has everyone excited
about platforms and how they can create a fertile arena for new businesses to be built while also acting
as a conduit for flexible ways of working”.
...
Source: Gratton, L. (July 27, 2016). Rethinking the Manager’s Role. MIT Sloan Management
Review, 58, 1.
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In Practice
What is the Best Management Structure for a of operations run by a manager depend on the
Business Organization? composition of these factors, at times some
Business and management textbooks cover dominant over others. Successful managers
the details of different managerial approaches. who create high amounts of added value for
Each of these approaches reflect a variety of their corporations are those who make the right
organizational values, behaviors, and attitudes. We decisions for who can align the management
dig into business practices to provide illustrative structures or managerial styles to environmental
examples and stories of CEOs, business leaders— challenges.
transactional versus inspirational—as well as A business organization, a corporation, a
initial failures and great successes are analyzed. regional, or a multinational enterprize have
The Legend of Vehbi Koç and young Koç diverging goals, are run by different compositions
generation executives; Yıldız Holding Chairman of resources, ruled by changing imperatives, and
Murat Ülker with the broad vision of expanding all operate in different environmental settings.
globally; Apple’s founder legendary Steve Jobs; An organizational structure planned for a
Former Coca Cola CEO Muhtar Kent; or regional company will be insufficient as the same
Jack Ma of Alibaba, biggest online retailer, are company expands into international markets. A
worldwide striking examples of managing in media organization must be designed by teams
different contexts—social, economic, political, while an automobile manufacturer is technology
and cultural. Do they all follow a certain type dominated and more vertically structured.
of managerial style and organizational structure? Likewise real life business practices in different
The answer is simply one style doesn’t fit all. sectors around the world demonstrate the variety
Kevin Turner, climbed up the hierarchical ladder of managerial styles and organizational structures
from cashier to top-level executive at Walmart, with similarities and differences.
once the world’s largest corporation. He was then Discuss:
hired by Microsoft as the chief operating officer 1) Compare the managerial practices of
(COO) serving successfuly for eight years. Turner organizations in different sectors that
wasn’t as lucky with the Citadel Securities in the you encounter during your daily life? To
financial sector, where he was hired as the first what extent and why the similarities and
CEO. There he lasted seven months! He appeared to differences are?
be uncomfortable in meetings for lacking sufficient 2) What would your initial approach be if
knowledge about Citadel’s operations and global you were assigned for a company which
ambitions to create a 24/7 e-commerce finance operates in different sectoral circumstances
company of the first magnitude.33 than the you were previously a part of?
The best management approach or most
suitable management structure changes from one
set of circumstances to another. Environmental
factors such as the nature of products and
services, economic and financial resources,
size of the organizaton or group, timeline for
attaining goals, knowledge and experience of
managers and employees, type of technology, and
culture determine the design of a management
structure. The outcomes of the success or failure
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Defining management and

LO 1 relevant terms
Management is achieving goals by the contribution of others.

The management definitions emphasize elements pertinent to
the management environment. These key elements are; goals,
people, and activities relevant to the management environment.
Organizational performance is a key concept in management
which is obtained through organizational effectiveness and
organizational efficieny. Organizational effectiveness is the
Summary
degree to the achievement of organizational goals based on the
statements and expectations. Organizational efficiency on the
other hand is about the amount of overall resources used for the
achievement of an organizational goal.
Explaining the management process

LO 2 and the functions of management
Management is a process through which required resources

are utilized by a sequence of functions starting with planning,
followed by organizing, leading, and controlling for attaining
organizational performance. Planning is identifying goals
and deciding which tasks that will be performed and the
resources that will be utilized for attaining these goals.
Organizing is determining tasks relevant to goals; grouping
tasks by departments; assigning the work force for specific
tasks; deciding the authority relationships, and preparing the
work environment which includes allocating equipment and
technology. Leading is about guiding the organization and/or
the group towards the goals. Controlling is the monitoring
function of the management process and is critical for the
success of other management functions.
Describing the management

LO 3 structure
The management structure indicates the hierarchical design

of an organization. The managerial hierarchy identifies the
scope of authority, responsibility, power, and skillsets that
are pertinent to each level. The management structure in
traditional terms involves three basic layers: Top/executive,
middle, and first line/supervisory levels. At the base of the
pyramid non-managerial or non-supervisory employees reside.
These three management levels are interconnected although
each management level has a different set of functions and
requires different managerial qualifications.
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Distinguishing basic management

LO 4 skills
Management skill is a combination of knowledge, behaviors,

and attitudes for performing a task.
Conceptual skills are related to seeing the organization
as a whole to reach established goals by coordinating and
integrating resources throughout the organization. Human
skills, also referred to as soft skills, are related to establishing
constructive relationships with other members of a group.
Summary
Technical skills involve job-specific knowledge, experience,

and ability for performing the tasks at a proficient level.
Conceptual skills, are most critical for top/executive
managers. Human skills (soft skills) must be most mastered by
middle level managers. Technical skills are directly related to
the task itself and must be possessed by the first-line managers
who are in the position of getting jobs completed.
Understanding the managerial roles

LO 5 that managers play in different settings
In order to achieve high performance managers are demanded

to play a range of roles from critical to complementary
depending on the management level and factors such as the
work environment.
The basic managerial roles are described in three groups as
Interpersonal roles, Decisional roles, and Information roles.
The significance of different roles that managers are expected
to realize is based on management level, environmental
circumstances, and managers’ skills.
Interpersonal roles of managers are about relationships
with internal and external stakeholders such as employees,
customers, relevant interest groups, or suppliers - even
communities where a company has its headquarters or markets
its goods or services. Decisional roles are related to the decision
making behaviors of management teams.
Describing the leadership process

LO 6 in comparison to management
Leadership is influencing a group of individuals toward the

accomplishment of common goals.
A leader is the one who applies the leadership process
through inspiring, motivating, encouraging, guiding, and
empowering. Leadership and leader are terms that are often
used as the same meaning with management and manager.
However, beside the similarities management and leadership
are analyzed differently regarding use of authority, relationships
with subordinates, the goal attainment attitudes, and the
characteristics of manager and leader.
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Identifying the anatomy of

LO 7 leadership
Leaders and leadership process have been subject to scholarly

research from different perspectives. Leadership is analyzed by
the traits approach, behaviorial perpective, contingency theory,
and contemporary approach.
The traits approach was one of the first attempts to study
leadership and reference was more to innate characteristics
of people with remarkable success. Specific traits and
Summary
characteristics can distinguish a leader from a manager’s profile.
Behavioral perspective analyses the leadership process with a
focus on how leaders act and what they do. The contingency
approach emphasizes that leadership style and best managerial
approach change according to environmental factors.
Explaining the communication process and

LO 8 forms of communication in organizations
Communication is the process of transmitting a message from

a person, group, or unit to another.
The communication process can take place in any type of
organization, with any group of people, and towards goals
of any scope. The communication process composes of
components each of which is key to the success of the process;
message, source/s (sender), encoding, medium (channel),
receiver, decoding, noise, and feedback.
Managers use varying forms of communication which
depend on the situation; the extent of importance, urgency
of the matter, distance, availability of technology, manager’s
style, and the overall organizational culture. Writtten and oral
communication, vertical and horizontal flow of communication,
electronic communication, personal networks, or nonverbal
communication are some of the forms that members of
an organization choose to design the message for sharing
information, an idea, a reaction, or a project. Managers’ choice
about which channel and what form of communication to
use shapes the relationships with individuals or groups in the
organization.
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1
What are the measures of organizational perfor- 6 Which group of management skills are critical
mance ? for monitoring as well as analyzing the organizational
environment and developing aligned strategies?
a. Responsibility and efficiency
b. Effectiveness and efficiency a. Technical skills
c. Effectiveness and social responsibility b. Human skills
d. Social responsibility and ethics c. Conceptual skills
e. Efficiency and ethics d. Soft skills
Test yourself
e. Management skills
2 Which one describes the “management process” 7 Which of the below gives the correct combination
in the proper content? for the management level and the most required
a. Planning, coordination, organizing, controlling skills?
b. Organizing, coordinating, leading, planning a. Top management-technical skills
c. Planning, organizing, leading, controlling b. Supervisory level- conceptual skills
d. Leading, controlling, organizing c. Middle level- conceptual skills
E. Coordinating, planning, leading, controlling d. First-line level- human skills
e. Middle level- human skills
3 Which one is the monitoring function of the
management process and is critical for the success of 8 Which managerial set of roles are mainly about
other management functions? relationships with internal and external stakeholders
such as employees, customers, relevant interest groups,
a. Planning b. Controlling or suppliers?
c. Organizing d. Leading
e. Decision making a. Interpersonal roles
b. Decisional roles
c. Entrepreneurial role
4 Which organizational level managers are d. Informational roles
responsible for overseeing the contribution to the
e. Disseminator role
organizational goals and strategies developed by the top
management?
9 What is the emhasis of task oriented leadership
a. Non-managerial employees behaviors?
b. First organizational level managers
a. Supportive approach to subordinates
c. Middle level managers
b. Production and technical aspects of a job
d. Top administration
c. Concern for the relationships with subordinates
e. Executive level managers
d. Approach to subordinates’ feelings
5 What set of responsibilities do the top administ- e. Changing approach based on circumstances
ration teams in an organization possess?
10 Which one below is a form of interpersonal
a. They encourage and support their teams for communication that is designed by body movements,
establishing division plans and attain organizational facial expressions, and gestures?
performance.
b. Oversee the contribution of a division to the a. Verbal communication
organizational goals and strategies developed by the b. Organizational communication
top management. c. Communicational network
c. They are primarily responsible for implementing d. Vertical communication
the operations in departments, divisions, or any e. Non-verbal communication
type of horizontal unit which they achieve by non-
managerial employees.
d. They oversee a company’s vision, monitor the
environment, develop the strategic plans, and
represent the organization.
e. They are responsible for leading their departments’
activities and inspiring employees with high
performance.
108
3
1. b If your answer is incorrect, review 6. c If your answer is incorrect, review

“Definition of management”. “Conceptual skills”.

2. c If your answer is incorrect, review 7. e If your answer is incorrect, review
“Management process”. “Managemet skills by managerial levels”.
3. b If your answer is incorrect, review 8. a If your answer is incorrect, review

“Controlling function”. “Interpersonal roles”.
4. c If your answer is incorrect, review 9. b If your answer is incorrect, review

“Management levels”. “Behavioral perspective”.
5. d If your answer is incorrect, review “Top/ 10. e If your answer is incorrect, review
executive management”. “Informal communication”.
Compare the impact and role of effectiveness

and efficieny on organizational performance.
Organizational performance is determined mainly by these two processes

both of which are essential for measuring the success of the outcome.
Organizational effectiveness is the degree of achieving organizational goals
based on explicit expectations. Organizational efficiency, on the other hand,
is about the amount of overall resources used for the achievement of an
organizational goal.
A business organization aims to have both measures fulfilled to the feasible
your turn 1 maximum extent. The impact and role of these measures on organizational

performance depend on the goals, resources, and environmental circumstances.
For example, during a period of economic recession costs become priority factors;
thus efficiency is more critical than effectiveness. On the other hand, if the product
quality is a core competency for sustaining the market share, than the achievement
of the goal for quality surpasses other production concerns. Briefly, managers seek
to mainatain a balance between the effectiveneness and efficiency by assessing
different aspects of a production process.
Compare the management functions. Which management

function contributes more to the management process?
The management process is composed of functions starting with planning,

followed by organizing, leading, and controlling for attaining organizational
performance. Each function has a specific role in completion of the management
process. In general terms, none of the functions is superior to another.
Management functions are connected, the outcome of one function
your turn 2 becomes an input for the others.
The significance of each management function depends on the needs
of certain organizational periods. For example, the establishment of a new
department requires more emphasis on the planning stage before continuing with
organizing and the following functions.
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3
Management
Compare the essentiality of different managerial tasks

based on the levels in the hierarchical structure.
The management structure in traditional terms involves three basic layers

Suggested nswers for “Your turn”
which are top/executive, middle, and first line/supervisory levels. These three
management levels are interconnected although each management level has
a different set of functions and requires different managerial qualifications.
Each of the managerial levels contributes to the organizational goals from
a different perspective whether the hierarchy is applied strictly or in a more
horizontal approach.
your turn 3 The top management tasks are critical because the strategies and policies
shaped at this level guide the entire organization. The middle managerial
level is adhesive; it links the top management to the lower levels of the
organizational structure and the reverse as well. Middle managers also fulfil
the divisional responsibilites which are essential for the achievement of the
ultimate goals and strategies. The first line or supervisory team tasks also
are neither less important nor more essentail than the other managerial levels.
The fist line managers at the lowest hierarchical level is of high importance to
a company, because they supervise the production of good and/or services.
Discuss and compare technical skills regarding electronics

and tourism sectors.
As we explained in the chapter, technical skills involve job-specific

knowledge, experience, and ability for performing the tasks at a proficient
level. The nature of these skills vary and mainly change by sectors. Likewise,
electronics and tourism sectors require different types of technical skills which
are related to the first level managers as well as non-managerial employees.
The electronics sector is much more based on technological skills than
the tourism industry. Therefore, the relevant technical requirements are more
your turn 4 likely about the use of machinery and other technologies. The tourism sector
managers and employees, on the other hand, are expected to be skilled in
face-to-face tasks such as service, lodging, and transportation. The similarity
between the two sectors is that both comprise technology to an extent. The
difference however is broader. Electronics’s primary input is grounded in
technology, whereas the tourism sector is primarily based on the behavioral
dimensions of providing comfort and entertainment.
110
3
Compare the managerial roles, similarities, and differences

between a small family business and an international company.
Small business, which is usually associated with entrepreneurship, is a

privately and independently owned company with a limited number of
employees and revenue compared to large businesses. Also, family businesses
are mostly small to medium size companies. Small and medium size businesses
are commonplace throughout the world. They account for the lion’s share
of employees: from barber shops to a variety stores, from a tailor shops to
an electronics repair stores, from a tavernasto a small farmsteads, etc., they
multiplied by the millions account for most of the globe’s economic activity.
Global companies are at the opposite end, with investments around the world
with vast amount of culturally diversified employees of all types keeping their
enterprises running.
Small businesses involve small numbers of employees. The work
enviroment is often family-based where relationships are informal, and is
your turn 5
either an older family member or a mentor for the employees.
The managerial roles for small business are mostly engaged in roles which
require making key decisions and adjusting to the environmental changes
while often working side by side with his/her employees. Global company
managers, on the other hand at every level deal with large numbers of
employees who are diversified in cultural norms and values, language, and
work habits. Global work atmosphere also has no time and space limits. This
type of work environment demands effective decision makers and leaders
but most importantly must execute their informational and monitoring roles
successfully. The global business environment is geographically dispersed and
subject to rapid changes with affects from all economies and cultures. Thus,
channelling the right and sufficient information about the environmental
developments, opportunities, or risks is key to make successful decisions.
Discuss the applicability of transformational leadership in

the global business environment.
Transformational leadership is about transmitting a sense of mission,

stimulating learning experiences, and inspiring new ways of thinking.
Transformational leaders emerge mostly in times of need and periods of rapid,
if not chaotic change. Transformational leaders possess the ability to inspire
radical change, articulate a vision, bring out the creativity in individuals,
empower followers to accomplish goals, and moreoever reach their full
potential. All these require unwavering determination and powerful initiative.
your turn 6 The global business environment is relatively more complicated than local
markets. It is diversified in terms of economies, politics, and cultures; it is
more competitive, involves more ambiguity in a climate of constant change.
International markets in the global business environment involves daunting
challenges from one country to another. In this regard, international operations
need to be carried out by managers with a global mind-set and multicultural
vision. Such leaders are skilled in monitoring and adjusting to changes, and
inspire employees from different countries to formulate new strategies when
challenges arise.
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3
Management
Why effective communication in a multicultural business environment, with

managers and employees from different cultures, is of utmost importance?
Suggested nswers for “Your turn”
Communication occurs between a sender and a receiver. Effective

communication occurs when the message from the sender is received with the
intended content, time, and location by the receiver. This assesment applies
to all types of communication and in any type of organizational environment.
The organizational factors though affect the effectiveness of the
communication. They are filtered and potentially distorted by work attitudes,
ethics, habits, values, technology, verbal as well as non-verbal language, and
other aspects of the work environment shape the communication process. These
factors get even more challenging in a multicultural business environments
your turn 7 because of cultural collissions and cross-currents. Eastern cultures emphasize
face-to-face relationships, indirect answers, or delaying feedback or not giving any
at all; while western cultures relatively prefer direct answers and use of technology
for connectivity. For example, Turkish communication culture generally is rich in
words and body language is explicit compared to styles that restrain the use physical
gestures to underscore verbal communication. Anyone working in a multicultural
environment either as a manager or an employee needs to be aware of other
culturally-based communication behaviors to minimize misunderstanding
the messenger or the message.
endnotes
1Koonts, H., O’Donnell, C., & Weihrich, H. (1986). 9Zietek, E. M. & Tiedens, L. Z. (January, 2015). The
Essentials of Management (4th ed.). McGraw-Hill, fluency of social hierarchy: The ease with which
p.13. hierarchical relationships are seen, remembered,
2Ivancevich, learned, and liked. Journal of Personality and Social
J.M. & Duening, T. N. (2004). Business
Psychology, 102, pp. 98-115.
– Principles, Guideliness, and Practices. Atomic
Dog Publishing, p. 156. 10Ivancevich & Duening, op. cit., p. 165.
3Robbins, S. P. & Coulter, M. (2016). Management. 11Dias Portolese, L. & Shah, A. J. (2009). Introduction
Pearson, Inc., p. 7. to Business. Mc GrawHill, p.184.
4Daft, R. L. (2016). Management (13th ed.). Cengage 12Elmer-Dewitt, P. (August 29, 2011). Rethinking
Learning, p. 8. Apple’s org chart. Fortune. Retrieved from http://
5Griffin, fortune.com/2011/08/29/rethinking-apples-org-
R. W. & Ebert, R. J. (2004). Business.
chart/
Pearson, p. 170.
13Hatch, M. J. & Schultz, M. (1997). Relations
6Daft, op. cit., p. 512.
between organizational culture, identity and
7Griffin & Ebert, op. cit. image. European Journal of Marketing, 31, 356-
8Boston, W. (December, 2015). Chain of mistakes’ 65; Tiber Leland, K. (2016). Does a company
led to Volkswagen scandal: VW chaiman, CEO. reputation rest on the shoulders of the CEO?
The Wall Street Journal. Retrieved from http:// Business Journal (Central New York), 30 (32), 5-5.
www.theaustralian.com.au/business/wall-street- 1/2p.
journal/chain-of-mistakes-led-to-volkswagen- 14Luthans, F. & Doh, J. (2009). International
scandal-vw-chaiman-ceo/ Management. McGraw- Hill, p. 67.
112
3
15Schein, E. H. (1997). Organizational Culture and 27Avolio, B. J., Bass, B. M., & Jung, D. I. (1999). Re-
Leadership. Jossey-Bass. examining the components of transformational
16Katz, and transactional leadership using the
R. (September 1974). Skills of an Effective
Multifactor Leadership. Journal of Occupational
Administrator. Harvard Business Review, pp. 90-
and Organizational Psychology, 72, pp. 441–462.
102.
doi:10.1348/096317999166789
17Delivery Hero (2015). Delivery Hero acquires 28Joseph,M. (April 29, 2016). What Does Chobani’s
Turkish food delivery giant Yemeksepeti. Retrieved
Founder Get For Giving 10% Of His Company
from https://www.deliveryhero.com/delivery-
To Workers? Retrieved from https://www.forbes.
hero-acquires-turkish-food-delivery-giant-
com/sites/maryjosephs/2016/04/29/
yemeksepeti
29Sampson, H. (April 7, 2014). One year in, Carnival
18Minzberg, H. (1975). The manager’s job: Folklore
CEO Arnold Donald is working to right the ship.
and fact. Harvard Business Review, pp. 49-61.
Retrieved from http://www.miamiherald.com/
19Delivering the goods (August 25, 2012). Economist. news/business/article1974194.html
Retrieved from http://www.economist.com/ 30Robbins & Coulter, op. cit., p. 332.
node/21560918
31Tucker, A. L. & Singer, S. J. (2014). The
20Northouse, P. G. (2013). Leadership (6th Ed.). Sage
effectiveness of MBWA. Production and Operations
Publications, p.5; Robbins & Coulter op. cit.,
Management, 24(2), pp. 253–271. DOI 10.1111/
p.491.
poms.12226
21Deutschman, A. (September 5, 2011). Exit the 32Giang, V. (October 29, 2013). The ‘Two Pizza Rule’
King. Newsweek.
is Jeff Bezos’ secret to productive meetings. Retrieved
22Northouse, op. cit., p. 12. from http://www.businessinsider.com/jeff-bezos-
23Ibid., p. 19. two-pizza-rule-for-productive-meetings-2013-10
33Leising, M. & Massa, A. (February 2017). Maybe
24Robbins & Coulter, op. cit., p. 495.
a good manager can’t run everything. Bloomberg-
25Northouse, op. cit. Businessweek, pp.32-34.
26Griffin, op. cit., p. 486.
113
Chapter 4 Managing Human Resources
1 2
Learning Outcomes
Define the concept of human resource Describe the internal and external environment
management. of human resource management.
3 Explain human resource management

activities to get the right people. 4 Understand human resource management
activities that maximize performance.

The Concept of Human Resource Management Human resources
Environment of Human Resource Management Human resource planning
Human Resource Management Activities to Recruitment
Get the Right People Selection
Human Resource Management Activities That Orientation
Maximize Performance Training
Performance appraisal
Compensation
114
4
Selecting qualified employees is like putting money in the bank.

John Boudreau
One of the most crucial features of business is the role of human resources in today’s economy
because there is a growing transformation towards service-based industries. Organizations may have a lot
of buildings, expensive instruments and some huge bank accounts, but organizational goals cannot be
achieved without qualified human resources. It is the people who have the capacity to make a difference
and create value by bringing their intelligence, commitment, knowledge and skills to the workplace. If
human knowledge and skills are a strategic resource, management must be seen as an integral part of
business success.
Human resource (HR) refers to the workforce within an organization responsible to perform certain
duties assigned by the management for achieving organizational goals. It would be difficult to imagine
any company achieving and maintaining effectiveness without efficient human resource management
programs and activities. Today, because of the recognition of the crucial role of people, human resource
management has become a major player in developing strategic plans and contributing to the goals and
missions of the organization.
The increased strategic importance of human resource management requires that employment policies,
programs and practices need to be coherent and integrated with organizational strategies. Accordingly,
the human resource management function is concerned with much more than filling out documents and
recordkeeping. Recruiting, selection, training, developing, rewarding, compensating and motivating the
workforce is directly related to the organizational effectiveness and profitability of the firm.
Human resource management (HRM) is a part of a larger field of management. Many environmental
factors and developments in business like global competition, workforce diversity, downsizing, reengineering,
and outsourcing influence human resource management functions in all industries. Therefore, it is very
important to become proactive and to have a long-term vision for overcoming these changes. It is necessary
to create and keep new, modern and quality human resources that may effectively support the goals of
business in conditions of economic uncertainty, rapid technological change and intense competition.
Today, employees demand more control of their work and daily life. They respond favorably to management
activities that support their work-life balance. Consequently, human resources management should treat
each employee as an individual and present services and programs to meet individual needs. By giving one of its
executives the title “Vice President of Individuality”, McDonald’s could be accepted as a pioneer in the service sector.1
THE CONCEPT OF HUMAN RESOURCE MANAGEMENT

Organizations operate in a complex and dynamic work
environment. With the changes occurring in technology, Human resource management (HRM)
people performance, operating costs, and demographics consists of all the activities involved in
human resources have become a key issue for business acquiring, maintaining, and developing an
and industry. Moreover, these developments in work organization’s human resources.
environment transformed the objectives and the strategic
role of human resource management in organizations.2
Human resource management (HRM) is the process of
acquiring, training, appraising, and compensating employees,
and of attending to their labor relations, health and safety,
and fairness concerns. As stated above, many firms realize
that the human resource function has a substantial impact
on a firm’s bottom-line performance. Therefore, they align
the firm’s human resource management goals and policies
with the strategic goals of the enterprise in order to improve
business performance. Managers call this strategic human
115
4
Managing Human Resources
resource management. Strategic human resource There is not only one and the best way for
management is the linking of the human resource managing human resources. Based on size, sector,
function with the company’s strategies to achieve employee numbers, financial situation, employee
organizational goals. skills and location, each company develops its own
HRM program. For example, the human resource
strategy at Google supports the needs of the company
Strategic human resource management is and facilitates the achievement of Google’s objectives.
the linking of the human resource function But this strategy would most likely not be appropriate
with the company’s strategies to achieve for Apple without modification.
organizational goals.
1
Dealing with human resource issues is not
the only the HR department’s responsibility. On What is the difference between
the contrary, all managers are, in a sense, human personal management and
resource managers because they all get involved human resource management?
in recruiting, interviewing, selecting, and training
their employees. The success of any HRM program
requires the cooperation of managers at different
levels who must interpret and implement HRM ENVIRONMENT OF HUMAN
policies and procedures. Even line supervisors RESOURCE MANAGEMENT
select prospective employees, train them, make Organizations operate in a changing environment.
salary recommendations, and provide performance Managers need to consistently observe the business
feedback. For example, an HRM department environment for opportunities and threats affecting
may apply a particular performance appraisal human resources and be prepared to react quickly
approach. The managers of other departments must
to these challenges Figure 4.1. The environmental
also implement this approach, otherwise it will not
factors influencing organizations and human
contribute to the organization’s overall strategies.
resource management can be described in two main
Without managerial support, HRM programs
cannot succeed. Therefore, human resource categories. They are internal environmental factors
managers need to understand clearly how to and external environmental factors.
communicate their policies and procedures to
other units of the organization.3
Figure 4.1 Trends Shaping Human Resource Management
So companies must be Employers will therefore

Trends
expect from HRM that they
• Globalization • More competitive • Focus more on big picture issues

• Increased competition • Faster and more responsive such as helping the company
• Deregulation and increased • More cost-effective achieve its strategic goals
indebtedness • Human capital • Find new ways to provide
• Technological innovation • Downsized transactional services such as
• More high-tech jobs • Leaner benefits administration
• More service jobs • Organized around empowered • Create high performance work
• More knowledge work teams systems
• An aging workforce • More scientific in how they • Take steps to help the employer
• Economic crises make decisions better manage challenging times
• Slower economic growth • More fiscally conservative • Manage ethically
in many countries • Have the proficiencies required
to do these things-for instance a
command of strategic
management and financial
budgeting
Source: Dessler, G. (2003). Management Principles and Practices for Tomorrow’s Leaders. Pearson Prentice Hall, p. 37.
116
4
Internal Environmental Factors Organizational factors

Affecting Human Resource Some organizational factors affecting
Management human resource management are the size of
Internal environmental factors are issues the organizations, environmental climate, top
that can be found within an organization’s management, structure of the organization and the
internal environment. These factors can be sector, and the characteristics of the industry that the
indicated as personal and organizational factors, organization operates. The size of the organization
job characteristics in the organization, and which is very important to the extent of HRM
interpersonal relationships. activities can be measured especially through the
number of employees, amount of income for a
year, or the sum of production. Accordingly, HR
Internal environmental factors affecting practices, in terms of business functions, will be
HRM are personal characteristics, job higher in a large firm than a small or medium sized
characteristics, and organizational factors. company. The size of the company also affects the
managerial style which determines the autonomy
of HRM department. Because small and medium
Personal characteristics sized organizations generally have centralized
organizational structure, human resources in those
Employees have different needs, wants and
firms is under close control of their managers.5
expectations that change over time. Personal
factors such as common values, employees’ On the other hand, the competitive strategy of the
perceptions of their roles and motivation affect organization has a greater impact on HR practices.
human resource management. Every employee An organization’s competitive strategy such as
carries his/her cultural background to the mergers and acquisitions, downsizing, outsourcing,
organization. Values such as tendencies to be a hard or hiring trends, determine the demand for
worker, adaptable, self-oriented or cooperative employees in correct number and qualifications.6
can be significant characteristics affecting HRM
practices. Therefore, firms need to use training External Environmental Factors
and education to achieve a unified organizational Affecting Human Resource
culture, which orients and motivates employees Management
to achieve purposes.4
External factors can be defined as factors
outside the organizations that cannot be controlled
Job characteristics and changed by the organization. Managers should
Job boundaries are becoming blurred because pay close attention to external environment for
of technological developments and changes in adapting an organization’s human resource strategy
today’s business world. In the past, a worker to the new developments occurring outside the
performed a job in a specific department, organization. Major environmental factors include
working on particular job tasks with others workforce diversity, government regulations, and
who did similar jobs. Today’s workers are just as economic change. External environmental factors
likely, however, to find themselves working on affecting HRM are workforce and demographic
project teams with various people from across trends, government regulations, and economic
the organization. Others may do the majority of challenges and trends.
their work at home and rarely see any of their co-
workers. Human resource management needs to
External environmental factors affecting
adapt its politics and programs on job security,
HRM are workforce and demographic
workload and working conditions according to
trends, government regulations, and
these developments.
economic challenges and trends.
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4
Workforce diversity
One of the most powerful forces affecting work organizations is changing worker demographics such
as gender, age, ethnicity, seniority, and occupation. The age distribution, characteristics, values, and
expectations of today’s workforce are remarkably different from that of the past. For example, the number of
women in the workforce in the United States and elsewhere has increased significantly as well as the proportion
of different ethnic groups.
The aging workforce is another important
Each color adds to the overall performance of a
workforce demographic trend affecting organizations. In many
European countries, there are not enough younger workers
to replace retiring older workers. On the other hand,
every generation has its own labor force entrants. Today’s
workforce mostly consists of Generation Y employees
who are different from Generation X employees in every
manner. Generation Y is widely known as the generation
born between 1980 and 2000. They are bringing some
challenges and strengths to the work life. Their capacity
for using information technology make them the most
high-performing employees. For example, millenials, also
known as Gen Y prefers to email or call, instead of face-to-
face meetings. They also want more flexibility in the work/life balance, compared to Gen X. They expect flexible
summer hours, to be able to work from home, and paid time off if they work beyond their normal hours.7
Because of the changing workforce, human resource departments need to adopt different methods
for hiring employees, by offering different types of compensation packages, and attractive policies and
promotions. Knowledge of employees’ demographic differences helps the HR experts for developing HRM
policies and practices that gradually increase the impact on employees.8
Government regulations
All the policies for human resource management should be in In Turkey, every HRM
accordance with legal regulations. Organizations need to deal effectively implementation should
be in accordance with the
with government regulations and HR departments play an important role
“Labor Law No.4857”,
by monitoring the legal environment and adapting the human resource
Occupational Health
practices. Every country has its own legislation and regulations. Equal
and Safety Law No.
opportunity, occupational health and safety, minimum wage, and industrial
6331, and Trade Unions
relations are affected primarily by legislation. The legality of human
and Collective Labour
resources function helps to create a more powerful organizational image.
Agreements Law No.
For this reason, firms should take national and international legislation
6356.
into account while managing their human resources.9
Economic conditions
Changes in the national economy directly and indirectly affect human resource activities of firms
in terms of recruitment, employment, redundancy implications, compensation, rewards, and salaries.
Organizations should predict the future of the economy and plan their
functions. In today’s changing business world, it is very difficult to
foresee economic developments accurately. For instance, in the 2008
2
economic crises the unemployment numbers raised to 2.6 million which is
the highest level in more than six decades in the United States.10 What is the impact of techno-
logical developments to hu-
man resource management?
118
4
HUMAN RESOURCE availability of the type of people needed (supply),

MANAGEMENT ACTIVITIES TO and creating plans for how to meet the need
(fulfillment).
GET THE RIGHT PEOPLE
Many organizations look to ensure that
they have the right number of the right people Human resource planning is the process of
at the right time and at the right place.11 assessing the future human resource need,
Primary human resource management challenges determining the availability of the type of
include determining how many people are needed people needed and creating plans for how
and for how long, and where the company to meet the need.
can provide the employees it needs. Once the
organization determines its personnel requirements,
As displayed in Figure 4.2., human resource
it needs to select and hire the best employees to fill
planning should reflect the firm’s strategic
the available positions.
plans. HR planning goes hand in hand with
an organization’s decision about what it wants
Human Resources Planning to accomplish (its mission) and how it wants
Planning is the starting point for all kinds of to go about accomplishing it. For example, if a
management processes including human resource company has set one of its goals to expand its
management. Human resource management production capabilities over the next five years,
starts with planning which is the development of such action will require skilled employees to
strategies to meet a firm’s future human resources be available to handle the jobs. Thus, once the
requirements. Human resource planning strategy is set, the HRM function must do its part
activity is concerned with assessing the future to ensure the strategy’s success, thereby helping
human resource need (demand), determining the the organization to achieve its objectives.12
Figure 4.2 Human Resource Planning Process

Strategic Planning HR Demand HR Supply
Technological forecasts Annual employment Existing employment

Economic forecasts requirements inventory
Organizational planning Numbers After application of
Investment planning Skills expected loss and
Occupation categories attrition rates
Variances
If surplus If shortage
Decisions Decisions
Layoff, retirement, Overtime,
etc recruitment
End End
Source: Ivancevich, J. M. & Duening, T. N. (2004). Business Principles, Guidelines, and Practices. Atomic Dog Publishing, p. 137.
119
4
Human resource planning generally follows four steps: (1) conducting a job analysis; (2) forecasting
demand; (3) forecasting the supply human resources; and (4) matching the demand and supply of human
resources.
Conducting job analysis

Job analysis is the systematic process of getting detailed
Job analysis is the systematic process
information about the skills, duties, and knowledge
of determining the skills, duties, and
required for performing jobs in an organization. Job analysis
knowledge required for performing specific
provides a summary of a job’s duties and responsibilities, its
jobs in an organization.
relationship to other jobs, the knowledge and skills required,
and working conditions under which it is performed.
Job analysis is such an essential activity for HR managers that it has been called the building block
of everything which personnel need. Every human resource management activity requires some type
of information that is compiled from job analysis: The selection, performance appraisal, training and
development, job evaluation, career planning, work redesign, and human resource planning. In human
resource planning, planners analyze an organization’s human resource needs in a dynamic environment
and develop activities that enable a firm to adapt to change. This planning process requires accurate
information about the levels of skills required in various jobs to ensure that sufficient people are available
in the organization to meet the human resource needs of the strategic plan.13
There are several methods to gather information about jobs such as questionnaires, observation,
and interviews. Managers can use a job analysis questionnaire to ascertain a job’s duties and
responsibilities. It requires employees to compose detailed information on what they do. Employees
do this by briefly stating their main duties in their own words, describing the conditions under
which they work. The HR department then works with supervisors to review this information. They
decide exactly what each job entails and interview the employees. No matter what method is used
to gather data, the information gathered from the job analysis process generates two outcomes: Job
descriptions and job specifications.14
A job description is a written document that identifies,
defines, and describes a job in terms of its duties, A job description is a written document
responsibilities, and work conditions. A common format that identifies, defines, and describes a job
for a job description includes the job title, the duties to in terms of its duties, responsibilities, and
be performed, the distinguishing characteristics of the job, work conditions.
environmental conditions, and responsibilities of the job
holder.
A job specification is a document containing the
A job specification is a document
minimum acceptable qualifications that a person should
containing the minimum acceptable
possess in order to perform a particular job. Job specification
qualifications that a person should possess
includes job related information such as educational
in order to perform a particular job.
requirements, experience, personality traits, and physical
abilities.
After jobs have been analyzed and the descriptions
written, the results should be reviewed with the supervisor and the worker to ensure that they are accurate,
clear, and understandable. Reviewing the results with employees help to gain their acceptance.15
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Forecasting demand
The first human resource planning activity entails Labor demand determines how many and
forecasting labor demand. The key objective is to determine what type of employees the organization
how many and what type of employees the firm needs at a needs in the future.
point in the future. For example, many Japanese electronics
firms estimated in the mid-1990s that the product segments of
music and games would increase at double-digit rates for 20 years. Much of the
assembly work of putting together the various components of the music and game
playing machines would require relative low-skilled and low-cost labor.16 A leading indicator is an
The basic process of forecasting personnel needs starts with estimating objective measure that
revenues for a given period and the size of the staff required to support accurately predicts future
the sales volume in the same period. In addition, projected turnover rates, labor demand. Inventory
decisions to upgrade (or downgrade) products or services, productivity levels, sales levels,
changes, and financial resources must be considered by the managers. An employment levels and
organization might use statistical models that predict labor demand for the profit levels are the most
consequent year given relatively objective statistics on leading indicators used leading indicators
form the previous year.17 for forecasting personnel
demand.
Forecasting supply
The next step in human resource planning is to estimate
how many staff will be employed by the organization in Labor supply is the availability of workers
the future. Labor supply is the availability of workers with the required skills in the future.
with the required skills in the future. The forecast of the
supply of human resources must take into account both
the present workforce and any changes that may occur
within it. When forecasting the supply, planners should
analyze the organization’s existing employees to determine
who can be retained to perform the required tasks. For
example, suppose that planners project that in five years an
automobile factory that currently employs 100 engineers will
need to employ a total of 200 engineers. Planners simply
cannot assume that they will have to hire 100 engineers,
during that period, some of the firm’s present engineers are
likely to be promoted, leave the firm, or move to other jobs
within the firm . Therefore, planners may project the supply of
engineers in five years at 83, which means that the firm will
have to hire a total of 117 new engineers.18
The two most commonly used techniques for forecasting
human resources supply are the replacement chart and skills
A replacement chart lists each important
inventories. The replacement chart lists each important
managerial position, who occupies it, how
managerial position, who occupies it, how long that
long that person will likely stay in the job,
person will likely stay in the job, and who is qualified as a
and who is qualified as a replacement.
replacement. This technique allows sufficient time to plan
developmental experiences for people identified as potential
A skills inventory (human resource
candidates to critical managerial positions.
information system) is a computerized
A skills inventory (human resource information system) databank containing information on the
is a computerized databank containing information on the education, skills, and experience of all
present employees.
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education, skills, and experience of all present employees. When a manager needs an employee for a position,
he or she uses key words to describe the position’s features in terms of skills and education. The computerized
system then produces a list of qualified candidates. Thus, an employee who is qualified to fill a required
position can be located quickly by human resource department.19
Matching the demand and supply of human resources

The main purpose of human resource planning is to bring together the If the company makes
forecasts of demand and supply for human resources, both current and people work overtime
future. After a comparison of requirements and availability of workers, as because of the labor
it can be seen in Figure 4.2, there will be two results: labor shortage; labor shortage, it must to take
surplus. When this is determined, the organization can assign how it is going into account the labor
to solve these potential problems. law which is related to
In case of labor shortages or if the supply of workers is less than the overtime work. As noted
demand, organizations can develop several strategies to overcome these in Turkish Labor Law
problems. If the shortage is small and employees are willing to work overtime, No.4857, the normal
it can be filled with current employees. If there is a shortage of highly skilled working time in a week
employees, training and promotion of current employees, together with the is 45 hours. Wages for
recruitment of less-skilled employees, are possibilities. A shortage of human each hour of overtime is
resources often means that the organization needs to use new approaches for remunerated at one and
recruitment. The organization may have to recruit in different geographic a half times the normal
areas than in the past, explore new methods, lower the employment standards hourly rate. Total overtime
and seek different kinds of candidates. For instance, instead of desiring work cannot be more than
extensive work experience, a firm may be willing to hire an inexperienced 270 hours in a year.
worker and train the individual to do the job.20
In case of a surplus or if the supply of workers is more than the demand, restricted hiring, reduced hours,
early retirements and layoffs may be required to correct the situation. Decisions in surplus conditions are
some of the most difficult that managers must make. Attrition is considered the most humane method
for making personnel cutbacks. Attrition is the normal reduction in the workforce that occurs when
employees leave a firm. Attrition occurs when employees who quit, die, or retire, or are not replaced. With
this approach no one is cut out of a job, but those who remain must handle the same workload with fewer
people. Early retirement which encourages more senior workers to leave the organization with full benefits
is another option. This method is usually viewed as a way to accomplish workforce reduction without
resorting to layoffs and individual firings.
As a last resort, employees are sometimes simply fired. Layoffs may
be an appropriate downsizing strategy during a temporary economic
downturn in an industry. However, because of its negative impact, 3
this method generally is used only when absolutely necessary.21 Many How does a manager forecast
companies, such as Hewlett-Packard, have preferred cut pay to avoid the external supply of human
layoffs for keeping their employees.22 resources?
Recruiting
Once the firm has determined its human resources needs
via human resource planning, it needs to hire the most Recruitment consists of a set of activities
qualified employees to fill the available positions. As Figure that improves the number and quality
4.3 shows, the hiring process has three steps: recruitment, of people who apply for employment,
selection, and orientation. as well as the probability that qualified
and compatible applicants will accept
Recruitment, the first step in the hiring process,
employment offers.
consists of a set of activities that improves the number and
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Figure 4.3 The Hiring Process quality of people who apply for employment, as well as the probability that
qualified and compatible applicants will accept employment offers.23 The
Recruitment recruitment process has become even more vital for business organizations
because of shifting and competitive labor market. It is very important for
an organization to make the recruitment function a part of human resource
planning. For example, in the beginning of 2000, a drugstore chain Walgreens
had to cut back its expansion plans to open new stores because of a shortage of
Selection trained pharmacists in the USA. This example reflects how human resource
planning and recruiting issues affect organizational strategic plans.24
Recruiting strategy and policy decisions entail identifying where to
recruit, whom to recruit, and how recruiting will be done. One of the first
Orientation decisions is to determine the extent to which internal and external sources
and methods will be used. Both promoting from within the organization
(internal recruitment) or hiring from outside the organization (external
recruitment) to fill job openings have some advantages and disadvantages. Table 4.1. shows some of the
major advantages of internal versus external recruiting.25
Table 4.1 Advantages and Disadvantages of Internal and External Recruiting Sources
Recruiting Source Advantages Disadvantages
Internal • Morale of promotion • Inbreeding
• Better assessment of abilities • Possible morale problems of those not
• Lower costs for some jobs promoted
• Motivator for good performance • “Political” infighting for promotions
• Causes a succession of promotions • Need for a management development
• Have to hire only at entry level program
External • New “blood” brings new • May not select someone who will “fit” the
perspectives job or organization
• Cheaper and faster than training • May cause morale problems for internal
professionals candidates not selected
• No group of political supporters in • Longer “adjustment” or orientation time.
organization already
• May bring new industry insights
Source: Mathis, R. L. & Jackson, J. H. (2003). Human Resource Management (10th ed.). Thomson South Western, p. 212.
Before deciding which source is the best, the company should focus on the aims of recruitment:26
• to obtain a pool of suitable candidates for vacant posts;
• to use and be seen to use a fair process;
• to ensure that all recruitment activities contribute to company goals and a desirable company im-
age; and
• to conduct recruitment activities in an efficient and cost-effective manner.
Internal recruitment
Internal recruiting or hiring from within the organization means using various sources developed and
managed inside the organization. If an organization has been effective in recruiting and selecting employees
in the past, current employees are often the best source of candidate pool. For making its employees handle
larger responsibilities, the organization needs a strong employee and management development program.
Hiring from within the organization generally relies on job posting and employee referrals.
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Job posting. Internal recruiting generally requires

job posting. Job posting means publicizing the open job to Job posting is publicizing the open job to
employees (often by literally posting it on bulletin boards or employees (often by literally posting it on
company intranets) and listing the job’s attributes, like qu- bulletin boards or company intranets) and
alifications, supervisor, working schedule, and pay rate. The listing the job’s attributes, like qualifications,
usual procedure of job posting is for all applications to be supervisor, working schedule, and pay rate.
sent to the human resource department for an initial review.
After an interview conducted by the prospective manager, a
decision is made based on qualifications, performance, length of service and other criteria. Job posting can
be a good practice, if it facilitates the transfer and promotion of qualified inside candidates.27
Employee referrals. One of the best sources for individuals who

will perform effectively on the job is a recommendation from a current emp-
loyee. Many organizations have found that their employees can serve an im- Studies have shown that
portant role in the recruitment process by actively soliciting applications employees recruited
through current employee
from their friends and associates. These recruiting systems may be informal
referrals tended to stay
and operate by word–of-mouth or they may be structured with definite gu-
with organizations longer
idelines to be followed. Employee referrals can develop quite a large pool of
and displayed greater
potential employees with a very low cost. However, using only this system
loyalty and job satisfaction
can violate equal employment regulations because current employees tend than those from other
to refer to people who are similar to themselves. Therefore, some external recruiting sources.
recruitment might be necessary to avoid legal problems in this area.
External recruiting
If a company cannot reach new employees by internal recruiting, it needs to open up recruiting activities
to outside of the company. External recruitment becomes essential in organizations that are growing rapidly
and have expanding workforce requirements. The following needs require external recruitment: (1) to fill
entry-level jobs; (2) to acquire skills not possessed by current employees; and (3) to obtain employees with
different backgrounds to provide a diversity of ideas.28
A number of methods are available for external recruitment methods. These are advertising, online
recruitment, employment agencies, and college recruiting.
Advertising. Advertising is one of the most widely

used methods of recruitment. Advertising communicates
Advertising is a way of communicating
the firm’s employment needs to the public through newspa-
the firm’s employment needs to the public
pers, radio, television, or other electronic media. Regardless
through media such as newspapers, radio
of the advertising method utilized in determining the con-
and television.
tent of an advertising message, an organization must decide
on the corporate image it wants to project. Studies found
that people responded more frequently to advertisements
from companies with a positive corporate image than to those companies with a lower corporate image.29
Advertising should contain desired qualifications, details on the job and application process, and an
overview of the organization.
Online recruitment. Online recruitment is the process of using the internet to actively identify
and recruit qualified candidates for an organization. The internet has quickly become one of the primary
recruitment tools for organizations. Most employers use online job boards to attract candidates. On the
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other hand, recruiting for professionals and ma- Private employment agencies are important
nagers is shifting from online job boards to social sources of clerical, white-collar, and managerial
networking sites such as Facebook and LinkedIn. personnel. It offers an important service in bringing
According to a research, social media has become qualified applicants and open positions together.
an almost universally adopted hiring tool, with 92 Typically, the employment agency is paid a fee
percent of recruiters surveyed using it as part of based on the salary offered to the new employee.
their process. 87 percent are using LinkedIn, 55 Employment agencies generally have their own
percent are using Facebook, and 47 percent are Web sites to show prospective employees the array
using Twitter in USA.30 of jobs that are available through their agency.
Online recruitment can also be done through Public employment agencies often called job
a company website. Many businesses now offer service or unemployment service agencies are
an employment opportunity or career page secti- operated by governments. Public employment
on and have created an online application, which agencies are known best for recruiting blue collar
is sent directly to human resource department.31 and clerical workers. Some public agencies use
For example, Google has details of available jobs in computerized job-matching systems to aid in the
every country, lists the top 10 reasons to work at the recruitment process. Public employment agencies
company and provides downloadable videos in which provide their services without a charge to either the
Google staff describe what it’s like to work at the Go- employer or the prospective employee.34
ogleplex.32 For example, the public employment agency in
There are many advantages of online recruit- Turkey, Turkish Labor Agency named Türkiye İş
ment. First of all, it saves time and money. Recru- Kurumu (İŞKUR) serves job seekers finding jobs
itment content is uploaded more quickly and at a suitable to their qualities and for employers finding
much lower cost than is possible with traditional employees who have qualities in compliance with the
media advertisements. Besides, recruiters can res- job requirements.35
pond to qualified candidates more quickly. It is
possible to expand applicant pool globally because College recruiting. College recruitment
potential applicants in other countries or areas can involves sending an employer’s representatives to
see job posted on the Web.33 college campuses to prescreen applicants and cre-
ate an applicant pool from the graduating classes.
It is an important source for management to reach
professional and technical employees. College rec-
4 ruiting could be expensive and time consuming if
the recruiters are not experienced. Employers need
What are the disadvantages to train recruiters in how to interview candidates,
of Internet recruiting? how to explain what the company has to offer, and
how to put candidates at ease.36
Employment agencies. An employ-
ment agency is an organization that helps firms to
recruit employees and at the same time aids indivi-
duals in their attempt to locate jobs. There are two College recruitment involves sending
kinds of employment agencies: Private and public an employer’s representatives to college
employment agencies. campuses to prescreen applicants and create
an applicant pool from the graduating classes.
An employment agency is an organization

that helps firms to recruit employees and at
the same time aids individuals to locate jobs.
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Selection
Once the recruiting process has attracted a pool of
applicants, the next step is to select someone for hiring. The The selection process is to choose the
selection process is to choose the right person who can right person who can successfully perform
successfully perform a certain job from the pool of qualified a certain job from the pool of qualified
candidates. Job analysis, human resource planning, and candidates.
recruitment are necessary prerequisites to the selection
process.
The selection process has a series of steps that

starts with the preliminary screening and ends
with a decision to hire the person. Figure 4.4
shows the steps in a typical selection process.
Even though these steps are universal, every
organization creates its own selection process
based on the size of the organization, the types
of the jobs to be filled and the number of people
to be hired. It is possible to say that if the job or
position is important, the organization generally
use each step formally.
Figure 4.4 The Selection Process
Preliminary screening
Employment
interview
Reference check and

Employment test background
investigations
Physical
examination
Selection
decision
Source: http://managementation.com/selection-process-steps/
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Step 1: Preliminary screening

Completing an application form is normally the first step in most selection procedures. The application
provides basic employment information for use in latter steps of the selection process and can be used to
screen out unqualified applicants.
Step 2. Employment interview

The most widely used selection technique is the employment interview. Job candidates are interviewed
by at least one member of the HRM staff and by the person for whom they will be working. Employment
interviews provide an opportunity for applicants and the firm to learn more about each other. While
the interviewer may get more information about the
candidate’s abilities and attitudes, the candidate may be
informed also about the job and work environment.
However, if it is not used properly, the interview
can be a poor device in the selection process and create
discrimination against other candidates. For example,
according to some research most interviewers make
decisions about candidates in the first two or three minutes
of the interview. Snap decisions can adversely affect an
interview’s validity because they are made based on limited
information. In addition, interviewers may be influenced
by such factors as the appearance of candidates.37
It is possible to improve interview validity by training interviewers to be aware of potential biases and
by tightening the structure of the interview. Using structured interviews may also reduce the reliability
and validity problem. In a structured interview, questions are written in advance and all interviewers
follow the same question list with each candidate. However, for managerial and professional candidates,
a somewhat less structured interviewing approach can be used in selection process. In an unstructured
interview, questions are not prepared in advance and there is no attempt to guarantee that applicants are
asked the same questions.38
Step 3: Employment test

The third step in the selection process is an employment
test which measures the aptitudes, skills, abilities, or Employment tests measure the aptitudes,
knowledge of job candidates. Employment tests allow skills, abilities, or knowledge of job
managers to choose candidates according to how they will candidates.
fit into the open positions and the organizational culture.
Since tests alone are not enough to make an evaluation
of a candidate, firms need to use employment testing conjunction with other selection tools such as
interviewing. Besides, test should be validated, administered, and scored consistently. All candidates
should be given the same directions, allowed same amount of time, and offered the same environmental
conditions for testing.
There are different types of tests that are used by organizations as selection tools. However, it is generally
classified by whether they measure mental abilities (cognitive), physical abilities, personality and interests,
and achievements.
Cognitive ability or intelligence tests measure the general intellectual abilities such as memory, verbal
and numerical ability. Physical ability tests measure the motor skills such as speed and accuracy of arm
movement and reaction time, manual dexterity, weight lifting, and dynamic strength. Personality or interest
tests measure basic aspects of personality such as friendliness, introversion, stability, and motivation.
Achievement tests measure the knowledge about the job.39
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Step 4: Reference check and background investigations

A reference check is intended to verify what was
stated on the application is correct and accurate.
It is stated that between 10 and 15 percent of
applicants either lie about or exaggerate factual
information. As a result, reference checking
ensures that applicants have the degrees they
claim from the school they cite and held the
jobs with the responsibilities they describe.40
Organizations can use two methods in conducting
the investigations and checks: The internal or the
external investigation. In the internal investigation,
HRM undertakes the task of questioning former
employers and personal references indicated by the
candidates. In the external investigation, HRM use
reference-checking firms. Although it is costlier,
such firms have a better track record of gathering
pertinent information, as well as being better informed on privacy rights issues.41
Step 5: Physical examination

Physical examination is part of the selecting process when
a job requires certain physical abilities from the employees. If Turkey has signed the UN Convention
HR asks the candidates to take a physical examination, it must on the Rights of Disabled that lays down
be able to show that it is a job-related requirement. Besides, all the criteria for individuals with disabilities
individuals who are conditionally offered employment should and obligation of employing disabled
be required to have one. Having a physical disability may not persons. This is detailed in Turkish Labor
be enough to exclude an individual from the job. Companies Law No. 4857, Article 30. In private
may be required to make reasonable accommodations. sector workplaces employing fifty or
more people within the boundaries of a
Step 6: Selection decision province, the employer must hire disabled
After going through previous steps that help to collect persons, numbers of which cannot be less
relevant information about the candidates, the company may than the 3% of the total. The employer
decide to make a job offer to an applicant. The important or employer’s representative who does not
point in this final step is that the HRM department can only employ disabled persons in contravention
make recommendations but the final decision should be made of the provisions of Article 30 is liable to
by the department manager in which the position is opened. a monthly fine of 2.095 TL (for the year
2015) for each disabled person for whom
this obligation is not fulfilled.
Selection decisions should be made by the

department manager which the applicant
will be hired.
Orientation Employee orientation is the systematic

Selecting the best qualified employees does not mean process of helping new employees learn
that selected employees adopt to the position and the about the company and getting emotionally
organization immediately. After people are hired, they attached to the firm.
need be oriented to the organization and to their jobs.
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Employee orientation is the systematic process of helping new employees learn about the company (such
as company cultures, policies, work rules and benefit programs) and becoming emotionally attached to
the firm. Several studies suggest that formal orientation program has a significant effect on stress, turnover,
and job performance. Giving realistic information about the job and the organization helps employee to
cope with stress and reduces turnover.42
All types of organizations should have some type of orientation program accomplishing such goals as:43
1. Make the new employees feel welcome and at home and part of the team;
2. Make sure the new employees have the basic information to function effectively, such as e-mail
access, personnel policies and benefits, and what the employer expects in terms of work behavior;
3. Help the new employees understand the organization in a broad sense (its past, present culture,
and strategies, and vision of the culture).
The HR department is responsible for initiating and conducting the orientation programs with support
of the department manager for which the employee is hired. The length of the orientation program
depends on its main purpose and contents. Many small firms have traditional orientation programs
that take several hours. They also support the orientation process with employee handbooks that cover
organizational policies, benefits and regulations. However, in many large organizations the orientation
process takes up to a week and includes videos, lectures by company officers, and exercises covering
matters like company history, vision and values. Some organizations use a “buddy system” in which the
job orientation is conducted by one of the new employee’s coworkers. The employee chosen for this role
must be carefully selected and properly trained for such orientation responsibilities.44
HRM ACTIVITIES THAT MAXIMIZE PERFORMANCE

Once employees are hired, increasing the organization needs to ensure that they are performing well. It
is the human resource manager’s job to train, motivate, appraise and see that employees are rewarded fairly.
Training
In today’s dynamic job environment, organizations need
to have well adjusted, trained and experienced people to Training is a continual process of providing
perform the activities that must be done. Rapid job changes employees with skills and knowledge they
require employee skills to be transformed and frequently need to perform at a high level.
updated. Training is a continual process of providing
employees with skills and knowledge they need to perform
at a high level. Training can involve the changing of skills,
knowledge, attitudes, or behavior. It may mean changing what employees know, how they work, their
attitudes toward their work, or their interaction with their coworkers and superiors.45
Training begins on the employee’s first day at work with orientation and continues the rest of her/his
working life. While there is much to be gained from training in terms of improved skills and productivity
of the workforce, training is a costly activity. Therefore, managers need to identify who needs training,
what type of training works best, and when the training is required. These questions are answered by the
training needs analysis.
Training needs analysis

Training needs analysis is a systematic analysis of the specific training activities the organization requires
to achieve its objectives. An organization should commit its resources only to those training activities that
can best help in achieving its objectives.
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Training needs may be determined by conducting analyses on several steps (Figure 4.5):
• Organizational analysis: From an overall organizational perspective, the firm’s strategic mission,
goals, and corporate plans are studied, along with the results of human resource planning.
• Task analysis: The next step of training needs analysis focuses on the tasks required to achieve
organizational goals. Job descriptions are important data sources for this analysis level.
• Person analysis: Determining individual training needs is the last step. The relevant questions are,
“Who needs to be trained?” and “What kind of knowledge, skills and abilities (KSAs) do employ-
ees need.” Performance appraisals and interviews or surveys of supervisors and observations are
helpful at this level.
Figure 4.5 Training Needs Process
What deficiencies, if any do

incumbents have in the Is there a What are the
skills, knowledge, or need for organization’ goals?
abilities required to exhibit training?
the necessary job behaviors
What behaviors are What tasks must

necessary for each job be completed to
incumbent to complete the achieve their
arranged tasks goals?
Source: De Cenzo, D. A. & Robbins, S. P. (1999). Human Resource Management (6th ed.). John Wiley & Sons, Inc., p. 229.
Once training needs have been identified, training objectives must be established. Management should
explicitly state what results are sought for each employee. It is not enough just to say the change in employee
knowledge, skills, attitudes, or behavior is desirable; management needs to clarify the training objectives:
What is to be change and by how much? Objectives need to be concise, accurate, timely and measurable.
Both the supervisor and the employee should know what is expected from the training efforts.46
Training techniques
Several methods can be used to satisfy an organization’s training needs and accomplish its objectives.
Such factors as cost, available time, number of persons to be trained, background of trainees, and skill
of the trainees determine the method used. Training techniques can be classified as either on-the-job-
training and off-the-job-training.
On-the-job-training (OJT) refers to new or inexperienced
employees learning through observing peers or managers On-the-job-training (OJT) refers to
performing the job and trying to imitate their behavior. OJT new or inexperienced employees learning
is preferred especially for training newly hired employees, through observing peers or managers
upgrading experienced employees’ skills when new technology performing the job and trying to imitate
is introduced, cross training employees within a department or their behavior.
work unit, and orienting transferred or promoted employees
to their new jobs. The most widely used OJT technique is
apprenticeship which is a work-study method. Such training is a formal and long term on-the-job-learning. It
traditionally involves having the learner/apprentice study under the supervision of a master craftsperson. The
majority of the apprenticeship programs are in the craft jobs.
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OJT is the most widely used training methods Internet-based training is increasingly used
because it needs less investment in time or money by companies. Many firms are creating their
for materials, trainer’s salary, or instructional design. own Internet based learning portals for their
However, there are also several disadvantages of on- employees. These portals let the company contract
the-job-training. Its major disadvantage is that the with training content-providers, which offer their
pressures of the workplace can cause instruction training content to the firms’ employees via the
of the employee to be haphazard or neglected. portal. For example, Ford Motor Company and SAE
Besides, while employees develop their skills, it can International have joined forces to provide a series of
cause low productivity. Ford’s online training courses to automotive engineers
For overcoming its disadvantages, on-the-job- worldwide. Ford and SAE International offer six
training must be structured carefully. Because OJT popular online courses on powertrain and problem-
involves learning by observing others, successful OJT solving topics as a way to extend Ford engineering
is based on using credible trainer, a manager or peer knowledge across the global industry.48
who models the behavior or skills. It is also important
to have the trainees try out the job to demonstrate
their understanding. A well designed OJT program
can reduce employee turnover and work accidents as
well as it improves employee morale.47 Off-the-job-training involves training
methods such as conferences, classroom
Off-the-job-training takes place at locations
groups, mobile learning, audiovisual
away from the work site. This approach offers a
techniques, lectures, computer-based
controlled environment and allows focused study
training, and internet-based training.
without interruptions. Conferences, classroom
groups, mobile learning, audiovisual techniques,
lectures, computer-based training and internet-
based training are some of the techniques for off-
the-job-training. Some of the off the job training
methods have been summarized in Table 4.2.
Table 4.2 Training Methods
Lectures designed to communicate specific interpersonal, technical, or
Classroom Lectures
problem-solving.
Using various DVD’s, films, and PowerPoint, and audiotape productions to
Audiovisual Techniques demonstrate specialized skills that are not easily presented by other training
methods.
Trainees learn on the actual or simulated equipment they will use on the job,
Vestibule Training
but are trained off the job.
Training that occurs by actually performing the work. This may include case
Simulation Exercises
analysis, experiential exercises, or role playing.
Delivering learning content on demand via mobile devices like cell phones,
Mobile Learning laptops, and iPads, wherever and whenever the learner has the time and
desire to access it.
Source: Dessler, G. (2013). Human Resource Management (13th ed.) Pearson, p. 286; De Cenzo, D. A. & Robbins, S.
P. (1999).
Human Resource Management (6th ed.). John Wiley & Sons, p. 231.
How can human resource

department evaluate the tra-
ining program’s results?
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Performance Appraisal
As mentioned earlier, just because employees have the
ability and experience to do the job does not ensure that they Performance appraisal is the process of
will perform satisfactorily. Organizations need to evaluate determining and communicating to an
the employees’ performance and let them know how well employee how he or she is performing on
they have performed on established goals. Performance the job.
appraisal can be defined as the process of determining and
communicating to an employee how s/he is performing on
the job.
HR departments use the information collected through performance appraisals to make important
decisions about HR functions. One of the most common uses of performance appraisals is for making
administrative decisions relating to promotions, firings, layoffs, and merit pay increases. Performance
appraisal information also provides needed input for determining both individual and organizational
training and development needs. Another important use of performance appraisals is to encourage
performance improvement. In this regard, performance appraisals are used as means of communicating to
employees how they are doing and suggesting needed changes in behavior, attitude, skills or knowledge.49
In most organizations, the HR department is responsible for coordinating the design and implementation
of performance appraisal programs. Generally, line managers play an essential role from beginning to
end of this process by conducting the appraisals and giving feedback. The supervisor is usually in the
best position to observe and evaluate his or her subordinate’s performance. However, relying only on
supervisors’ appraisals is not always sufficient. For example, an employee’s supervisor may not understand
how customers and colleagues see the employee’s performance. Therefore, methods like self-appraisal
(subordinates evaluate themselves), peer appraisal (colleagues make the assessment), and appraisal by
subordinates (subordinates assess the manager) can be applied as significant contemporary approaches to
performance appraisal.50
Another approach in performance appraisal
systems is to view an individual performance
from multiple perspectives which is called
360 Degree Feedback (Figure 4.6). In
this method, the employee may be rated by
senior managers, the employee her/himself,
supervisors, subordinates, peers, and internal or
external customers. Typically, a questionnaire is
sent to the people who provide the ratings as
online. Computerized systems then compile
all this feedback into individualized reports to
rates. The evaluation process can be done so
quickly and conveniently.
360-degree feedback performance is an

appraisal system in which information
is gathered from top management,
supervisors, peers, subordinates, and
customers.
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Figure 4.6 360 Degree Feedback Performance Appraisal
Top
Management
Immediate
Subordinates
Superiors
360°
Appraisal
Peers Customers
Self
Source: http://hrmpractice.com/360-degrees-performance-appraisal/
The positive aspect of 360-degree feedback is that, because data is gathered from multiple sources, it
may provide a more objective measure of an employee’s performance. The use of multiple sources results
in a broader view of the employee’s performance and may minimize biases that result from limited views
of behavior.
However, during the 360-degree feedback process, it takes
more time and energy to collect, process, and effectively feed the Figure 4.7 Performance Appraisal Process
data back to the individual. Nevertheless, the HR department
can compete with these problems by training people who are
Establishing performance standards
giving and receiving feedback and monitoring the appraisal
system effectiveness.51
Communicating standards and

Performance appraisal process expectations
Performance appraisal is perhaps the most important, yet
most difficult human resource activity for most managers. For
generating an accurate and reliable data, a systematic process
Measuring the actual performance
should be followed. All managers need to understand the key
factors that drive an effective performance appraisal system and
be skilled at implementing them. Figure 4.7 shows the steps in
the performance appraisal process.52
Comparing to standards
Establishing performance standards

Standards need to be developed in order to be able to
measure performance. There are two main methods that are Discussing results (providing feedback)
currently used for developing the standards against which the
employees’ performance is measured. The first method is setting
targets for employees. The targets can be quantified outputs,
improvements targets, or targets relating to a particular project. Decision making
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They can also be standing targets dealing with the day-to-day operations of the job. The second method
is to determine the level of competence that the individual must achieve. Competencies can be set out as
required organizational behaviors for which the employee should aim.53
For creating and setting effective and useful employee goals and objectives, the acronym
“SMART” can be used in the performance appraisal process. It contains the characteristics of
strategic goals and objectives that will be useful for managers and employees.
Specific means that the target is clearly defined.
Measurable means that the target state is defined as a number.
Achievable means that the staff member can take the necessary actions to meet the objective.
Realistic means that the staff member has a fair chance to achieve the desired results.
Time-bound means that the target state is described with a time dimension.
Source: http://performance-appraisals.org/faq/smart.htm
Communicating standards and expectations

Most employees need and expect to know ahead
of time on what basis their employer will evaluate
them. Ideally, each employee’s goals should derive
from and contribute to the company’s overall targets.
Everyone should clearly understand what he or she is
required to do to contribute to the company’s success.
To create and maintain this framework, employers
need to inform workers of their value, praise them for
their accomplishments, establish a track record of fair
and honest feedback, be consistent in their treatment
of all employees, and canvass workers for their own
insights into the company’s processes and operations.54
The standards should also be communicated to the evaluators and if required, the standards can also be
modified at this stage according to the relevant feedback from the employees and the evaluators.
Measuring the actual performance

The most difficult part of the performance appraisal process is measuring the actual performance of the
employees that is the work done by the employees during the specified period. It is a continuous process
which involves monitoring the performance throughout the year. This stage requires the careful selection
of the appropriate techniques of measurement, taking care that personal bias does not affect the outcome
of the process and providing assistance rather than interfering in an employee’s work.55 Performance
appraisal can be employed by trait appraisal instruments, behavioral appraisal instruments, and behavioral
anchored rating scales.
Trait appraisal instruments evaluate employees based on characteristics that tend to be consistent
and enduring, such as decisiveness, reliability, energy, and loyalty. Because people routinely make trait
judgments about others, these instruments can be a powerful way of describing people. However, this
type of appraisal instrument has several disadvantages such as ambiguity (what it takes to be loyal) and
propensity for conscious or unconscious bias (the supervisor may feel that women are more emotional
than men and therefore rate their traits differently). There is also some difficulty for defending legally,
given that assessment of traits focuses attention on the person rather than on the job performance.56
Behavioral appraisal instruments assess certain employee behaviors, such as coming to work on time,
completing assignments within stipulated guidelines, and getting along with coworkers. A behavioral
observation scale is one type of behavioral appraisal instruments in which various behaviors are listed and
supervisors record the frequency of their occurrence.
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Behavioral anchored rating scales assess the effectiveness of the

employee’s performance using specific examples of good or bad behaviors
at work, often referred to as critical incidents. The main advantage of this Some managers encourage
approach is that it is closely focused on concrete aspects of job performance. employees to record their
Employees may more clearly understand why they received a particular rating own critical incidents
and what they need to do to improve. This approach is also easier to defend (where the employee
legally. However, developing this kind of instrument is quite expensive. The excelled, situations that
use of critical incidents is more demanding of the manager since it requires did not go well). That’s an
for the manager to write things out when they occur.57 interesting variation that
places more responsibility
An example of a good critical incident of a sales assistant is the following: with the employee, and
July 20 – The sales clerk patiently attended to the customer’s complaint. He is also does not require the
polite, prompt, enthusiastic in solving the customers’ problem. manager to have been
On the other hand, the bad critical incident may appear as under: present when the incident
July 20 – The sales assistant stayed 45 minutes over on his break during the occurred.58
busiest part of the day. He failed to answer the store manager’s call thrice. He is
lazy, negligent, stubborn and uninterested in work.
Source: http://www.whatishumanresource.com/traditional-methods-of-
performance-appraisal
Outcome appraisal instruments measure workers’ performance results such as sales volume, number
of units produced, number of satisfied customers, customer complaints, and meeting deadlines. The
results and outcomes of work performance provide the most objective technique for collecting data for
appraisal. Measurements can be taken at different points in time and comparisons made with objectives.
Management by Objectives (MBO) is one strategy mostly used as an outcome-oriented approach. Under
this strategy, employees and supervisors agree on a set of goals to be accomplished for a particular period.
Performance is then assessed at the end of the period by comparing actual achievement against the agreed-
upon goals. This approach provides clear direction to employees, reduces subjectivity, and allows individual
goals to be established.59
Comparing to standards
The actual performance is compared to the desired or the standard performance. The result can show
the actual performance being more than the desired performance or, the actual performance being less
than the desired performance depicting a negative deviation in the organizational performance. It includes
recalling, evaluating, and analyzing the data related to the employees’ performance.60
Discussing results (Feedback)

The appraisal interview is the most important step of the entire evaluation process. The results, the
problems and the possible solutions are discussed in a way that elicits the positive behavioral responses. To
provide effective performance feedback managers should pay attention to the following recommendations:61
• Provide feedback frequently, not once a year.
• Create the right context for the discussion.
• Ask the employee to rate his or her performance before the session.
• Encourage the subordinate to participate in the session.
• Recognize effective performance through praise.
• Focus on solving problems.
• Focus on feedback on behavior or results, not on the person.
• Minimize criticism.
• Agree to specific goals and set a date to review process.
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For example, Pepsi-Cola International (PCI), has devised a common performance appraisal system that
focuses on motivating managers to achieve and maintain high standards of performance. Administrative
consistency is achieved through the use of a performance appraisal system of five feedback mechanisms - instant
feedback, coaching, accountability based performance appraisals, development feedback, and a human resource
plan. The first step of instant feedback is based on the principle that any idea about any aspect of the business or
about an individual’s performance is raised appropriately and discussed in a sensitive manner.62
Decision making
The purpose of conducting employee performance appraisal is making
6
decisions about employees without any bias by the HR manager. The HR
manager’s decisions about rewards, promotions, demotions, transfers, and What is the most typical
sometimes suspensions/dismissal of employees should match outcome of problem that occurs in a per-
the performance appraisal to avoid grievance or disturbances in between formance appraisal process?
them, as they affect the overall performance of the organization.63
Compensation
In modern societies, money is important both economically and psychologically. It is not just about to
get what you need, but it is associated with the status and the recognition. Accordingly, one of the most
important functions of the human resource management is
compensation for attracting qualified employees from the
labor market. Compensation can be defined as the total Compensations is the total of all rewards
of all rewards provided employees in return for work and provided employees in return for work and
services performed. The key objectives of the compensation services performed.
system for a business organization are retaining the best
employees, motivate employees to perform at higher levels,
and have the company achieve its strategic goals.64
Employees need to be confident that that they are being
compensated fairly for the work they do. Fair pay is what Internal equity is obtained when
employees generally view as equitable. Internal equity employees receive pay according to the
is obtained when employees receive pay according to the relative value of their jobs within the same
relative value of their jobs organization.
within the same organization.
Job evaluation is a primary External equity occurs when a firm’s
Job evaluations rank tool for determining internal employees receive pay comparable to workers
all the jobs in the equity. Job evaluation is who perform similar jobs in other firms.
organization and places intended to provide a rational,
them in a hierarchy that orderly, and systematic
will reflect the relative judgement of how important each job is to the firm. External equity occurs
worth of each. It ranks when a firm’s employees receive pay comparable to workers who perform
jobs not people. Because similar jobs in other firms. Firms often use market surveys to achieve external
job evaluations assume equity. It is possible to use market survey but organizations mostly purchase
normal performance commercially available surveys.65
of the job by a typical
employee, it ignores
individual abilities or
the performance of the
jobholder.66
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4
The compensation program has three components as it is seen in Figure 4.8. The base compensation,
pay incentives, and benefits.
Figure 4.8 Components of Total Compensation
Total
compensation
Base Pay
Benefits
compensation incentives
Source: Gomez-Mejia, L. R. & Balkin, D. B. (2002). Management. McGraw-Hill, p. 277.
Base compensation
The basic compensation that an employee receives,
Wage payment is directly calculated on the
usually as a wage or salary, is called base pay. There are two
amount of time worked.
kinds of base pay categories: hourly and salaried. Wage
can be defined as a compensation calculated on a weekly,
A salary is a consistent payment made
monthly, or annual basis. A salary is a consistent payment
each period regardless of number of hours
made each period regardless of number of hours worked.
worked.
Being salaried typically carry a higher status for employees
than being paid wages.
In setting wage and salary levels, a company may search
its competitors’ compensation system. Companies should pay
more than their rivals to attract
and retain qualified employees.
Moreover, managers must
also decide how its internal
wage and salary levels will According to Turkish
compare for different jobs. Labor Law “No
It is reasonable to pay more discrimination based
for demanding positions and on language, race,
better qualified employees in sex, political opinion,
an organization. For instance, even if two employees may do exactly the same philosophical belief,
job, the employee with more experience may earn more.67 religion and sex or similar
reasons is permissible
in the employment
Pay incentives relationship. Differential
In addition to the basic wage structure, organizations that are sincerely remuneration for similar
committed to developing a compensation system may prefer to use incentive jobs or for work of equal
pay programs. Pay incentives can be defined as compensations that reward value is not permissible.”
employees for their high performance. Pay incentives are often referred to
as a variable pay because the amount is contingent on or varies according to
changes in performance. Incentives may be based on the employee’s own contributions or the performance
of the team, business unit, or the entire company.
Pay incentives can be defined as

compensations that reward employees for
their high performance.
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Individual incentive plans provide income above the

base salary if the individual meets a specific performance A bonus is an individual performance
standard. The most typical individual incentives are merit incentive in the form of a special payment
pay and bonus. Bonus is an individual performance made over and above the employee’s salary.
incentive in the form of a special payment made over and
above the employee’s salary. For example, a sales bonus is
a typical incentive. Employees receive bonuses when they sell a certain number of goods for the year.
Employees who fail to reach this goal earn no bonuses. Merit salary systems link raises to performance
levels in non-sales jobs. Under a merit pay plan, employees who receive merit increases have a sum of
money added to their base salary. Those who perform better generally receive more merit pay. Executives
commonly receive stock options as incentives. For example, Disney Company permits its CEO to buy several
thousand shares of company stock each year at a predetermined price.68
Group incentives provide extra income to groups and teams for their performance above the standards.
Each individual incentive option it is described above also can be used on a group basis; that is, two
or more employees can be paid for their combined performance. Group incentives work better where
employees’ tasks are interdependent and require competition.
Companywide incentives direct the efforts of all employees toward achieving overall organizational
effectiveness. This type of incentive produces rewards for all employees based on organization-wide cost
reduction or profit sharing. One of the best known companywide incentive systems is profit-sharing.
Profit sharing provides employees to receive their regular compensation plus a share of the profits earned
by the company. This system increases commitment and loyalty to the organization. On the other hand,
employees often find it difficult to relate their efforts to the profit sharing bonus. Additionally, external
environmental factors, such as economic conditions and competitors, may have a greater effect on the
company’s profitability than any actions of the employees themselves.69
Benefits
At present, employees expect more than just an hourly wage or salary from their employers; they
expect additional considerations that will enrich their lives and support work-life balance. Therefore,
many organizations offer benefit programs which are almost
40 percent of the typical total compensation package for
employees. A benefit is an indirect reward given to an A benefit is an indirect reward given to an
employee or a group of employees as a part of organizational employee or a group of employees as a part
membership. Benefits are typically unrelated to employee of organizational membership.
productivity, therefore, while they may be valuable in
recruiting and retaining employees, they do not directly
affect a worker’s performance. However, these programs, especially the voluntary benefits, help the
organizations to demonstrate their goodwill toward employees and increase loyalty to the company.
While employers provide most benefits voluntarily, some of the benefits are required by law. In Turkey,
some benefits defined by the law are funeral, birth and marriage benefits, duty travel allowances, mobile duty
compensation, paid vacations, severance pay, unemployment insurance, medical leave, dismissal pay or collective
payment in the form of severance pay.70 Most of the companies
also voluntarily provide health, life, and retirement benefits
to employees. Some of the companies allow employees
to use payroll deductions for buying company stocks at internet
discounted prices. Retirement plans are also part of benefit For additional information about benefits
packages that are available to many employees. Companies required by 4857 Labor Law, go to “http://
sponsor retirement plans which are set up to pay pensions turkishlaborlaw.com/turkish-labor-law-no-
to workers when they retire.71 For example, University of 4857/19-4857-labor-law-english-by-article”
California (UC) offers comprehensive retirement benefits,
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4
including a pension plan and a choice of primary (required) retirement benefits for eligible faculty and staff. UC
also offers voluntary retirement savings plans, educational resources to help employees to prepare for retirement,
and retiree health insurance.72
In addition, organizations also provide non-financial voluntary services that are called fringe benefits.
The purpose of such programs is to create a more convenient workplace and increase employee motivation.
Some of the fringe benefit examples are recreational programs, eating facilities including company cafeterias,
meal plans, housing and accommodations, company cars for managers, transport services between home
and workplace, educational services, shopping discount tickets, and flexible working plans.73 For example,
Arçelik, a Turkish manufacturing company, has two kinds of benefit programs: Benefits for all employees and
benefits for certain positions. The company provides training support, discounts for the company’s products,
lunch, workplace medical services, and transportation to all employees. Benefits for certain positions are cars, oil
expenses, checkups, accident insurance and lunch tickets.74
Further Reading
How Microsoft Uses Social Media for Recruiting and Employer Branding
“Microsoft’s old online recruiting presence had become outdated, and was a navigational nightmare
for jobseekers, who suffered from content overload and lack of an organized, central careers hub.
Microsoft now takes a global approach to recruitment, rather than having different careers sites for
different countries and even different business units within the same country.
Microsoft embarked on a major recruitment overhaul nearly 5 years ago, as competition
from companies like Google made the battle for top talent even more challenging. The foundation
of this recruitment marketing initiative was made up of key business and marketing goals such as
creating a consistent global message,
managing their own employer brand
and improving user experience. The new
and improved Microsoft Careers site is a
pleasure to navigate, and the company’s
online presence also includes channels
like Twitter, Facebook, LinkedIn and
YouTube in order to engage, impress
and inspire potential job candidates. In
2010, Microsoft increased new hires by
300%, and the company is expecting
continuous improvement as the social
recruitment techniques and tools get
more sophisticated...”
Source: http://linkhumans.com/blog/online-recruitment-employer-branding-microsoft-case-study
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In Practice
Should You Rehire a Defector? “He stabbed you in the back,” Shayam said.
“Ram Kapur and his brother Shayam were “He left you for more money, without thinking
returning to the home from the Holi festival in twice about Green Impact’s mission or your
India. Ram’s phone rang just as they walked friendship. You can’t trust him. Besides, your
through the door, and he held up the screen to business is doing great now. You don’t need him
show Shayam the caller’s name: Hari Shukla. anymore.” Recently, though, Ram had started
“Why is he calling you on Holi?” his brother to consider expansion, perhaps into the Middle
asked, surprised. East, where sustainable building wasn’t such
a hard sell. But he wasn’t sure that his young
Ram was the founder and CEO of Green
team could keep the business thriving if he took
Impact Consulting, a sustainable design firm, and
his focus off day-to-day operations. With Hari
Hari had been one of the young company’s most
back, maybe he could revive his dreams for the
valued employees—until two years ago, when he’d
company. “Hari may be the only one who can
decamped to a rival firm. “A job, I think,” Ram
help me take the business to the next level,” he
replied. “We’ve been back in touch.” “No way! He
told Shayam. His brother scoffed. “This city is
abandoned you! You swore you’d never speak to
full of talented, competent people. There is no
him again!” That was true. Hari had been Ram’s
way that that deserter is your only option.”
right-hand man at Green Impact, overseeing the
civil engineers onsite at the firm’s residential and Three days later, Ram was back in the office.
commercial real estate projects, while Ram led He’d returned Hari’s call, and the two finally
the technical analysis and design teams back at discussed what was on Hari’s mind: He missed
the office. But then Hari had blindsided him by the tight-knit culture at Green Impact, and he
resigning. He said he was leaving for “personal was exhausted from the long hours at his new
reasons,” only to turn up at a larger competitor: job. He had been wooed by a 75% salary increase
The Sustainable Build Group. and the opportunity to travel, he told Ram, but
he wanted to feel as if he was helping to build
Of course, Ram knew this was a risk of being
something again, not just keep someone else’s
an entrepreneur in India. The talent market
company running.
was so tight that strong employees were often
poached from small companies by bigger-name, Ram had started to get excited about the
more successful ones. But he still couldn’t help possibility of working with his old employee. But
feeling betrayed—even devastated. It was a tough now back at the office, surrounded by the team
year. Hari’s unexpected departure left Ram in that had so capably risen to the challenge that
charge of both the office and the field teams. He Hari had created, he was less sure. He wondered
was stretched too thin to tackle the growth plans about the disruption it would cause”.
he’d been dreaming of. He focused on serving Source: Jyotsna, B. & Gupta, N. (December
existing clients and retaining his employees—he 2016). Case Study: Should You Rehire a Defector?
even had to raise salaries across the board to make Harvard Business Review. Retrieved from https://
sure others didn’t follow in Hari’s footsteps—but hbr.org/2016/12/should-you-rehire-a-defector.
he had no time for marketing and barely kept Discuss:
the business going. He put on a brave face for his
1. What would you do if you were Ram? Would
employees, the customers, and his parents. Only
you give to Hari second chance in your
his brother knew how hard he’d struggled and
company?
how hurt he’d been. “I can’t believe you would
speak to him.” Shayam shook his head “I know, 2. How would current employees react if Ram
I know,” Ram said. “He really let me—and the decides to take Hari back? Do you think
company— down. But he was a great employee— that rehiring Hari would reward an act of
and a friend. I have to at least consider it.” disloyalty?
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4
LO 1 Defining the concept of human

resource management
Human resource management (HRM) is the process of

acquiring, training, appraising, and compensating employees,
and of attending to their labor relations, health and safety,
and fairness concerns. Many firms realize that human resource
function has a substantial impact on the firm’s bottom-line
performance. Therefore, they align the firm’s human resource
management goals and policies with the strategic goals of the
Summary
enterprise in order to improve business performance. Managers
call this strategic human resource management.
There is not only one and the best way for managing human
resources. Based on size, sector, employee numbers, financial
situation, employee skills and location, each company develops
its own HRM program.
Describing the internal and

LO 2 external environment of human
resource management
The environmental factors influencing organizations and

human resource management can be divided in two categories:
Internal environmental factors and external environmental
factors. Internal environmental factors are the issues that can
be found within an organization’s internal environment. These
factors can be indicated as personal and organizational factors,
job characteristics in the organization, and interpersonal
relationships. External environmental factors can be defined
as factors outside the organizations that cannot be controlled
and changed by the organization. Managers should pay close
attention to external environment for adapting organization’s
human resource strategy to the new developments occurring
outside the organization. Major environmental factors include
workforce diversity, government regulations, and economic
change. External environmental factors affecting HRM are
workforce and demographic trends, government regulations,
and economic challenges and trends.
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Explaining human resource

LO 3 management activities that get
the right people
Many organizations look to ensure that they have the right number of the right people at the right time
and at the right place. Primary human resource management challenges include determining how many
people are needed and for how long, and where the company can provide the employees it needs.
Planning is the starting point for all kinds of management processes including human resource
management. Human resource management starts with planning which is the development of strategies
to meet a firm’s future human resources requirements. Human resource planning activity is concerned
Summary
with assessing the future human resource need (demand), determining the availability of the type of
people needed (supply) creating plans for how to meet the need (fulfillment).
Once the firm has determined its staffing needs via human resource planning, it needs to hire
the most qualified employees to fill the available position. The hiring process has three components:
recruitment, selection, and orientation. Recruitment consists of a set of activities that improves the
number and quality of people who apply for employment, as well as the probability that qualified and
compatible applicants will accept employment offers. Once the recruiting process has attracted a pool of
applicants, the next step is to select someone for hiring. The selection process is to choose the employee
who can successfully perform the job from the pool of qualified candidates. After people are hired, they
need to be oriented to the organization and to their jobs. Employee orientation is the systematic process
of helping new employees learn about the company (such as company to create, policies, work rules and
benefit programs) and getting emotionally attached to the firm.
Understanding human resource

LO 4 management activities that
maximize performance
Once employees are hired, the organization needs to ensure that they are performing well. It is the
human resource manager’s job to train, motivate, appraise and see that employees are compensated fairly.
Training is a continual process of providing employees with skills and knowledge they need to
perform at a high level. Training can involve the changing of skills, knowledge, attitudes, or behavior. It
may mean changing what employees know, how they work, their attitudes toward their work, or their
interaction with their coworkers or superior.
Organizations need to evaluate employees’ performance and let them know how well they have
performed on established goals. Performance appraisal can be defined as a process of determining
and communicating to an employee how he or she is performing on the job and establishing a plan of
improvement.
HR departments use the information collected through performance appraisals to make important
decisions about HR functions. One of the most common uses of performance appraisals is for making
administrative decisions relating to promotions, firings, layoffs, and merit pay increases. Performance
appraisal information also provides needed input for determining both individual and organizational
training and development needs. Another important use of performance appraisals is to encourage
performance improvement. In this regard, performance appraisals communicate to employees how they
are doing and suggest needed changes in behavior, attitude, skills or knowledge
Compensation can be defined as the total of all rewards provided employees in return for work
and services performed. The basic compensation that an employee receives, usually as a wage or salary,
is called base pay. Pay incentives can be defined as compensation that rewards employees for the good
performance. Many organizations also offer some benefit programs which accounts almost 40 percent
of the typical total compensation package to employees.
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1 Which one is one of the external 6 What is the first step in selection process?
environmental factors affecting human resource
management? a. Interview
b. Employment interview
a. Cultural features of employees c. Reference check
Test yourself
b. Working conditions d. Physical examination
c. Job characteristics e. Preliminary screening
d. Aging workforce
e. Competitive strategy of organization
7 Which one of the following is an important
data source for task analysis in training need
2 Which of the below takes part in human analysis process?
resource planning process?
a. Human resource planning
a. Performance appraisal b. Job description
b. Training c. Performance appraisal
c. Job analysis d. Skill analysis
d. Orientation e. Replacement chart
e. Compensation
8 Which one of the following training
3 Which one is a list of key personnel and their techniques employs the actual or simulated
possible replacement within a firm? equipment which trainees will use on the job?
a. Replacement chart a. Vestibule training
b. Skill inventory b. Classroom lectures
c. Labor supply c. Mobile learning
d. Job specification d. E-learning
e. Job description e. Audiovisual techniques
4 Which one of the following is applied in the 9 Which one of the following is not a behavi-
case of labor shortage? oral appraisal instrument?
a. Retirement a. Coming to work on time
b. Layoff b. Completing assignment on time
c. Overtime c. Getting along with customers
d. Reduced hours d. Getting along with co-workers
e. Restricted hiring e. Sales volume
5 Which one of the following refers to publicize 10 Which one of the following rewards
job openings on bulletin boards or company employees for the good performance?
intranets?
a. Pay incentives
a. Employee referrals b. Benefit
b. Advertising c. Base compensation
c. Online recruiting d. Wage
d. Job posting e. Salary
e. Media
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4
If your answer is incorrect, review If your answer is incorrect, review “Human

1. d 6. e
“Environment of Human Resource Resource Management Activities That Get
Management”. the Right People”.
If your answer is incorrect, review “Human If your answer is incorrect, review “Human
2. c 7. b
Resource Management Activities That Get Resource Management Activities That
the Right People”. Maximize Performance”.
3. a 8. a
the Right People”. Maximize Performance”.
4. c 9. e
the Right People”. Maximize Performance”
5. d 10. a
the Right People”. Maximize Performance”
What is the difference between personnel

management and human resource management?
Many people think that human resource management is the new version of
personnel management but there are some differences between these approaches:
1) While personnel management is a traditional approach of managing people
in the organization, human resource management is a modern approach of
managing people; 2) Personnel management focuses on personnel administration,
employee welfare and labor relations. Human resource management focuses
on selection, development and motivation of human resources; 3) Personnel
management focuses on increased production and satisfied employees. Human

your turn 1 resource management focuses on effectiveness, culture, productivity and
employee’s motivation; 4) Personnel management assumes people as inputs for
achieving desired outputs. Human resource management assumes people as
important and valuable resources for achieving desired outputs; 5) Personnel
management provides less training and development opportunities to employees
than HRM does; 5) In personnel management, decisions are made by the top
management. In human resource management, decisions are made collectively
by participation of management and employees; and 6) Personnel management
is a routine function. Human resource management is a strategic function.
What is the impact of technological developments to

human resource management?
Technology is one of the most important external factors shaping human

resource management. Recruiting activity of human resource management has
been significantly impacted by technology. Internet makes easier and cheaper
to reach job candidates from all over the world. Information technology makes
your turn 2 it possible for human resources professionals to train new staff members in a
more quickly and efficient manner. It is also possible to assess their progress
through computerized testing programs. Human resources professionals can
also use information technology to evaluate employee performance and to get
employee feedback effectively.
144
4
How does a manager forecaste the external supply of

human resources?

Forecasting external supply is to estimate the number and type of people who
will be available for hiring from the labor market. It is not an easy task for
a manager to predict availability of potential labor supply. The labor market
is broad and includes everyone from high school graduates to migrants from
your turn 3 employees returning from military service to job seekers who have been
recently laid off. For getting an idea of availability of labor, managers need
to rely on information from outside sources, such as government reports,
employment commissions and figures supplied by universities on the number
of student in major fields.
What are the disadvantages of Internet recruiting?
As wepeople
Many explained in not
who are the seriously
chapter, looking
technical
for askills involve
job may submitjob-specific
resumes juste
differemary input is By
to see what happens. grounded in technology,
using online whereas
recruitment, the tourism
employers may get sector
more
Araştır
your turn4 4 is primarily applicants,
unqualified based on theandbehavioral dimensions
HR departments haveoftoproviding comfort
review more and
resumes.
entertainment.
Besides online recruitment creates some disadvantages for older and minority
employees who have no access to internet.
How can human resource department evaluate the training

program’s results?
Many companies are investing millions of dollars in training programs to

gain competitive advantage. Therefore, it is crucial for managers to evaluate
nd transportation.
training The similarity
results. Evaluating the trainingbetween
programs thehelps
two tosectors is weaknesses
identify that both
comprise
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effective difference
can however
be withdrawnis broader.
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Araştır
your turn4 5 sector is primarily
training based on the
efforts: Participants’ behavioral
reactions dimensions
to the program,of what
providing comfort
(if anything)
and trainees
the entertainment.
learned from the program, and to what extent their on-the-job
behavior or results change as a result of the program. Pretests, questionnaires,
controlled experimentation, and performance evaluation results can be used
to measure the success of training programs.
What is the most typical problem that occurs in

performance appraisal process?
The most typical problem associated with performance appraisals is the lack
s primary
of inputWhile
objectivity. is grounded
measuringin technology, whereas
commonly used the tourism
factors sector is
such as attitude,
primarily based
appearance, on the behavioral
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your turn4 6 entertainment.
can remove objectivity from appraisal process. A bias can be either positive
and negative. It occurs when a manager generalizes one positive performance
feature or incident to all aspects of employee performance.
145
4
endnotes
1Jensen, T. (August 10, 2006). James Kuhn; VP of 14Dessler, G. (2003). Management Principles and
individuality for McDonald’s. Retrieved from Practices for Tomorrow’s Leaders. Pearson Prentice
https://groups.google.com/forum/#!topic/alt. Hall, p. 225.
obituaries/7cY6TqiGthk 15Mondy, R. W. & Noe, R. M. (2005). Human
2Ivancevich, J. M. & Duening, T. N. (2004). Business Resource Management (9th ed.) Pearson Prentice
Principles, Guidelines, and Practices. Atomic Dog Hall, p. 95; De Cenzo & Robbins, op. cit., p. 143.
Publishing, p. 266. 16Hitt,M. A., Black, J. S., & Porter, L.W. (2005).
3Ivancevich & Duening, op. cit., p. 267; Gomez- Management. Pearson Prentice Hall, p. 528.
Mejia, L. R. & Balkin, D. B. (2002). Management. 17Noe, et al., op. cit., p. 178.
McGraw-Hill, p. 258.
18Pride, W. M., Hughes, R. J., & Kapoor, J. R. (2009).
4Genç, K. Y. (2014). Environmental factors affecting
Introduction to Business. Cengage Learning, p.
human resource management activities of Turkish
252.
large firms. International Journal of Business and
Management, 9 (11), p. 110. 19Griffin, R.W. & Ebert, R. J. Business (7th ed.)
5Ibid., Pearson, p. 219; Dessler, G. (2013). Human
p. 108.
Resource Management (13th ed.). Pearson, p. 169.
6Mirze, S. K. (2002). Introduction to Business. Literatür
20Mondy & Noe, op. cit., p. 104; Ivancevich, op. cit.,
Yayıncılık, p. 162.
p. 144.
7Meier, J. (2010). Generation Y in the workforce: 21Pride, et al., op. cit., p. 253; Mathis, R. L. & Jakson,
managerial challenges. The Journal of Human
J. H. (2003). Human Resource Management (10th
Resource and Adult Learning, 6, (1), pp. 74, 75.
ed.) Thomson South Western, pp. 50-51.
8Punia, M. & Sharma, B. (April 2015). A 22Mcgregor, J. (May 29, 2009). Cutting salaries instead
comprehensive review of factors influencing HRM
of jobs. Retrieved from https://www.bloomberg.
practices in manufacturing industries. Journal
com/news/articles/2009-05-28/cutting-salaries-
of Management Engineering and Information
instead-of-jobs
Technology, 2 (2), p. 24. Retrieved from www.
jmeit.com 23Hill, C. W. L. & Mc Shane, S.L. (2008). Principles
9Genç, of Management. McGraw-Hill Irwin, p. 294.
op. cit., p. 105.
24Mathis & Jackson, op. cit., p. 205.
10Goldman, D. (January 9, 2009). Worst year for
jobs since 45. Retrieved from http://money. 25Ibid., p. 212.
cnn.com/2009/01/09/news/economy/jobs_ 26Foot, M. & Hook, C. (1996). Introducing Human
december/
Resource Management. Logman, p. 55.
11Chartered Institute of Personnel and Development-
27Byars,L. L. & Rue, L.W. (1997). Human Resource
CIPD (Spring 2010). Workforce planning right
Management (5th ed.). Irwin, p. 143; Dessler,
people, right time, right skills. Retrieved from
2003, op. cit., p. 227.
https://www.cipd.co.uk/Images/workforce-
planning_2010-right-people-time-skills_tcm18- 28Mondy & Noe, op. cit., p. 130.
9058.pdf 29Byars & Rue, op. cit., p. 145; Mondy & Noe, op.
12De Cenzo, D. A. & Robbins, S. P. (1999). Human cit., p. 133.
Resource Management (6th ed.) John Wiley & 30Morrison, K. (September 7, 2015). Social Media
Sons, Inc., p. 132; Ivancevich, J. M. (2004). to Find High-quality Candidates. Retrieved from
Human Resource Management. (9th ed.) Mc Graw http://www.adweek.com/digital/survey-96-of-
Hill, p. 137. recruiters-use-social-media-to-find-high-quality-
13Noe, R.A., Hollenbeck, J.R., Gerhart, B., & Wright, candidates/
P.M. (2006). Human Resource Management
Gaining a Competitive Advantage (5th ed.)
McGraw-Hill Irwin, pp. 145-146.
146
4
31Online Recruitment. https://www.recruiter.com/ 56Gomez-Mejia & Balkin, op. cit., p. 275.

online-recruitment.html 57Gomez-Mejia & Balkin, op. cit., p. 275.
32Wisdomjobs.com. Staffing and developing a diverse 58Performance Resource Center. http://performance-
workforce/recruiting job applicants. Retrieved
appraisals.org/faq/criticalincident.htm
from https://www.wisdomjobs.com/e-university/
principles-of-management-tutorial-293/ 59Gomez-Mejia & Balkin, op. cit., p. 275.
recruiting-job-applicants-9447.html 60whatishumanresource.com. https://sites.google.com/
33Hill & McShane, op. cit., p. 298. site/whatishumanresource/performance-appraisal-
34Mondy process
& Noe, op. cit., p. 135.
61Noe et al., op. cit., pp. 368-369.
35Türkiye İş Kurumu (İŞKUR). http://www.iskur.gov.
tr/en-us/corporateprofile/institution/history.aspx 62whatishumanresource.com. https://sites.google.com/
36Dessler, site/whatishumanresource/performance-appraisal-
op. cit., p. 184.
at-pepsi-cola-international
37Quartz. How quickly interviewers decide whether 63whatishumanresource.com. https://sites.google.com/
or not to hire you? Retrieved from https://
site/whatishumanresource/performance-appraisal-
qz.com/406976/heres-how-quickly-interviewers-
process
decide-whether-or-not-to-hire-you/
64Gomez-Mejia & Balkin, op. cit., p. 276.
38Ivancevich, op. cit., p. 230.
65Gomez-Mejia & Balkin, op. cit., p. 278; Mondy &
39Mirze, op. cit., p. 170.
Noe, op. cit., p. 285.
40Hitt et al., op. cit., p. 535. 66De Cenzo & Robbins, op. cit., p. 328.
41De Cenzo & Robbins, op. cit., p. 207. 67Mathis & Jackson, op. cit., p. 373; Griffin & Ebert,
42Wisdomjobs.com. Orienting and developing employees. op. cit., p. 224.
Retrieved from https://www.wisdomjobs.com/e- 68Gomez-Mejia & Balkin, op. cit., p. 276; Griffin &
university/principles-of-management-tutorial-293/
Ebert, op. cit., p. 225.
orienting-and-developing-employees-9451.html
69De Cenzo & Robbins, op. cit., p. 337.
43Dessler, op. cit., p. 270.
70Turkish Labor Law. Benefits in kind and allowance.
44Byars & Rue, op. cit., p. 206.
Retrieved from https://turkishlaborlaw.com/news/
45De Cenzo & Robbins, op. cit., p. 227. business-in-turkey/341-benefits-in-kind-and-
46Ibid., allowance
p. 225.
71Griffin & Ebert, op. cit., pp. 226-227; Gomez-
47Noe et al., op. cit., p. 284; Ibid., p. 230.
Mejia & Balkin, op. cit., p. 276.
48Society of Automotive Engineers (SAE). http:// 72UC net. http://ucnet.universityofcalifornia.edu/
training.sae.org/ford/
compensation-and-benefits/
49Byars & Rue, op. cit., p. 284. 73Mirze, op. cit., p. 199.
50Mondy & Noe, op. cit, p. 258; Mirze, op. cit., p. 74ArçelikA.Ş. Compensation and Benefits. Retrieved
84.
from http://www.arcelikas.com/page/83/Work_
51Hittet al., op. cit., p. 541; Mondy & Noe, op. cit., Life
251.
52Ivancevich, op. cit., p. 260.
53Stredwick, J. (2005). An Introduction to Human
Resource Management (2nd ed.). Elsevier, p. 296.
54 https://www.inc.com/encyclopedia/employee-
performance-appraisals.html
55whatishumanresource.com. https://sites.google.com/
site/whatishumanresource/performance-appraisal-
process
147
Chapter 5 Marketing Management
1 2
Learning Outcomes
Reach an accurate understanding of what Explain the methods that companies follow
marketing is and what it entails. for strategic positioning towards market
segments.
3 Develop skills necessary for an integrated

management of the marketing mix elements,
namely; product, pricing, place, and promotion.
4 Grasp the issues related to branding, which
stands as the most strategic, long-term
investment of the company.
5 6
Appraise how and why the marketing
Describe new trends in marketing influenced principles can be applied in accordance
by globalization, automation, and digitalization. with ethical principles of doing business in a
globalizing and digitalizing world.

Foundations of Marketing Marketing
Strategic Marketing Management Branding
Marketing Mix Product
Branding Good/Service
New Trends in Marketing Pricing
Marketing Ethics Place
Promotion
Branding
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5
“Make your marketing so useful people would pay you for it”, says Jay Baer, certified speaking
professional (CSP) and a New York Times’ best-selling author of five books. What he means is that the
product alone cannot be the basis of marketing. Marketers have to treat consumers as real people, with
their thoughts and feelings including anger, fear, and love, and try to reach them on a personal basis,
to the extent possible. The physical good (or the perceptible characteristics of an intangible service) is
important, but not as important as consumer perceptions of that product. What marketers need to do is
to understand consumers, add value to the product, and expect consumers to pay for the extra advantage
or value embedded in the product.
As Simon Sinek, yet another inspirational author and speaker, puts it, “people don’t buy what you do,
they buy why you do it.” In other words, it is not the buttons or the color of the smart phone per se, but
the feeling of being connected to the modern world, the power of belonging to a group of millions, and
perhaps the deep motivation to be liked by others, when we are choosing a specific brand. Marketing is
all about making a good point using a vehicle of interaction (a.k.a the product) and convincing people to
pay in return for this good cause. With this perspective in mind, a person can sell everything, including a
good or a service, an ideology, an organization, as well as himself or herself.
FOUNDATIONS OF MARKETING
Marketing is not just a departmental task. Starbucks does not have a marketing department, because the
whole organization is “marketing”. The co-founder of HP, David Packard, once said “marketing is too important
to be left to the marketing department” pointing out the importance of integrated and systematic communication
with customers. Therefore, marketing should not be perceived as another function in the organization, not
even an important or specialized activity among others. It should be the basic driving motivation across all
departments in the organization. Below is a discussion on how marketing (and other important concepts)
can be defined with this unifying mindset.
Definition of Marketing
One can define marketing from a variety of perspectives.
Marketing is typically defined as the creation, promotion, Marketing is typically defined as the
and delivery of goods and services directed towards creation, promotion, and delivery of goods
consumers and businesses.1 This definition reflects upon and services directed towards consumers and
the basic activities and functions of marketing and specifies businesses.
that marketers deal with (1) identifying and creating
needs, wants, and desires of consumers in B2C (business-
to-consumer) and B2B (business-to-business) markets, (2) promoting the product by way of integrated
communication techniques, and (3) delivering the product by appropriate sales points in either brick-and-
mortar retail locations or virtual outlets.
The American Marketing Association offers the following formal definition: “Marketing is the activity,
set of institutions, and processes for creating, communicating, delivering, and exchanging that have value
for customers, clients, partners, and society at large” (Approved July 2013).2 This definition concentrates
on the notion of an immense marketing system with different actors and processes. It would be very difficult,
if not impossible, to identify, promote, and/or deliver any product without the essential organizations
(such as advertising firms, producers, and wholesales) and institutions (such as the government and the
“modern” exchange market structure) supporting this eco-system.
Perhaps a better definition for marketing would entail the human dimension, such as the following:
marketing is managing profitable customer relationships. In this short-yet-effective definition, there are
three important concepts: first, marketing is all about building a relationship with customers. Without
a deep understanding of consumer behavior, marketing cannot succeed. For instance, the giant German
auto maker BMW is very successful not only because the product is superb, but also because the company
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5
Marketing Management
is keen on defining, grasping, and appreciating the other shareholders, but also because they need
feelings and thoughts of its target customers. In other money to invest in other opportunities. It would
words, the company cannot drive markets, without not be this hard for companies to understand and
being first driven by customer information. Based on convince customers if they had unlimited resources
this enlightenment, companies can imagine how the including cash, people, production facilities, and
product and the brand can possibly create long-lasting so forth. But this is not the case. Companies have
relationships involving consumers’ minds and hearts. to build a strong, long-lasting relationship with
customers, and proactively manage this relationship
within limited budgets to make a profit.
Scope of marketing is not limited with products
Marketing is all (good and services), which are intended to be
about building a commercially sold. The following are also in the scope
relationship with of marketing:
customers and requires • Events, such the Olympics where different
a deep understanding of types of sports are played by thousands of
consumer behavior. different players from around the world,
• Places, such as Paris as the most romantic
destination for honeymoon,
Secondly, marketing is about managing • Organizations, such as the World Wild
customer relations. It is no coincidence that Life, trying to lead initiatives on preserving
a majority of a brand’s fans agree on the basic wild life on earth,
values and advantages that the brand provides. • Persons, such as Marilyn Monroe, who has
Building a strong relationship with customers become the icon for beauty and the symbol
requires a proactive approach in marketing. A of “dumb blonde” character in Hollywood,
passive approach would not even care about • Experiences, such as Disneyland theme
what the customer thinks or feels, whereas an park, with over 650 million visitors since it
active approach would search for clues about that opened,
customers expect. A reactive approach would listen
to customer requests, respond to complaints, and
build the product accordingly, hence the word re-
active. However, an ideal (proactive) marketing
methodology would understand customers and 1
build a relationship based on their expectations How would you define
before the customers would be telling about their marketing? Explain your
needs and expectations. Apple would not wait reasoning.
until customers imagine a smart phone with a lot
of applications solving their everyday problems in
different capacities. These are the technical details of
a concrete product. What consumers desire, on the Consumers may become hungry (need),
other hand, may be proactively managed by today’s want to eat vegetables because they are on
marketers who base their decisions on consumer a diet (want), actually want to eat a mixed
knowledge. Marketing success is (almost) never pizza with all toppings (desire), and go to
based on chance, but a careful, thoughtful, and the cashier at the fast-food restaurant to buy
helpful examination of target customers. a hamburger (demand) because her budget
is quite short. Beware of consumer behavior
Lastly, the management of customer
from different aspects: need, want, desire,
relationships must generate profits, not only because
and demand!
companies need money to pay their employees and
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5
Consumers may need something, which is mostly common across all people regardless of culture and
geography. Need is usually biological, such as thirst, hunger, and love. Want is the need directed towards
an object, where brands may compete over customers. Brands may also position themselves as “desirable”,
such as in the case of Magnum ice cream, an obvious example, or Coca-Cola, a less obvious example. Consumer
demand emerges when the consumer pays for the product, i.e. the actualization of what the customer
wants or desires.
STRATEGIC MARKETING MANAGEMENT

This section is devoted to a discussion on how and why companies should create a systematic
and working methodology to actually manage customer relationships, pointed out before. With the
above-mentioned typology of consumer motivations towards different products and brands (i.e. need,
want, desire, and demand), the company has to decide on its strategic positioning. Strategy can
be defined as the method or the plan to achieve a desired future state. Marketing strategy, from
this perspective, is the way of doing marketing towards
a certain positioning. For marketers to decide on this
“way,” they have to combine all marketing goals into one Marketing strategy is the way of doing
comprehensive plan. Two key decisions marketers have marketing towards a certain positioning.
to make in this regard are (1) generic marketing strategy
and (2) segmentation and targeting.
Figure 5.1 Generic Marketing Strategies

Generic Marketing Strategy
Firms needs to choose a specific strategy, STRATEGIC ADVANTAGE
a way of doing business so that they can Unique product Basic product
concentrate their efforts and resources on
certain areas.3 In his argument, firms failing
to do this would “stuck in the middle,”
Broad
vaguely perceived by consumers as a strong Differentiation Cost Leadership

STRATEGIC TARGET
brand (Figure 5.1). Firms which stuck in

the middle fail to develop their strategy in STUCK IN THE
at least one of three dimensions: (1) cost MIDDLE
leadership, (2) differentiation, and (3)
focus. Companies should build competitive
Narrow
advantage in order to remain distinctive in Focus

the market and hold the advantage for a
long period of time.
Source: Porter, M. E. (1980). Competitive Strategy: Techniques for
Analyzing Industries and Competitors. Free Press, p. 39.
Cost leadership
One of the ways to establish competitive advantage is to
produce output with the lowest cost in the industry. This can
be achieved by producing in more and more efficient ways
using scale economies, scope economies, and experience Scale economies state that a company
(learning curve) effects. Scale economies state that a can produce at a lower cost per unit of
company can produce at a lower cost per unit of production production if it is able to use the capacity
if it is able to use the capacity further. The company can further.
achieve a cost advantage with increased output of a product
because fixed costs can be distributed over a larger quantity
of outputs, leading to a lower cost per unit.
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5
According to learning (or experience) effects, takes you from one place to another. If the product
one can do better if more experience accumulates. satisfies this basic function, the customer may be
In other words, “practice makes it perfect.” Lastly, willing to purchase the product without looking
the concept of scale economies states that if the for any extra value being offered with the product.
same physical or virtual facility (or resources) can Instead, this customer may pay a lower price with
be used to produce another product, this creates a the basic value in return. This is why the strategy
cost advantage. At this point, the average total cost attempts to capture a diverse range of consumers
decreases as a result of increasing the number of without particularly focusing on a specific segment.
different products produced.
However, these
economies can Differentiation refers to offering extra value
continue until a in addition to the basic features offered in
certain point. A cost Cost-leader companies the product.
advantage is achieved try to minimize the cost,
when the company not the price. They can
can produce larger offer the product with Differentiation
amounts of the same low price (through which In addition to cost leadership, companies may
or different products they maximize their want to offer some extra value in addition to the
using the same profit margins) or with basic features offered in the product. For instance,
resources. However, an ongoing, average price a shampoo brand may claim it repairs the hair and
after a certain level (through which they makes it shine (beyond the fact that it actually cleans
of output, other maximize their market the hair) and an airline brand may assert that it gives
problems start to share). you an extreme travelling pleasure with delicious food,
arise. For instance, comfortable chairs, and on-time schedules (in addition
a large volume of output starts to accumulate to the fact that it actually makes you travel from one
higher costs of movement, storage, damage, and place to another). In return for these superior product
deterioration. Moreover, it would start to be more characteristics, the customer has to pay an extra
and more difficult to sell these items, creating amount. Companies can differentiate themselves on a
additional sales costs. Additionally, managerial variety of different points, exemplified below:
problems may arise because of increased • Emphasize the competitive position; e.g.
production and sales efforts. For these and other Avis: “We are the second best in the market”.
reasons, companies should carefully plan their • Emphasize the product usage ritual; e.g.
production for different products and calculate the “Çay Saati” biscuits.
optimum level of production with the lowest cost, • Emphasize the particular segment of
especially when the generic marketing strategy is users; e.g. Snickers emphasizing the young
cost leadership. adolescents who need energy.
• Emphasize the cultural symbols associated
with the product/brand, e.g. Torku using the
The reasoning behind cost leadership historic Ottoman cap on top of the product
strategy is that in each industry, customers bottle.
are looking for a few basic things being Differentiation strategy requires that the point
offered in a product. being differentiated has specific characteristics.
For instance, the so-called differentiation as the
company argues may not be meaningful for the target
The reasoning behind cost leadership strategy customers. If the consumer is not willing to pay for it,
is that in each industry, customers are looking for then the company has to start from scratch to find a
a few basic things being offered in a product. For meaningful advantage.
instance, a shampoo cleans the hair and an airplane
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5
in the fast-food market, which is itself huge,

focusing on a few people who are allergic to
wheat and producing gluten-free products
2 might be a good idea. Those who are aller-
Think of examples or gic would then choose this company if they
experiences where you came want to eat fast-food. The positioning would
across brands claiming an be quite clear for this company.
advantageous feature but you • Profit margins are usually higher for focused
did not care enough. companies. They often need to engage them-
selves with intense market research (e.g. search
for the number allergic people who would
A second important factor to consider when want to eat fast-food and who would have
planning based on the strategy of differentiation an effective demand for this product with
is the competition. If one of the competitors has enough resources and access to the fast-food
already claimed a similar advantage, your position is restaurant) and marketing research (e.g. the
not solid regarding that brand attribute. Similarly, characteristics of these consumers purchase
if competitors can easily match or copy a similar processes, life styles, demographic profiles, and
advantage, then you are not in fact differentiating brand preferences), as well as scientific research
your brand. and development (e.g. the ingredients and the
Last but not least, the company should also nutritional values of the products being pro-
be able to deliver the same advantage over a long duced). These research activities add an extra
period of time, so that the brand value does not cost on top other production and marketing-
diminish over time. If the top management cannot related costs, leading to higher prices. Those
allocate enough resources to preserve the brand who specifically have the need identified by
position, then the brand will die eventually. the company are likely to pay for this price.
Focus strategy attempts to capture a smaller The number of potential customers, total
segment in the market. costs, profit margins, and the particularity of
the product increase from cost leadership to
differentiation to niche marketing.
Focus
Focus strategy attempts to capture a smaller
segment in the market; however offering a very
specific product designed according to the Companies with a focus
particular needs of this segment, it is highly possible strategy do not focus on
that people with that need would buy from this a specific product, but
focused company. Focus (or niche) strategy can be rather focus on a specific
attractive for several reasons: segment of customers
• A particular niche market can allow a few with particular needs/
companies only (usually one or two), so the wants/desires.
competition is not intense. The niche mar-
kets are considered to be “safer” areas since
not the basic need (cost leadership), not Strategic Segmentation and Target
even the basic need plus additional benefits Customers
or attributes (differentiation), but idiosyn- Deciding for the generic marketing strategy
cratic needs and desires are pursued. goes hand in hand with strategic segmentation,
• It may be easier to build a clear positioning since companies have to consider the segment
strategy since the product itself is directed they are targeting when they are strategically
towards particular attributes. For instance,
planning their marketing activities. Population,
153
5
in marketing sense, is constituted by all people

in the world who can potentially purchase and/
or consume the product. Segmentation is the task Segmentation is the task of dividing this
of dividing this population into sub-groups in a population into sub-groups in a way that
way that can meaningfully separate consumers in can meaningfully separate consumers in
terms of their consumption patterns. In order to terms of their consumption patterns.
talk about a useful segmentation, the following
conditions must be met: The criteria for segmentation may differ
1. People in the same group should be from one company to another. One of the most
homogenous, i.e. similar to each other in convenient methods is geographic segmentation.
one way of another. This is in fact the basis With this method, marketers can easily divide the
of effective segmentation: each segment generic market into segments by identifying the
must be similar in terms of needs or chosen geographically meaningful factors. For instance, in
characteristics. eastern Turkey consumers may behave differently in
2. People in different groups should be food consumption from consumers living on the coastal
heterogeneous. Together with the first point, region. The former may dominantly like spicy and hot
this would demonstrate that consumers food, while the latter may like to eat green vegetables
are effectively divided into sets of different and fish. However, this type of segmentation is
needs. overly simplistic and disregards almost all variables
3. Some data should be available for each that may eliminate the effects of geographical
segment so that measurements can be distance, such as taste and personal preferences.
made as regards to the size of the market, A more sophisticated yet still simple criterion
the general characteristics of consumers for segmentation is demographic (and in the case
constituting that market, details of their of B2B markets, firmographics). In this strategy,
buying behavior, and thus, the overall marketers divide consumers into groups based on
attractiveness of the segment. factual information such as age, gender, education,
4. The segments should be substantial either marital status, and income. A lot of marketing
in terms of number (sales potential) or in research companies prefer to make segmentation
terms profit per unit sold (profit potential). on these criteria and most of them rely on the
Each company is likely to have a “minimum” statistical tendency that at least a few criteria in this
requirement to be profitable. list go up and down together. For instance, it is very
5. The segments should also be accessible likely that age and education increase together, and
so that an effective distribution and that education are income are highly correlated.
communication strategy can be established. The problem with demographic segmentation is
that it still remains insufficient to explain intricate
Segmentation criteria consumer behavior including important details
A generic market would be a market of such as why consumers choose different product
consumers with general needs concerning a good/ solutions, why they prefer different brands, and the
service category. For instance, a generic market for reasons for brand loyalty or disloyalty.
the automobile would be constituted by all people who A more useful approach is categorizing
are likely to buy a car for transportation with basic consumers on the basis of how they purchase and
features. However, companies are likely to divide use a particular product or brand. User occasions,
consumers into groups because efforts directed frequency of purchase, reasons for buying (and
towards consumers who would provide a match not buying), level of loyalty, and other relevant
with the company’s resources and goals would be details about specific consumer behavior can
more effective both on the company’s side (easy help marketers identify points of differentiating
conviction, more profit, concentrated marketing, consumers and create meaningful consumer
etc.) and on the customer’s side (more satisfaction, groups. Consumers may develop a certain attitude
less search for the right product, etc.). towards a product category, a specific product, and/
or a particular brand, and these idiosyncrasies can
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be used in developing different marketing strategies genetics and socialization. Last but not least,
for different segments. In fact, companies with the psychographics can attempt to identify differences
intention of following a differentiation strategy based on the consumer’s “would-be” social class,
discussed above must find these peculiarities. discussed to have different components including
For instance, considering a commodity such as economic capital (financial resources), cultural
water, some consumers can be totally indifferent capital (education and accumulated knowledge),
to the brand or the ingredients, while some others social capital (being part of a strong network), and
may carefully read the labels and follow the news physical capital (attractiveness or physical power).
regarding water.
Psychographics enable marketers to closely

An ideal segmentation approach combines
“know” consumers and understand their
different strategies (including demographics
psychological and social predispositions.
and psychographics) to arrive at groups with the
highest level of differentiation.
The most useful approach in segmenting
consumers is on the basis of psychographic
information. With psychographics, marketers
become able to closely “know” consumers
and understand their psychological and social Targeting involves the careful selection of at
predispositions. One of the most important least one segment by considering a variety of
factors in psychographics is the life style approach. different factors.
Lifestyle has been first studied in marketing
literature in the 1960s through the concept of AIO
(activities, interests, and opinions), measuring
Targeting
people’s activities in terms of how they spend time.
Combining the life style phenomenon with the After a careful analysis of consumers’ attitudes,
marketing concept of segmentation, starting with opinions, and behavior, a useful segmentation
the 1970s, several scholars have started to learn more can be made. The next step after segmentation is
about consumers’ personal lives.4 Practitioners actually choosing which segments to target. The
have become involved with developing tools to increased availability of consumer data over the
more systematically make this categorization. One internet has made it possible to directly target a
of these tools has been developed under the name specific group of consumers or households. Proper
VALS (Web Link 1), representing values and life evaluation of the data is critical in segmentation
styles. Based on a self-administered survey and a and targeting decisions. Targeting involves the
few selected demographic data, VALS attempts to careful selection of at least one segment identified
categorize consumers under eight distinct groups, in the previous step, by considering a variety
namely, innovators, thinkers, believers, achievers, of different factors. One of these factors is the
strivers, experiencers, makers, and survivors. measurability. As in the case of segmentation, the
size and the purchasing power of the target should
be measurable. A second criterion is that the target
should be substantial in order to compensate for
internet all the costs related to marketing research, strategic
http://www.strategicbusinessinsights.com/vals/ organization, and sales. For example, a ketchup
company may choose to target business segments
with international fast food chains. Additionally,
the chosen target should be accessible, so that
Besides life styles, psychographic segmentation
consumers in that target market can be effectively
can also consider the individual’s personality,
satisfied. Also, the target should be differentiable,
by investigating his or her character, shaped by
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i.e. separable from other segments and potential target groups. For instance, men and women can be
segmented regarding a product such as shoes, but it would be very difficult to target either men or women
for a musical instruments. Lastly, the targeted segment should be actionable. An obvious example might
be cigarette companies which cannot directly target consumers under the age of eighteen.
Marketers can target one or all of the segments identified in previous stages. Figure 5.2 illustrates that the
company can produce and sell an all-satisfying (usually a basic) product and engage in mass marketing. For
instance, the well-known soda drink company Coca-Cola has been using a very similar, generic product all over the
world for more than a century.
Figure 5.2 Target Marketing
Micro marketing
3
Provide a hypothetical example Focused marketing
of segmentation in sector of
your interest. Explain how you
divided the market, i.e. the Differentiated
criteria for segmentation. marketing
Mass marketing
On a higher level in Figure 5.2, companies may choose to differentiate their products, prices,
distribution, and communication strategies as tailored to the specific needs and expectations of the
targeted segments. For example, Turkish Airlines, similar to other airline companies in regard to seating
categories, uses a different product and price combination for different consumers under different names, such
as economy, business, and first class. If the company chooses to focus on only
one or a few of these segments, this reflects that the company is actually
focusing on the particular needs of specific consumers.
Focusing as a general
marketing strategy is the Lastly, through a micro marketing strategy, a company can focus on
concentration of the needs individual consumers, one by one. In many of the service industries, such
and desires of a particular as consultancy and medicine, the usual practice is micro targeting each
consumer group. Focusing particular customer.
as a targeting strategy, In segmentation and targeting decisions, as in all marketing decisions,
indicating a similar marketers should feel responsible about whom they target, how, and why.
concept, is more related Underprivileged consumers, such as those who are financially poor, children,
to the marketing mix illiterate, or old, raise the issues of consumer vulnerability5, especially if the
bundle, i.e. product, price, product in consideration is a harmful one.
place, promotion.
MARKETING MIX
Marketing mix, also known as the 4Ps
Marketing mix can be considered as the tactical-level of marketing, constitutes the set of all
marketing facilities, which are directed towards a certain marketing activities a company engages
target group, identified in the phase of strategic decisions. itself in pursuing its marketing goals and
Four Ps are identified to be the initial letters of the most objectives.
fundamental marketing actions, namely, product, price,
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place (distribution), and promotion. These activities have to Figure 5.3 Marketing Mix (Four Ps)
be combined in such a way that they are meaningful and
effective together in the eyes of the target customers (Figure
5.3). This is why called marketers can also be called “mixers
of ingredients”.6
Marketing mix is called a mix because decisions about Product Price
each different element cannot be made without considering
the other elements. For instance, if the offering is of high
quality (product), the price should be high to reflect this
superiority. Communicating this quality (promotion) would
then be managed with the idea of a smaller target market Place Promotion
with specific characteristics. Four Ps of marketing actually
represents the firm’s perspective. When evaluated from
the consumer’s perspective, marketing mix is called “Four
Cs”, representing customer value (product), cost to the
customer (price), convenience (place), and communication
(promotion), explained in each section below. To better analyze the service performance, there were three
additions to the original four Ps of McCarthy7, which resulted in the expanded marketing mix (7 Ps).
Additional Ps include (1) physical evidence (facilities, spatial layout, and interior design), (2) people (staff,
uniforms, waiting and queuing systems, complaint management, and social interactions), and (3) process
(level of standardization, service performance, resource allocation systems, and operation manuals).
Product
Product (good or service) is the offering in the market,
created and sold in order to solve a problem or satisfy a need
or want. A commodity can be a product, such as salt or Product (good or service) is the offering
bread, can be successfully branded by a company. In business in the market, created and sold in order to
terms, a product can be tangible (like soap) or intangible solve a problem or satisfy a need or want.
(like education). Tangible offerings are called goods while
intangible offerings are called services, where product is a
more general term reflecting both goods and services. In Figure 5.4 Layers of a Product
this chapter, too, product is meant to capture both tangible
and intangible offerings. Product from the consumer’s Potential
perspective is called “customer value”, because the offering
in the market is in fact something that the customer values
Augmented
enough to give money in return. The product solves the
customer’s problem and/or creates a difference in the
consumer’s life and hence produces some value. Products can Expected
be studied in terms of layers, as a complex unit consisting of

different features and components (Figure 5.4). Generic
The core product is at the center of the product category

by reflecting the basic need of all brands present in the market.
For instance, all automobile brands offer a basic core benefit, Core
which is transportation. All universities offer education; and
all hospitals offer treatment. If the basic benefit is different
for a particular brand in the market, then that is in fact a
different product category. For instance, if the automobile
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has wings and offers the advantage of air travel, by brands in the future. For instance, a future
then it is no longer an automobile. Therefore, automobile may include smart infrastructure, seamless
companies can not differentiate themselves on the designs, robotic components, and high-speed internet
basis of this core benefit; but they can follow a cost- connection. Today, brands do not have these features,
leadership strategy and offer the most fundamental but these are some of the prospective attributes to be
value which satisfies the core need/want. included by any brand’s augmented product.
The generic
product reflects Categorizations of a product
the most general
A product is a customer The most fundamental distinction is between
characteristics of a
value from the consumer’s tangible products and intangible services. By
product with the
perspective. definition, services are intangible and perishable.
basic benefit, plus
Consumers cannot save some part of a service to
additional features
consume later, hence services are inseparable. The
being offered by the simplest product available.
consumer and the service provider have to be in
For instance, the core benefit of transportation can be
the same place at the same time for the service
satisfied with an automobile and the expected product
relationship to occur. Additionally, services are
for an automobile would be four tires, one steering
considered to be heterogeneous because real people
wheel, and a vehicle body containing seats tailored
are involved in the service delivery process, and
towards an average human being. Although the
the perceived quality of services can differ when
generic product is quite basic, the expected product
different people are involved. Lastly, quality of
reflects the characteristics of a brand. For instance,
services cannot be determined on a straightforward
the product can have different qualities expected by
basis because the statistical measurements require
Mercedes versus Toyota.
a standardized production and/or delivery,
As noted earlier in the chapter, a shampoo can whereas service quality can be measured on a more
wash one’s hair (core benefit), but brands are likely subjective basis due to the human factor.
to differentiate themselves by adding different
A new perspective in marketing reflects that
features. A brand may claim that the product
every transaction in a market is always a service
does not only clean the hair, but also makes the
relationship.8 The distinction between a product
hair grow, shine, and repair. For these additional
and a service does not exist, and the product is only
features, brands usually expect a higher payment
a transmitter of the service exchange. This exchange
in return, resulting in a higher price. This layer is
is the reciprocal application of each partner’s (i.e.
called the augmented product, since brands strive to
the customer and the service provider) resources for
add different features to distinguish themselves on
the mutual benefit of all shareholders. This leads to
a continuous basis. Going back to the automobile
the idea of co-creation, through which customers
example, the sector has come a long way until
and providers experientially perceive “value-in-
today starting from Ford’s Model T introduced in
use” that emerges from the usage or the possession
1908. Today, the core benefit is the same. However
of resources.9 For instance, a customer using a cell
since brands heavily augmented the product
phone actually consumes “communication”, and he
throughout the years by including many features
or she integrates his or her resources (e.g. his or her
like air conditioning, road assistance, advanced
social network which makes it possible to share and
electronic systems, and ABS, the generic product
comment on photos) into the exchange relationship.
(and accordingly the expected product) may now
represent something much more than the Model It is possible to categorize products on the
T. There are other examples of sectors in which basis of B2B and B2C markets, too, where the
augmentation is elevated, and hence the product former usually deals with unfinished products,
has enlarged over the years. components, and raw materials to be used in the
production process of another product while B2C
Lastly, the potential product represents the
products are used by end-consumers.
characteristics and features which can be included
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Products can also be categorized in terms of the consumers’ buying behavior (Table 5.1).
Table 5.1 Product Categories
Durable Product Perishable Product Service

Convenience Shoehorn Detergent Bank
Shopping Refrigerator Pharmaceuticals Insurance
Specialty Jewelry Special winery Carrying company
Unsought Shroud Pesticide Hospital
Consumers purchase convenience products on a frequent basis. They are usually cheap products,
which require minimum effort. Shopping products, on the other hand, require more effort on the part
of consumers since they are less frequently purchased. Specialty products require much more time and
money; therefore, consumers may compare brands and prices and may necessitate different promotion
and distribution strategies. Lastly, unsought products are not normally wanted by consumers, as the name
implies. They are not products to be consumed with joy, but bought because of an obligation.
Price
The second major marketing activity involves the pricing
of a product. This represents the financial compensation in
return for the value provided by the product or service. This The simplest pricing method is cost-based
marketing mix element does not only involve the price tag pricing where companies first figure out the
attached to the product, but also the cost of search, acquisition, cost of producing one item, and then add a
consumption, and even disposal of the product. This is profit margin to arrive the price to be used
why the price is echoed by the term “cost to the customer”, in the marketplace.
reflecting the direct cost and the indirect expenses associated
with the acquisition and consumption of the product.
Setting a price is one of the major marketing decisions. There are different pricing approaches with
unique advantages and disadvantages. The simplest method is called cost-based pricing where companies
first figure out the cost of producing one item, and then add a profit margin to arrive the price to be used
in the marketplace. Cost-oriented pricing should consider the fixed, variable, and total costs, as well as the
margin to be added. The profit margin may depend on the top managers’ expectations; in line with the
general marketing strategy, the company may decide to have a maximum cutoff, and decide on the specific
price accordingly. Alternatively, the company can try to cover the investment made in the first place, and
by dividing the investment by the number of units produced to finally arrive at the minimum price.
The cost-plus pricing is considered to be elementary,10 because it disregards important factors such as
competition and consumer perceptions. Perhaps a better pricing strategy is competition-based pricing, where
marketers try to understand the market conditions, a reference price by which consumers can compare other
prices, and the ongoing price of different types of offerings in the same market. Price sensitivity of consumers,
i.e. differences in demand when price changes, can also be captured with this type of pricing methodology.
The company, however, should always consider how consumers react not only in terms of quantity
purchased, but also in terms of product quality perceptions, future intention to buy, and other types of
behavior such as brand loyalty. For instance, depending on how consumers perceive the product, they may
be willing to pay more than the competition-average price in the market or, inversely, may pay even below
the unit cost. It is thus very important to evaluate and consider consumer appreciation for the product
and act proactively. A price pyramid can be constructed to see the estimated level of quantity sold at
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each different price, starting from a very low price Place (Distribution)
where very large volumes can be sold, ending at the Products cannot be sold if they are not in the
highest possible price where only a few consumers right place at the right time. Place is a decision
are willing to buy. regarding where the products would be purchased
In considering pricing methodologies, marketers (and implicitly, how they are purchased), and
can also rely on the so-called psychological pricing the activity conducted by the company is called
tactics. One such tactic involves consumers’ reliance distribution. From the consumer’s perspective,
on price to judge the quality of the product. Price as this is called convenience because if the product
quality signal can be increased to send the message is not available for the consumer, there is nothing
that the product is superior, which is called the high- else that can cover for this problem. For material
level pricing. Another psychological pricing tactic is goods, physical availability is a must since
ending the price with certain numbers, such as 9.99 consumers can easily purchase another brand if
Turkish liras for a t-shirt. This price tag implicitly the product is not on hand. For goods sold on
conveys the message that the price is under 10 the web, physical availability is still a concern
TL range rather than the next higher category. because the products will have to be delivered on
Lastly, in bundle-pricing, two or more products are time. For intangible services, availability should
generally offered at a lower price than the totality of be a point of interest, too, because the timely
individual items, leading to higher sales. and appropriate existence of the service provider
would increase chances of sales and satisfaction.
Psychological pricing is commonly used Place is a specific aspect of convenience products,
as the name implies.
A distribution channel is a chain of intermediaries
through which products reach consumers. A supply
chain represents a whole system of organizations,
people, systems, and resources responsible along
the way of products moving from producers to
consumers. Being affected by many variables such
as the size of the company, the nature of the product
categories, the environment, and the characteristics
of target buyers, the structure of distribution
channels may differ (Figure 5.5).
Figure 5.5 B2C Channels of Distribution
(Direct)
Distributor
Producer Retailer End User
Wholesaler Retailer
Large Small
Retailer
Wholesaler Wholesaler
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Figure 5.5 illustrates that depending on the four Ps, including the range of product categories
above-mentioned circumstances, a company may and brands to sell (Product), the price range
choose one alternative among others. In the case (Price), the location, the shelf organization and
of company-owned sales force and/or through the environmental layout (Place), and the style
electronic mail or the internet, a company can of service providers with the general atmosphere
deliver products without any intermediaries in (Promotion). Based on the marketing strategy
between. Alternatively, a company may engage in chosen, a retailer can choose from a variety of
a business relationship with a distributor, which different types, briefly discussed below.
generally resells products to another intermediary. A boutique is a small store selling specialized
However, the point of contact for producer is the items such as jewelry, fine wine, and
distributor. Another type is between producers and accommodation (i.e. boutique hotels). On the
retailers, which sell products directly to consumers. contrary, a category killer sells a variety of different
A company may choose to sell large volumes to a items (usually concentrating on a few product
large or a small wholesaler first, which then resells categories), and attempts to kill that category for
products to a retailer. other retailers. A convenience store usually works
with extended hours and sells a limited range of
product categories intended to supply items of
emergency and instant purchase such as bandages
internet and cigarettes. A department store sells a large
http://www.franchisedirect.com/ range of products at moderate prices. A discount
store offers a wide range of products at much lower
prices. E-tailer refers to the selling of products on
A special type of distribution, called franchising, the internet through which the consumers receives
is an arrangement where a producer does not sell products directly from the manufacturer (or the
the products but sells the right to sell the products intermediary). A supermarket is self-service store
under certain rules. The official agreement may where individuals buy products themselves and
contain items including the ingredients of a product, pays for them at the cashier. Supermarkets are
the furniture and the lighting in the physical sales usually large and they sell a wide range of products.
points, and even the behavior of the sales people. Hypermarkets provide larger variety, higher
Franchise Direct (Web Link 2) declares that a very volumes, and lower prices. A shopping mall has a
large percentage of all franchisers in the world range of retailers in a single (usually large) outlet.
are from the food sector, followed by cleaning, The idea behind shopping malls is that consumers
automotive, and hotel sectors. can shop around for different products, compare
different retailers, spend time, socialize, eat, and
shop more. A vending machine automatically
provides products by dispensing the product in
Retailing is simply the process of selling
return for money dropped into the machine (or
consumer goods and services to customers,
through credit cards).
also the term often refers to a physical
shop with a service provider filling
the small orders of a large number of
individuals. 4
Explain your thoughts about
the retailer type “corner shops.”
Retailing is simply the process of selling
Do you think it is a good idea?
consumer goods and services to customers, also
Why/why not, and in what
the term often refers to a physical shop with a
circumstances your answer
service provider filling the small orders of a large
would change?
number of individuals. Each retailer has its own
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Promotion promotions and personal sales efforts, customers

Promotion entails the activities that attempt are inclined to purchase the product due to
to establish some sort of a relationship with target incentives and more direct persuasion efforts.
customers, and all shareholders involved, and try to Advertising is the most expensive but the most
win the heart and loyalty of consumers. Promotion effective (in terms of the number of people reached
aims to promote the product in the market. To do with one message) contact method. It is the most
that, it is necessary to actually know consumers well-known mass method of conveying a message.
closely, and act accordingly. From the consumers’ The most important advantage lies in the fact that
perspective, communication is an essential marketers are able to dramatize the brand meaning,
component in a marketing exchange relationship. such as by having actual people play a role, having
See Chapter 3 for the communication process. animated images, and all sorts of videos and visual
effects. One disadvantage is that there is no control
over who is watching the advertisement and the
single reaction on each view by each viewer.
Promotion entails the activities that attempt
to establish some sort of a relationship
One very popular advertising method is
with target customers, and all shareholders
television advertising. Commercial TV ads usually
involved, and try to win the heart and
seek to increase the percentage of target customers
loyalty of consumers.
reached and increase the sales volume. TV ads
are usually a part of a media plan, in which other
communications methods are also employed to
The simple communication model maintains provide a more significant impact. Marketers often
that there is a sender and a receiver of the message aim to target an air time that reaches the desired
being transmitted through a medium. The sender consumer group. Advertising is expensive, and it
encodes the message using his or her own system constitutes a very large percentage of funding for
of thinking, including factors such as culture, television networks, especially during prime time,
language, perception, and knowledge. The between 8 and 11 PM.
receiver then receives the message using his or her
own resources. Still another element that might
potentially influence the communication process, Advertising is the most
usually in negative ways, is the so-called “noise” expensive but the most
element, which includes cultural differences, effective (in terms of the
individual variances in perceptions, as well as number of people reached
physical noise. Noise prevents the receiver from with one message) contact
decoding the message in the intended way. method.
The tools of communication available for
marketers are: (1) advertising, (2) sales promotions, Other contact methods include sales
(3) public relations and publicity, and (4) personal promotions, which aim to increase sales within a
sales. A company may choose to inform the mass certain period of time. To do this, marketers use
public about the brand proposition and the product a variety of different promotional activities. It is
benefits through advertising and publicity, after nowadays common to see online promotions, such
which customers can demand the product. This is as interactive games on the web, online contests, and
called the pull strategy, since customers are pulled cheaper products or product bundles sold online.
by using one-way communication tools. Since More traditional promotion activities exist such
the communication is not direct, customers make as free samples, coupons, sales discounts, volume
their own minds and choose to buy the product, discounts, displays, contests, bundles, and rebates.
which signals conviction on the part of consumers. These sales promotions are usually conducted at
The push strategy, on the other hand, creates a sales points (POP, point-of-purchase).
short-term reaction. For instance, through sales
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Besides POP promotions, other mechanisms • Preparing news releases,

to create and/or increase demand include loyalty • Managing interviews,
programs, whereby consumers collect miles, points, • Acting as the spokesperson of the
or credits, and then use them to buy more products. company,
One example of a very large-scale sales promotion is • Managing the web site and social media
the so-called Black Friday, the day after Thanksgiving. content,
It has become the busiest shopping day of the year, and • Responding to customer complaints,
statistics show that 30% of all sales in the U.S. occur • Building on company reputation,
between Black Friday and the Christmas. Also, other • Engaging in crisis management when
big discount days such as opening days, New Year’s necessary,
day, or holidays motivate people to consume more • Helping in the process of event
either physically or online. management.
Consumers react to discount days

Public relations (PR) involves gaining
exposure in the mass media and other
types of contact channels and proactively
managing the dispersion of information
between organizations and individuals.
While PR is the strategic management of the

spread of information, publicity is the management
of the general brand awareness. The similarity
between PR and publicity is that both deal with
the media. The primary focus of publicity is getting
as much press coverage as possible, and good
publicity is possible when the company’s PR is
working effectively.
Lastly, personal sales is not only a type of
distribution channel (i.e. direct sales), but also a
type of promotion facility. Personal selling occurs
when a representative from the company meets
Another marketing communication tool is a potential customer. The purpose is usually
public relations and publicity. Although these two making a sale, and sometimes meeting the client
functions are enunciated together, they in fact entail and providing information about the company,
different activities. Public relations (PR) involves product, and/or brand. This sales activity can only
gaining exposure in the mass media and other types occur with representatives in the field. Among
of contact channels and proactively managing the the different roles of a salesperson are taking
dispersion of information between organizations and orders, getting orders, or building a relationship.
individuals. The difference with advertising is that it Sometimes the salesperson can engage in cold
does not require direct payment, especially when the calling when a prior appointment is not made,
information is newsworthy, interesting, important, hence the representative may not be fully prepared
and/or relevant. PR specialists try to develop and for the interview.
maintain a strong and positive relationship between
In the sales process, there are different steps
the company/brand and the target audience, the
which should be studied in detail before, during,
media, opinion leaders, the government, other
and after the sales contact. The first step is
businesses and organizations, and nongovernmental
prospecting, which is trying to identify prospects
organizations. Among the activities that PR
(potential clients), followed by making selections
specialists do include the following:
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among these prospects, which is called qualifying leads. The next step is to prepare for the interview (pre-
approach), which is especially important because without proper knowledge about the product and/or
the customer needs, making sales becomes very difficult. The approach stage involves actually meeting the
customer, followed by sales presentation through which the sales representative demonstrates the product
qualities, answers questions, and tries to capture the attention and interest of the prospect buyer. The last
steps are the closing and the follow-up stages, where the representative tries to hopefully gain the sales, close
the deal, and follow if the customer is satisfied or not. If the customer decides not to buy, the salesperson
can try to establish a strong relationship with the lost customer for future reference and for building up the
company’s client network.
BRANDING Branding involves a set of marketing and

promotion activities that promote the
A brand is a name, slogan, symbol, or logo associated with brand, aiming to have a persistent image
a product or service. Branding is the process of differentiating in consumers’ minds. Branding is the most
the company’s offerings in the marketplace from those of strategic investment of the company.
the competitors. Branding involves a set of marketing and
promotion activities that promote the brand, aiming to have Brand equity is a term reflecting the brand’s
a persistent image in consumers’ minds. Branding is the worth in the eyes of consumers, usually
most strategic investment of the company. Brand equity is reflected in the price.
a term reflecting the brand’s worth in the eyes of consumers,
usually reflected in the price. Brand identity is the set of all Brand identity is the set of all individual
individual components of a brand, specifically including the components of a brand, specifically
imagery, slogans, colors, and all other types of imagery. including the imagery, slogans, colors, and
Promoting a brand image all other types of imagery.
Positioning is how the brand is perceived

by the consumers and the “position” in their
minds.
Positioning
Positioning is how the brand is perceived by the
consumers and the “position” in their minds. Companies
try to distinguish themselves from competitors and
emphasize this differentiation point through different
communication attempts. A positioning strategy has
to be sustainable and create a meaningful competitive
advantage.11 Marketers can base their positioning on a variety of different factors, but overall positioning
can depend on one of three bases:
• Functional positioning: The brand promises to solve a problem and provide a functional benefit to
customers. For instance, Oral-B electric toothbrush claims to reach each and every spot over one’s teeth,
and promises a clean, hygienic, and healthy mouth.
• Symbolic positioning: The brand tries to capture the attention and win the hearts of consumers by
focusing on ego identification, social belonging, life meaningfulness, and emotional attachments.
For instance, Dove soap has positioned itself in a way that all women around the world should
feel beautiful and proud. Dove does not position itself to make women beautiful, but rather make
women feel at peace with their bodies.
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• Experiential positioning: The brand tries situation by asking them about (1) what makes
to provide stimulation throughout the them think positive about or choose a brand in
purchasing and consumption process. For the particular product category, (2) the importance
instance, a toy store may invite children weights attached to these success factors to arrive at
to play with toys to understand what they the critical success factors, and (3) ask consumers
like and do not like (sensory experience); about each brand’s performance on these critical
a smart phone brand may provide in-store factors and put them on the map based on the
experience booths where consumers can ex- simple coordinates logic.
plore their needs and wants (cognitive ex- The idea behind the concept of critical success
perience), and a theme park may attempt to factors is that consumers have certain expectations
make consumers have different experiences and desires pertaining to each product category
stimulating a variety of different emotions and it is very important to understand what target
including joy, happiness, excitement, and consumers really want. Trying to be the best in other
thrill (emotional experience). A lot of brands dimensions would mean loss of time and money, as
have experiential elements included in their well as lost customers; instead companies should
brand positioning such as Starbucks (baristas first discover target buyers’ perceptions of crucial
taking names and chatting with customers), aspects, and then concentrate on these aspects.
Doc McStuffin (Disney TV channel having A hypothetical example of a perceptual map for
children around a big toy bear inspecting it restaurants is shown in Figure 5.6.
like a doctor), and Game of Thrones (different
games, films, parks, and events).
Figure 5.6 An Imaginary Perceptual (Positioning) Map
Food
Positioning (Perceptual) maps Quality A
Perceptual maps are based on consumer
perceptions showing the position of the product/
C
brand so that the firm can see its position as B
perceived by consumers, take corrective action if
necessary, compare its position with competitors, E
D
and make strategic, future-oriented decisions.
F
G
Perceptual maps are based on consumer
perceptions showing the position of the
product/brand so that the firm can see its Atmosphere
position as perceived by consumers, take

corrective action if necessary, compare
its position with competitors, and make In Figure 5.6, it is clear that brands may not
strategic, future-oriented decisions. be able to differentiate themselves in terms of
the factors that consumers value the most. The
two most important factors to consider in the
It is possible for brands to see their positioning restaurant business in our example are the food
using different dimensions. Software programs are quality (whether items are tasty and delicious with
available to graphically analyze this positioning. A good ingredients) and the atmosphere (whether
simpler way is to decide on the two most critical the physical environment is consumer-friendly and
factors in consumers’ minds and then draw a two- the atmosphere is nice).
dimensional graph by placing the company’s brand In terms of these two criteria, firms A and B seem
and other competitors’ brands on the map. It is to be performing better compared to compared to
important to seek for consumer opinion at this otherfirms’ positioning in the market. Firms C, D,
point in order to obtain a realistic picture of the and E are performing a bit worse compared A and
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B. These firms create two competition groups as since people from the other group are rushing into
circled in the map, indicating that firms A and B it. Therefore the new firm would enter the market
are close competitors, as are firms C, D, and E. with the second-best choice after A and B.
A new company planning to have a stance in the This does not mean that all empty spaces in
restaurant business may decide to compete with the the map are sensible opportunities for firms. For
better performers or the other group, depending instance, one may not expect a restaurant to be
on the marketing strategy, resources, and vision. awful on the food but have a perfect atmosphere, or
The red line in the map indicates whether to have the best food but in a horrible environment.
the two factors (food and atmosphere) correlate Either of these must be at least tolerable by
perfectly or not. In our case, consumers are able to consumers because in our hypothetical example,
see the good and the bad points in each dimension, research indicated that these two attributes are in
and hence provide different scores. On the other fact critical for the success of firms doing restaurant
hand, companies are not completely scattered business. Therefore, the spots on the right bottom
throughout the diagram. It seems that if the firm and the left top should be left empty, as the logic
is able to provide high-quality food, it somehow indicates.
manages to provide a nice atmosphere, too. This is Looking at the map, it can easily be argued
especially true for the two big competition groups that the firm F is able to differentiate itself on
in the market. This may indicate that if the firm the atmosphere, but not on the food. The firm
becomes aware of the success criteria, it may start can be advised to develop its capabilities on the
to develop itself on different dimensions. menu and food to become a strong competitor.
F can benchmark the facilities of A and B for
further improvement. If there is a problem of
consumer perceptions, i.e. F is in fact producing
Perceptual maps can be used to see the high-quality food, this means that F needs a
current position of a brand, compare it repositioning. Repositioning refers to a major
with competition, and to discuss what to change of consumer perceptions either when the
do about it. But the map does not show the company wants to prove its intended position in
sales, the market share, or the profits of any consumers’ minds or it wants to change the current
company. In Figure 5.6, firm G may be the position towards something else. Firm G, however,
worst on the critical dimensions, but reach seems to be much behind competition since it
a large scale of production, offer the food at has strong negative perceptions on both critical
a low price, and be the most profitable firm success factors. Therefore, G should also try hard to
among others. reach the standard put forth by other companies.
However, it can also be argued that G does not have
to differentiate itself on these factors, but claim that
Another point of discussion in the map concerns another dimension is in fact more important than
the gaps (the empty spots) which a firm may want food or atmosphere. In other words, G may not
to aim. For instance, there are empty spaces in try to convince consumers that “G is good on food
the map between two competition groups. A firm and/or atmosphere” but try to convince consumers
may want to open a restaurant with high food that “A third dimension is more important,” such
quality and a nice atmosphere, above the average as courtesy of the personnel, location, prices,
of the inferior competition group, but below the cleanliness, healthiness, and so forth. Since the map
average of the superior competition group. This is solely based on perceptions, rather than focusing
positioning may convince the current customers of on the company’s operational features, consumers’
C/D/E that there is a superior option. This may minds can be influenced by convincing arguments
also convince the customers of A/B that there is about why other dimensions should receive more
now a new restaurant which can be tried for once weight.
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Key Issues in Branding Interbrand valuation of a brand includes three

One of the key issues in branding is the concept key components:13 financial analysis (overall
of brand value. The power of a brand starts from financial return to investors), role of the brand (the
awareness, followed by being well-informed portion of the purchase decision attributable to the
about the brand, liking, preference, conviction, brand as opposed to other factors such as price or
purchase, and re-purchase. This is a hierarchical convenience), and brand strength (the ability of
development, therefore the assumption is that a the brand to create brand loyalty, and therefore,
consumer may not like the product if she or he is sustainable demand and profit in the future).
not aware of it, and she or he cannot purchase the
product unless she or he is convinced. Brand value
is a generic term which reflects brand equity (being
a well-known brand will generate more revenue) or internet
strength of a brand, the financial strength (the net http://interbrand.com/
present value of the estimated future cash flows),
and/or the effective attachment consumers have
with the brand due to functionally, emotionally, Interbrand maintains that, for a brand to
and experientially strong aspects. The value of a be on the list of “Best Brands,” it has to meet
brand can (and should) be stated in simple terms, certain requirements. For instance, at least 30% of
through a brand value proposition, where the revenue must come from outside the origin country;
differentiating point of the company becomes clear. the firm should have a broad coverage in emerging
markets (not only in developed regions); and there
should be sufficient publicly available information
regarding the company’s financial performance. These
Brand value reflects brand equity (being criteria indicate that a company cannot create a
a well-known brand will generate more strong brand for a long time unless it disperses its
revenue) or strength of a brand, the financial operations around the globe and becomes aware
strength (the net present value of the of the importance of segmentation criteria that
estimated future cash flows), and/or the applies for a large scale of consumers. This is mainly
effective attachment consumers have with because the brand cannot have a solid stance unless
the brand due to functionally, emotionally, the underlying consumer motivations are studied
and experientially strong aspects. and generalized across nations, which then requires
systematic methodologies to understand the needs
and desires.
Although there are several marketing It is possible
performance metrics that companies can follow for companies to
in order to understand how they are doing in the develop their own
Companies can develop
market, such as market share, sales, or profits, brand valuation
their own brand valuation
it is also very important to measure brand value methodologies, too.
methodologies.
from a more perceptual perspective. One such Companies usually
measure by Aaker lists ten attributes of a brand rely on financial data
that can be important: differentiation, satisfaction/ and market facts such as sales; however they should
loyalty, perceived quality, leadership/popularity, also make a review of their marketing performance
perceived value, brand personality, organizational in terms of consumer satisfaction and loyalty.
associations, brand awareness, market share and Some cost-based valuation methods are used to
market price, and distribution coverage.12 see the brand’s replacement value, indicating the
Another popular measurement of a brand is quantitative equivalent of the brand’s worth. A
provided by the firm Interbrand (Web Link 3). similar methodology is called the income-based
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valuation method, where the company calculates and candid. In Aaker’s study, a second dimension
the discounted cash flows over a certain period. is excitement. These brands are considered to be
A third method, the market-based method, daring, spirited, imaginative, and up-to-date. An
makes a comparison of the company with other example from Turkey might be Mavi Jeans, which has
companies within the marketplace. In this method, created an energetic brand community using the right
the company should be able to access data on celebrities and the appropriate advertising strategies.
comparable transactions in the market. A third dimension is competence, reflecting the
Another key issue in studying brands is brand brand’s reliability, responsibility, dependability,
personality. Brand personality refers to the set and efficiency. Zeki Triko is perceived as a competent
of human characteristics attributable to a brand. brand, because the swimsuits material is of high-
It may be considered as a general framework quality and the products can be used for several
through which the company can study consumer years without deterioration. A fourth dimension
perceptions and the current positioning of is sophistication, where the brand is found to be
the brand. Personality of a brand, just like the glamorous, pretentious, charming, and perhaps,
personality of a human being, is the way a brand romantic. Beymen is an example for a sophisticated
speaks and behaves; therefore, brand personality brand in Turkey since the brand is perceived as
usually refers to the emotional associations of premium, classy, and alluring. Lastly, a brand’s
a brand, rather than its tangible and functional personality can be perceived along the dimension of
attributes although demographic characteristics ruggedness, where the brand is considered tough,
can be used to assess brand personality. For strong, outdoorsy, and rugged. For example, Arçelik
instance, Marlboro cigarettes are considered more is a brand perceived as strong and long-lasting.
masculine, while Virginia Slims is feminine. IBM is Brand personality
older while Apple is younger. Also, certain brands may reveals the brand’s
evoke certain feelings in consumer minds. Disneyland true stance in the
triggers the feeling of childhood, fun, and excitement, minds of consumers. Strong brands are able to
while Nike represents an outdoorsy and energetic It is important to touch consumers’ lives
person. Elements of the corporate identity, as well as consider the fact from different points.
the brand’s logo, symbol, slogan, and other symbolic that a brand should
and visual components, may help build a desired not attempt to be
personality, just like Nike is doing with the swoosh good in everything. Similarly, a brand’s personality
logo, and Apple with the bitten apple. should not reflect a lot of confusing (perhaps
contradicting) attributes. Strong brands are able
to touch consumers’ lives from different points,
Brand personality refers to the set of just like Apple which may be considered as both
human characteristics attributable to a exciting and competent at the same time. However,
brand. not all brands are able to reach this point. Many
brands are better choosing a positioning strategy
and a dominant personality dimension in order
One leading study on the concept of brand to create a long-term, sustainable image. For
personality is by Jennifer Aaker 14 who came up instance, Beymen may not try hard to look “sincere”
with five dimensions through studying hundreds in consumers’ minds but stay sophisticated (and a bit
of different product categories and a lot of different snobbish) in order to maintain its current status.
possible brand associations. The first dimension of
brand personality is sincerity, representing whether NEW TRENDS IN MARKETING
the brand is domestic, honest, genuine, and
Major trends in the world such as globalization,
cheerful. A Turkish example would be Tofaş, which
automation, and digitalization have their effects
does not attempt to distinguish itself on the basis of
on marketing, too. In fact, marketing is a very
superior performance or elegant design, but the brand
old discipline but it has become a totally different
is often perceived as “one of us”, inexpensive, friendly,
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concept compared to the day it first emerged. target consumers and the intended value has started
In earlier eras, slaves were subjected to further to capture the lifetime customer loyalty. Customer
humiliation by being “branded” to signify whose relationship management (CRM) has been a key
slaves they were. The modern practice of marketing concept with many software programs claiming
evolved over time: The simple trade era was to help firms understand what the data says about
dominated by commodities being exchanged for customers and facilitating the formation of a long-
household consumption, which later progressed lasting relationship.
towards commodities exchanged for the use of
larger communities and nations. The subsequent
era is called the production era, where the major “Big-data” in this new era represents large
concern was to produce with minimum input and complex sets of data collected through
providing the maximum output, with the smallest primary data collection methods and data
percentage of faults. The production concept was readily available on the web.
dominant starting from the mid-19th century until
the 1920’s, which can be considered a very recent
time considering the length of human history. This “Big-data” in this new era represents large and
was followed by the product era, where managers complex sets of data collected through primary data
came to realize that not only the production collection methods and data readily available on
process, but also what is being produced is also the web. There are a variety of challenges associated
important. This realization, however, did not with big data, including searching for, capturing,
prevent difficulties when products started to storing, and analyzing data, visualizing, updating,
accumulate with even faster production processes, and sharing the analyzed data, in addition to
which then made managers start thinking about data privacy. Big data can be described by five
customers. But the marketing conceptualization characteristics:15 the volume (the quantity of data),
was still primitive because all managers can do variety (type and nature of data), velocity (the
was an unsystematic combination of attempts speed of data generation), variability (inconsistency
trying to sell products already produced (called the of data), and veracity (the quality of data). The
sales era). Since managers had no idea about what aim is to understand and predict consumer
customers in fact need, want, or desire, sales efforts behavior through sophisticated analytics methods.
were lacking in skill, and at times overbearing. According to Smart Insights (Web Link 4), top-
rated digital marketing trends for 2017 are mainly
represented by content marketing (20.3%) and
big data (20.2%), followed by other developments
internet such as marketing automation, mobile marketing,
http://www.smartinsights.com/ social media marketing, internet of things, and
search engine optimization.
Associated with the development of more
The modern marketing era arrived to solve the complex statistical data analysis methods, software
problem of a lack of connections between customers programming, and artificial intelligence, digital
and the company, and between production and sales technologies constitute another big development
departments. What is produced became what the in recent years. Virtual and augmented reality, for
customer already wants. After this enlightenment, instance, provides an effective way for marketers
the marketing concept has evolved into something to get into the lives of consumers, connect with
else in which marketers have started to feel them, and have real-life experiences together. One
the need to understand consumer motivations example is the world-wide game of finding, catching,
and underlying sociological and psychological and training Pokemons all around the globe, where
processes. The marketing era was then followed by Pokemons do not exist in real life (or do they?).
the relationship marketing era (from the 1990s to
Content marketing still remains to be the
the 2010s), where the focus has changed to building
dominant digital marketing technique, instead
a long-term, mutually-benefiting relationship with
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of the traditional search marketing. Content marketing

refers to the creation, publishing, and distribution of
Content marketing refers to the creation,
digital content for a targeted audience online. For instance,
publishing, and distribution of digital
YouTube (a subsidiary of Google) has an online video platform
content for a targeted audience online.
enabling marketers and consumers share lived or animated
experiences online. A lot of quizzes by Buzzfeed (Web Link
5), as another example, make consumers discover their own
realities, go through a list of exciting questions, and then share
the results if they want to.
internet
A lot of companies eagerly turn to social media
marketing to create stories with customers, instead of more https://www.buzzfeed.com/
traditional communications channels such as TV or radio.
Consumers actively use social media to make consumption
decisions, hence companies feel the need to create social media content and connect with customers.
Most of the social media platforms have their own built-in data analytic tools which companies can utilize.
Among these platforms, social networking websites (e.g. Facebook, Twitter, Instagram, Pinterest, LinkedIn, etc.)
with mobile phone applications produce the prime effect.
Social media can be used more passively

such as by following the content related to
the brand or as a PR tool (news about the
5
company on Twitter) or direct marketing
What do you think is the tool (selling products on Facebook),
most significant development or more actively through customer
among the newest trends in engagement tools, by making customers
marketing? make comments, react in various ways, and
participate in different types of applications
and games.
One specific marketing development in recent

years is the use of electroencephalograpgy (EEG) and
functional magnetic resonance imaging techniques
(fMRI) to better understand consumer motivations and
their reactions to stimuli (such as advertising). Despite
huge academic interest in the area because of its ability
to reveal the consumer’s black box, practitioners have
been often reluctant to use this technology because
of its high cost and the need for expertise and time to
analyze the results. This trend is also changing as it is
now possible to see a lot of collaborative agreements
between advertisers and marketers with universities
and organizations conducting research with MRI. There are a lot of techniques used in neuro-marketing
research such as eye tracking, facial emotion coding, and brain activity.
MARKETING ETHICS
Marketing ethics deals with the moral principles behind marketing activities. One of the newest eras
in marketing involves the concept of societal marketing, for instance, which tries to discuss creative ways
to optimize consumer satisfaction and preserve society and nature as a whole. A company is doing a
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good job pleasing some consumers with particular • Materialism

needs and desires, and it can do this very efficiently • Created needs and
and effectively, control the market in this regard, • Cultural corruption.
become the market share leader, and maintain These and other issues are being raised more
its brand value for years. This represents good frequently each day. There are people who refuse
marketing performance. But what about the society the marketing system altogether, called the “anti-
at large? Would it be better if all resources spent on marketing” groups, and who offer to replace it
marketing research, advertising, and branding were with more sustainable systems for the betterment
used for providing consumption items, including of humanity. Anti-consumerism is a more general
food and shelter, for the benefit of all consumers term reflecting a sociopolitical ideology against
around the world? These and other (maybe a bit the recurrent buying and consuming of material
existential) questions have started to trail, with the possessions, including advocating environmental
crucial doubt mind: Is marketing inherently evil? activism, anti-globalization, and animal-rights
There are a lot of issues raised as regards activism. Consumer educate themselves, too,
to marketing ethics. The following list is not such as through buying only the necessary items,
exhaustive: recycling, and minimalism.
• Invasion of privacy in marketing research Corporate social responsibility (CSR), also
• Stereotyping in segmentation and targeting called corporate citizenship, denotes the integration
• Uncontrolled marketing efforts towards of a self-regulation mechanism in all conducts and
vulnerable consumers, such as the elderly ideas of doing business. The basic form of CSR is
children, illiterate people, and financially philanthropy, i.e. providing monetary donations.
disadvantaged people There may be other more sophisticated and more
• Unethical pricing tactics such as price fix- creative ways of providing superior value for the society,
ing, price wars, and price collusion respecting humanity, and sustaining nature, such
• Ethically questionable and insensitive con- IKEA’s initiative to recycle old furniture, and Bimbo’s
duct in advertising and promotion (a bakery in Mexico) provision of resources to help
• Deceptive advertising and marketing employees complete their education. One specific type
tactics such as by strong emotions like fear of CSR is called “enlightened marketing,” where
and sex companies would try to innovate not the items that
• Product safety issues would sell but the things that would recover the
• Irreversible corruption of the nature and environment and improve upon societal values.
natural resources
• Misleading packaging
• Low-quality export/import products
• Bribery 6
• Over-booking and over-selling Do you think business ethics
• Intentionally creating limited supply is any different than the moral
• Fake products attitude of people managing
• Planned obsolescence the company?
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Further Reading
Branson, R. (2007). Screw It, Let’s Do It: Lessons in Life and Business. Random House.
Cialdini, R. B. & Cialdini, R. (2016). Pre-Suasion. Random House.
Godin, S. (2009). Purple Cow, New Edition: Transform Your Business by Being Remarkable. Penguin.
Greene, R. (2010). The Art of Seduction (Vol. 1). Profile Books.
Kim, W. C. & Mauborgne, R. (2014). Blue Ocean Strategy, Expanded Edition: How to Create Uncontested
Market Space and Make The Competition Irrelevant. Harvard Business Review Press.
Klein, N. (2015). No Logo. Éditions Actes Sud.
Lindström, M. & Underhill, P. (2010). Buyology: Truth and Lies About Why We Buy. Crown Business.
Pulizzi, J. (2015). Content Inc.: How Entrepreneurs Use Content to Build Massive Audiences and Create
Radically Successful Businesses. McGraw Hill Professional.
Schaefer, M. W. (2015). The Content Code: Six Essential Strategies for Igniting Your Content, Your Marketing,
and Your Business. Schaefer Marketing Solutions.
Scott, D. M. (2007). The New Rules of Marketing. John Wiley & Sons.
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In Practice
The Unavoidable Charm of Online Marketing. In a recent study, 84% of the respondents
How Applicable Is It? reported that user-generated content on the
Treasure Products Inc., a company that company websites have a significant influence on
originated in Turkey in 1986, is an excellent what customer purchases.
example of the strategic importance of Treasure Products conducted a SWOT
marketing in establishing and maintaining analysis to evaluate its current marketing
a “firm’s competitive power.” That year, the strategies. The company’s market positioning
company entered the vintage jewelry market by based on strengths such as brand image, product
specializing in the reproduction of simulated quality, presence in international markets, and
Ottoman diamond jewelry of good quality. price advantage as well as weaknesses such as
Over the years, Treasure Products has scored still being dominated by traditional marketing
a consistent record of success at home and in methods, high marketing costs, and insufficient
markets overseas. Key to its success has been experience in digital marketing techniques. The
the main marketing strategy which is product shift in demand for vintage jewelry, internet access
diversification. It ranged from women’s jewelry being available in most places, and an increasing
to men’s watches plated in brass, copper, and use of digital media as well as online purchasing
oxidized silver enriched by simulated gemstones. alternatives are some of the opportunities in the
However, the company is now facing challenges market that the company can utilize for obtaining
of a shrinking retail market as new competitors new marketing channels. On the other hand, the
employ Internet sales strategies. company must be aware of the threats of inferior
Treasure Products is large company with more reproduction products in the international jewelry
than a thousand employees. The company started market, the ease for new entries in e- business,
its growth stage with the motto of “You deserve to and governmental restrictions such as taxes for
be charming!” It has marketing and manufacturing digital purchases or technological problems in
operations in 19 countries including the United certain countries which may become critical risks.
States. Other than manufacturers and distributors Source: https://digitalmarketinginstitute.com/
in different regions of the world, Treasure Products the-insider/05-10-16-the-evolution-of-digital-
has partnerships in countries such as Malaysia marketing-30-years-in-the-past-and-future
and India. https://www.slideshare.net/globalwebindex/
Although the company’s products have been globalwebindex-social-q1-summary-report
known for their fancy designs and relatively Discuss:
affordable prices, in recent years it has launched a 1. What are the strategies that Treasure
new marketing initiative. The current CEO, Mr. Products Inc. can formulate for occupying
Cem is highly experienced in overseas operations. a distinctive place in the digital vintage
He was hired by the new board formed after Mr. jewelry market? Does the diversification
Bilir succeeded his father in 2016. Since that strategy need to be enhanced and supported
time, Mr. Cem has focused on reaching young by other marketing strategies? Is product a
consumers and millennials. The branding is sufficient differentiating point?
reflected in his hiring initiatives. One is the chief 2. What is the impact of digitalized marketing
marketing officer (CMO) as well as new hires for on the current marketing mix that Treasure
specific departments such as product designs. Bilir Products Inc. has been implementing? Can
believes that the newer generations of consumers it be sustained?
are highly attracted to digital marketing practices.
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LO 1 Reaching an accurate understanding of

what marketing is and what it entails
Marketing should not be perceived as another function in the

organization. It should be the basic driving motivation across all
departments. Kotler and Keller defines marketing as the creation,
promotion, and delivery of goods and services directed towards
consumers and businesses, however, it should be perceived as
the major driving factor in the organization, determining the
strategic orientation and the foundation of branding.
Summary
Another definition is “Marketing is managing profitable

customer relationships”. This definition covers three important
concepts: First of all, marketing is all about building a
relationship with customers. Without a deep understanding
of consumer behavior, marketing cannot succeed. Secondly,
marketing is about managing customer relations. An ideal
(proactive) marketing methodology would understand
customers and build a relationship based on their expectations
before the customers would be telling about their needs and
expectations. Lastly, the management of customer relationships
must generate profits, not only because companies need money
to pay their employees and other shareholders, but also because
they need money to invest in other opportunities.
LO 2 Explaining the methods that companies follow for

strategic positioning towards market segments
Marketing strategy is the way of doing marketing towards a

certain positioning. For marketers to decide on this “way,” they
have to combine all marketing goals into one comprehensive
plan. Two key decisions marketers have to make in this regard are
generic marketing strategy and segmentation and targeting.
According to Porter, companies should build competitive
advantage in order to stand distinctive in the market and hold
the advantage for a long period of time. One of the ways to
establish competitive advantage is to produce output with the
lowest cost in the industry. This can be achieved by producing
in more and more efficient ways using scale economies, scope
economies, and experience (learning curve) effects.
Segmentation is the task of dividing the population into
sub-groups in a way that can meaningfully separate consumers
in terms of their consumption patterns. An ideal segmentation
approach combines different strategies (including
demographics and psychographics) to arrive at groups with the
highest level of differentiation. Targeting involves the careful
selection of at least one segment identified in the previous step,
by considering a variety of different factors. In segmentation
and targeting decisions, as in all marketing decisions, marketers
should feel responsible about whom they target, how, and why.
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Developing skills necessary for an integrated

LO 3 management of the marketing mix elements,
namely; product, pricing, place, and promotion
Marketing mix, also known as the 4Ps of marketing, constitutes the set of all marketing activities a
company engages itself in pursuing its marketing goals and objectives. Product (good or service) is the
offering in the market, created and sold in order to solve a problem or satisfy a need or want.
The second major marketing activity involves the pricing of a product. This represents the financial
compensation in return for the value provided by the product or service. Setting a price is one of the major
Summary
marketing decisions. There are different pricing approaches with unique advantages and disadvantages.
The simplest method is called cost-based pricing where companies first figure out the cost of producing
one item, and then add a profit margin to arrive the price to be used in the marketplace.
Place is a decision regarding where the products would be purchased (and implicitly, how they are
purchased), and the activity conducted by the company is called distribution. From the consumer’s
perspective, this is called convenience because if the product is not available for the consumer, there is
nothing else that can cover for this problem.
Promotion entails the activities that attempt to establish some sort of a relationship with target
customers, and all shareholders involved, and try to win the heart and loyalty of consumers. From the
consumers’ perspective, communication is an essential component in a marketing exchange relationship.
The tools of communication available for marketers are (1) advertising, (2) sales promotions, (3) public
relations and publicity, and (4) personal sales.
LO 4 Grasping the issues related to branding, which stands as the

most strategic, long-term investment of the company
Branding involves a set of marketing and promotion activities that promote the brand, aiming to have a
persistent image in consumers’ minds. It is the most strategic investment of the company. Brand equity is
a term reflecting the brand’s worth in the eyes of consumers, usually reflected in the price. Brand identity
is the set of all individual components of a brand, specifically including the imagery, slogans, colors, and all
other types of imagery. Positioning is how the brand is perceived by the consumers. A positioning strategy
has to be sustainable and create a meaningful competitive advantage. Positioning (Perceptual) maps are
based on consumer perceptions showing the perceived position of the product/brand so that the firm can
see its standing compared to competitors, take corrective action if necessary, and make strategic, future-
oriented decisions.
One of the key issues in branding is the concept of brand value. Brand value is a generic term which
reflects brand equity (being a well-known brand will generate more revenue), the financial strength (the
net present value of the estimated future cash flows), and/or the effective attachment consumers have with
the brand due to functionally, emotionally, and experientially strong aspects. Another key issue in studying
brands is brand personality. Brand personality refers to the set of human characteristics attributable to
a brand. It may be considered as a general framework through which the company can study consumer
perceptions and the current positioning of the brand. Strong brands are able to touch consumers’ lives form
different points.
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5
LO 5 Describing new trends in marketing influenced by

globalization, automation, and digitalization
Major trends in the world such as globalization, automation, and digitalization have their effects on
marketing, too. In fact, marketing is a very old discipline but it has become a totally different concept
compared to the day it was first discussed and used. The marketing concept has evolved into something
else in which marketers have started to feel the need to understand consumer motivations and underlying
sociological and psychological processes.
Customer relationship management (CRM) has been a key concept with many software programs
claiming to help firms understand what the data says about customers and facilitating the formation of
Summary
a long-lasting relationship. “Big-data” in this new era represents large and complex sets of data collected
through primary data collection methods and data readily available on the web. There are a variety of
challenges associated with big data, including searching for, capturing, storing, and analyzing data,
visualizing, updating, and sharing the analyzed data, in addition to data privacy. The aim is to understand
and predict consumer behavior through sophisticated analytics methods.
One specific marketing development in recent years is the use of electroencephalograpgy (EEG) and
functional magnetic resonance imaging techniques (fMRI) to better understand consumer motivations
and their reactions to stimuli (such as advertising).
Appraising how and why the marketing principles would

LO 6 be applied in accordance with ethical principles of doing
business in a globalizing and digitalizing world
Marketing ethics deals with the moral principles behind marketing activities. One of the newest eras in
marketing involves the concept of societal marketing, for instance, which tries to discuss creative ways to
optimize consumer satisfaction and preserve society and nature as a whole. A company is doing a good
job pleasing some consumers with particular needs and desires, and it can do this very efficiently and
effectively, control the market in this regard, become the market share leader, and maintain its brand
value for years.
There are a lot of issues raised as regards to marketing ethics such as invasion of privacy in marketing
research, stereotyping in segmentation and targeting, uncontrolled marketing efforts towards vulnerable
consumers, unethical pricing tactics such as price fixing, price wars, and price collusion, and ethically
questionable and insensitive conduct in advertising and promotion.
In response to unethical marketing conduct, anti marketing groups suggest more sustainable systems
for the betterment of humanity. Anti-consumerism is a more general term reflecting a sociopolitical
ideology against the recurrent buying and consuming of material possessions, including other advocate
ideas such as environmental activism, anti-globalization, and animal-rights activism.
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5
1 Which of the following is not an essential 6 Service economies may necessitate a larger
marketing activity? combination of marketing mix elements. Which of
a. Deciding on and organizing the marketing mix the following is not an appropriate addition to the
elements. original 4P’s?
b. Participating in corporate social responsibility a. Possessions b. People
events. c. Physical evidence d. Process
Test yourself
c. Making profits to preserve a sustainable re- e. All of the above are appropriate additions
investment money.
d. Creating long-term customer relationships.
e. Managing and organizing the strategic orientation
7 For a smart phone, which combination of
“product feature versus product layer” below
of the company.
would not be correct?
2 What cannot be true for focus marketing a. Touchscreen – expected product
strategy? b. Ability to be worn on hand – potential product
c. Calling someone – core benefit
a. Marketing research costs are high.
d. Capacity for a larger camera affixed on top of the
b. Strategic target is narrow.
built-in camera – augmented product
c. Strategic advantage is always a unique product.
e. Ability to connect with a computer – potential
d. There should be a focused attention on the target product
chosen.
e. Communication with the target consumers should
be specifically planned. 8 What is the type of positioning when a hotel
makes TV advertising in which players enjoy the sun,
the sea, the food, and the music, and they look all
3 Which of the following characteristics of very happy?
segmentation is not absolutely essential?
a. Functional b. Operational
a. People in the same group are homogenous. c. Experiential d. Symbolic
b. People in different groups are heterogeneous. e. Practical
c. The segments should be substantial.
d. People should be approachable.
e. All of the above are true. 9 A positioning (perceptual) map would
indicate all of the following, except:
4 a. Profits
Which is the most useful segmentation
criterion? b. Position in the minds of consumers
c. Close competitors’ position
a. Demographics d. General competitive structure in the market
b. Psychographics e. Competitive gaps in the market
c. Geographic
d. User behavior 10 Modern trends in marketing force marketers
e. Income to do all of the following, except:
5 When the marketers customizes the product a. Build brands based on an understanding of glo-
and other marketing mix elements to satisfy the bal segmentation.
individual person, this is called ____________. b. Hiring social media experts to follow and lead
a. Mass marketing what is being discussed about the brand.
b. Focused marketing c. Push the marketing mechanism towards selling
c. Differentiation marketing more items to more individuals.
d. Micro marketing d. Use more sophisticated methods to analyze the
e. None of the above data collected automatically.
e. Be responsible for all shareholders in the world,
including non-customers and animals.
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5

“Definition of Marketing”. “Marketing Mix”.
2. c If your answer is incorrect, review 7. e If your answer is incorrect, review

“Generic Marketing Strategy”. “Product/Service”.

3. e 8. c If your answer is incorrect, review
“Strategic Segmentation and Target
“Positioning”.
Customers”.

“Segmentation Criteria”. “Positioning (Perceptual) Maps”.
5. d If your answer is incorrect, review 10. c If your answer is incorrect, review “New
“Targeting”. Trends in Marketing”.
How would you define marketing? Explain your

reasoning.
Marketing is often defined by focusing on the activities marketing personnel

run on an everyday basis, such as sales efforts or advertising. It is also defined
as the movement of materials from producers to consumers in the form of
final products. In recent years, marketers have come to realize that marketing
your turn 1 is also about establishing strong relationships with consumers. Therefore, your
definition may change depending on how you conceptualize marketing: As a
set of activities conducted by marketing personnel (a functional perspective,
which is outdated and lacking) or as a socio-psychological process of exchanges
in the market, based on a relationship between brands and consumers.
Think of examples or experiences where you came across brands

claiming an advantageous feature but you did not care enough.
Points of differentiation claimed by companies have the risk of being irrelevant

for consumers. You are asked to find such an example. For instance, in a
restaurant you may find that the menu lists a lot of healthy options such as
your turn 2 vegetables and salad, while you are not really interested in healthy stuff, but
rather seek food which is delicious and filling. At a hospital, you may find that
the nurses are very nice and friendly, while in fact you give more importance
to whether the physicians are qualified or not. These and other examples you
may come up with point out the significance of whether and how marketers.
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5
Provide a hypothetical example of segmentation in sector of your interest.

Explain how you divided the market, i.e. the criteria for segmentation.

Segmentation should be based on psychographic consumer data, since it
provides the most relevant information as regards to how consumers behave
the way they do. As an example, consumers in the women shoes category
can be segmented based on where they live (geographic segmentation) which
would then lead to shoes which are appropriate for hot and cold weather.
Consumers can be segmented based on demographic data, such as shows for
your turn 3 young women versus older women. Consumers can also be segmented based
on how and why they use shoes, which might lead to products which are more
suitable for work or for parties at night. In a more useful way, consumers
can be segmented based on their life styles. Some women would like to wear
sneakers all the time and combine them with comfortable pants, while some
women wear more fashionable items, and combine those with high-heel
stilettos. This last criterion is better able to differentiate among consumers in
terms of their thoughts and feelings towards shoes.
Explain your thoughts about the retailer type “corner shops.”

Do you think it is a good idea? Why/why not, and in what
circumstances your answer would change?
Corner shops originated by the name “corner” because traditionally such shops
are located on the corner of an intersection, where a lot of pedestrians pass by.
They are sometimes called “convenience stores,” because they are small retail
businesses which stock a range of everyday items such as groceries, tobacco
products, water, newspapers, and other items which consumers need on a
your turn 4 regular and frequent basis. Therefore, it might be a good idea to open corner
stores because (1) corners are places where human traffic is high therefore
there is a high sales potential and (2) all consumers buy convenience items;
therefore, sales potentials are high. However marketers should be aware of
the risks that (1) the advantage of quantity discounts is not possible since the
place is too small and (2) consumers may find the prices too high and not buy
enough to compensate for the costs.
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5
What do you think is the most significant development among the

newest trends in marketing?
One of the major developments is globalization. It affects each and every

culture in similar and different ways. Production and consumption of products
start to occur in distinct places around the globe, and it is very much possible
for consumers in different parts of the world to be quite similar to each other
in terms of their consumption. A second major development is digitalization.
your turn 5 Marketing is now conducted on an online basis, in which consumers buy,
sell, discuss, and share products and stories about the products; and marketers
either passively follow digital marketing content, or actively participate in the
conversation, or even better, proactively create the digital content. Marketing
executives are now highly driven by data collected through all sorts of digital
and virtual places, specifically including social media platforms.
Do you think business ethics is any different than the

moral attitude of people managing the company?
Both yes and no. Managers who are making strategic decisions on behalf of the
brand are able to drive the company in different directions. Therefore, their
personal predisposition towards ethical issues including marketing facilities
(advertising towards vulnerable consumers, suitable pricing, product claims,
your turn 6 and sales personnel behavior, etc.), is likely to directly affect the general ethical
conduct of the company. On the other hand, ethics is a systematic approach;
therefore, not only managers but also the overall system of doing business,
encompassing the vision, the strategy, and all functions including the human
resources, organization, financial affairs, and marketing, should be tailored in
an integrated way towards maintaining a healthy, working system of ethical
organization.
endnotes
1Kotler, P. & Kevin, L. K. (2012). Marketing Management. Prentice Hall.

2AMA (American Marketing Association). Definition of Marketing. Retrieved from
https://www.ama.org/aboutama/pages/definition-of-marketing.aspx
3Porter, M. E. (1980). Competitive Strategy: Techniques for Analyzing Industries and Competitors. Free Press.
4Plummer, J. T. (1974). The concept and application of life style segmentation. Journal of Marketing, 38 (1),
pp. 33-37.
5Smith, N. C. & Cooper-Martin, E. (1997). Ethics and target marketing: The role of product harm and
consumer vulnerability. Journal of Marketing, 61 (3), pp. 1-20.
6Culltion, J. W. (1948). The Management of Marketing Costs. Harvard University Press (research bulletin).
180
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7McCarthy, J. E. (1964). Basic Marketing: A Managerial Approach. Irwin.

8Vargo,S. L. & Lusch, R. F. (January 2004). Evolving to a new dominant logic for marketing. Journal of
Marketing, 68, pp. 1-17.
9Grönroos, C. (2011). Value co-creation in service logic: A critical analysis. Marketing Theory, 11 (3), pp. 279-
301.
10Stone, M. A. & Desmond, J. (2007). Fundamentals of Marketing. Routledge.
11Ries, A. & Trout, J. (1986). Positioning: The Battle for Your Mind. McGraw-Hill.
12Aaker, D. (1991). Managing Brand Equity: Capitalizing on the Value of a Brand Name. Free Press.
13Murphy, J. (ed.). Brand Valuation: Establishing a True and Fair View. Hutchinson Business Books.
14Aaker, J. (August 1997). Dimensions of brand personality. Journal of Marketing Research, 34, pp. 347-356.
15Martin, H. (2016). Big data for development: A review of promises and challenges. Development Policy
Review, 34 (1), pp. 135-174.
181
Production Management and
Chapter 6 Managing Information Systems
1 2
Learning Outcomes
Define the concept of production, production Explain the types of production processes.
system, and production management.
3 Identify the historical evolution of production

management. 4 Describe the new trends in production
processes.
5 Explain the scope of production management.

6 Describe managing information.
7 Define information technology.

8 Identify information systems.
9 Describe the information systems for decision

making.

Production, Production System and Production
Production Management Production system
Types of Production Processes
The Historical Evolution of Production Production management
Management Lean production
New Trends in Production Processes Just-in-time
The Scope of Production Management Information technology
Managing Information Information systems
Information Technology
Information Systems Management information system
Information Systems for Decision Making
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6
Production along with marketing and finance is an essential and vital business activity in an organization.
The production function in a profit-seeking company aims to produce goods and/or services to satisfy
customers. In other words, it exists in order to provide goods and services demanded by customers.
Without production there is no company or any other functions of the company. However, the production
function by itself is not enough for the existence of companies. The other functions such as marketing
and finance also are critical for the survival of a company. In this regard, the production function needs
to produce goods and services that meet the needs and requirements of customers in the market. Shortly,
the production function adds value to a company’s inputs by transforming them into marketable outputs.
If the produced goods and services are not sold in the market the company doesn’t survive. Production
management refers to the systematic design, operation, and control of the production process involving
effective control of cost, performance, quality and waste requirements. While production management
deals with decision making related to quality, quantity, cost, flexibility, capacity, and etc of production, it
applies management principles to production.
This chapter emphasizes different aspects of the production function in a business organization. First
the terms production, production systems, and production management are defined. Following parts
are the types of production processes and the historical evolution of production management. Then new
trends in production processes and the scope of production are introduced for better understanding the
advanced level of the production function.
The chapter continues with the basics of managing information systems. In order to manage the
production systems and subsytems effectively, information flow in the organisation among the functional
units of a company must be fluent, seamless, accurate, and on time. Otherwise, a company cannot be
successful in the market whatever its performance is in production, finance, or marketing. Especially in
the information age, information systems and information technologies are essential tools to compete in
the market. Companies do not only use information systems that connect all the functional units of the
companies, but they also compete with the Internet-only companies via Web-based stores and online
channels. All business managers are responsible for making investment and effectively utilizing these
information technologies for the benefit of their companies. Many companies in the world spend billions
in US dollars on information systems hardwares, softwares, and telecommunications equipment in order
to be effective and efficient in business processes and compete in the highly competitive global markets. In
compliance with the importance of the content for today’s business organizations; information technology,
information systems, and information systems for decision making are also explained.
PRODUCTION, PRODUCTION SYSTEM, AND PRODUCTION

MANAGEMENT
Briefly, production is defined as the transformation of
tangible and intangible inputs into goods or services. In
other words, production is the transformation or conversion Production is the transformation or
of a set of inputs, such as raw materials, labor, knowledge, conversion of a set of inputs, such as raw
into one or more outputs such as tables, cars, and banking materials, labor, knowledge, into one or
services. The production function in a business organization more outputs such as tables, cars, and
is specifically concerned with the activity of producing goods- banking services.
that is, the design, implementation, operation and control
of people, materials, equipment, money, and information to
achieve specific production objectives.
Before explaining the production system, it is better to
define what the system is. A system is a collection of interacting, A system is a collection of interacting,
interrelated, or interdependent elements or components that interrelated or interdependent components
are organized for a common purpose. Organizations can be that are organized for a common purpose.
seen as systems that procure and transform inputs into outputs
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6
Production Management and Managing Information Systems
which are subsequently discharged into their external environment. The cycle of inputs, transformation, and
outputs must be maintained if an organization is to exist over time. This is to say, an organization can survive only
if it is capable of producing some output that can be exchanged for the energy necessary to obtain new inputs
and also to maintain itself in operating order. It is generally emphasized that all companies are to some degree
open systems as opposed to closed systems. That is, a typical company system depends on other systems for its
inputs and thus cannot exist in isolation while closed systems do not depend on other systems for its inputs.1
Therefore, it is understood that the system is composed of inputs, process, outputs, and feedback. Companies
themselves are systems made up of interacting subsystems. One of the important subsystems of companies is the
production management department. The production function can offer competitive advantages to a company
such as shorter new product lead time, more inventory turns, shorter manufacturing lead time, higher quality,
greater flexibility, better customer service, and reduced waste.
Production System
Most organizations, including non-profit organizations, can be described as production systems.
These organizations transform or convert a set of inputs into one or more outputs. The main purpose of
production systems is to produce goods and/or services. The outputs of a production system are normally
called products; these products may be tangible goods, intangible services, or a combination. The input-
process-output process along with feedback, which is referred to as a production system, is characteristic
of a wide variety of operating systems.
Goods are tangible items that can be touched or held. Production systems that produce goods are often
referred to as manufacturing systems, and the production of goods is called manufacturing. Some examples
for the manufacturing systems are automotive factories, chemical factories and
furniture factories. Services are intangible products that satisfy some need of
a consumer, including the enhancement of a good. Production systems that
produce services are referred to as service systems. Legal assistance, banking The main purpose of
services and transportation services are examples for the service systems.2 production systems is to
Products can be a combination of goods and services. A restaurant is a good produce goods and/or
example for the combination of both where they produce meals which are tangible servives.
products along with the intangible services of delivery and cleaning.
General structure of a production system is given in Figure 6.1 Inputs, process, outputs and feedback
are the main elements of a production system. Inputs which are raw materials, materials, machine, energy,
labor, management, capital, knowledge and enterpreneurship are transformed into outputs which are
goods and services.
Figure 6.1 Production System
INPUT TRANSFORMATION OUTPUT

PROCESS
Raw material Goods
Material Services
Machine
Labor
Management
Capital
Knowledge
Energy
Entrepreneurship
Feedback
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6
The production system has the following 3. Operation: Operating the transformation
characteristics: process involves the actual implementation
• Production is an organized activity; thus of production procedures. The planning,
every production system has an objective. organizing and controling of operations directly
• The system transforms the various inputs affect the output of a production system.
to useful outputs. The operating function also involves activities
• It does not operate in isolation from the such as purchasing, redesigning the process (if
other organizational systems. necessary), and forecasting requirements.
• There exists a feedback about the produc- 4. Control: The transformation control process
tion activities, which is essential to control requires some methods for measuring the
and improve system performance.3 product or service before it is sold or used. For
The transformation process in the production example, computers are used to monitor sales in
system can be: a store. By using the computer, the store manager
can monitor inventory levels so that stock reorders
• Physical: in manufacturing operations,
can be placed and outages minimized.4
• Locational: in transportation or warehouse
Feedback mechanisms are required to monitor
operations,
the performance of the transformation process. The-
• Exchange: in retail operations,
re may be some random disturbances hampering the
• Physiological: in health care,
transformation process of converting the inputs into
• Psychological: in entertainment,
desired outputs. Random disturbances can be plan-
• Informational: in communication.
ned and are due to the internal environment.5
As it is mentioned above, production systems
produce goods, services, or a combination of both.
During the transformation process, However, the production of goods and services
the production function in the company have some important differences as well.
involves four specific sub-functions which Some of the main differences of the production
are design, scheduling, operation, and of goods and services are as follows:
transformation control.
• Systems that produce tangible goods usu-
ally rely more heavily on raw materials
During the transformation process, the inputs than do service systems.
production function in the company involves • Goods usually can be stored for later use
four specific sub-functions which are design, and transported over space before the ulti-
scheduling, operation, and transformation control: mate use, whereas services usually cannot.
1. Design: Designing the transformation • Consumers of goods have little, if any,
process involves making decisions on direct involvement with the production
equipment selection, type of production of the goods. In contrast, most services
process, and work flow patterns. The deci- require close involvement of the customer
sion on which process to utilize is based on with the production process and in many
economic considerations, volume required, cases actual physical contact is essential.
and labor resources, and skills available. • As a result of the above items, the produc-
Managers must design transformation tion of goods can be separated from the
systems to take advantage of all existing customer in space and time more easily
knowledge and technology. than the production of services.6
2. Scheduling: Once designed, the optimal However, it may be noted that a clear cut
process must be scheduled to produce the distinction between goods and services is difficult
desired product or service at the right time. to make. In reality, all services are most likely a
Scheduling covers the long run which mixture of a service and a tangible good. Also the
forecasts product demand for developing sale of many goods includes or requires service. For
inputs such as raw materials and labor example, automobile sales have the service components of
needed and the short run which involves financing and transportation. The differences between
employees’ daily or weekly work activities. goods and services are summarized in Table 6.1.7
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6
Table 6.1 The Differences Between Goods and Services

Goods (Tangible Products) Services (Intangible Products)
Goods can be resold Reselling services is unusual
Goods can be inventoried Many services cannot be inventoried
Some aspects of quality are measurable Many aspects of quality are difficult to measure
Selling is distinct from production of goods Selling is often a part of the production of service
Service provider, not the service itself, is often
Goods are transportable
transportable
Location of a facility is important for cost Location of a facility is not important
Often easy to automate production of goods Service is often difficult to automate
Revenue is generated primarily from the tangible Revenue is generated primarily from the
goods even if they are accompanied by services. intangible services even though there are some
goods which are associated with services
Production Management
Production management refers to the application
of management principles to the production function Production management involves the
in a factory. In other words, production management application of planning, organizing,
involves application of planning, organizing, directing, and directing, and controlling the production
controlling the production process. process.
The application of management to the field of production
has been the result of at least three developments:
i. First development is the creation of the factory system for producing goods. Until the emergence
of the concept of manufacturing, there was not much awareness about management. Until then
people operated businesses of one type or another, but for the most part, these people were busi-
ness owners who did not regard themselves as managers;
ii. Essentially production management stems from the first, namely the development of the large
corporation with multiple owners and the necessity to hire people for operating businesses; and
iii. Evolves from the work of many of the pioneers of scientific management who were able to dem-
onstrate the value, from a performance and profit point of view, of some of the techniques they
were developing.8
Following definitions explain main characteristics of production management:
• It is the process of effective planning and regulating operations of the production section of an
enterprise which is responsible for the act transforming materials into finished products.
• Production management provides decisions to the production process for ensuring that the
resulting goods and services are produced in accordance with the quantitative specifications and
demand schedule with minimum cost.
• Production management is a set of general principles for production economics. Facility design,
job design, schedule design, quality control, inventory control, work study, and cost and budg-
etary control are some application examples for the production management. This definition
explains the main areas of an enterprise where the principles of production management can be
applied.9
The meaning of production management for business organizations
entails three main reasons: It encompasses both services and
1
manufacturing; it’s important in effectively and efficiently managing
productivity; and it plays a strategic role in an organization’s competitive What are the main activities of
success. production management?
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6
TYPES OF PRODUCTION PROCESSES

Production is the creation of utility and the frame-work with which the creation of utility occurs and is
termed as the production system. Production systems differ from one company to another. The production
system of a company refers to how the flow of work is
configured. There are inputs and outputs, operations and
activities imparting values to the inputs. Production can be The production system of a company refers
configured in a number of different ways, depending on the to how the flow of work is configured.
nature of the product, customer requirements, and available
production technologies. There are several different processes
manufacturers use to produce goods.
Although there are different types of processes, in the
literature, the processes are classified according to their
physical configuration, material and product flow, flexibility internet
and volume expectations in this chapter. The four types http://kalyan-city.blogspot.com.tr/2012/02/
of processes are: Flow process; Job-shop process; Cellular types-of-production-system-intermittent.html
process; and Project process. For different classifications
check the Internet.
Although the selection of a production process structure is a very important
decision for a company, the nature of the product may affect determining the
type of the process. For example, production of a bridge must be a project process Production system
or production of paper must be performed by using the continuous flow process. may compose several
The selection of a process structure is determined by many factors. Some subsystems, each of which
of the most important ones are as follows: may have a different
process structure. For
• The expected volume and demand pattern for the products.
• The number of different products manufactured by the system and example: automobiles are
the processing type that each one requires. designed using a project
• The type of the customer order, which defines whether the product process, but many of its
is made to stock or made to order. parts are manufactured
• The physical characteristics of the products and the specific technol- using job-shop or cellular
ogies required to produce them. For example, manufacturing of steel processes, and final
requires working with large volumes of metal that must be processed at assembly is done by using
high temperatures. flow processes.
2
What is the difference
between made to stock and
made to order?
Flow Process
The flow process is a very common method of production. This type of process is used when the
product is built up through many separated stages in a sequence. This production method is financially
the most efficient and effective because there is less of a need for skilled workers.
The flow process is employed where all products require
the same type of processing in the same sequence of tasks. Du-
ring the flow process the overall production is decomposed The flow process is employed where all
into tasks or operations that must be performed and the tasks products require the same type of processing
are assigned to be performed at distinct work stations which in the same sequence of tasks.
are arranged sequentially as it is shown in Figure 6.2.10
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6
Figure 6.2 Flow Process Structure

Product
1 2 3 4 5 6 Output
Flow
Since all the products undergo the same processing at a given stage and materials flow in the same
direction, equipment, tools, jobs and material handling are usually specialized for efficiency. Production of
paper, assembling of automobiles and manufacturing of books are examples of flow processes.
Types of flow processes

There are three types of flow processes: continuous flow process; repetitive or discrete flow process;
and disconnected or batch flow process.
1. Continuous flow process: This type of flow process is usually used in process industries such as
paper, chemicals, bulk foods, petroleum and water. This process is designed to produce large
volumes of a small variety of uniform products. The type of processing is usually subject to very
strict specifications and has a highly interconnected structure whereby material literally moves
continuously, rather than through a sequence of discrete tasks. Most of the time it is true because
the product itself is physically continuous like paper or chemicals. Continuous flow processes can
also be used for discrete products such as beverages, detergent and candy.
2. Repetitive or discrete flow process: Through this type of flow process, work stations are tightly
connected to each other and they are organized around the sequence of activities required to
produce one general type of product like computers, automobiles or restaurant meals. The prod-
ucts do not need to be continuous but generally units of product are processed and transported
between work stations one by one in a synchronized manner. That is why it is called repetitive.
The products themselves are physically discrete and the work required can be divided into discrete
tasks. A narrow range of products are manufactured in large quantities by specialized machines
and equipment and the automation is very high. A common version of a repetitive process is an as-
sembly line such as computer assembly lines, where the workers or machines at each work station add
components to a product moving along the line.
3. Disconnected or batch flow process: Batch flow process is used when a moderate volume of goods
or serrvices as well as a moderate variety of products or services is required. In a batch flow pro-
cess, volumes are higher because same or similar products are repeatedly provided. The variation
in processing times and batch sizes and possibly lengthy setup times between product batches,
will cause some products to wait in inventory between stages for certain periods. Some examples
for the batch flow processes are ice cream, soft drinks, books and magazines. Companies can take
advantage of the common flow of materials and use special equipment and jobs at each work sta-
tion and have the flexibility to produce a variety of products in different volumes.
Advantages of the flow processes: Since specialized
equipment is used, operations are efficient; workers can
benefit from repetition of a narrow range of tasks; material Types of flow processes are continuous flow
handling can be simplified; work-in process inventories are process; repetitive or discrete flow process;
small; space utilization is efficient; quality conformance and disconnected or batch flow process.
is easier to achieve; and production scheduling and
coordination are relatively easy.
Disadvantages of the flow processes: Initial costs are high; work can become tedious and boring; and the
production system is extremely vulnerable.
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6
Job-Shop Process
The job-shop process is characterized by manufacturing of one or few quantity of products according
to the needs and requirements of customers. The job-shop process is used when a company manufactures
several different products that require different types of processing and the processing for different products
is performed in different sequences. Maximum flexibility can be achieved by this process. General purpose
machines are suitable in job - shops because they are capable of performing many different types of
operations and thus capable of producing a wide variety of products with small lot sizes. Machines which
perform similar function grouped together such as lathe machines in one department, milling machines in
another department, and so forth. There is a high customisation, high flexibility of equipment, and skilled
labor in a job-shop process. A tool and die shop is an example of job-shop, where job process is carried out to
produce one-of-a kind tools or customised printed products. Furniture, and custom-made chemicals are other
examples of this type of process. Besides, in the job-shop process detailed planning is essential for sequencing
the requirements of each product, capacities for each work centre and order priorities. An example for a
job-shop is shown in Figure 6.3.11
Some of the important advantages of the job-shop process: Wide variety of products are produced; operators
become more skilled; full potential of operators can be utilized; opportunity exists for creative methods and
innovative ideas; and since machines are grouped, therefore
supervision task becomes more effective.
Some of the important disadvantages of job-shop process: The job-shop process is used when a
company manufactures several different
High material handling costs; high material flow distance;
products that require different types of
high production lead time; high levels of work in progress
processing and processing for different
inventory; less efficiency of general purpose equipment, products is performed in different
difficulty in quality conformance; and high production sequences.
costs.
Figure 6.3 Job-Shop Processes
Lathe department Milling department Drilling department
L L M M D D
M M D D
L L
M M
L L
G G
Assembly
L L
A A G G
G G
Receiving and A A
shipping Grinding department
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Cellular Process
Cellular manufacturing is a process that produces
families of parts within a single line or cell of machines
Cellular manufacturing is a process
operated by operators who work only within the line or the
that produces families of parts within a
cell. A cell is a small scale, clearly-defined production unit
single line or cell of machines operated by
within a larger factory. This unit has complete responsibility operators who work only within the line or
for producing a family of like parts or a product. All the cell.
necessary machines and manpower are contained within
this cell, thus giving it a degree of operational autonomy.
Each worker is expected to have mastered a full range of operating skills required by her or his cell.
Therefore, systematic job rotation and training are necessary conditions for effective cell development.
Complete worker training is needed to ensure that flexible worker assignments can be fulfilled. Cellular
manufacturing, which is actually an application of group technology, has been described as a stepping
stone to achieving world class manufacturing status. The objective of cellular manufacturing is to design
cells in such a way that some measure of performance is optimized. This measure of performance could be
productivity, cycle time, or some other logistics measure. Measures seen in practice include pieces per man
hour, unit cost, on-time delivery, lead time, defect rates, and percentage of parts made cell-complete.12
Companies often capture some of the efficiencies of flow
processes and the flexibility of job-shop processes by creating
hybrids of the two, which is called cellular process. A cellular Organizations often capture some of
process can also be a mixture of mini flow processes (work the efficiencies of flow processes and the
flexibility of job-shop processes by creating
cells), and a job-shop operation. Work cell is operated like a
hybrids of the two, which is called cellular
flow cell with several activities connected in sequence. process.
A company divides its products into families or groups
of products that require similar processing steps in the same
sequence in order to create a cellular process. A work cell is then created to
perform these steps in the designated sequence for all the products in the
family. The output of the cell can be a finished or semifinished product. If
the product is not convenient for any cell as many are, then a job-shop cell Cellular processes are
that does all the processing steps in any sequence can be applied. most commonly used
Some of the most important advantages of cellular processes: Material handling as substitutes for job-
and transport are reduced; setup and throughput times are reduced; in-process shop processes that need
inventories are smaller; less space is needed; worker satisfaction is increased; increased productivity.
and quality is improved. Despite its advantages, only a few companies can Also, increasingly, they
effectively utilize the cellular production process because of the difficulties are used in place of flow
in application. Successful implementation of a cellular production system processes to obtain greater
requires a considerable amount of work and expertise to characterize and flexibility.
classify products and then design the appropriate work cells and remaining
job-shop process. In Figure 6.4 process and cellular layout are shown.
Figure 6.4 Process Layout and Cellular Layout
Hydraulic Presses Milling Machines Cell 1 Cell 2
Lathes Welders Cell 3 Cell 4
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Project Process in which they are used will vary from job to job. The
This type of production process is characterised dominant operations management issues for such
by a high degree of job customization, a large processes are:
scope for each project, and need for substantial 1. How to coordinate a wide variety of
resources to complete the project. Projects are resources that are needed for the current
usually complex, take a long time and consist of a project, as well as for other projects of the
large number of complex activities. These processes company,
are used when there is high customization and low 2. How to complete the project by scheduled
product volume, because each product is unique. date and within the budget.13
Equipment flexibility and labor skills can range Examples for the project processes are construction
from low to high depending on the type of project. projects like building, highway and bridges, computer
With project processes the customer is usually software, cargo airplanes, and ships.
involved in deciding on the design of the product.
The major strength of this type of process is its
flexibility to meet the individual needs of customers.
Projects are usually analyzed using network-solving 3
techniques like Critical Path Method (CPM) or What are the advantages
Project Evaluation and Review Technique (PERT). and disadvantages of project
These are expensive processes and variable costs processes?
are comparatively very high but fixed costs can be
negligible. Moreover, highly skilled personnel must
work independently, with minimal guidance and
supervision. In addition, workers need to be well THE HISTORICAL EVOLUTION
trained in a variety of tasks. OF PRODUCTION
MANAGEMENT
Systems for production have existed since
The project process is characterised by ancient times. It can be said that production has
a high degree of job customisation, a started by the existence of humanbeings in order
large scope for each project, and need for to survive. The Great Wall of China, the warships,
substantial resources to complete the project. roads, and aqueducts of the Roman Empire
provide examples of the human ability to organize
for production. Even so, most of these examples
could be classified as “public work” projects.
The production of goods for sale, at least in the
When there is a high level modern sense, and the modern factory system
of customisation, low had their roots in the first Industrial Revolution
volume and one-of-a kind in the 19th century.14
product like bridges or
cargo airplanes, project
processes are used. During the First Industrial Revolution,
many new inventions were implemented
that allowed goods to be manufactured with
Although in project processes one-of-a-kind
greater ease and speed.
products are produced by utilizing similar skills and
equipment, the process itself often is customized:
unique skills and equipment may be required
and/or combined in new ways. For example, a Contemporary production management has its
construction company may use iron workers, cement roots in the Industrial Revolution that occurred
workers, carpenters and electricians on most jobs, but during the late eighteenth and early nineteenth
how they are used, the number used, and the sequence centuries in England. Until that time, goods had
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been produced in small shops by artisans and their incentives were established to encourage workers to
apprentices without the aid of mechanical equipment. follow the standards. Taylor’s philosophy became
The production system was not complex, workers were known as scientific management. His ideas were
autonomous and self-employed with deep knowledge embraced and extended by efficiency experts Frank
of their work and broad skills enabling them to do and Lilian Gilbreth, Henry Gannt, and others. One
a job from start to finish. During the Industrial of Taylor’s biggest advocates was Henry Ford.16
Revolution, however, many new inventions came Ford’s Model T
into being that allowed goods to be manufactured
with greater ease and speed. The inventions
reduced the need for individual artisans and led to
the development of modern factories.15 With the
invention of the steam engine by James Watt in 1765,
machine power replaced human power and animal
labor. In the 19th century mass production began
with large volumes but less variety. This production
type required customers to buy what they produce
rather than catering for customers’ requirements. The
revolution first took hold in textile mills, grain mills,
metalworking, and machine-making facilities.
Adam Smith’s Wealth of Nations (1776) The year 1913 saw the introduction of one of the
proposed the division of labor in which the machine age’s greatest technological innovations: The
production process was broken down into moving assembly line for the manufacture of Ford
a series of small tasks, each performed by a automobiles. After the application of this moving
different worker. assembly line for the production of the Model T, the
time required to assemble a car moved from a high
of 728 hours to 1.5 hours. When the line was in its
Around the same time, Adam Smith’s Wealth final form each worker was performing a small unit
of Nations (1776) proposed the division of labor, of work while the chassis was being moved along the
in which the production process was broken line mechanically. This technological breakthrough,
down into a series of small tasks, each performed coupled with the concepts of scientific management,
by a different worker. The specialization of the represents the classic application of labor specialization
workers on limited, repetitive tasks allowed them and still exists today in both manufacturing and service
to become very proficient at those tasks and operations.17 This type of production yielded the name
further encouraged the development of specialized of mass production.
machinery. The introduction of interchangeable Mass production is
parts by Eli Whitney (1790s) allowed the typically characterized
manufacture of firearms, clocks, sewing machines by some type of Ford is said to be inspired
and other goods to shift from customized one- mechanization, as with by the idea of an assembly
at-a-time production to volume production an assembly line, to line from observing a Swiss
of standardized parts. Advances in technology achieve high volume of watch manufacturer’s use of
continued through the 1800s. Cost accounting standard products, the the technology. Incidentally,
and other control systems were developed, but detailed organization all Model T Fords were
management theory and practice were virtually of materials flow, painted black because black
nonexistent. In the early 1900s Frederick W. Taylor careful control of paint dried the fastest.
approached the management of work as a science. quality standards and
Based on observation, measurement, and analysis, division of labor.
he identified the best method for performing
each job. Once determined, the methods were
standardized for all workers, and economic
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American manufacturers became adept to quality (rather than

mass production over the next 50 years and easily quantity). The
dominated manufacturing worldwide. The human quality slogan has
relations movement of the 1930s, led by Elton Mayo since spread across Lean production emphasizes
and The Hawthorne studies, introduced the idea that the globe and is the flexibility and quality.
worker motivation, as well as the technical aspects underlying force for
of work, affected productivity. Quantitaive models successful operations
and techniques spawned by the operations research today.
groups of World War II continued to develop and In 1990s by the emergence of Internet, the
were applied successfully to manufacturing and way of making business and the production
services. Computers and automation led still another systems were affected deeply. The Internet offers
upsurge in technological advancements applied to great potential for business organizations, but
operations.18 the potential as well as the risks must be clearly
From the Industrial revolution through understood in order to determine if and how to
the 1960s, the United States was the world’s exploit this potential. In many cases, The Internet
greatest producer of goods and services, as has altered the way companies compete in the
well as the major source of managerial and marketplace. Electronic business (e-business)
technical expertise. However, in the 1970s involves the use of the Internet to transact business.
and 1980s U.S. manufacturing superiority was E-business is changing the way companies interact
challenged by lower costs and higher quality with their customers and suppliers.
from foreign manufacturers, led by Japan. The
Japanese manufacturers started to dominate
many industries. The robustness of the Japanese The field of supply chain management was
economy is especially amazing in light of Japan’s born to manage the flow of information,
devastated condition at the end of World War products, and services across a network of
II. This success has caused operations managers customers, enterprises and supply chain partners.
throughout the world to study how Japanese
companies were able to develop this production Production management has changed
dominance. The answer is the Japanese production dramatically over the years. More and more
system which is a synthesis and enhancement of activities are taking place outside the enterprise in
relatively old ideas imported from the United factories, distribution centers, offices, and stores
States. US companies thought that mass overseas, therefore companies need to develop skills
production had solved the problem of production, in coordinating operations across a global supply
so they delegated the function of manufacturing chain. The field of supply chain management was
to technical specialists who ignored changes in born to manage the flow of information, products,
the consumer environment and the strategic and services across a network of customers,
importance of operations. Decisions were made enterprises and supply chain partners. Supply
based on short-term financial goals rather than chain management concentrates on input and
long-term starategic initiatives. output dimensions of transformation processes.
Although mass production produces large Increasingly, however, as the transformation process
volumes of goods, it is not as simple to rapidly adapt is performed by suppliers who can be located
to changes in demand. Mass production could not around the world, the supply chain manager is
entirely fit in the present market conditions. Main also concerned with the timeliness, quality, and
characteristics of today’s markets are a shortened legalities of the suppliers’ operations.
product life cycles and product development times,
changes in technology, more customized products,
and segmented markets. Japanese manufacturers
4
changed the rules of production from mass
production to lean production. Lean production What are the main principles
prizes flexibility (rather than efficiency) and of Japanese production system?
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NEW TRENDS IN PRODUCTION PROCESSES

The ultimate goal of production management is to provide high-quality goods and services
instantaneously in response to customer demand by the lowest possible cost. The whole idea of classical
production was to make a large number of a limited variety of products at very low costs. Over the years,
low cost often came at the expense of quality and flexibility. Furthermore, suppliers didn’t always deliver
when they claimed they would, so manufacturers had to carry large inventories of raw materials and
components. Such inefficiencies caused incompetence for many companies in the global market dominated
by multinationals. As a result of new global competition,
companies had to offer a wide variety of high-quality custom-
designed products at lower costs. Clearly something had The ultimate goal of production
management is to provide high-quality
to change on the production floor to make that possible.
goods and services instantaneously in
Several major developments have radically changed the
response to customer demand by the lowest
production process and production management for the possible cost.
companies in order to compete in the global market.19
Flexible Manufacturing System

The concept of flexible manufacturing system (FMS)
Flexible manufacturing system (FMS) was
was conceived in Britain in the early 1960s, and the first
introduced in response to a new demand for
physical FMS was established around 1967 in the United
more variety and for greater responsiveness
States. The flexible manufacturing system was introduced to changes in products, production
in response to a new demand for more variety and for technology, and markets.
greater responsiveness to changes in products, production
technology, and markets. The objective of an FMS is to
carry out on a single system fabrication of several types of parts that can change over time with small
conversion in time, at the required volume and quality, and with the aim of achieving productivity and
flexibility at the same time.
The FMS is based on the concept of group technology,
as it is designed to produce parts within a specific range of
styles, sizes, and processes. Thus, FMS flexibility is limited to A part family is defined as a number of parts
the production of a single part family or a limited range of with similar dimensions, geometric features, and
part families. A part family is defined as a number of parts tolerances or processing requirements or both.
with similar dimensions, geometric features, and tolerances
or processing requirements or both. By taking advantage of
these similarities between parts in design and/or manufacture to achieve economy of scope, FMS can address
changes in work orders, production schedules, part-programs, and tooling. FMS also requires a high degree
of communication and cooperation among customers and employees throughout the company.
The flexible manufacturing systems are based on the concept of flexibility which can be defined as the
capacity of a system to adjust itself in response to changing requirements without significant expense in
terms of time, effort, cost, or performance.20 The ability to process many different parts within FMS with
minimum engineering effort and change over time requires both physical and logical enablers.21 Flexible
manufacturing systems typically address mid-volume and mid-variety production. If a product is required
in high quantities with no style variations, then a dedicated mass production manufacturing system is
most appropriate. For products characterized by low volume and high variety, then job shops with versatile
machines or even manual methods would be more appropriate.22
Historically, most of the applications of FMS have been in milling and drilling operations (non-
rotational parts), and more recently in turning (rotational parts), through the employment of CNC
machining centers. Other implementations of FMS include assembly, inspection, sheet-metal processing
(punching, shearing, bending, and forming), and forging.
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FMS reduces or eliminates waste by ensuring that non-value added tasks such as load/unload, parts
clamping and fixturing and set-up, gauging, tool changes, and maintenance occur outside the processing
cycle, hence achieving higher productivity. Its automated features, monitoring and feedback adaptability
and fault recovery strategies allow un-manned utilization of second and third shifts which increases the
utilization of its expensive equipment.
Compared to conventional manufacturing systems, the benefits of FMS implementation include
increased machine utilization (as high as 90 %); fewer machines required; reduction in necessary factory
floor space; greater responsiveness to changes; reduced inventory requirements; reduced work-in-process
(WIP); lower lead times; reduced direct labor requirements and higher labor productivity; and opportunity
for un-attended production.23
Some drawbacks of FMS include: complex management of large number of products; significant
capital investment; and sophisticated technology to be managed. Since flexible manufacturing systems
are designed to fulfill the processing requirements for all members of the parts family, the “Flexibility”
required for anticipated changes is built-in a priori. Hence, FMSs are relatively costly and some of their
capabilities are often under-utilized as not all part variants are processed at the same time”.24
Lean Production System

Today’s production management environment is very different from what it was just a few years ago.
Customers demand better quality, greater speed, and lower costs. In order to succeed, companies have to
be masters of the basics of production management. To achieve this many companies are implementing a
concept called lean systems.25
Lean production is the production of goods using less
human effort, less manufacturing space, less investment in Lean production is the production
tools, and less engineering time to develop a new product. of goods using less human effort, less
A company can be accepted as making lean production manufacturing space, less investment in
by continuously increasing its capacity to produce high tools, and less engineering time to develop a
quality goods while decreasing its need for resources. Lean new product.
production is based on the premise that nothing will be
produced until it is needed. In theory, when a product is
sold, the market pulls a replacement from the last position in the system,
which is final assembly in a manufacturing environment. This triggers an
order to the factory production line, and each worker pulls another unit Lean production systems
from the position immediately upstream in the process-all the way back to incorporate advantages of
the release of the raw materials and components needed at the first work mass production and job-
station. Ideally, lean production is implemented throughout the supply shop production.
chain, with the signal moving backward from the customer all the way back
to the most basic raw materials.
Lean production systems use a highly skilled workforce and flexible equipment. In fact, they
incorporate advantages of both mass production (high volume, low unit cost) and job - shop production
(variety and flexibility). Quality is higher than in mass production. The skilled workers are more involved
in maintaining and improving the system in lean production system.
These workers can stop the production if there are any defective items
and try to work together to solve the problem or defect so that it won’t
recur. Since lean production systems operate with less inventories, 5
emphasis is placed on anticipating when problems might occur before What are the responsibilities of
they arise, and avoiding those problems through careful planning. workers in a lean production system
Workers participate in both planning and correction stages. Technical compared to traditional workers?
experts are still recruited, but more as consultants rather than substitutes
for workers.
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Just-In-Time Production System

Just-In-Time (JIT) is a Japanese management philosophy
which has been applied in practice since the early 1970s
in many Japanese manufacturing companies. It was first Just-In-Time (JIT) production is a
developed and perfected within the Toyota manufacturing Japanese management philosophy applied
plants by Taiichi Ohno as a means of meeting consumer in manufacturing which involves having the
demands with minimum delays. Just-In-Time production is right items of the right quality and quantity
a Japanese management philosophy applied in manufacturing in the right place and the right time.
which involves having the right items of the right quality and
quantity in the right place and the right time. It has been widely
reported that the proper use of JIT production has resulted in increases in quality, productivity, and efficiency,
improved communication and decreases in costs and wastes. The potential of gaining these benefits has made
many organizations question and consider this approach to manufacturing. For these reasons, JIT has become a
very popular subject currently being investigated by many worldwide organizations.26
The just-in-time concept applies primarily to repetitive manufacturing processes. It does not necessarily
require large volumes, but typically is restricted to operations that produce the same parts over and over
again. Ideally, the finished products would be uniform, but with customized products, the repetitive seg-
ments of the business may appear only at the component and subcomponent level.
Under just-in-time, the ideal size is one piece. The manufacturing process is a network of interconnected
work centers, where the perfect arrangement would be to have each worker complete his task on a part and
pass it directly to the next worker just as that person was ready for another piece. The idea is to drive all
ques toward zero in order to minimize inventory investment, shorten production lead times, react faster to
demand changes, and uncover any quality problems.
This production system makes no allowances for contingencies. Every
piece is expected to be correct when received, every machine is expected to
The name just-in-time
be available when needed to produce parts, and every delivery commitment
arose from the concept
is expected to be honored at the precise time it is scheduled. Just-in-time
of making parts from
requires heavy emphasis on quality, preventive maintenance, and mutual
upstream processes
trust among all participants in the manufacturing enterprise. The process is
only when needed by
given top priority and everyone conscientiously adheres to it.27
downstream processes.
Toyota created a system based on a simple idea: Production of the needed
quantity of required parts each day. This is a pull system, in which employees at a
given operation go to the source of the required parts, such as machining or subassembly, and withdraw the units
as they need them. Only enough new parts are manufactured or procured to replace those withdrawn.
The JIT system can produce a steady rate of output to meet the sales rate in small, consistent batch
sizes to level loads and stabilise the operating system. This causes the reduction of the inventory required
between stages of the production process.
Computer Integrated Manufacturing

Companies integrate robots, computer aided manufacturing (CAM), computer aided design (CAD),
flexible manufacturing systems, computers, and other advanced technologies to a production system called
computer integrated manaufacturing (CIM). In this system computers help workers to design products,
control machines, handle materials, and monitor and control the production function in an integrated
fashion. It doesn’t just mean that more automation and fewer people can be used in the production, but
it is a new type of automation organized around the computer. The key factor of CIM is a centralized
computer system running software that integrates and controls separate processes and functions.28
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Mass Customization
Companies integrate robots, computer Customization aims to make a unique product
aided manufacturing (CAM), computer or provide a specific service to specific individuals.
aided design (CAD), flexible manufacturing Although it once may have seemed impossible,
systems, computers, and other advanced mass customization, which means tailoring
technologies to a production system called products to meet the needs of a large number of
computer integrated manaufacturing individual customers, is now practiced widely. For
(CIM), in which computers help workers to example, The National Bicylc Industrial Company
design products, control machines, handle in Japan makes 18 Bicycle models in more than
materials, and monitor and control the 2 million combinations, with each combination
production function in an integrated fashion. designed to fulfil the needs of a specific customer. The
customer choses the model, size, color and design then
the desired product is assembled by the robots.30
Computer integrated manufacturing encompasses
the entire range of product development and
manufacturing activities with all the functions being Mass customization means tailoring
carried out by the help of dedicated software packages. products to meet the needs of a large number
The data required for various functions are passed of individual customers
from one application software to another in a seamless
manner. For example, the product data are created
during the design process. The data have to be transferred Companies prefer to produce standard
from the modeling software to manufacturing software products in high volumes by low costs. On the
without any loss of data. CIM uses a common database other hand, customers want to buy products
wherever feasible and communication technologies among a wide variety of produts but with lowest
to integrate design, manufacturing, and associated possible cost. This situation creates a big problem
business functions that combine the automated for the companies and need to be solved. While
segments of a factory or a manufacturing facility. CIM companies try to solve this problem, they want
reduces the human component of manufacturing and to have a wide variety of products by not loosing
thereby relieves the process of its slow, expensive, and the benefits of standardization. These include
error-prone component. CIM stands for a holistic increasing the resources needed to achieve design
and methodological approach to the activities of the variety; increasing variety in the production
manufacturing enterprise in order to achieve vast process, which would add to the skills necessary
improvement in its performance. to produce products, thus causing a decrease in
Manufacturing engineers are required to achieve the productivity; creating an additional inventory
objectives to be competitive in a global context: burden during and after production, by having to
carry replacement parts for the increased variety of
• Reduction in inventory
parts; and adding to the difficulty of diagnosing
• Lower the cost of the product
and repairing product failures. This can be achieved
• Reduce waste
by mass customization, a strategy of producing
• Improve quality
standardized goods or services, but incorporating
• Increase flexibility in manufacturing to
some degree of customization in the final product
achieve immediate and rapid response to
or service.31
product changes, production changes,
process changes, equipment changes, and Mass customization brings the personalization
the change of personnel.29 and flexibility of custom-made business
manufacturing together and takes it to another
level of mass production with lower unit cost.
Therefore, different mass customer groups are
targeted in mass customization rather than
targeting a single customer. Mass customization is
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utilized in numerous business types. For instance, technologies. E-manufacturing is a recent concept
in software that allow users to change or add certain developed to answer the aforementioned needs of
functionalities according to their requirement. e-business strategies and to meet the requirements
Similarly, Macbooks are available in different RAM for the complete integration of all business elements
sizes, hard disk capacities and the outer finish to including the all suppliers, customer service
provide users exactly what they are looking for. networks, and manufacturing units through the
effective use of web-enabled computational tools
and tether-free technologies. E-manufacturing
E-manufacturing includes the ability to monitor the plant floor
Manufacturing have to work hard to achieve assets and predict the variation and performance
not only high quality, productivity and low cost, loss to dynamically reschedule production and
but also the ability to react fast, responsively and maintenance operations, and synchronize related
effectively to the market, which is becoming more and consequent actions to achieve a complete
international, dynamic and customer-drive. Many integration between manufacturing systems and
companies design their products in a continent upper-level enterprise applications.33
and manufacture them in a different continent and
then sell the products at high volume in a different
continent. Such global-wide manufacturing
phenomena are getting to be more common in internet
the manufacturing industry in the late 1990s. http://citeseerx.ist.psu.edu/viewdoc/download
Maintaining design and manufacturing agility and ?doi=10.1.1.98.9021&rep=rep1&type=pdf
working on the extended product development
chain are key for these manufacturing companies
to be successful and cope with such phenomena. E-manufacturing provides a transparent,
Companies need to distribute intelligence and seamless, and automated information exchange
decision making authority as close to the points of process to enable an only handle information once
delivery, sale and even after-sale service as possible. environment improves the utılization of plant floor
In order to respond easily and fast companies must assets using a holistic approach. This approach
integrate the design and production information combines the tools of predictive maintenance
with their business partners. To survive, they techniques and delivers customer services utilizing
have to be prepared to change the definition of the latest predictive intelligence methods and
their core business if business goals and market tether-free technologies.
conditions dictate. E-manufacturing technology
is a promising enabled technology to achieve such THE SCOPE OF PRODUCTION
agility in the changing manufacturing business.32 MANAGEMENT
Nowadays, companies try to produce a wide
variety of products in order to meet customers’
E-manufacturing is a system methodolgy changing and developing needs and requirements.
that enables the manufacturing operations Moreover, high competition, technological
to successfully integrate with the functional improvements, the structure of the business, source
objectives of an enterprise through the use of capital, social developments, and industrial
of Internet, tether-free (i.e. wireless, web, relations bring pressure on companies for paying
etc.), and predictive technologies. more attention to production management.
It should be emphasized that all activities in
organizations are related to production function
E-manufacturing is a system methodolgy directly or indirectly, which indicates clearly that
that enables the manufacturing operations to problems regarding production affect the whole
successfully integrate with the functional objectives company.
of an enterprise through the use of Internet,
tether-free (i.e. wireless, web, etc.) and predictive
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The purpose of production management 3D printing technology is applied to different industries from food
is to improve the most critical dimensions industry to manufacturing bikes, from Pokemon figures to medical
of production which are quantity, time, surgery.
quality, and cost. While production
management aims to achieve these goals
at the maximum efficiency level, it
simultaneously determines many other
factors such as product types, quantity
as well as quality of products, and the
production facility. On the other hand,
the cost of production is targeted to be
minimized or profit is maximized. Besides,
issues of customer satisfaction, minimum
levels of inventory, and the effective and
efficient usage of production resources can
not be ignored.
The scope of production management ranges across the company. People working for production
management are involved in product design, process selection, selection and management of technology,
design of work systems, location planning, facilities planning and quality improvement of the company’s
goods or services. Production function includes many interrelated activities such as forecasting, capacity
planning, scheduling, managing inventories, assuring quality, motivating employees, and more.
Product Design
At the heart of all operational decisions is the product itself. The design characteristics of the product
will affect the way the production system should be designed and operated. By considering production
implications while the product is being designed, companies can make a higher-quality product at lower
cost. Therefore, many companies include staff from operations as part of the product design team.
Product design typically has strategic implications for the success and prosperity of a company.
Furthermore, it has an impact on future activities. The decisions about the product design are one of the most
fundamental decisions of a company. The main focus of product design is customer satisfaction. Hence, it is
essential for designers to understand what the customers’ expectations are and design accordingly. Marketing
is the primary source of this information. It is important to note that although profit is generally the overall
measure of design effectiveness, because the time interval between the design phase and profit realization is
often considerable, more immediate measures come into play. These measures include development time
and cost, the product or service cost, and the resulting product or service quality. Quality is among the top
priorities in the product design. At one time, having high quality was enough for a product to stand out; now
it is the norm, and those that fall below this norm are the ones that stand out.34
Product design and development generally proceeds in a series of phases: Idea generation; Feasibility
analysis; Product specifications; Process specifications: Prototype development; Design review; Market
test; Product introduction; and Follow-up evaluation.
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Capacity Planning and Process Design

Two fundamental design issues are how to produce the firm’s products and how much production
capacity to have. The design of the production process is crucial to supporting the marketing strategy of the
organization. For example, if a company wants to compete primarily through its low cost, it can produce narrow
range of products by huge volumes and standard products are produced by efficient but inflexible production
process, whereas if the company wants to produce customized products the production process is flexible but
inefficient.
The design of the production process requires decisions to be made regarding the arrangement of
individual production activities, the division of work and specialization of labor, and the choice of
equipment and technology. Besides, product design and selection of the production process are directly
related. When the companies seek to produce types of products such as paper or some chemicals, due to
the nature and structure of these products there is no need to make a selection decision for the production
process. These types of products can be produced by just one kind of production process which is flow
type process.
Desired production capacity is closely related to the production method. Some of the capacity decisions
have great strategic importance such as deciding how many products a new factory should be able to
produce per year. The capacity of the production
system defines the company’s competitive boundaries.
Specifically, it sets the company’s response rate to the
Different factors can affect location decisions
market, its cost structure, its workforce composition, its
such as proximity to customers, transportation,
level of technology, its management and staff support
source of labor, community attitude, proximity
requirements, and its general inventory strategy. The
to suppliers, proximity to raw materials,
objective of capacity planning is to specify which level
government law and regulations, taxes, and
of capacity will meet market demands in a cost efficient
culture. The nature of the company’s business will
way. Capacity planning can be long term (more than
determine which factors should dominate the
one year), intermediate term (6 to 12 months), and
location decision.
short term (less than 6 months).
Facility Location and Layout

Many production management problems have important spatial aspects. The decision on where to
locate a factory or a facility have long-term strategic importance because they determine how much it will
cost to make products and how well customers can be served. Facility location is the determination of the
best geographic location for a company’s facilities. Facility
location and layout decisions are important for two reasons:
First, they require long-term commitments in buildings Facility location is the determination of
and facilities, which means that mistakes are difficult to the best geographic location for a company’s
correct. Secondly, these decisions require sizable financial facilities.
investment and can have a large impact on operating costs
and revenues.
Decisions about the internal design of facilities range from determining the layout of a complete
manufacturing process to choosing where to display certain products in a retail store, how to arrange
different items in a warehouse, where to locate a computer lab on a university campus, or where to locate a
machine in a building. Layout planning is deciding on the best physical arrangement of all resources that
consume space within a facility. These resources can be a desk, a work center, a cabinet, a person, an entire
office, or even a department. It is an important decision because it can significantly affect the productivity
of a business.
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Aggregate Planning and Master strategies involve capacity options: they attempt to
Production Schedule alter capacity so that it matches demand. Mixed
strategies involve an element of each of these
Aggregate planning is concerned with the
approaches.36
determination of production, inventory, and work
force levels to meet fluctuating demand requirements
over a planning horizon that ranges from six
Aggregate planning is concerned with the
months to one year. Typically the planning horizon
determination of production, inventory, and
incorporates the next seasonal peak in demand. The
work force levels to meet fluctuating demand
planning horizon is often divided into periods. For
requirements over a planning horizon that
example, a one year planning horizon may be composed
ranges from six months to one year.
of six one-month periods plus two three-month periods.
Normally, the physical resources of a company are
assumed to be fixed during the planning horizon of
interest and the planning effort is oriented toward The master schedule is the heart of production
the best utilization of those resources, given the planning and control. It determines the quantities
external demand requirements.35 needed from all sources to meet the demand and
governs key decisions as well as activities throughout
Aggregate planning begins with a forecast of
the organization. The master schedule interfaces
aggregate demand for the intermediate range. This
with marketing, capacity planning, production
is followed by a general plan to meet the demand
planning, and distribution planning. A master
requirements by setting output, employment,
schedule indicates the quantity and timing for a
and finished goods inventory levels. Aggregate
product or a group of products, but it does not show
plans are updated periodically, often monthly, to
planned production. For example, a master schedule
take into account the updated forecasts and other
may call for delivery of
changes. Aggregate planners are concerned with
100 bottles of milk to
the quantity and the timing of expected demand.
be delivered on April
If total expected demand for the planning period
6. But this may not A master schedule
is much different from available capacity over
require any production; determines the quantities
that same period, the major approach of planners
there may be 300 bottles needed to meet demands
will be to obtain a balance by altering capacity,
of milk in inventory or from all sources and
demand, or both. In some periods, expected
if the inventory is 50 governs key decisions and
demand may exceed projected capacity, in others
bottles of milk, then it activities throughout the
expected demand may be less than projected
may involve production organization.
capacity. The company’s task is to achieve rough
of 50 or more bottles.
equality of demand and capacity over the entire
planning horizon. The master production schedule (MPS) indicates
the quantity and timing of planned production,
Effective aggregate planning requires appropriate
taking into account desired delivery quantity
information. First, the available resources over the
and delivery as well as on-hand inventory. Once
planning period must be known. Then, a forecast
a tentative master schedule has been developed,
of expected demand must be available. Finally,
it must be validated. Validation is referred to as
planners must consider any policies regarding
rough-cut capacity planning. It involves testing the
changes in employment levels.
feasibility of a proposed master schedule relative
Aggregate planning strategies can be described to available capacities, to assure that capacity is
as proactive, reactive, or mixed. Proactive strategies sufficient for the production.
involve demand options: they attempt to alter
demand so that it matches the capacity. Reactive
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Inventory Management and The major objectives of an MRP system are to

Materials Requirement Planning simultaneously:
The objective of inventory management has 1. Ensure the availability of materials, com-
been to keep enough inventory to meet customer ponents, and products for planned pro-
demand and also be cost effective. However, duction and for customer delivery,
inventory has not always been perceived as an 2. Maintain the lowest possible level of in-
area to control costs. Traditionally, companies ventory,
maintained “generous” inventory levels to meet 3. Plan manufacturing activities, delivery
long-term customer demand since there were fewer schedules, and purchasing activities.37
competitors and products in a generally sheltered MRP is a time phased priority-planning techni-
market environment. In the current global que that calculates material requirements and sche-
business environment, with more competitors and dules supply to meet demand across all products
highly diverse markets in which new products and and parts in one or more plants. The main theme
new product features are rapidly and continually of MRP is “getting the right materials to the right
introduced, the cost of inventory has increased due place at the right time”. MRP systems use four
in part to quicker product obsolescence. pieces of information to determine what material
should be ordered and when:
Inventory is a stock of items kept by a company
to meet internal or external customer demand. An
inventory system controls the levels of inventory
by determining how much and when to order.
Traditionally, there are two basic types of inventory An inventory system controls the levels
systems: a continuous system and a periodic system. of inventory by determining how much to
In the continuous inventory system, an order is order and when to order.
placed for the same constant amount whenever
the inventory on hand decreases to a certain level, •
whereas in a periodic system, an order is placed for the master production schedule, which
a variable amount after specific regular intervals. describes when each product is scheduled
Today, advanced inventory control systems such as to be manufactured;
materials requirement planning (MRP) and Just • bill of materials, which lists exactly the
In-Time Production (JIT) systems that have been parts or materials required to make each
integrated by production systems are frequently product;
used. • production cycle times and material needs at
each stage of the production cycle time; and,
MRP is concerned with both production
• supplier lead times.
scheduling and inventory control. It is a material
The master schedule and bill of materials indi-
control system that attempts to keep adequate
cate which materials should be ordered; the master
inventory levels to assure that required materials
schedule, production cycle times, and supplier lead
are available when needed. MRP is applicable in
times then jointly determine when orders should
situations of multiple items with complex bills of
be placed. Bill of materials gives information about
materials. MRP is not useful for job shops or for
the product structure, i.e., parts and raw material
continuous processes that are tightly linked.
units necessary to manufacture one unit of the pro-
duct of interest.
Materials requirement planning is a MRP was pioneered in the 1970’s with the
material control system that attempts to work of Orlicky. Later evolved or became part of
keep adequate inventory levels to assure integrated to Manufacturing Resource Planning
that required materials are available when systems (or MRPII). MRPII is a computer based
needed. planning and scheduling system designed to
improve management’s control of manufacturing
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and its support functions. In today’s corporate Quality management systems serve a variety of
environment MRPII is often termed as ERP purposes, such as improving processes, reducing
(Enterprise Resource Planning). MRPII represents waste, lowering costs, facilitating and identifying
a group of software programs designed to tie training opportunities, engaging staff, and setting
together disparate company functions to create organization-wide direction. Implementing a
more efficient operations in areas such as assembly quality management system affects every aspect of a
or delivery of products and services. Thus MRP company’s performance. Two overarching benefits
has evolved to become a component of an MRPII to the design and implementation of documented
system. Technically, MRPII extends MRP and links quality management systems include:
it with the company’s information resources such 1. Meeting the customers’ requirements,
as human resource information system, financial which helps to instill confidence in the
management, accounting, sales, and others.38 There company, in turn leading to more custom-
are three primary functions of an MRP system. ers, more sales, and more repeat business.
First, the system helps ensure that the appropriate 2. Second one is meeting the company’s
materials are available for production and the requirements, which ensures compliance
necessary products are available for customers to with regulations and provision of prod-
avoid shortages. Second, MRP reduces waste by ucts and services in the most cost- and
maintaining only the lowest possible materials and resource-efficient manner, creating room
product levels in stock. Lastly, an MRP system for expansion, growth and profit.39
helps plan manufacturing functions, delivery The degree to which a product or a service suc-
schedules and purchasing. When an MRP system is cessfully satisfies its intended purpose has four pri-
applied effectively, it reduces material waste while mary determinants: Design; how well it conforms
also avoiding product shortages. to the design; ease of use; and after delivery servi-
ce. Any serious attempt to deal with quality issues
must take into account the costs associated with
quality. Those costs can be classified into three ca-
6 tegories:
What are the main drawbacks • Appraisal costs relate to inspection, testing,
of the Material Requirements and other activities intended to uncover
Planning (MRP) system? defective products or services, or to assure
that there are none.
• Prevention costs relate to attempts for
Quality Management preventing defects from occuring. They
Quality management is a formalized system include costs such as planning and ad-
that documents processes, procedures, and ministration system, training, and quality
responsibilities for achieving quality policies and control procedures.
objectives. This system helps coordinate and direct a • Failure costs are incurred by defective parts
company’s activities to meet customer and regulatory or products or by faulty services. Internal
requirements and improve its effectiveness and failures are those discovered during the
efficiency on a continuous basis. ISO 9001:2015, production process; external failures are
the international standard specifying requirements for those discovered after delivery to the cus-
quality management system, is the most prominent tomer.
approach to quality management systems.
Quality management is a formalized

system that documents processes,
procedures, and responsibilities for
achieving quality policies and objectives.
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The term total quality management (TQM) refers to

a quest for quality in an organization. There are three key
Total quality management (TQM) refers
components of the TQM philosophy: One is a never-
to a quest for quality in an organization.
ending push to improve, which is referred to as continuous
improvement; the second is the participation or involvement
of relevant parties in organizational processes; and the third
is the goal of customer satisfaction which means meeting
or exceeding customer expectations. TQM expands the Key components of the TQM philosophy:
traditional view of quality- looking only at the quality of continuous improvement; participation;
the final product – to looking at the quality of every aspect customer satisfaction.
of the process that produces the product. TQM systems are
intended to prevent poor quality from occuring.
Supply Chain Management

Supply chain management (SCM) is the oversight
The concept of continuous improvement
of materials, information, and finances as they move in a
was not new, but it did not receive much
process from supplier to manufacturer, wholesaler, retailer,
interest in the World since 1980s except
and consumer. Supply chain management coordinates and
in Japan. Many Japanese companies
integrates these flows both within and among companies.
used it for many years, and it became
One argument is that the ultimate goal of any effective
a cornerstone of the Japanese approach
supply chain management system is to reduce inventory to production. The Japanese use the
(with the assumption that products are available when term kaizen to refer to continuous
needed). SCM represents an effort by suppliers to develop improvement.
and implement supply chains that are as efficient and
economical as possible.
Supply chain management main flows are the product
flow, information flow, and finances flow. The product
Supply chain management (SCM) is flow is the movement of goods from a supplier to a
the oversight of materials, information, customer, as well as any customer returns or service needs.
and finances as they move in a process The information flow involves transmitting orders and
from supplier to manufacturer, wholesaler, updating the status of delivery. The financial flow consists
retailer, and consumer. of credit terms, payment schedules, and consignment and
title ownership arrangements.
Supply chain management is the active management of
supply chain activities in order to maximize customer value
and achieve a sustainable competitive advantage. It represents Supply chain management main flows
a conscious effort by the supply chain firms to develop and are the product flow, information flow, and
run supply chains in the most effective and efficient ways finances flow.
possible. SCM is created for the purpose of improving
quality, reducing costs, and achieving competitive advantage in a world where lean manufacturing and
specialization force companies to rely on one another for valuable productive activities. All supply chain
activities, including product development, planning, sourcing, producing, delivering, and providing for
returns are handled collaboratively within an integrated supply chain to ensure the maximum use of shared
resources.
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A supply chain is the connected network of individuals, organizations, resources, activities, and
technologies involved in the manufacture and sale of a product or service. A supply chain starts with the
delivery of raw materials from a supplier to a manufacturer and ends with the delivery of the finished
product or service to the end consumer. Supply chain management oversees each touch point of a
company’s product or service, from initial creation to final sale. With so many places along the supply
chain that can add value through efficiencies or lose value through increased expenses, proper supply chain
management can increase revenues, decrease costs, and impact a company’s bottom line. Understanding the
importance of SCM to its business, Walgreens Boots Alliance Inc. has placed focused effort on transforming its
supply chain in 2016. The company operates the second largest pharmaceutical chain in the United States and
needs to efficiently manage and revise its supply chain so it stays ahead of the changing trends and continues to
add value to its bottom line.40
Supply chain strategies are the critical backbone to the companies
today. Effective market coverage, availability of products at locations that Logistics typically refers to
hold the key to revenue recognition depends upon the effectiveness of activities that occur within
supply chain strategy rolled out. Very simply stated, when a product is the boundaries of a single
introduced in the market and advertised, the entire market in the country company and supply
and all the sales counters need to have the product where the customer can chains refer to networks
make the purchase and take the delivery. Any glitch in the product not of companies that work
being available at the right time can result in drop in the customer interest together and coordinate
and demand which can be disastrous. Transportation network design and their actions to deliver a
management assume importance to support sales and marketing strategy.41 product in the market.
MANAGING INFORMATION
Automated information processing has entered our lives at the end of the nineteenth century. In 1890, statis-
tician Herman Hollerith designed the Punch Card tabulating System to record that year’s U.S. census. The 1880
census was done by hand and took seven years to tabulate. However, Hollerith was able to complete the 1890
census in 12 weeks with a saving of 5 million USD for the US Census Bureau.42
By the 1960s, with the advent of affordable information technology, information systems had undergone
material changes. Information systems have continued to evolve by developing technology. Moreover,
management of information systems and technology have also evolved. Today’s information systems allow
greater use of information throughout the company, but they generate new challenges in organizing,
analyzing, and protecting information. Today information systems and information technology affect all
companies. The need for managing information flows among businesses and their employees, businesses and
their suppliers, businesses and their customers, and so on is very important. Since businesses are changing
continuously, old fashioned companies that try to compete with the companies that have the latest technology
will be unsuccessful. Time and place have always been at the center of business. Customers long had to go
to the business during certain hours to satisfy their needs. Customers went to the store for shopping or went
to the bank to arrange for a loan. Today, information technology allows businesses to deliver goods and
services whenever and wherever it is convenient for the customer. Thus, customers can order clothes online,
arrange a home mortgage loan by phone or computer, or buy
a computer on the Internet at any time they choose.43 Knowledge is information charged with
In the mid-1990s, the information technology enough intelligence to make it relevant and
concept started to move away and knowledge technology useful.
emerged. Knowledge is information charged with enough
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intelligence to make it relevant and useful. Knowledge

technology (KT) adds a layer of intelligence to filter
Knowledge technology (KT) adds a
appropriate information and deliver it when it is needed.
layer of intelligence to filter appropriate
KT changes the traditional flow of information; instead of
information and deliver it when it is needed.
an individual going to the database, the database comes to
the individual. This technology “thinks” about the facts
according to an individual’s needs, reducing the time that a person must
spend finding and getting information. As KT became more sophisticated
in the mid-2000s it became better known as business intelligence (BI).
Business intelligence BI refers to a variety of software applications that analyze an organization’s
(BI) activities include data
raw data and take out useful insights from it. Companies using business
mining, online analytical
intelligence can focus on the decisions as how to react to problems and
process, querying and
opportunities. BI provides companies to have seamless information flow
reporting.
and therefore the right information goes to the right person at the right
time.
The business that build flexible information infrastructure will have a significant competitive advantage.
Constant changes in technology interact with each other to create more change. For business success,
flexibility must be maintained to integrate these changes. There are many historical stories about mighty
companies that couldn’t keep up with the challenges of change in the markets. Knowledge sharing is
crucial for keeping pace with change.
Today, managers are exposed to information from inside and outside of the company. Too much and
unnecessary information can confuse issues rather than clarify them. How can managers keep from getting
buried in the infoglut? Stepping back to gain perspective is key to managing the flood of information.
The most important step toward gaining perspective is to identify a few number of key goals one wishes
to attain. Eliminating the information that is not relevant to the top priorities can reduce the amount of
information flow. As the goals are refined, the huge stack of paper gradually dropped to a manageable size.
Obviously, not all the information that is coming to the manager will be useful.
The effectiveness of management information
depends on four characteristics:
The effectiveness of management
1. Quality: The information must be accurate and information depends on four
reliable. If not, the solution of the problems will characteristics: Quality, Completeness,
generate new problems. Timeliness, and Relevance.
2. Completeness: The information must be enough
to allow the decision maker to make the right decision but not so much as to confuse the issue.
Today, having excessive information rather than too little is a significant problem for business
managers.
3. Timeliness: Managers can reach the information rapidly and on time. E-mail, instant messaging,
and other social media tools make it possible for companies to hear about a problem immediately.
4. Relevance: Every decision maker needs a different variety of information. However, the problem
is to have too much data by information systems. Decision makers must be careful about the
questions they ask to get the answers they need.
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Data and Information

Often, the words information and data are used interchangeably. Yet they
are not the same thing. Data are fundamental to business intelligence. The Data are raw and
simple way to understand the difference between data and information is unorganized facts whereas
to understand the primary function of the item that is looked at, then the information is the
distinction between the two can become clear. For example, while computers processed data that has a
need data, humans need information and data are the building blocks. However, meaningful context.
information gives meaning and context.
In essence, data refer to raw facts such as the number of items ordered or the number of machines
used for the production. Data have not been shaped, processed, or interpreted. They are series of ones and
zeros that humans would not be able to read. Data are disorganised and unfriendly. Once data have been
processed and turned into information, they become palatable to human readers. They take on context
and structure. Data become useful for businesses to make decisions and form the basis of progress.44
Data are the raw material that is to be processed for information or for collection of details. It is
unorganized data or facts that are to be processed. Data are plain facts and have to be processed for further
information, also have no meaning if not interpreted. Data
alone are not enough to get details and find the meaning
The term information refers to data that
of something. On the other hand, the term information
have been gathered and converted into a
refers to data that have been gathered and converted into
meaningful context.
a meaningful context. Information is processed data. The
data that can be made useful is known as information.
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Information is basically the data plus the meaning of what the data was collected for. Information cannot
be generated without the help of data since information depends upon data. Information is something that
is being conveyed and it is meaningful when data are gathered and meaning is generated. Information is
processed and turns into a meaningful form.
Databases, Data Warehousing, and Data Mining

Databases are the heart of information systems. Databases are programs that assign multiple characteristics
to data and allow users to sort the data by characteristic. A database is a systematic collection of data that
supports storage, update, and manipulation of data. Databases
can be relatively small and specialized, such as those used for
cost accounting and sales records. These databases are not A database is a systematic collection of
shared among a company’s management. The database users data that supports storage, update and
typically create reports from the computers for management manipulation of data.
purposes. These reports are designed for customization to
The database management system
contain only the data that management needs for decision
(DBMS) provides users and programmers
making. The information is confidential in this type of
with a systematic way to create, retrieve,
databases and the access to them is usually restricted. The
update, and manage data.
database management system (DBMS) is a software for
creating and managing databases. The DBMS provides users
and programmers with a systematic way to create, retrieve, update, and manage data. A DBMS makes it
possible for end users to create, read, update and delete data in a database. The DBMS essentially serves as
an interface between the database and end users or application programs ensuring that data is consistently
organized and remains easily accessible.
A data warehouse is constructed by integrating data
from heterogeneous sources that support analytical reporting,
A data warehouse is a single, complete
structured and/or ad hoc queries, and decision making. It is a
and consistent store of data obtained from
single, complete, and consistent store of data obtained from
different sources made available to end users
different sources made available to end users in what they can
in what they can understand and use in a
understand and use in a business context. Data warehousing
business context.
involves different functions such as data cleaning, data
integration, and data consolidations. Data warehouses are
huge databases that contain almost all of the information about a company’s operations. Companies that
have many facilities all over the world or country use these warehouses in order to keep all the operating
information and use it according to their needs. Multiple users control access to both retrieving and entering
data in data warehouses. Both customers and suppliers can access data warehouses with some restrictions.
7
What are the functions of data
warehouse tools?
The amount of data contained in data warehouses is overwhelming. The purpose of data mining is to
find the useful data. Data mining is the process of determining the relevant factors in the accumulated
data to extract the data that is important to the user. An automaker might use data-mining software to
find patterns among car buyers, such as which buyers of which models, which incentive and then tailor
its marketing and production decisions accordingly.45
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INFORMATION TECHNOLOGY
Data mining is the process of analyzing There are as many ways to use information
data from different perspectives and technology (IT) in business as there are business
summarizing it into useful information. activities to be performed, business problems to be
solved, and business opportunities to be pursued.
Technology has improved operations management
such as productivity, efficiency, and customer
Data mining is searching for hidden patterns responsiveness. A company’s information technology
in a data warehouse. Data mining is the process may incorporate its operations’ technology.
of analyzing data from different perspectives and Information technology includes hardware,
summarizing it into useful information. The computer networks, and software. A company’s
software discovers previously unknown relationships information technology provides the foundation
among the data. Data mining software is one of the for serving customers, working with vendors, and
analytical tools for analyzing data and allows users managing internal company business processes.
to analyze data from many different dimensions,
categorize it, and summarize the relationships
identified. Technically, data mining is the process Information technology includes hardware,
of finding correlations or patterns among dozens computer networks, and software.
of fields in large relational databases. The success of
data mining depends on a number of factors. The
most important factor is access to data to mine in the The capability to reach and respond on-
first place. Most of the companies have a multitude demand became technically possible thanks to the
of data storage systems that run on incompatible integration of broadband telecommunications,
platforms. The divergent systems must be integrated the Internet, digital communications, high
in some way before the data can be connected. This performance mobile devices, and the digitization
integration helps companies to understand what is of all media content. Integration of information
meant by all this data. technology forms the critical infrastructure,
Data mining today is primarily used by and that infrastructure enables the next wave
companies with a strong consumer focus - of IT developments and breakthroughs. New
retail, financial communication, and marketing IT capabilities such as e-commerce and social
organizations. It enables these companies to networks, strongly influence competitive
determine relationships among “internal” factors strategies and the efficiency of operations. New
such as price, product positioning, or staff skills, developments in information technology are
and “external” factors such as economic indicators, important to all business disciplines because
competition, and customer demographics. And, they trigger changes in marketing, operations,
it enables them to determine the impact on sales, e-commerce, logistics, human resources, finance,
customer satisfaction, and corporate profits. Finally, accounting, and relationships with customers
it enables them to “drill down” into summary and business partners. Nothing about business or
information to view detailed transactional data. corporate strategy is untouched by IT.47
With data mining, a retailer could use point-of-
sale records of customer purchases to send targeted
promotions based on an individual’s purchase Developments in information technology
history. By mining demographic data from trigger changes in marketing, operations,
comment or warranty cards, the retailer could e-commerce, logistics, human resources,
develop products and promotions to appeal to finance, accounting, and relationships with
specific customer segments.46 customers and business partners.
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Hardware
Computer-based information technology began with the advent of mainframe computers in the 1950s.
These machines allowed industry to automate information storage and retrieval for the first time. By 1964
individual workstations were linked to a company’s mainframe so individuals could share information
stored on the mainframe. The development of floppy disks in 1971 allowed users to share information easily
with each other.48 Microcomputer technology was available as early as the 1970s, and the introduction
of the first IBM Personal Computer (PC) in 1981 was the beginning of desktop computing. Soon these
computers were being linked together within a company as a local-area network (LAN) so that users could
share information among themselves without using mainframe.
Today, desktop and portable computers produced by manufacturers around the world have become
commodity products with processing power that is more than a company’s entire computing center of the
1960s. As information became more easily shared, the computers became more powerful. The typical computer
for individuals to use today has graphical icons, point-and-click and/or touch screen navigation, and preloaded
software to access the Internet at a cheap price. Due to their portability, wireless capabilities, and light weight,
laptop, and notebook computers are used instead of large desktop computers in the offices. They can be carried
anywhere with you for business meetings or trip and used at home to remotely connect to office systems. Smaller
handheld devices have also continued to improve in functionality and have become indispensable tools to access
e-mail and other applications inside and outside of the office, or on the factory floor. Companies produce
smartphones with touch screen navigation and scrolling, and simplified calling from an address book, e-mail
and text messaging, visual voice mail, video playing, and Web browsing via Wi-Fi connectivity.49
Network technology converts data to on and off signals, in contrast to analog technology which sends
signals in virtually infinite increments. Servers store information for users linked to them which allowed
the development of data warehouses. Computers connect outside a LAN by Internet using telephone lines.
Computers no longer need a physical connection to a network. Users can access and provide information
by wireless networking as cellular and digital telephones do. A signal is sent to a satellite or central location
and then bounced to its destination.
Software
Computer software provides the instructions that enable Computer software provides the
users to tell the computer what to do. When people look for a instructions that enable users to tell the
computer to buy, they first think of the equipment. However computer what to do.
finding the right software is more important than the right
hardware. While some programs are easier to use, some are
very complicated. Business persons first have to decide on the functions and
performance of the computer then choose the right software. Although most
software is sold commercially through suppliers like retail stores, some software, ERP combined with the
called shareware, are distributed to potential customers free of charge. If the Internet is the basis of
companies’ e-business.
program meets their needs and they decide to use it, they are asked to send a Large manufacturing
specified fee to the developer. Public domain software (freeware) is software that companies are the original
is free for the taking. But their quality is consistent. Operating system software target market for ERP. The
tells the computer hardware how to run. Today, Microsoft Corporation’s main suppliers of ERP
Windows software becomes the standard operating system for the vast majority software and support are
of microcomputers used as desktops and portable computers. Baan, PeopleSoft, and SAP.
Business people generally use software for writing,
manipulating numbers, filling and retrieving data, presenting
information visually, communicating, and accounting. Today, Enterprise resource planning (ERP) software,
many large and midsized companies have made capital which is a form of integrated software,
investments in the enterprise systems. Enterprise resource combines all of a company’s computerized
planning (ERP) software, which is a form of integrated functions into a single, integrated software
software, combines all of a company’s computerized functions program that runs off a single database.
into a single, integrated software program that runs off a
single database, allowing various departments to easily share
information and communicate with each other.
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Computer Networks
One of the most important changes in business technology is to change mainframe computers by
network systems that allow many users to access information at the same time. Before the use of these
systems, mainframe computers were serving as the center
of information processing. The mainframe performed
The network computing system (client/ all the tasks and sent the results to a “dumb” terminal
server computing) allows personal that could not perform those tasks itself. The network
computers (clients) to obtain needed computing system (client/server computing) allows
information from huge databases in a personal computers (clients) to obtain needed information
central computer (the server). from huge databases in a central computer (the server).
Networks connect people to people and people to data.50
The main benefits of network computing systems are saving time and money, providing easy links
across functional boundaries, and allowing employees to see complete information.
As mentioned earlier, a LAN is a type of computer
network. Other types of networks used by firms include the
Internet, intranets, and extranets. The Internet is a network The Internet is a network of networks,
of networks, connecting hundreds of thousands of corporate, connecting hundreds of thousands of
educational, and research computer networks around the corporate, educational, and research
51
world. Open systems with unrestircted connectivity, computer networks around the world.
using internet networking technologies as their technology
platform, are today’s primary telecommunications technology drivers. Web browser suites, HTML Web
page editors, Internet and intranet servers and network management software, TCP/IP Internet networking
products, and network security firewalls are just a few examples. These technologies are being applied in
Internet, intranet, and extranet applications, especially those for electronic commerce and collaboration.52
Information sharing is revolutionized by easily accessible Internet and the World Wide Web (WWW).
Internet gives the opportunity of real time text, voice, graphics and video sharing among everybody with
access to the Internet. Today, the Internet allows many-to-many communication through such things as file
sharing, Web logs (blogs), and social networking services that connect many people to each other at once.
Internal network, referred to as intranets, is a
companywide network, closed to public access, that
Intranet is a companywide network, closed uses the infrastructure and standards of the Internet and
to public access, that uses the infrastructure the Web. It may consist of many interlinked local area
and standards of the Internet and the Web. networks and also use leased lines in the wide area network.
Typically, an intranet includes connections through one
or more gateway computers to the outside Internet. The main purpose of an intranet is to share company
information and computing resources among employees. Employees in the company can communicate
to each other and access company information by intranet. Access to intranets typically is limited to
company’s employees and acccess to restricted data can further be limited to certain employees. Intranet
gives the opportunity of working remotely by connecting to the company.
An extranet is a private network that uses Internet
technology and the public telecommunication system An extranet is a private network that
to securely share part of a business’s information or uses Internet technology and the public
operations with suppliers, vendors, partners, customers, telecommunication system to securely
or other businesses. An extranet can be viewed as part of share part of a business’s information or
a company’s intranet that is extended to users outside the operations with suppliers, vendors, partners,
company. Some extranets can not be accessed by the general customers, or other businesses.
public. An extranet requires security and privacy. These can
include firewall server management, the issuance and use of digital certificates or similar means of user
authentication, encryption of messages, and the use of virtual private networks that tunnel through the
public network. Companies can use an extranet to exchange large volumes of data using Electronic Data
Interchange (EDI), collaborate with other companies on joint development efforts, jointly develop and
use training programs with other companies, access services provided by one company to a group of other
companies, and share news of common interest exclusively with partner companies.53
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INFORMATION SYSTEMS
Information systems manipulate data into usable
information by combining computers, data mining tools, Information system (IS) is any organized
and human resources. Information system (IS) is any combination of people, hardware, software,
organized combination of people, hardware, software, communications networks, data resources,
communications networks, data resources, and policies and policies and procedures that stores,
and procedures that stores, retrieves, transforms, and retrieves, transforms, and disseminates
disseminates information in an organization. People rely information in an organization.
on modern information systems to communicate with one
another using a variety of physical devices (hardware), information processing instructions and procedures
(software), communications channels (networks), and stored data (data resources).54
Informations systems can be classified into two categories based on the general type of support
they provide: Managerial support and operational support. Figure 6.5 represents this classification as
management support systems and operations support systems.55 Information systems are categorized this
way to spotlight the major roles each plays in the operations and management of a business.
Management Support Systems are divided into two as
follows: Management Information Systems and Decision
Support Systems. Similarly Operations Support Systems Management Support Systems are
are classified as follows: Process Control Systems and classified as Management Information
Transaction Processing Systems. Systems and Decision Support Systems.
Information systems designed to support business processes
and operations may also be providing data to, or accepting Operations Support Systems are classified
data from, systems focused on business decision making as Process Control Systems and Transaction
or achieving competitive advantage. Today’s companies are Processing Systems.
constantly striving to achieve integration of their systems to
allow information to flow freely through them, which adds
even greater flexibility and business support than any of the individual system roles could provide.
Figure 6.5 Classification of Information Systems
Information Systems
Management Support Operations Support

Systems Systems
Management Transaction Processing

Information Systems Systems
Decision Support Process Control

Systems Systems
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6
Operations Support Systems Management information system is a specific

Companies use operations support systems to category of information systems serving the middle
maintain records and otherwise support operations level managers. MIS provide middle managers with
and decisions at a nonstrategic level. Operations reports on the company’s current performance.
support systems produce a variety of information This information is used to monitor and control
products for internal and external use; however, the business and predict future performance.
they do not emphasize the specific information Decision support systems support nonroutine
products that can best be used by managers. decision making for middle management. They
Further processing by management information focus on problems that are unique and rapidly
systems is usually required. The role of a company’s changing, for which the procedure for arriving at
operations support systems is to process business a solution may not be fully predefined in advance.
transactions, control industrial processes, support DSS use internal and external information together
enterprise communications and collaborations, to answer the questions for decision making.57
and update corporate databases.56 In this part, a brief explanation about the
operations support systems including transaction
processing system, process control system,
Operations support systems process and management support systems including
business transactions, control industrial management information systems and decision
processes, support enterprise communications support systems are given. However, management
and collaborations, and update corporate information systems and decision support systems
databases. are explained elaborately in the following heading
through the purpose of this chapter.
Transaction processing systems are important

examples of operations support systems that
record and process the data resulting from business Most successful management
transactions. Sales and inventory processing and support systems are one aspect
accounting systems are some examples for the of a distributed, enterprise
application of these systems. information system that enables
Process control systems are used to monitor flexible and integrated information
and control physical processes. For example, a sharing and communication
process control system, such as electronic sensors linked with both internal and external
to computers, can warn an operator to make instant stakeholders.
adjustments about the overheating of a machine.
Management Support Systems

When information system applications provide internet
information and support effective decision
http://study.com/academy/lesson/what-are-
making for the decision makers, they are called
information-systems-definition-types-quiz.html
management support systems. It is a very complex
and difficult task for all decision makers and
business professionals to provide information
and support decision making. The information
provided by these systems is based on both the
internal and external data using various data analysis 8
tools. Conceptually, a wide variety of information What are the most important
systems support many different decision making roles of an information system
responsibilities: management information systems for a business enterprise?
(MIS) and decision support systems (DSS).
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6
INFORMATION SYSTEMS FOR The main purpose of the MIS is to give managers
DECISION MAKING feedback about their own performance; top
management can monitor the company as a whole.
Using information systems to support business
Information displayed by the MIS typically shows
decision making has been one of the primary thrusts
“actual” data over against “planned” results and results
of the business use of information technology. The fast
from a year before; thus it measures progress against
pace of new information technologies made decision
goals. The MIS receives data from company units and
support available from lower levels of management
functions. Some of the data are collected automatically
to upper level of management. So much data clog
from computer-linked check-out counters; others are
the Internet and other sources that the challenge for
keyed in at periodic intervals. Routine reports are
businesses has shifted from acquiring data to sorting
preprogrammed and run at intervals or on demand
through it to find the most useful elements, which
while others are obtained using built-in query
can then be turned into valuable information. New
languages; display functions built into the system
type of information systems are being developed
are used by managers to check on status at desk-side
for decision making ranging from general tools to
computers connected to the MIS by networks. Many
specialized systems. Some of the most popular and
sophisticated systems also monitor and display the
common ones are described below.
performance of the company’s stock.60
Advances in the applications of MIS and
Management Information Systems technology continue to have deep effects on companies
The functional areas such as accounting, finance, and managers. Modern computer-based information
marketing, production and human resources are systems have become central components of many
supported by information systems designed for their companies’ structures in order to gain competitive
particular reporting needs. General purpose reporting advantage. Since MIS provides high quality, timely,
systems are referred to as management information relevant, and relatively complete information to the
systems. Their objective is to provide reports to managers, the need for tall management hierarchies
managers for tracking operations, monitoring, has been reduced. Horizontal information flows are
and control. These systems provide reports about now have become more important. The direct flow
operational efficiency, effectiveness and productivity of information from one department to another can
by extracting information from databases and be obtained by few layers of staff. Besides, advanced
processing it according to the needs of the user.58 information systems can also lower the employee
number needed to perform the companywide
activities. Effective
Management information system (MIS) use of management
broadly refers to a computer-based system information systems
that provides managers with the tools to improve the decision- Effective use of
organize, evaluate, and efficiently manage making and can cause management information
departments within an organization. the company to be systems improve
the decision-making
more competitive and customer service
Management information system (MIS) in the market. processes which enebles
broadly refers to a computer-based system that Managers can find the company to be more
provides managers with the tools to organize, ways to improve competitive in the market.
evaluate, and efficiently manage departments customer service
within an organization. In order to provide past, and companies can be more customer oriented by
present, and prediction information, a management using management information systems. Therefore,
information system includes software that helps in managers can identify markets that previously had
decision making; data resources such as databases; been perceived as unapproachable. The company’s
the hardware resources of a system; decision support information technology can also enable the company
systems; application of human resources and projects to enter into joint ventures, partnerships, and
management; and any computerized processes that strategic alliances; use new distribution channels; and
enable the department to run efficiently.59 sell products globally.
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Before the implementation of MIS, managers Configuration of a DSS range from relatively
need to consider the company’s ultimate goals simple applications that support a single user
and what types of information managers need to to complex enterprise-wide systems. A DSS can
measure to determine how well they are moving support the analysis and solution of a specific
toward achieving those goals. They also investigate problem, evaluate a strategic opportunity, or
what sources of information might be available to support ongoing operations. These systems support
measure and improve the company’s efficiency, unstructured and semistructured decisions, such as
quality, innovation, and responsiveness to customers whether to make or buy products and what type
expectations. The company’s current MIS needs to of new products to develop and introduce into the
be evaluated to determine how accurate, reliable, existing markets.63
timely, and relevant the information it provides The characteristics of decision support systems are:
is, as well as how the current system compares
1. An easy-to-use interactive interface,
to the company’s competitors and others in the
2. Models that enable sensitivity analysis,
industry. During the implementation of MIS,
what-if analysis, goal seeking, and risk
consistent technological standards must be used
analysis,
that will allow the system to be used by different
3. Data from both internal databases and
types of computer operating systems. In order to
external sources added to by the decision
lessen resistance to the new MIS, user-friendly and
maker, who may have insights relevant to
accessible technology usage is very important.61
the decision situation.
Decision Support Systems

A decision support system (DSS) is a highly Some of the most important
flexible and interactive information technology benefits of the DSS are to
system that is designed to support decision making improve the efficiency and
when the problem is not structured. DSS is an speed of decision-making
information system that quickly provides relevant activities, increase the control,
data to help decision makers making decisions and competitiveness and capability of
choosing courses of action. Information technology futuristic decision-making of the
brings speed, vast amount of information, and organization, facilitate interpersonal
sophisticated processing capabilities to help create communication, encourage
information useful in making a decision. The learning or training, and help
automate managerial processes.
decision maker brings know-how in the form of
his/her experience, intuition, judgement, and
knowledge of the relevant factors. Information
technology is an efficient instrument, but the
decision maker must ask the proper questions to DSS rely on both model bases and data bases
obtain the information for and must know how as vital system resources. A DSS model base is
to process the information to get the questions a software component that consists of models
answered. In fact, the primary objective of a DSS is used in computational and analytical routines
to improve the effectiveness of a decision maker by that mathematically express relationships among
providing assistance that will complement decision variables. For example, a spreadsheet program
maker’s insights.62 might contain models that express simple accounting
relationships among variables, such as Revenue 3
Expenses 6 Profit. Besides, DSS can combine model
components to create integrated models that support
A decision support system (DSS) is an
specific types of decisions. The system typically contains
information system that quickly provides
built-in analytical modelling routines and also enables
relevant data to help decision maker make
the decision maker to build his/her own models.
decisions and choose courses of action.
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Executive Information Systems

Although the trend is increasingly toward employee
empowerment and decision making at all levels of a company,
sometimes companies need to create specialized information An executive information system (EIS)
systems to address the needs of executives. An executive is a decision support system used to help
information system (EIS) is a decision support system used senior executives in decision-making
to help senior executives in decision-making processes in the processes in the company.
company. The decision-making process is done by providing
easy access to important data needed to achieve strategic goals in
an organization. An EIS normally features graphical displays on an easy-to-use interface. These systems can be used
in various types of companies to monitor enterprise performance as well as to identify opportunities and problems.
Top managers can access the company’s primary databases by touching the computer screen, pointing
with a mouse, or even speaking via voice recognition. The typical EIS lets users select among various data,
such as the company’s income statement and sales figures as well as stock market trends for the company
and for the industry as a whole. In an EIS, information is presented in forms tailored to the preferences
of the executives using the system. For example, majority of the executive information systems emphasizes
the use of a graphical user interface and graphic displays that can be customized to the information preferences
of executives using the EIS. Other information presentation methods used by an EIS include exception
reporting and trend analysis.
EIS depends on two factors: Internal factors such as need for timely information, improved
communications, access to the operational data, rapid status updates on various business activities, and
access to the corporate database. External factors such as increasing and intensifying global competition,
rapidly changing business environment, accessing external databases, and various government regulations.
Some of the important characteristics of EIS: Flexible and easily used; provides timely information with
short response time and also with quick retrieval: produces correct and relevant information; contains user
friendly interfaces consisting of the graphic user; accessed from different locations; customized to a large
extent; and support over vision, mission and the strategy; and strategic management.
Expert Systems
An expert system is a software that uses artificial
intelligence (AI) technologies to simulate the judgment
and behavior of a human or an organization that has expert An expert system is a software that uses
knowledge and experience in a particular field. AI’s scientific artificial intelligence technologies to simulate
goal is to understand intelligence by building computer the judgment and behavior of a human or an
programs that exhibit intelligent behavior. It is concerned
organization that has expert knowledge and
with the concepts and methods of symbolic inference, or
experience in a particular field.
reasoning, by a computer, and how the knowledge used
to make those inferences will be represented inside the
machine. Typically, an expert system incorporates a knowledge base containing accumulated experience
and an inference or rules engine -- a set of rules for applying the knowledge base to each particular
situation that is described to the program. The system’s capabilities can be enhanced by additions to the
knowledge base or to the set of rules. Current systems may include machine learning capabilities that allow
them to improve their performance based on experience, just as humans do.64
Expert systems imitate human thinking through complicated
sets of “if…then” rules. The system applies human knowledge in a
specific subject area to solve the problem. Expert systems are used for
different types of business purposes. That is, credit limits for credit 9
applicants can be determined, potential problems or breakdowns can How does Management
be monitored and predicted in a manufacturing facility, and mortgage Information System (MIS) serve
loans can be made. These systems are typically developed by capturing the managers for decision making?
the knowledge of recognized experts in a field whether within a business
itself or outside of it..
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Further Reading
The Great Decoupling: An Interview with Erik In this interview with HBR editor Amy
Brynjolfsson and Andrew McAfee Bernstein and editor at large Anand Raman,
This HBR article covers an interview Brynjolfsson and McAfee explain that while
with Erik Brynjolfsson and Andrew McAfee, digital technologies will help economies grow
faculty members at the MIT Sloan School faster, not everyone will benefit equally—as the
of Management, who have been working on latest data already shows. Compared with the
digitization aspect of the modern business Industrial Revolution, digital technologies are
environment. more likely to create winner-takeallmarkets.
Brynjolfsson and McAfee also believe that despite
“Machines, it seems, can do almost anything the rapid pace of technological development,
human beings can. Now cars are even starting business dynamism has dipped, and they worry
to drive themselves. What does that mean for that the policy response has been inadequate.
business and employment? Will any jobs be left They conclude that though no one knows what
for people? Will machines take over not just low- the future holds, the time to start tackling the
skilled tasks but high-skilled ones too? If a man and economic downside of new technologies is now”.
a machine work side by side, which one will make
the decisions? These are some of the questions Source: Bernstein, A. & Raman, A. (June 2015).
facing companies, industries, and economies as The great decoupling: An interview with Erik
digital technologies transform business... Brynjolfsson and Andrew McAfee. Harvard
Business Review. Retrieved from
https://hbr.org/2015/06/the-great-decoupling
In Practice
Productivity Gains at Whirlpool The company overhauled the manufacturing

Workers and management at Whirlpool process, and taught its workers how to improve
Appliance’s Benton Harbor plant in Michigan quality. As quality improved, productivity went up
have set an example of how to achieve productivity because more of the output was good, and costs
gains, which has benefited not only the company went down because of fewer defective parts that had
and its stockholders, but Whirlpool customers, to be scrapped or reworked. Costs of inventory also
and the workers themselves. decreased, because fewer spare parts were needed to
replace defective output, both at the factory and for
Things weren’t always rosy at the plant. warranty repairs. And workers were able to see the
Productivity and quality weren’t good. Neither connection between their efforts to improve quality
were lobor-management relations. Workers hid and productivity, and their pay.
defective parts so management wouldn’t find them,
and when a machine broke down, workers would Not only was Whirlpool able to use the
simply sit down until sooner or later someone productivity gains to increase workers’ pay, it was
came to fix it. All that changed in the late 1980s. also able to hold the lid on price increases and to
Faced with the possibility that the plant would funnel some of the savings into research, which
be shut down, management and lobor worked added to cost savings and quality improvement.
together to find a way to keep the plant open. Source: Stevenson, W. (2005). Operations
The way was to increase productivity-producing Management (8th ed.). McGraw-Hill.
more without using more resources. Interestingly, Discuss:
the improvement in the productivity didn’t come
by spending money on fancy machines. Rather, 1. What were the two key aspects that
it was accomplished by placing more emphasis Whirlpool management did to achieve
on quality. That was a shift from the old way, productivity gains?
which emphasized volume, often at the expense of 2. Who has benefited from productivity gains?
quality. To motivate workers, the company agreed 3. How are productivity and quality related?
to gain sharing, a plan that rewarded workers by 4. How can a company afford to pay its
increasing their pay for productivity increases. workers for productivity gains?
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Defining the concept of production, production

LO 1 system, and production management
Briefly, production is defined as transformation of tangible and

intangible inputs into goods or services. In other words, production
is the transformasion or conversion of a set of inputs, such as raw
materials, labor, knowledge, into one or more outputs such as
tables, cars, banking services. Most organizations, including not-
for-profit organizations, can be described as production systems.
These organizations transform or convert a set of inputs into
one or more outputs. The main purpose of production systems is
Summary
to produce goods and/or services. Production management refers

to the application of management principles to the production
function in a factory. In other words, production management
involves application of planning, organizing, directing and
controlling the production process.
LO 2 Explaining the types of production processes
The processes are classified according to their physical

configuration, material and product flow, flexibility and volume
expectations. The four categories of processes are: Flow processes,
Job-shop processes, Cellular processes and Project processes.
Flow process is when the product is built up through many
separated stages; the product is built upon at each stage and then
passed directly to the next stage where it is built upon again.
Job-shop processes are characterized by manufacturing of one
or few quantity of products produced according to the needs
and requirements of customers. Cellular manufacturing is a
manufacturing process that produces families of parts within a
single line or cell of machines operated by operators who work
only within the line or cell. Project processes are characterised by
high degree of job customisation, the large scope for each project
and need for substantial resources to complete the project.
Identifying historical evolution of production

LO 3 management
Contemporary production management has its roots in the

Industrial Revolution that occurred during the late eighteenth and
early nineteenth centuries in England. Until that time, goods had been
produced in small shops by artisans and their apprentices without
the aid of mechanical equipment. In the early 1900s Frederick W.
Taylor approached the management of work as a science. Based on
observation, measurement, and analysis, he identified the best method
for performing each job. From the Industrial Revolution through the
1960s, the United States was the world’ greatest producer of goods
and services, as well as the major source of managerial and technical
expertise. However, in the 1970s and 1980s the U.S. manufacturing
superiority was challenged by lower costs and higher quality from
foreign manufacturers led by Japan. The Japanese manufacturers
started to dominate many industries. In 1990s by the emergence of
Internet, the way of making business and the production systems were
affected deeply. Production management has changed dramatically
over the years. More and more activities are taking place outside the
enterprise in factories, distribution centers, offices and storesoverseas,
therefore companies need to develop skills in coordinating operations
across a global supply chain.
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LO 4 Describing the new trends in production processes
As a result of new global competition, companies have had to make

a wide variety of high-quality custom-designed products at very
low cost. Clearly something had to change on the production
floor to make that possible. Several major developments have
radically changed the production process and production
management for the companies in order to compete in the global
market. Some of the most important examples for new trends in
Summary
production processes are flexible production system, just in time
production system, lean production system, computer integrated
manufacturing, mass customization and e-manufacturing.
LO 5 Explaining the scope of production management
The purpose of production management is to improve the most

important production factors which are quantity, time, quality and
cost. While production management tries to achieve these goals it
simultaneously determines many other factors such as the product
types, quantity of these products, quality of them and the production
facility. The scope of production management ranges across the
organization. People working in the production management are
involved in product design, capacity planning and process design,
selection and management of technology, design of work systems,
facility location and layout, aggregate planning and master production
schedule, inventory management and materials requirement planning,
quality management, supply chain management.
LO 6 Describing managing information
Today, a lot of information is coming to managers from inside and

outside of the company. Too much information can confuse issues
rather than clarify them. How can managers keep from getting
buried in the infoglut? Stepping back to gain perspective is the key to
managing the flood of information. The most important step toward
gaining perspective is to identify a few number of key goals you wish
to reach. Eliminating the information that is not related to those top
priorities can reduce the amount of information flow. As the goals were
refined, the huge stack of paper gradually dropped to a manageable
size. Obviously, not all the information that is coming to the manager
will be useful. The usefulness information managemant depends on
four characteristics: Quality, completeness, timeliness and relevance.
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LO 7 Defining the information technology
There are as many ways to use information technology (IT) in business

as there are business activities to be performed, business problems to
be solved, and business opportunities to be pursued. Technology has
improved operations management such as productivity, efficiency and
customer responsiveness. A company’s information technology may
incorporate its operations technology. Information technology includes
hardware, computer networks and software. A company’s information
Summary
technology provides the foundation for serving customers, working

with vendors and managing internal company business processes.
LO 8 Identifying information systems
An information system (IS) can be any organized combination of

people, hardware, software, communications networks, data resources,
and policies and procedures that stores, retrieves, transforms, and
disseminates information in an organization. Information systems
can be classified into two categories based on the general type of
support they provide: managerial support and operational support.
Information systems are categorized this way to spotlight the major
roles each plays in the operations and management of a business.
Management Support Systems are divided as follows: Management
Information Systems and Decision Support Systems. Similarly
Operations Support Systems are classified as follows: Process Control
Systems and Transaction Processing Systems.
Describing the information systems for decision

LO 9 making
Using information systems to support business decision making has

been one of the primary thrusts of the business use of information
technology. The fast pace of new information technologies made
decision support available from lower levels of management to upper
levels of management. So much data clog the Internet and other
sources that the challenge for businesses has shifted from acquiring
data to sorting through it to find the most useful elements, which can
then be turned into valuable information. New type of information
systems are being developed for decision making such as management
information systems, decision support systems, executive information
systems and expert systems.
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1 Which one of the following is not a compe- 6 Which one of the following is not one of the
titive advantage offered to a company by the pro- the phases of product design and development?
duction function?
a. Idea generation
a. Longer new product lead time b. Feasibility analysis
b. More inventory turns
Test yourself
c. Product specifications
c. Shorter manufacturing lead time d. Process specifications
d. Higher quality e. Preliminary screening
e. Greater flexibility
7 Which one of the following is constructed by
2 Which one of the following is the characteris- integrating data from multiple heterogeneous so-
tics of a service? urces that support analytical reporting, structured
a. Not stocked and/or ad hoc queries, and decision making?
b. Easily measurable quality a. Database
c. Transportable b. Knowledge
d. Resalable c. Information
e. Easy to automate d. Data
e. Data warehouse
3 Which one of the following process type
produces a wide variety of products according to 8 Which one of the following is a companywide
the needs and requirements of the customers? network, closed to public access that uses the infrast-
a. Cellular processes ructure and standards of the Internet and the Web?
b. Job shop processes a. Database warehouse
c. Flow processes b. Database
d. Continuous flow processes c. Internet
e. Batch flow processes d. Intranet
e. Extranet
4 Which one of the following person known as
the father of scientific management? 9 Which one of the following system is a
a. Eli Whitney management support system?
b. Adam Smith a. Management information systems
c. Frederick W. Taylor b. Process control systems
d. Henry Gannt c. Transaction processing systems
e. Henry Ford d. Electronic data interchange systems
e. Database systems
5 Which one of the following production
systems was introduced in response to a new 10 Which one of the following systems is a software
demand for more product variety and for greater that uses artificial intelligence technologies to
responsiveness to changes in products, production simulate the judgment and behavior of a human
technology, and markets? or an organization that has expert knowledge and
experience in a particular field?
a. Mass customization
b. Lean production system a. Process control systems
c. Just in time production system b. Transaction processing systems
d. Flexible manufacturing system c. Management information systems
e. Computer integrated manufacturing system d. Expert system
e. Executive information systems
221
6

1. a 6. e If your answer is incorrect, review “The
“Production, Production Systems, and
Scope of Production Management”.
Production Management” section.

2. a 7. e If your answer is incorrect, review
“Production, Production Systems, and
“Managing Information”.
Production Management” section.
3. b If your answer is incorrect, review “Types 8. d If your answer is incorrect, review

of Production Processes”. “Information Technology”.

4. c 9. a If your answer is incorrect, review
“Historical Evolution of Production
“Information Systems”.
Management”.

5. d If your answer is incorrect, review “New 10. d
“Information systems for Decision
Trends in Production Process”.
Making”.
What are the main activities of production management?
The main activities of production management are as below:

• Specification and procurement of input resources namely manage-
your turn 1 ment, material, land, labor, equipment, and capital.
• Product design and development to determine the production pro-
cess for transforming the input into output of goods and services.
• Supervision and control of transformation process for efficient pro-
duction of goods and services.
What is the difference between made to stock and made to

order?
When the product features are set by the company and the product is produced in
advance of orders(depending on the forecasts), it is “made to stock”. It is a strategy
of a company in order to meet the anticipated demand and if the forecasting is true
it is very cost effective. When there are few product lines and long preparation times
your turn 2 between products, the company can apply “made to stock”.
When the product features are set by the customer and the production is performed
after receiving the order, it is “made to order”. Therefore, the product is customized
and the customers’ special requests are accepted.
What are the main advantages and disadvantages of

project processes?
The main advantage of a project approach is its flexibility to customise the

product. The main disadvantage is the cost of this production. These processes
your turn 3 usually cannot exploit economies of scale, productivity gains from learning, and
the general efficiencies of repetitiveness to the same extent that other can.
222
6
What are the main principles of Japanese production

system?
The Japanese production system is based on three principles: (1) Quality

comes first, (2) Improve the product and process continuously, and (3)
Eliminate all forms of waste. In the implementation of these principles, there

your turn 4 is total organizational commitment and involvement. Everyone is responsible
for product quality, process improvement, and reduction of waste. Training
of the workers are very important because they have gerater responsibility.
Japanese companies utilize the principles of experimentation and measurement
to see whether or not alternative methods are better.
What are the responsibilities of workers in a lean production

system compared to traditional workers?
Much more is expected from the workers in a lean production system. They
must work together in a team and play active roles in operating and improving
your turn 5 systems. Individual creativity is much less important than team success. Due
to high responsibility, workers feel more pressure and anxiety. Moreover, a
flatter organizational structure means, career paths are not as steep in lean
production structure. Workers become generalists rather than specialists in
this system.
What are the main drawbacks of the Material Requirements

Planning (MRP)system?
MRP systems also have several potential drawbacks. First, MRP relies upon
accurate input information. If a small business has not maintained good
inventory records or has not updated its bills of materials with all relevant
your turn 6 changes, it may encounter serious problems with the outputs of its MRP
system. The problems could range from missing parts and excessive order
quantities to schedule delays and missed delivery dates. Another potential
drawback associated with MRP is that the systems can be difficult, time
consuming, and costly to implement. Many businesses encounter resistance
from employees when they try to implement MRP.
223
6
What are the functions of data warehouse tools?
The following are the functions of data warehouse tools:

• Data Extraction: Involves gathering data from multiple heterogene-

ous sources.
your turn 7 • Data Cleaning: Involves finding and correcting the errors in data.
• Data Transformation: Involves converting the data from legacy
format to warehouse format.
• Data Loading: Involves sorting, summarizing, consolidating, check-
ing integrity, and building indices and partitions.
• Refreshing: Involves updating from data sources to warehouse.
What are the most important roles of an information system

for a business enterprise?
There are three vital roles that information systems can perform for a business
enterprise:
your turn 8
• Support of business process and operations.
• Support of decision making by employees and managers.
• Support of strategies for competitive advantage.
How does Management Information System serve serve the

managers for decision making?
MIS managers are primarily interested in weekly, monthly, and yearly results,
although some systems enable managers to drill down to see daily or hourly
data if required. MIS generally provides answers to routine questions that
your turn 9 have been specified in advance and have a predefined procedure for answering
them. For instance, MIS reports might list the total kilograms of lettuce used
this quarter by a restaurant chain or compare total annual sales for specific
products to planned targets.
224
6
endnotes
1Bedeian, A. G. (1993). Management. The Dyden 17Davis, M. M. & Heineke, J. (2005). Operations
Press, p. 52. Management: Integrating Manufacturing and
2Martinich, Services (5th ed.). McGraw-Hill Irwin, pp.19-20.
J. S. (1997). Production and Operations
Management. John Wiley &Sons Inc., pp. 7-8. 18Russell, op. cit., p.7.
3Kumar, S. A. & Suresh, N. (2009). Operations 19Nickels,W. G., McHugh, J. M., & McHugh, S.
Management. New Age International Ltd., M. (2008). Understanding Business (8th ed.).
Publishers, p. 3. McGraw-Hill Irwin, pp. 239-240.
4Donelly, J. H., Gibson, J. L., & Ivancevich, J.M. 20Toni DE, T. S. (1998). Manufacturing flexibility:
(1990). Fundamentals of Management (7 th ed.). A literature review. International Journal of
Von Hoffman Press, Inc., pp. 506-507. Production Research, 36 (6), pp.1587–1617.
5Rastogi,
M. K. (2010). Production and Operations 21 ElMaraghy, H. A. (2006). Flexible and
Management. University Science Press, p.7. reconfigurable manufacturing systems paradigms.
6Martinich, International Journal of Flexible Manufacturing
op. cit., pp. 8-9.
System (IJFMS), 17(4), 261–276, Special issue on
7Ashwathappa, K. & Bhat, K. S. (2009). Production reconfigurable manufacturing systems.
and Operations Management. Himalaya Publishing
22ElMaraghy H.A. (2007). Reconfigurable Process
House, p. 51.
Plans For Responsive Manufacturing Systems.
8Chand, S. (2016). Production Management: it’s In: Cunha P.F., Maropoulos P.G. (Eds). Digital
Meaning, Definition, Function, and Scope. Your Enterprise Technology, Springer. .
Article Library: The Next Generation Library. 23ElMaraghy, H. & Caggiano, A. (2016). Flexible
Retrieved from http://www.yourarticlelibrary.
Manufacturing System. Retrieved from http://
com/production-management/production-
link.springer.com/referenceworkentry/10.1007%
management-its-meaning-definition-function-
2F978-3-642-20617-7_6554
and-scope/27925/
24Elmaraghy, op. cit., pp. 261-276.
9Rastogi, op. cit., p. 2.
25Reid, R.D. & Sanders, N.R. (2005). Operations
10Martinich, op. cit., pp. 329-330.
Management: An Integrated Approach (2nd ed.).
11What is Six Sigma. Net, Job Shop Manufacturing. John Wiley &Sons Inc., p.18.
Retrieved from http://www.whatissixsigma.net/ 26Kootanaee1, A. J., Babu, K. N., & Talari, H. F.
job-shop-manufacturing/.
(March 2013). Just-in-Time Manufacturing
12Encylopedia of Management. Cellular System: From Introduction to Implement.
Manufacturing. Retrieved from http://www. International Journal of Economics, Business and
referenceforbusiness.com/management/Bun- Finance, 1 (2), p. 8.
Comp/Cellular-Manufacturing.html 27Davis & Heineke, op. cit., p. 353.
13Martinich, op. cit., p. 340. 28Boone, E. & Kurtz, D. L. (2005). Contemporary
14Stevenson, W. J. (2005). Operations Management Business (11th ed.). Thomson South-Western
(8th ed.). McGraw-Hill Irwin, p.18. Corp., p. 361.
15Evans, J. R., Collier, D. A. (2007). Operations 29Abdulghafour, A. B. Computer Integrated Manufacturing.
Management: An Integrated Goods and Services Retrieved from http://www.uotechnology.edu.iq/dep-
Approach. Thomson Higher Education, p. 23. production/branch3_files/cim.pdf.
16Russell,
R. S. & Taylor III, B.W. (2009). Operations 30Nickels et al., op. cit., p.241.
Management: Along the Supply Chain (6th ed.). 31 Stevenson, op. cit., p.127.
John Wiley & Sons Inc., p.7.
32 Cheng, K. & Bateman, R. J. (2008). E-Manufacturing:
Characteristics, applications and potentials. Progress
in Natural Science,18, p. 1323.
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33Lee, J. (2003). E-manufacturing-fundamental, 48Meija-Gomez & Balkin, op. cit., p. 389.

tools, and transformation. Robotics and Computer 49Brown, C. V., De Hayes, D. W., Hoffer, J. A.,
Integrated Manufacturing, 19, p. 502.
Martin, E. W., & Perkins, W. C. (2012). Managing
34Stevenson, op. cit., pp.122-123. Information Technology (Int. ed.). Pearson, p. 2.
35Gallego, G. (2001). Aggregate production 50Nickels et al., op. cit, p. 605.
planning. IEOR 4000: Production Management, 51Meija-Gomez & Balkin, op. cit., p. 390.
Lecture 5. retrieved from http://www.columbia.
edu/~gmg2/4000/pdf/lect_05.pdf. 52O’Brien, J. A. & Marakas, G.M. (2011). Management
36Stevenson, Information Systems (10th ed.). McGraw-Hill Irwin,

op. cit., pp. 544-545.
p. 256.
37Gallego, G. (2001). Production management, 53Rouse, M. Techtarget Network, Search Enterprise
materials requirement planning. IEOR
Wan, Definition, Extranet. Retrieved from http://
4000. Retrieved from http://www.columbia.
searchenterprisewan.techtarget.com/definition/
edu/~gmg2/4000/pdf/lect_06.pdf
extranet.
38Moustakis, V. (2000). Materials requirement 54O’Brien & Marakas, op. cit., p. 38.
planning. Report Produced For the EC Funded
Project. Retrieved from http://www.adi.pt/docs/ 55Turban & Volonino, op. cit., p. 35.
innoregio_MRP-en.pdf. 56O’Brien & Marakas, op. cit., p. 48.
39American Society for Quality, (ASQ). Learn About 57Laudon, K. C. & Laudon, J. P. (2007). Management
Quality, Quality Management System. Retrieved Information Systems: Managing the Digital Firm
from http://asq.org/learn-about-quality/quality- (10th ed.). Pearson Prentice Hall, p. 54.
management-system/
58Turban & Volonino, op. cit., p. 37.
40Investopedia. Supply Chain Management – SCM.
59Beal,V. MIS-Management Information System.
Retrieved from http://www.investopedia.com/
terms/s/scm.asp#ixzz4eQiQbbkF Webopedia. Retrieved from http://www.
41Management Study Guide. Supply Chain Management. webopedia.com/TERM/M/MIS.html
60Inc., Management Information Systems. Retrieved
Retrieved from http://www.managementstudyguide.
com/supply-chain-management-definition.htm from https://www.inc.com/encyclopedia/
42Mejia-Gomez, management-information-systems-mis.html.
L. R. & Balkin, D. B. (2002).
61Meija-Gomez & Balkin, op. cit., pp. 397-398.
Management. McGraw-Hill, p. 386.
43Nickels 62Haag, S., Cummings, M., & Phillips, A. (2007).
et al., op. cit., p. 596.
44DQ Management Information System: For the
Global Blog. What is the difference between Information Age (6th ed.). McGraw-Hill/Irwin,
data and information? Retrieved from https:// p.184.
www.dqglobal.com/2014/05/27/what-is-the-
63Turban & Volonino, op. cit., p. 40.
difference-between-data-and-information/
45Mejia-Gomez 64Rouse, M. Searchhealthit. Techtarget. Retrieved from
& Balkin, op. cit., p. 388.
46Data http://searchhealthit.techtarget.com/definition/
Mining: What is data mining? Retrieved from expert-system
http://www.anderson.ucla.edu/faculty/jason.frand/
teacher/technologies/palace/datamining.htm.
47Turban, E. & Volonino, L. (2013). Information
Technology for Management (8th ed.). John Wiley
& Sons, Inc., p. 2.
226
6
227
Chapter 7 Accounting and Financial Analysis
1 2
Learning Outcomes
Define accounting and relevant terms. Identify the users of accounting information.
3 Describe and distinguish the areas of

accounting. 4 Describe the profession of accounting.
5 Understand the recording process.

6 Identify the content and purpose of the basic
financial statements.
7 Explain and understand the financial statement

analysis.

Accounting - Terms and Definitions Accounting
Users of Accounting Information Accountants
Areas of Accounting Accounting (Financial) information
Accountants and Accounting Profession Bookkeeping
Recording Business Transactions Financial statements
Basic Financial Statements Financial statement analysis
Analyzing Financial Statements Recording process
Liquidity
228
7
“Managers and investors alike must understand that accounting numbers are the beginning, not the end, of
business valuation.”
Warren Buffett
Throughout this chapter you will study how financial accounting functions within business entities.
However, before beginning on the study of accounting, you need to know and understand some basic
terms of accounting.
What is the role of accounting in business? The simplest answer to this question is that accounting
provides information for managers to use in operating a business. In addition, accounting provides
information to other stakeholders to use in assessing economic performance and condition of the business.
Each type of organizations has managers. Managers are responsible to manage the organizations in
effective and efficient manner. Some of the managers will be responsible at the top level such as to formulate
strategies or to make long term plans; some of the managers are in the middle level to make short term
plans, to organize resources, to direct personnel, and to control operations. Accounting will provide benefit
to the managers to report a business entity’s financial condition, support decisions, and control business
operations. Managers in organizations or in all the business entities will need information in their decision
making process. Some of the needed information will
Accounting provides information
be financial some non-financial. Who will provide the
necessary information to them? Where will they get the
information? The answer is “accounting”. Accounting
will provide useful “financial information” about the
business entity to all decision makers.
Anyone who focus on a business entity must learn
how to read, understand, and analyze the accounting
statements and financial statements even the accounting
process itself is performed by accountants. The purpose
of this chapter is to introduce basic accounting principles,
terms, and rules. Consequently, the readers will have an
idea of what accounting is, how it works, and why it is
important.
ACCOUNTING – TERMS AND DEFINITIONS

Economic events and transactions, such as purchase of materials and sales of inventory to the customers
will occur in business entities and all of them will affect their success. All the economic events and transactions
must be identified, recorded, and results must be reported. Accounting organizes and summarizes financial
information in the financial statements for decision makers’ use. All the data related to economic events and
transactions must be collected, categorized, summarized, and analyzed in order to be converted to financial
information.Financial information can be seen as an input for an efficient decision making process.
Definition of Accounting
In a general sense, accounting is an information system Accounting is an information system
that measures business transactions or economic events, that provides reports to decision makers
processes the data into reports, and communicates the about the economic activities and condition
1
results to decision makers. Accounting consists of three of a business.
basic activities—it identifies, records, and communicates
the economic events of an organization to interested users.
The purpose is to provide financial information about the business entity to the decision makers that they
will be more informed in their decision making process.
Economic events of a company must be identified and specified. If any event or transaction affects the
financial position of a company and can be measured reliably in monetary terms, it means that economic
event is a financial transaction.
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7
Accounting and Financial Analysis
Once a company identifies the financial The method used to record and summarize the
transactions, it records those events in the accounting data into reports is called an accounting
accounting books (like journal and ledgers) in order system (see Figure 7.1). Source documents such as
to provide a history of its financial transactions. a sales invoice, will be used to identify the economic
Recording consists of keeping a systematic and event whether is financial or not and serve as input
chronological diary of events that are measured of the accounting system.
reliably in monetary amounts.
Finally, the company communicates the
collected information to interested users by means The method used to record and summarize
of financial statements. the accounting data into reports is called an
accounting system.
Figure 7.1 Accounting System Process
• Sales documents • Balance sheet

Inputs • Purchasing • Journalizing • Income
Accounting documents Processing • Posting Outputs statement
Documents • Payroll records • All accounts are • Cash flows
• Bank records summarized statement
• Others • Other reports
A major purpose of accounting is to help decision makers evaluate the financial position and performance
of the company in order to make well informed decisions. To be able to understand what is happening in
the world of business, it is necessary to understand the language of business. Accounting is famously known
as the “the language of business”. This is because accounting is the means by which business information
is communicated to all information users. The better our understanding of the language, the better we can
understand what is happening with our finances, our businesses, or our investments!2
A vital element in communicating economic events
is the accountant’s ability to analyze and interpret the
reported information. Analysis involves the use of ratios, Accounting is “the language of business”.
percentages, graphs, and charts to highlight significant
financial trends and relationships. Interpretation involves
explaining the uses, meaning, and limitations of reported
data.3 Financial statements are the tools to
Financial statement analysis and interpretation are the communicate the financial information to
main parts of accounting. So we will explain basic financial users.
analysis techniques and some ratios in this chapter.
How can we provide financial information to the
decision makers, how can we communicate with them? Financial
statements are the communication tools between accounting and
information users. 1
Where can you find financial
An accounting system provides information about the business
information about a company?
entity in financial statements such as the balance sheet, the income
statement, and the statement of cash flows.
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7
Definition of Bookkeeping
Many people confuse bookkeeping and Bookkeeping is the recording of a firm’s
accounting. They think that bookkeeping is financial transactions which usually involves
accounting. Actually it is not. Bookkeeping only the recording of budgetary events.
is the act of recording and organizing financial
transactions in the accounting system in accordance
with the generally accepted accounting principles
(GAAP). It ensures that records of the individual Managers in different fields use accounting
financial transactions are correct, up-to-date, and information to administer the activities,
comprehensive. In modern accounting systems, businesses, or functional areas they oversee as
well as coordinating those activities, businesses,
bookkeeping is processed by computer software.
or functions within the framework of the
Accounting process on the other hand includes organization.7
bookkeeping function and also includes reporting
Business entities present summarized financial
and analyzing the financial data to be used in the
information in the form of financial statements
decision-making process. Thus, accounting involves to both internal and external information users.
the entire process of identifying, recording, and In addition to financial statements, for internal
communicating economic events.4 users, accounting provides internal reports, such
as financial comparisons of operating alternatives,
projections of income from new sales campaigns,
and forecasts of cash needs for the next year.8
Bookkeeping and
Individual managers often require detailed
accounting are not the
information for different purposes in an accounting
same processes.
system. Consider, for example, the sales order information
of a company. This information will be used for different
purposes in decisions of different managers. The sales
manager may be interested in the total amount of sales
Internal users of accounting information in order to determine the commissions to be paid. The
are managers who plan, organize, and run a marketing manager of the company uses sales information
business. to evaluate the impact of a particular promotion strategy.
The distribution manager is more likely to be interested
in the sales order quantities by geographic region and
by customer-requested delivery dates to ensure timely
USERS OF ACCOUNTING deliveries. Whereas the manufacturing manager’s focus
would be the quantities of various products and their
INFORMATION
expected delivery dates, so that s/he can develop an
In modern economies, different information effective production schedule.9
users make different economic decisions, based on
their relationsip with the entity.5
ERP integrates company resources for higher efficiency
The users of accounting information either
directly or indirectly connected to the business
entity can be classified as internal and external
users.
Internal Users
Internal users of accounting information are
managers who plan, organize, and run a business.
They include marketing managers, production
supervisors, finance directors, and company officers.6
231
7
To simultaneously serve the needs of the

managers of different departments, companies
create a database consisting of small and detailed
information that can be used for multiple purposes. Financial accounting and
For instance, the sales order database will contain managerial accounting
detailed information about the product, quantity of the have different goals.
order, selling price, and delivery details (place and date)
for each sales order. The database stores information
in a way that allows different managers to access
the information they need. Many companies are
building their own Enterprise Resource Planning
2
(ERP) systems, which are single databases that collect
data and feed it into applications that support the Give an example for a type
company’s business activities, such as purchasing, of information that will
be important if you want
production, distribution, and sales.10 to invest in a company as a
shareholder (owner).
Managers of all levels AREAS OF ACCOUNTING

need to know accounting There are several specialized fields of accounting
because their decisions practice. The two most common fields are financial
will often be determined accounting and managerial accounting. Other fields
by “the numbers”. include cost accounting, environmental accounting,
tax accounting, international accounting, not-for-
profit accounting, and social accounting.
External Users
External users are individuals and organizations Financial Accounting
outside a company who needs financial information Financial accounting focuses on reporting to
about the company. There are several types of external parties such as stockholders, investors,
external users of accounting information. The two governmental agencies, creditors, banks, and
most common types are investors and creditors. The suppliers. Financial accounting measures and
information needs and questions of external users are records business transactions and provides financial
quite different. Current and prospective investors statements that are based on generally accepted
(owners) use accounting information to make accounting principles (GAAP).
decisions to buy, hold, or sell stock. Creditors such
as suppliers and banks use accounting information
to evaluate the risks of selling on credit or lending Financial accounting measures and records
money.11 Taxing authorities want to know whether business transactions and provides financial
the company complies with the tax laws. Customers statements that are based on generally
or clients are interested in whether a company will accepted accounting principles (GAAP).
continue to honor product warranties. Labor unions
want to know whether the owners have the ability to
pay increased wages and benefits. Regulatory agencies, Financial accounting is primarily concerned
such as the Securities and Exchange Commission or with the recording and reporting of economic data
the Federal Trade Commission, want to know whether and activities for a business especially for external
the company is operating within prescribed rules.12 users. These accounting disclosures of business
operations help determine investment and lending
decisions. A variety of government regulations
External users are individuals and
and laws require to collect, process, and report the
organizations outside a company who seek financial information. Financial accounting deals
for financial information about the company. with past events. Financial accounting is the face a
business shows the outside world.13
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7
Managerial Accounting We can summarize the main purposes of

Managerial accounting is concerned with managerial accounting information that is used
providing information to internal decision makers, within a business as follows:14
such as company managers. Managerial accounting • Planning: An example of planning is
uses both financial accounting and estimated data to budgeting. Budgeting is the process of
aid management in running day-to-day operations forecasting future financial needs. This
and in planning future operations. process is based on the funds that the com-
pany expects to collect as a result of sales
and how much will be paid to purchase
Managerial accounting uses both
materials, for salaries, and wages etc.
financial accounting and estimated data
• Decision Making: Managerial account-
to aid management in running day-to-
ing information will be helpful to evaluate
day operations and in planning future
various alternatives available. For example,
operations.
management may be considering whether
to purchase or lease an equipment.
• Control: Management also uses account-
Managerial accounting measures, analyzes, ing information to determine whether the
and reports financial and nonfinancial information business is operating according to its plans
that helps managers make decisions to fulfill the and identifies the differences.
goals of an organization. Managers use managerial The key questions are: (1) How will this
accounting information to develop, communicate, information help managers do their jobs better, and
and implement strategies. They also use managerial (2) Do the benefits of producing this information
accounting information to coordinate product exceed the costs?15
design, production, and marketing decisions as Table 7.1. shows the major differences between
well as evaluating performance. financial and managerial accounting, even though
they often rely on the same underlying financial data.
Table 7.1 Comparison of Financial and Managerial Accounting
Financial Accounting Managerial Accounting

• Help managers make
• Communicate organization’s
decisions to fulfill an
financial position to those
organization’s goals.
outside the organization:
Reports to those inside the
• Owners, stockholders
Purpose of information organization for:
• Creditors, banks
• Planning
• Tax authorities
• Directing and motivating
• Regulators
• Controlling
• Suppliers
• Performance evaluation
• External users such as owners,
Primary users investors, banks, regulators, and • Managers of the organization
suppliers
• Future-oriented.
• Past-oriented.
Focus and emphasis • Emphasizes decisions
• Emphasizes financial
affecting the future (budget
consequences of past activities
for 2018 prepared in 2017)
233
7
• Emphasizes timeliness.
• Varies from hourly
• Emphasizes precision.
information to 15 to 20
• Annual and quarterly financial
years, with financial and
reports, primarily on the
nonfinancial reports on
Time span and type of reports company as a whole.
products, departments,
• Emphasizes summary
territories and strategies.
data concerning the entire
• Emphasizes detailed segment
organization.
reports about departments,
products, and customers
• Must follow GAAP and
• Need not follow GAAP but
be certified by external,
are based on cost-benefit
Rules of measurement and independent auditors.
analysis.
reporting • Emphasizes objectivity and
• Emphasizes relevance.
verifiability.
• Not mandatory
• Mandatory for external reports
Sources: Noreen, E. W., Brewer, P., & Garrison, R. H. (2011). Managerial Accounting for Managers (2nd ed.).
McGraw-Hill/Irwin, p. 34; Horngren, C. T., Datar, S. M., Madhav, V., & Rajan, M. V. (2012). Cost Accounting: A
Managerial Emphasis (14th ed.). Pearson Education, p. 4.
As illustrated in Table 7.1, financial and managerial accounting differ not only in their user orientation but
also in their emphasis on the past and the future, in the type of data provided to users, and in several other ways.
ACCOUNTANTS AND ACCOUNTING PROFESSION

Accountants work throughout private industry and government. A private accountant works for a
business firm in any position not included in public accounting. In private (or managerial) accounting, the
accountant is involved in activities such as cost accounting
(finding the cost of producing specific products), budgeting,
accounting information system design and support, or tax A private accountant works for a business
planning and preparation. Accountants might also be a firm in any position not included in public
member of a company’s internal audit team.16 A certified accounting.
management accountant (CMA) is a certified professional
who works for a single company.
Accountants get to the top of organizations as often as anyone else. Why? Because accountants must
deal with every aspect of a company’s business in order to record all of its activities. Accountants often have
the broadest view of what is going on in the company.17
Public accountants and their staff provide services to the general public on a fee basis.18 In public
accounting, an accountant may practice as an individual or as a member of a public accounting firm.
Individuals in public accounting offer expert service to the general public, in much the same way that doctors
serve patients and lawyers serve clients.19 Public accounting firms provide areas of service such as auditing,
tax consulting, and management consulting. A major portion of public accounting involves auditing.
Another option is to pursue one of the many accounting opportunities in governmental agencies.
Public accountants who meet education, experience,
and examination requirements may become a Certified
Public Accountant (CPA). CPAs generally perform general Certified Public Accountants (CPAs) are
accounting, audit, or tax services.20 CPAs are licensed licensed professional accountants who serve
professional accountants who serve the general public. the general public.
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All professions have regulations. Accountancy the Public Oversight, Accounting and Auditing
profession in Turkey is regulated through the law Standards Board of Turkey.
No. 3568, “The Law of Independent Accountancy, The Union of Chambers of Certified Public
Certified Public Accountancy, and Sworn-in Certified Accountants of Turkey (TÜRMOB) is the national
Public Accountancy”. It was enacted in 1989. The law umbrella organization for the 81 local chambers
establishes accounting and auditing as a profession of CPAs (SMMMs) and Chambers of Sworn-in
and defines those who are rendering services in these CPAs (YMMs). The Union is empowered to award
fields as professionals. The Law defines accounting professional licenses that Turkey’s accountants
and auditing as a profession and recognizes must have to render professional services.
two qualifications of accounting and auditing
The Turkish Capital Markets Board, under
professionals granted by the Union of Chambers
the Capital Markets Law, establishes financial
of Certified Public Accountants (TÜRMOB):
reporting requirements with respect to listed entities,
Certified Public Accountant (CPA, Serbest
financial intermediaries, and portfolio management
Muhasebeci Mali Müşavirler-SMMM) and Sworn-
companies, along with their subsidiaries, associates,
in Certified Public Accountant (Sworn-in CPAs,
and joint ventures.
Yeminli Mali Müşavirler-YMM). Only accountants
who have been awarded a license by TÜRMOB are Similarly, the Banking Regulation and
entitled to render professional services.21 Supervision Agency sets financial reporting
requirements for entities under its purview, while
In distinguishing between the two titles,
the Under Secretariat of Treasury supervises
SMMMs may keep books, prepare financial
insurance, reinsurance companies as well as pension
statements, and conduct general audits, but cannot
funds. As mentioned above, as PIEs all regulated
perform tax audits nor provide consulting services.
entities are required to apply TAS.
With the exception of bookkeeping, YMMs are
allowed to perform all the services provided by
SMMMs in addition to tax audits and certifying
financial statements.
internet
Public Oversight Accounting and Auditing
Governing Organizations
Standards Authority (KGK) http://www.kgk.
The Republic of Turkey adopted a new Turkish gov.tr
Commercial Code in 2012 (Law No. 6102). The Union Of Chambers Of Certified Public
law contains provisions on the formation and Accountants Turkey (TÜRMOB) http://www.
operation of entities in its jurisdiction and stipulates turmob.org.tr
the accounting, auditing, and ethical standards to
be applied by companies and professionals. The
Code requires application of Turkish Accounting
Standards (TAS) in the preparation of the
Ethics in Accounting
financial statements of public interest entities
(PIEs).22 Ethical considerations are important to acco-
unting. Because users of accounting information
The Public Oversight, Accounting and
must depend on the good faith of people involved
Auditing Standards Board of Turkey (POA),
in accounting activities. State laws around the world
known in Turkish as Kamu Gözetimi, Muhasebe
require companies to report relevant and reliable
ve Denetim Standartları Kurumu (KGK) was
information to outsiders. Relevant means “able to
established in 2011 with the legal authority to
affect a decision”. Reliable means “verifiable and free
establish and issue accounting and financial
of error and bias”. Occasionally, a company might
reporting standards.23
report biased information. It may overstate profits
Turkey has already adopted IFRS Standards for or understate the company’s debts. In recent years,
the financial statements of all public interest entities. several well-known companies such as Enron, repor-
Turkish Accounting Standards (TAS) are issued by ted misleading information.
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An audit is an examination of a company’s

Investors seek for relevant financial records.
and reliable information
to outsiders. Audits are intended to protect the public by
ensuring that accounting data are relevant and
reliable.26 The auditor’s role is to certify that the
What are the criteria for ethical judgments in financial reports are accurate and within the generally
accounting? The responsibility for setting ethical accepted reporting guidelines. An auditor’s stamp
standards for the profession is shared between the of approval does not imply anything about a firm’s
professional accountancy organizations and the performance; the auditor is certifying only that the
public oversight authority. information contained within the financial statements
For example, the American Institute of Certified is accurate.27
Public Accountants (AICPA), other professional
organizations, and most companies have codes of
conduct that require ethical conduct.24 Similarly, the
Union of Chambers of Certified Public Accountants 3
and Sworn-in Certified Public Accountants of Turkey The financial statements of
(TÜRMOB) has the responsibility for establishing company must be audited,
professional ethics standards for its members. In why?
collaboration with the Experts Accountants
Association of Turkey (EAAT), TÜRMOB has
adopted, translated (in accordance with the IFAC
Translation Policy), and published the 2014 RECORDING BUSINESS
version of the IESBA Code of Ethics. Members of
TRANSACTIONS
EAAT must also comply with the Code as issued An accounting system is the composition of
by TÜRMOB.25 methods and procedures for collecting, classifying,
summarizing, and reporting the financial and
operating information of a business. Understanding
The Role of Auditors in Ensuring both the recording of transactions and the combining
Proper Reporting of these transaction records to form financial
A company’s actual performance may differ from statements is critical for developing two skills: (1)
what is reported to the public. How does a society Ability to communicate the results of transactions to
deal with this conflict of interest? In Turkey, law others, and (2) Understanding of how transactions
requires all companies that sell their stock to the public affect the financial statements and how the financial
statements reflect the transactions.28
to have an annual audit by independent auditors.
Companies want to be profitable and financially
strong to attract investors, so there is a conflict
of interest here. To provide reliable information, An accounting system is the composition
of methods and procedures for collecting,
financial statements of companies must be audited
classifying, summarizing, and reporting the
by independent accountants. An audit is an
financial and operating information of a
examination of a company’s financial records. The business.
independent accountants then issue an opinion that
states whether or not the financial statements give a
fair picture of the company’s financial situation. Accounting systems may be either manual or
The vast majority of accountants do their jobs computerized. Understanding a manual accounting
professionally and ethically, but these examples are system assists in recognizing the relationships
not much heard. Unfortunately, only those who among accounting data and accounting reports. In
cheat make the headlines. In recent years we have addition, most computerized systems use principles
seen many accounting scandals. used in a manual system.
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The Accounting Cycle

The accounting cycle is a set of steps that are repeated in the
same order every period to keep track of what happened in the
business and to report the financial effect of those transactions. The
accounting cycle is the financial process starting with obtaining
data from business transactions and leading up to preparation of
financial statements. This cycle starts when a business transaction
occurs. It will end when the transaction has been included in the
financial statements or reports of the company. The steps of the
accounting cycle are illustrated in Figure 7.2.
Figure 7.2 Accounting Cycle
The accounting cycle is a set of steps that

Transactions
are repeated in the same order every period
to keep track of what happened in the
business and to report the financial effect of Closing the
Journal Entries
those transactions. Books
The accounting process starts with

Financial
identifying and analyzing business transactions Statements Posting
and events. Transactions can include the sale of a

product or the purchase of supplies, equipment,
land, etc for business activities that impact the
financial position of company. The transaction Adjusted Trial Trial Balance
is recorded chronologically in the journal. All Balance
the transactions are recorded through journal

entries. The third step is to post each journal Recording
Adjusting
entry to the appropriate ledger accounts. Entries
The journalized transactions are posted to the

account that it impacts. The accounting cycle requires summarizing of the entries pertaining to a particular
period in a trial balance. A trial balance is essentially a list of all accounts and provides an overview of the
various types of financial transactions entered into by any organization during a period. After preparation
of trial balance, the next step is recording the adjustments like adjusting prepaid/outstanding expenses,
recording advance/accrued income, etc. The purpose of adjusting entries is to match incomes with expense
during the accounting period. One of the most important steps of the accounting process involve preparing
the financial statements. Final step of the accounting process involves closing the books for the revenue
and expense accounts which leads to begin again the entire cycle with zero balances.
In manual accounting systems, these steps are followed manually and sequentially by an accountant. In
the computerized accounting systems, many software programs like SAP, ERP, etc complete all the steps
involved in the accounting process simultaneously and the user is just required to initiate the process by
providing the relevant financial data.
The Accounting Equation

The accounting equation is the formula used to capture the company’s financial position at any point
in time. The accounting equation shows how assets, liabilities, and owners’ equity are related to each other:
assets = liabilities + owners’ equity
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This relationship is the basic accounting Owners’ equity

equation. Assets must equal the sum of liabilities The owners’ claims to the assets of the business
and owner’s equity. Liabilities appear before are called equity. Also known as owner’s equity
owners’ equity in the basic accounting equation
or stockholder’s equity, depending on how the
because they are paid first if a business is liquidated.
business is organized. Owners’ equity equals what
is owned (assets) minus what is owed (liabilities). It
is the company’s net worth.
The accounting equation is the formula used
to capture the company’s financial position at
any point in time. Left side of the equation
always equals the right side of the equation. Owners’ equity equals what is owned
(assets) minus what is owed (liabilities). It is
the company’s net worth.
To find out what belongs to owners, we subtract

The accounting equation: the creditors’ claims (the liabilities) from assets.
assets = liabilities + owners’ equity
assets – liabilities = owners’ equity
The accounting equation applies to all economic
entities regardless of size, nature of business, or Transaction Analysis
form of business organization. It applies to a small Accounting is based on actual business
proprietorship such as a corner grocery store as well as transactions; not opinions, expectations, or desires.
to a giant corporation such as Arçelik. The equation Businesses engage in transactions with customers,
provides the underlying framework for recording suppliers, employees, governmental entities, and
and summarizing economic events. others. A transaction is any event that affects
the financial position of the business and can be
Assets measured reliably on monetary terms.
Assets are economic resources a business owns. The
business uses its assets in carrying out such activities
as production and sales. The common characteristic A transaction is an event that affects the
possessed by all assets is the capacity to provide future financial position of the enterprise and
services or benefits. Cash, merchandise inventory, requires recording.
equipment furniture, and land are examples of assets.
Source documents like invoices, receipts, checks, or

Assets are economic resources a business contracts usually support the details of a transaction.
owns. We will give examples of transactions of a small
company named Sun-Shine.
Liabilities are existing debts and obligations
of the company. Transaction 1: Starting the Business
Deniz Güneş decides to open a management
consulting company as a proprietorship named
Liabilities Sun-Shine. On April 1, 2017, Deniz Güneş
Liabilities are claims of creditors against assets. invested $30.000 cash in the business. This
Liabilities are existing debts and obligations of the transaction results in an equal increase in assets and
company. Liabilities are something the business owner’s equity. The effect of this transaction on the
owes. Businesses of all sizes usually borrow money accounting equation of the business is as follows:
and purchase merchandise on credit. Examples are
debt, taxes, accounts payable, and warranty claims.
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Transaction ASSETS = LIABILITIES + OWNER’S EQUITY

Cash Capital
(1) +30.000 +30.000
Balance 30.000 30.000
For each transaction, the amount on the left side of the equation must equal the amount on the right
side. The first transaction increases both the assets (in this case, cash) and the owner’s equity (capital) of
the business.
Transaction 2: Purchase of supplies for cash
On April 5, 2017, Sun-Shine Company purchases supplies, paying cash of $20.000. This transaction
results in an equal increase and decrease in total assets, though the composition of assets changes: Cash
decreases $20.000, and the asset Supplies increases $20.000.
Transaction ASSETS = LIABILITIES + OWNER’S EQUITY

Cash + Supplies Capital
(1) +30.000 +30.000
(2) -20.000 +20.000
Balance 10.000 20.000 30.000
Total 30.000 30.000
Transaction 3: Purchase of equipment on credit

On April 10, 2017, The company buys equipment on account (credit), agreeing to pay $25.000 within
60 days. This transaction is a purchase on account (a credit purchase). The asset Equipment increases
$25.000, and the liability Accounts Payable increases by the same amount. The effect on the equation is:
Transaction ASSETS = LIABILITIES + OE

Cash + Supplies + Equipment Accounts Payable Capital
(1) +30.000 +30.000
(2) -20.000 +20.000
(3) ---- ---- +25.000 +25.000
Balance 10.000 20.000 25.000 25.000 30.000
Total 55.000 55.000
Using Accounts to Record Transactions

Accounting relies on a system of accounts, with a name
or a title of each account intended to capture the nature of An account is a detailed record of increases
the items in the account. An account is a detailed record and decreases in a specific asset, liability, or
of increases and decreases in a specific asset, liability, or owner’s equity item.
owner’s equity item.
A shortened form of the general ledger account is called
the T-account because it takes the form of the capital letter T. An account, in its simplest form, has three
parts: First, each account has a title, which is the name of the item recorded in the account. Second, each
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account has a space for recording increases in the amount of the item. Third, each account has a space for
recording decreases in the amount of the item. See the cash account appears as follows:
Cash Account
Debit side Credit side
The left side of the account is called the debit side, and the right side is called the credit side. Debits
and credits are sometimes abbreviated as Dr. and Cr.
Debit-Credit Rules and Double Entry Accounting

Amounts entered on the left side of an account, regardless of the account title, are called debits to
the account. Entering an amount on the left side of an account is called debiting the account. Amounts
entered on the right side of an account are called credits, and the account is said to be credited.
These are the rules of debit and credit. Whether an account is increased or decreased by a debit or a
credit depends on the type of account. Debits are not “good” or “bad.” Neither are credits. When the totals
of the two sides of an account are compared, an account will have a debit balance if the total of the debit
amounts exceeds the credits. An account will have a credit balance if the credit amounts exceed the debits.
Accounting uses the double-entry system, which means that we record the dual effects of each
transaction. As a result, every transaction affects at least two accounts. It would be incomplete to record
only the giving side, or only the receiving side, of a transaction.
Sun-Shine company entered increases in cash—an asset—on the left side, and decreases in cash on
the right side. Therefore, we must enter increases in liabilities on the right or credit side, and decreases in
liabilities on the left or debit side.
Look again at the accounting equation:
Assets = Liabilities + Owners’ Equity
If a debit increases assets, then a credit must be used to increase liabilities or owners’ equity because they
are on opposite sides of the equal sign. Likewise, if a credit decreases assets, then a debit must be used to
decrease liabilities or owners’ equity. These rules can be shown as follows:
ASSETS = LIABILITIES + OWNERS’ EQUITY
Debit for Credit for Debit for Credit for Debit for Credit for
increases decreases decreases increases decreases increases
Maintaining the equality of the balance sheet equation requires the

amounts debited to various accounts for each transaction equal the
amounts credited to various accounts. As a result, the sum of balances
in accounts with debit balances at the end of each period must equal 4
the sum of balances in accounts with credit balances. Debits equal A company borrowed money
credits: this applies to each individual transaction and to the balance from the bank for 3 months.
sheet as a whole.29 Show the effects of this
transaction on the accounting
equation.
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Steps in the Recording Process Transaction 1: On April 1, 2017, Deniz Güneş

In practically every business, there are three invested $30.000 cash in the business. The business
basic steps in the recording process: increased cash, which is an asset, so we debit cash.
The business also increased owner’s equity, so we
1. Analyze each transaction for its effects on credit capital.
the accounts,
2. Enter the transaction information in a
journal, Journal Entry
3. Transfer the journal information to the Date Account Titles Debit Credit
appropriate accounts in the ledger.
April 1, 2017 CASH 30.000
Accountants record transactions first in a journal,
which is the chronological record of transactions. CAPITAL 30.000
The journal entry presents the full story for each
transaction. The journal is referred to as the book of Ledger Accounts
original entry. For each transaction the journal shows
the debit and credit effects on specific accounts. CASH CAPITAL
Entering transaction data in the journal is 30.000 30.000
known as journalizing. Companies make separate
journal entries for each transaction. A complete Transaction 2: On April 5, 2017, Sun-Shine
entry consists of: the date of the transaction; the Company purchases supplies, paying cash of
accounts and amounts to be debited and credited; $20.000.
and a brief explanation of the transaction.
The purchase decreased cash. Therefore, we
credit cash. The asset supplies, increased, so we
debit the supplies account.
A journal is the chronological record of
transactions Journal Entry
A ledger is the book holding all the Date Account Titles Debit Credit
accounts with their balances. April 5, 2017 SUPPLIES 20.000
CASH 20.000
Posting is the process of copying from the
journal to the ledger.
Ledger Accounts
CASH SUPPLIES
Accountants then post (copy) the data to the book
of accounts called the ledger. The process of copying 30.000 20.000 20.000
from the journal to the ledger is called posting.
We post from the journal to the ledger. The ledger Transaction 3: On April 10, 2017, The company
provides the balance in each of the accounts. For buys equipment on account (credit), agreeing to
example, the cash account shows the amount of cash pay $25.000 within 60 days.
available to meet current obligations. The accounts
receivable show amounts due from customers; the
Journal Entry
accounts payable show amounts owed to creditors.
Date Account Titles Debit Credit
The Recording Process Illustrated April 5, EQUIPMENT 25.000

2017
Illustrations show the basic steps in the recording
process, using the April transactions of Sun-Shine ACCOUNTS PAYABLE 25.000
Company.
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Ledger Accounts BASIC FINANCIAL STATEMENTS

EQUIPMENT ACCOUNTS PAYABLE We already know that the financial statements
25.000 25.000 summarize the transaction data into a form that
is useful for decision making. The most important
The Ledger Accounts After Posting financial statements are the balance sheet, the
We next show the accounts of Sun-Shine income statement, and the cash flows statement.
Company after posting. The amounts and accounts appearing in the
financial statements are drawn from the ledger.
CASH SUPPLIES
30.000 20.000 20.000
The financial statements summarize the

EQUIPMENT ACCOUNTS PAYABLE transaction data into a form that is useful
25.000 25.000 for decision making.
The most important financial statements are

CAPITAL the balance sheet, the income statement,
30.000 and the cash flows statement.
Each account has a balance. An account balance

is the difference between the account’s total debits
The Balance Sheet
and its total credits. For example, the $10.000
balance in the cash account is the difference between A balance sheet or statement of financial
total debited amount and credited amount and it position is a financial statement that reports a
means how much money on hand. business’s assets, liabilities, and equity on a specific
date. Balance sheets are static. They are like
snapshots, that they reflect conditions on the date
of their preparation. In this respect it’s a position
statement rather than a flow statement.
5
Explain what an account
is and how it helps in the
A balance sheet or statement of financial
recording process.
position is a financial statement that
reports a business’s assets, liabilities, and
equity on a specific date.
Chart of Accounts
A list of the accounts in the ledger is called a
chart of accounts. The accounts are normally listed
in the order in which they appear in the financial
statements. The balance sheet accounts are usually
listed first in the order of assets, liabilities, and Balance sheet also called
owner’s equity. The income statement accounts are the statement of financial
then listed in the order of revenues and expenses. condition or statement of
financial position, must
Companies use a chart of accounts to list all
always balance.
their accounts along with the account numbers.
Account numbers usually have two or more digits.
In Turkey, we have Uniform Chart of Accounts that
companies must use the account titles according to the
Uniform Chart of Accounts.
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A balance sheet has two sides: assets are listed and totaled on the left; liabilities and equity are listed and
totaled on the right. The total of all assets must equal the total of all liabilities plus equity.
Anything owned by a firm is an asset; anything owed by a firm is a liability. Firms normally support a
portion of their assets with funds of the owners, called “owner’s equity” (also called “stockholder’s equity”).
Each balance sheet has a heading that includes the name of the business, the title “Balance Sheet or
Statement of Financial Position” and the date. The information in the balance sheet presents a picture of
the business’s financial position on the date in the heading. Balance sheets are prepared at least once a year.
Balance sheet classification

A classified balance sheet groups together similar assets and similar liabilities, using a number of
standard classifications and sections.
Assets Liabilities and Owners’ (Stockholders’) Equity

Current assets Current liabilities
Non-Current assets Non-Current (Long-term) liabilities
Owners’ (Stockholders’) equity
Classification of assets. Assets that management expects to convert to cash, or to sell, or to

consume during the normal operating cycle of the business are current assets. All other assets are noncur-
rent assets.
Current assets are the assets that a company expects
to convert to cash or use up within one year or within its
operating cycle, whichever is longer. Common types of Current assets are the assets that a
current assets are cash, short-term investments, receivables company expects to convert to cash or use
(notes receivable, accounts receivable, and interest up within one year or within its operating
receivable), inventories, and prepaid expenses (insurance cycle, whichever is longer.
and supplies).
Companies list current assets in the order in which
they expect to convert them into cash. The operations of a
merchandising business involve the purchase of merchandise Figure 7.3 Operating Cycle
for sale (purchasing activity), the sale and distribution of the
products to customers (sales activity), and the receipt of cash
from customers (collection activity). This overall process is Cash
referred to as the operating cycle. Thus, the operating cycle
begins with spending cash, and it ends with receiving cash
from customers, as illustrated in Figure 7.3.
The operating cycle of a business is the time between
buying and/or creating a product or service and receiving the
cash on its sale. For most businesses, this will be less than a year.
Accounts
Inventory
Receivable
The operating cycle of a business is the time
between buying and/or creating a product or
service and receiving the cash on its sale.
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Non-current assets include long-term payable, long term notes payable, lease liabilities, and
investments, property, plant and equipment (fixed pension liabilities.
assets), and intangible assets.
Non-current (long-term) liabilities are

Non-current assets include long-term obligations that a company expects to pay
investments, property, plant and equipment after one year.
(fixed assets), and intangible assets.
Owners’ (stockholders’ or share-

holders’) equity. Business owners have several
options for obtaining the capital they need to start
6 and operate their business. One way is to contri-
Explain the necessity of bute their own money to the business. The owners’
classifying the assets as claims to the assets of the business is called owners’
current and non-current. equity. Owners’ equity consists of contributed ca-
pital, retained earnings and, other reserves.
Classification of liabilities. Similarly, Contributed capital is the amount that the
obligations that management expects to discharge owners have invested in the company. Business
with a cash payment or otherwise settle during the owners’ personal contributions to the business
operating cycle are current liabilities, whereas all are called equity capital or owner capital or paid
other obligations are noncurrent liabilities. in capital. This type of capital may come from
personal funds, such as from accumulated savings,
or from funds the owners borrow using their homes
or other personal property as security for the loan.
Contributed capital is the amount that the

owners have invested in the company.
Retained earnings are the profits that the

owners do not take out of the business but
instead save for use by the business.
A second component of owners’ equity is

Current liabilities are all those debts of the retained earnings. Retained earnings are the
company that are expected to be paid within profits that the owners do not take out of the
the next 12 months, the same period in which business but instead save for use by the business.
the current assets are expected to become cash. Normally, a good policy for a company is not
Common examples are accounts payable, wages to distribute all of its profits. It is better to hold
payable, bank loans payable, interest payable, and some of its profits in reserve for use in the business
taxes payable. through retained earnings. Reserves are created
for different purposes. For example, the board may
Non-current (long-term) liabilities are obligations
aside a portion of retained earnings as a reserve for an
that a company expects to pay after one year. Liabilities
amount that the business expects to pay managers and
in this category include bonds payable, mortgages
employees as bonuses.30
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Exhibit 7.1 Balance Sheet of Arçelik Company
CONSOLIDATED STATEMENT OF FINANCIAL POSITION (Balance Sheet) for the year ended December 31,
2015 and 2014.
(Amounts expressed in thousands of Turkish Lira (TRY) unless otherwise indicated.)
ASSETS 31.12.2015 31.12.2014
Current assets:
Cash and cash equivalents 2.167.627 1.621.221
Trade receivables 4.790.525 4.433.898
-Due from related parties 8.950 22.371
-Trade receivables, third parties 4.781.575 4.411.527
Derivative instruments 16.293 7.783
Inventories 2.140.057 2.124.946
Prepaid expenses 74.944 68.741
Current income tax assets 27.014 57.988
Other current assets 179.678 145.365
Assets held for sale 10.114 11.815
Total current assets 9.406.252 8.471.757
Non-current assets:
Financial investments 539.176 698.488
Trade receivables 13.205 24.423
Derivate instruments 144.742 17.803
Associates 209.881 195.311
Investment properties - 5.929
Property, plant and equipment 2.055.675 1.812.746
Intangible assets 1.170.930 1.091.195
-Goodwill 163.450 169.195
-Other intangible assets 1.007.480 922.000
Deferred tax assets 198.647 77.353
Total non-current assets 4.332.256 3.923.248
TOTAL ASSETS 13.738.508 12.395.005
LIABILITIES
Current liabilities:
Financial liabilities 1.035.741 719.862
Short term portion of long term financial liabilities 1.149.001 1.082.761
Trade payables 2.090.394 1.781.442
-Due to related parties 413.983 203.022
-Trade payables, third parties 1.676.411 1.578.420
Derivative instruments 3.263 3.811
Employee benefit obligations 156.910 163.623
Other payables 168.519 124.918
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-Due to related parties 12.982 10.003

-Other payables, third parties 155.537 114.915
Current income tax liabilities 13.062 18.154
Provisions 334.536 263.992
Other current liabilities 284.871 272.240
Total current liabilities 5.236.297 4.430.803
Non-current liabilities
Financial liabilities 3.268.907 2.964.986
Other payables 60.674 57.823
Derivate instruments —
Provisions 318.522 268.671
-Provision for employee benefits 192.470 174.896
-Other provisions 126.052 93.775
Deferred tax liabilities 149.635 245.422
Other non-current liabilities 28.636 28.602
Total non-current liabilities 3.826.374 3.565.504
TOTAL LIABILITIES 9.062.671 7.996.307
EQUITY
Paid-in capital 675.728 675.728
Adjustment to share capital 468.811 468.811
Share premium 889 889
Other comprehensive income/expense not to be reclassified to profit or loss
-Actuarial gain/loss arising from defined benefit plans -57.615 -44.552
-Non-current assets revaluation fund 75.747 67.241
Other comprehensive income/loss to be reclassified to profit or loss
-Financial assets revaluation fund 374.201 525.549
-Foreign cur. hedge of net invest. in foreign operations -259.170 -216.342
-Cash flow hedges 1.413 412
Currency translation differences 324.618 178.569
Contribution to shareholders’ equity related to merger 14.507 14.507
Restricted reserves 307.051 275.430
Retained earnings 1.839.690 1.792.299
Net income for the period 891.141 617.084
Atributable to:
Equity holders of the parent 4.657.011 4.355.625
Non-controlling interest 18.826 43.073
Total equity 4.675.837 4.398.698
TOTAL LIABILITIES AND EQUITY 13.738.508 12.395.005
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Income Statement are the cost of the goods and services used to earn
As you know, profitability is one of the major revenues. Examples include salaries expense, rent
goals of a business. Business entities must be expense, advertising expense, utilities expense, and
profitable in order to be successful and to survive. depreciation (allocation of cost) of a building or
Profit, however, means different things to different office equipment. These expenses are often called
people. Accountants prefer to use the term net the cost of doing business or expired costs.
income because it can be precisely defined from
an accounting point of view as the net increase
in owners’ equity that results from a company’s Revenues are increases in owners’ equity
operations.31 resulting from selling goods, rendering
The income statement (also called the statement services, or performing other business
of profit and loss or statement of operations) shows activities.
the amount of sales, all the costs incurred in making
those sales and all the overhead costs incurred in Expenses are the cost of the goods and
running the operations of the company so it would services used to earn revenues.
be able to deliver on its promises to customers.
It reports the success or failure of the company’s
operations for a period of time. The income
statement presents a summary of a business entity’s
revenues and expenses for a period of time. Income statement goes by
various names, including
the statement of earnings,
profit and loss (P&L)
The income statement shows the amount statement, statement of
of sales, all the costs incurred in making income and expenses, or
those sales and all the overhead costs statement of operations.
incurred in running the operations of the
company so it would be able to deliver on
its promises to customers.
Sales
Net income is reported on the income statement, Companies must sell products or services to
and management, owners, and others use it to their customers or clients to earn revenue. Nothing
measure a company’s progress in meeting the goal happens until you sell something to your customers.
of profitability. Net income, in its simplest form, is Sales revenue will be earned by selling the products
measured as the difference between revenues and and services that the company regularly offers for sale
expenses when revenues exceed expenses: in the normal course of business. This means sales
revenue doesn’t include the sale of excess equipment
net income = revenues - expenses or land, because that’s not our normal and regular
business. We also don’t include the sale of a building
Revenues are increases in owners’ equity that we’re not using anymore. Gain or loss on the
resulting from selling goods, rendering services, or sales of building will be reported as an unusal and
performing other business activities. extraordinary income but not as a sales revenue.
Expenses are decreases in owners’ equity Managers, investors, and others often use the
resulting from the cost of selling goods or amount of sales and trends in sales as indicators of
rendering services and the cost of the activities a firm’s progress. Increasing sales suggest growth;
necessary to carry on a business, such as attracting decreasing sales indicate the possibility of decreased
and serving customers. In other words, expenses future earnings and other financial problems.
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Cost of sales R&D has a better chance of staying ahead of its

The cost of sales or cost of goods sold (COGS) competitors. Having better products sooner than
is the cost of creating the products that a company others should provide an edge, at least for a while.
sells; therefore, the only costs included in the
measure are those that are directly tied to the Sales and marketing expenses. Selling
production of the products. expenses include the costs of storing goods and
preparing them for sale: preparing displays, advertising
and otherwise promoting sales, and delivering goods to
The cost of sales or cost of goods sold
a buyer if the seller has agreed to pay the cost of delivery.
(COGS) is the cost of creating the products
that a company sells. General and administrative expen-
ses (G&A). General and administrative expen-
ses include expenses for accounting, personnel,
credit checking, collections, and any other ex-
For a manufacturer, it is the cost of producing penses that apply to overall operations. Examples
the products sold during an accounting period. In include the costs of executive salaries, accounting and
a manufacturing company, COGS always includes human resources personnel, many corporate and emp-
the cost of the supplies and materials used in creating loyee welfare costs, and all the costs of supporting the
the product along with the direct labor costs used to company’s administrative organization. As you see,
produce the good. It excludes indirect expenses such another cost of doing business.
as distribution costs and sales force costs.
Operating income
Gross profit Operating income, is the difference between
This is a key measure of profitability. For a gross profit and operating expenses. Operating
merchandiser or manufacturer gross profit is the income is an important measure of overall
difference between net sales and the cost of goods profitability, because it represents the income of
sold. Gross profit represents the merchandising a company’s main business. It’s usually the final
profit of a company. Earning a gross profit is very result of the company’s normal business activities,
important, because it must be enough to cover all before unusual, nonrecurring, or financially related
of the operating expenses of a business. items that are often considered incidental to what
the company is in business to do.
Operating expenses
Operating expenses include all the operating Other income and expenses
costs of the business, what it takes to keep the doors Other income and expenses also called
open and to support the sales of the company’s nonoperating revenues and expenses, are not
products. Operating expenses are often grouped related to a company’s operating activities. The
into the categories of research and development nonoperating items, such as interest expense on
expenses, sales and marketing expenses, and general borrowed money and profits or losses on selling
and administrative expenses. nonbusiness assets that are likely to happen in the
normal course of doing business, but are not part
Let’s look briefly at what each of these categories
of main activities of the business.
of expenses typically includes:
While typically small in relation to the
operations of the business, they are not necessarily
Gross profit is the difference between net
minor. In fact, some of them can become very
large in relation to net income, especially if the
sales and the cost of goods sold
company’s profit margins are modest. An example
might be the sale of unused land the company has
held for many years, often at a price many times
Research and development greater than the value at which it was carried on the
expenses. Research and development company’s books. When such items get very large,
(R&D) is money spent to create new products they will most likely be labeled extraordinary items
or to significantly improve existing products. A and shown separately.
company which can afford to spend more for
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Income before taxes, income taxes, and net income

Income before taxes is the amount a company has earned from all activities—operating and
nonoperating—before taking into account the amount of income taxes it incurred.
Income taxes also called provision for income taxes, represent the expense for state taxes on corporate
income. Income taxes are shown as a separate item on the income statement. Corporations must report
and pay income taxes on their earnings.
Net income is the final figure, or “bottom line,” of an
income statement. It is what remains of gross margin after Net income is the final figure, or
operating expenses have been deducted, other revenues and “bottom line,” of an income statement.
expenses have been added or deducted, and income taxes
have been deducted.
The income statement is a useful tool for understanding a company’s performance in a very high-level
way. See the Arçelik example in Exhibit 7.2.
Exhibit 7.2 Income Statement of Arçelik Company
CONSOLIDATED STATEMENT OF PROFIT OR LOSS

for the year ended December 31, 2015 and 2014.
(Amounts expressed in thousands of Turkish Lira (TRY) unless otherwise indicated)
2015 2014
Net Sales 14.166.100 12.514.033
Cost of sales -9.630.207 -8.535.201
Gross Profit 4.535.893 3.978.832
General administrative expenses -602.068 -532.789
Marketing, selling and distribution expenses -2.722.014 -2.356.247
Research and development expenses -125.173 -102.055
Other income from operating activities 471.267 216.137
Other expenses from operating activities -275.148 -235.089
Operating profit 1.282.757 968.789
income from investments activities 17.857 16.264
expenses from investments activities -2.781 -1.377
income from association (net) 24.403 18.156
Operating income before financial income 1.322.236 1.001.832
financal income 782.555 476.126
financal expenses -1.319.670 -746.336
Profit before tax 785.121 731.622
Tax income/expense
-taxes on income -97.286 -80.892
-deferred tax income/expense 205.158 -12.752
Net income for the period 892.993 637.978
Attributable to:
Non-controlling interest 1.852 20.894
Equity holders of the parent 891.141 617.084
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Statement of Cash Flows ANALYZING FINANCIAL

How can a profitable firm run out of cash? STATEMENTS
Two explanations of the relation between cash and Accounting is designed to provide information
income suggest answers:32 (1) Net income for a that business owners, managers, and lenders use
particular period does not equal cash flow from for decision making. The basic financial statements
operations. (2) Firms receive cash inflows and
provide much of the information users need to
disburse cash outflows because of investment and
financing activities, which the income statement make economic decisions about businesses. A
does not report directly. firm’s financial managers can use the financial
statements to assess the financial condition of
the firm. Readers cannot easily answer questions
about a firm’s profitability and risks based only on
The statement of cash flows helps a reader the raw information in financial statements. For
understand how a firm obtains and uses cash. example, one cannot assess the profitability of a
firm by noting the amount of net income—large
net income could result from a large firm earning
The statement of cash flows reports the cash small profits on its transactions or from a small
coming in (positive amounts) and the cash going firm earning large profits. Comparing net income
out (negative amounts) during a period. Money with the assets used to generate those earnings will
comes in immediately as a result of the sale of goods provide more useful information.34
and services for cash and later from customers who Financial ratios provide a quick and relatively
buy on credit. Money goes out to pay for various simple means of assessing the financial health of a
costs and operating expenses. Business activities business. Ratio analysis expresses the relationship
result in a net cash inflow or a net cash outflow. among selected items of financial statement data.
The statement of cash flows reports the net A ratio expresses the mathematical relationship
increase or decrease in cash during a period and the between one quantity and another. The relationship
ending cash balance. It provides useful information is expressed in terms of either a percentage, a rate,
about a firm’s ability to generate cash from or a simple proportion.
operations, maintain and expand its operating
capacity, meet its financial obligations, and pay
dividends. As a result, it is used by managers in
evaluating past operations and in planning future Financial ratios provide a quick and
investing and financing activities. It is also used relatively simple means of assessing the
by investors, creditors, and others in assessing financial health of a business.
a firm’s profit potential. In addition, it is a basis
for assessing the firm’s ability to pay its maturing
debt.33 The statement of cash flows reports cash Firms can assess their financial characteristics by
flows by three types of activities: Cash flows from comparing their financial ratios with those of other
operating, investing, and financing activities. firms in the same industry. Ratios also allow quick
comparisons between your business and other
businesses in your industry. Banks and investors
use them to help decide whether a business is a
The income statement good credit or investment risk. Managers look at
shows revenue and
ratios to monitor operations and spot weak areas
expenses that were
recorded according to the and inefficiency. For example, ratios can indicate
accrual basis accounting. whether a business is carrying a dangerous amount
of debt, holding too much inventory, or not collecting
accounts receivable quickly enough. Managers could
also look at their customers’ and vendors’ ratios to
The statement of cash flows reports cash flows assess any risk involved.
by three types of activities: Cash flows from
operating, investing, and financing activities.
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Financial ratios are commonly classified When current assets exceed current liabilities,
according to the characteristics they measure as: net working capital is positive. When current assets
liquidity ratios; efficiency (activity) ratios; debt are much larger than current liabilities, businesses
ratios; and profitability ratios. are better able to pay current liabilities. Businesses
with large amounts of net working capital usually
find it easier to borrow money, because lenders feel
Measures and Evaluation of assured that these businesses will have the means to
Liquidity repay their loans.
Liquidity refers to a firm’s ability to meet short- When net working capital is negative, a
term obligations. Liquidity ratios give a picture of company might not be able to pay short term
a company’s short-term financial solvency. creditors, and the company might ultimately be
forced into bankruptcy. Many businesses set up
NWC credit lines to make sure they don’t run out
Liquidity is a firm’s ability to meet short-
of cash at a critical point. Calculate the NWC of
term obligations. The greater the level of
Arçelik Company for the year 2015:
current assets available relative to current
liabilities, the greater the firm’s liquidity.
9.406.252 - 5.236.297 = 4.169.955 Turkish Lira
As you realize we got the numbers from the
balance sheet illustrated above. NWC of Arçelik is
positive. It means Arçelik has the ability to pay its
Since short-term assets are commonly used
short term debts by using its current assets.
to pay short-term obligations (which are current
liabilities), most liquidity measures compare As we mentioned above liquidity ratios will be
current assets with current liabilities. The greater used to evaluate the company’s short term debt
the level of current assets available relative to paying ability. Most commonly used liquidity ratios
current liabilities, the greater the firm’s liquidity. are current ratio and quick ratio (acid test ratio).
A high degree of liquidity can enhance the
firm’s safety, but an excessive degree of liquidity Current ratio
can reduce the firm’s return. For example, holding The current ratio is closely related to working
an excessive amount of cash is a waste and can reduce capital; it is another way of expressing the
a firm’s returns. relationship between current assets and current
liabilities. The current ratio (CR) is used to assess
Net working capital (NWC) a company’s ability to pay current liabilities as they
become due. The current ratio helps investors and
The excess of the current assets of a business over
creditors understand the liquidity of a company
its current liabilities is called net working capital
and how easily that company will be able to pay
(NWC). The net working capital is often used in
off its current liabilities. It is computed as current
evaluating a company’s ability to meet currently
assets divided by current liabilities:
maturing debts.
current ratio = current assets / current liabilities
Net working capital (NWC) is the excess

of the current assets of a business over its The current ratio (CR) measures the ability
current liabilities. of the firm to pay its current liabilities.
Net working capital is the difference between If current ratio is more than 1, it indicates a
current assets and current liabilities: positive status for the creditors. A higher current
ratio less risk for those who lend money. If the
net working capital = current assets – current
current ratio is less than 1, it indicates that the
liabilities
company has a negative net working capital.
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Generally, the higher the current ratio, Inventory may not be easily converted into
the greater the safety margin between current cash and therefore may be excluded when assessing
obligations and the ability to pay them. A very liquidity. Inventory is excluded because some
low current ratio, of course, can be unfavorable, companies have difficulty turning their inventory
indicating that a company will not be able to pay into cash. Quick ratio is used to see the dependency
its debts on time. Generally, we don’t want to of the company on its inventories to pay its short term
current ratio too low or too high, because if CR debts. The quick ratio is more conservative than the
is too low, company may not pay own current current ratio, a more well-known liquidity measure,
liabilities. Also, if the CR is too high, company because it excludes inventory from current assets.
may not be investing short term resources in longer
term investments that earn higher returns.
Now, we can calculate the current ratio of Arçelik
The quick ratio excludes
Company for the year 2015.
inventory from current
9.406.252 / 5.236.297 = 1,8 times assets.
You can estimate that Arçelik’s current ratio
will be higher than 1, because NWC is positive.
1,8 means the company’s current assets can pay quick ratio = (current assets – inventory) /
its short term liabilities 1,8 times. After payment current liabilities
of the short term liabilities, company has some or quick ratio is calculated by adding cash, cash
current assets to continue its daily operations. equivalents, short-term investments, and current
According to current ratio, we can say company receivables together that can easily be converted
has good position because they can pay their short into cash. The formula:
term liabilities easily in 2015. quick ratio = (cash + marketable securities
+accounts receivable) / current liabilities
Generally, the quick ratio should be lower than
the current ratio, because the inventory figure drops
7
from the calculation. A higher ratio correlates to a
Calculate and explain the higher level of liquidity. This usually corresponds to
meaning of current ratio of better financial health. In the event that short-term
Arçelik Company for the year obligations need to be paid off immediately, there
2014. are situations in which the current ratio would
overestimate a company’s short-term financial
strength.
Quick ratio (Acid test ratio) Let’s calculate the quick ratio of Arçelik for the
year 2015:
The quick ratio (acid test ratio) is a liquidity
ratio that measures the ability of a company to pay quick ratio (acid test ratio) = (9.406.252 -
its current liabilities with most liquid assets. The 2.140.057) / 5.236.297 = 1,4 times
quick ratio is similar to the current ratio, but it’s a The result of quick ratio shows that even the
tougher measure of liquidity than the current ratio, company faces problems to sell its inventory, it has
because it excludes inventories. still ability to pay its short term liabilities as 1,4
times. As we can understand from the results, the
quick ratio is very close to the current ratio because
The quick ratio measures a company’s amount of inventory is not a very high portion in
ability to meet its short-term obligations total current assets. In other words, the company is
with its most liquid assets. not depending on the inventory to be able to pay
its short term debts. So the result of quick ratio is
satisfactory in terms of short term debt paying ability.
The company can pay its short term debts quickly.
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Measures of Efficiency The accounts receivable turnover ratio as a 3,07

Efficiency ratios (Activity ratios) measure for Arçelik, the company can collect its receivables
how efficiently a firm manages its assets. Efficiency 3,07 times in a year.
ratios use turnover measures to show how efficiently accounts receivable turnover = 14.166.100 /
a company operates and uses its assets. (( 4.790.525 + 4.433.898)/2)
Efficiency ratios are meaningful only when = 3,07 times
comparing with other firms in the industry or a If the company can collect 3,07 times in a year
company’s prior turnover ratios. it means they have to wait 117 days to collect
their receivables. So, in order to decide about the
company’s collection ability, you can use whether
Efficiency (activity) ratios measure how the accounts receivable turnover ratio or the
efficiently a company operates and uses its Average Collection Period ratio. Actually they are
assets. different ratios but both of them will provide same
information about company’s credit policy and
efficiency of receivebles. Let’s calculate the average
Accounts receivable turnover and collection period ratio.
average collection period (ACP) The average collection period measures the
The accounts receivable turnover ratio average number of days it takes for a company to
measures how many times a business can collect collect revenue from its credit sales. The average
its average accounts receivable during the year. It daily sales are the 360 divided by trade receivable
measures the ability of a company to efficiently turnover ratio in the year
issue credit to its customers and collect funds from The average collection period = 360 / 3,07
them in a timely manner. Since the receivables = 117 days
turnover ratio measures a business’ ability to
efficiently collect its receivables, if only makes
sense that a higher ratio would be more favorable.
The average collection period (ACP)
Higher ratios mean that companies are
measures the average number of days it
collecting their receivables more frequently
takes for the company to collect revenue
throught the year and it indicates a combination
from its credit sales.
of a conservative credit policy and an aggressive
collections department, as well as a number of high-
quality customers. Increasing turnover in accounts Lower average collection period ratio is favorable
payable over a period of time, generally indicates because it shows company can collect cash earlier
improvement in the process of cash collection on from customers. This shows that the company is
credit sales. However, a normal level of receivables not giving out interest free loans to customers for
turnover differs depending on the industy. Also, long periods of time. A low ACP also reduces the
very high values of this ratio may not be favorable, risk of default. Comparing this measure with the
if achieved by extremely strict credit terms since credit terms provides information on the efficiency
such policies may repel potential buyers. in collecting receivables. When management takes
Accounts receivable turnover is calculated by too long to collect cash from customers, they will
dividing net sales by the average accounts receivable have difficulty paying own suppliers.
for that period.
accounts receivable turnover = net sales /
average accounts receivable
The result of accounts
receivable turnover ratio
is number of times; the
The accounts receivable turnover ratio result of the average
shows how quickly a company converts collection period ratio is
accounts receivable into cash. number of days.
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Asset turnover
Firms prefer to support a high level of sales Inventory turnover ratio shows how many
with a relatively small amount of assets so that they times a company’s inventory is sold and
efficiently utilize the assets they invest in. Firms replaced over a period of time.
that maintain excess assets indicate that they are
not investing their funds wisely.
The asset turnover ratio is calculated by dividing
It is computed by dividing the cost of goods
net sales by average total assets. It shows how
sold by the average inventory.
efficiently a company can use its asset to generate
sales. The asset turnover ratio can be calculated: inventory turnover = cost of goods sold /
average inventory
asset turnover = net sales / total assets
This calculation uses the cost of goods sold
The total assets turnover ratio measures a
figure as the numerator, since inventories are
firm’s ability to generate sales from a particular
usually carried at cost.
level of investment in assets, or alternatively, to
control the amount of assets it uses to generate a In general, high inventory turnover ratio
particular level of sales. Low asset turnover means indicates better performance and shows that
that the company does not use its assets efficiently. a company can sustain sales volume. Because
It can have idle capacity. inventories are the least liquid form of current asset,
a high inventory turnover ratio is generally positive.
On the other hand, if the ratio is unusually high
compared with the average for your industry could
The asset turnover ratio is an efficiency mean you are losing sales because inventory shortage.
ratio that measures a company’s ability to A lower value means inefficiency in controlling
generate sales from its assets by comparing inventory levels. A lower turnover implies weak
net sales with average total assets. sales and, therefore, may be an indication of over-
stocking which may pose risk of obsolescence and
increased inventory holding costs.
Inventory turnover (IT) and days of
inventory outstanding
A business should keep enough inventory on hand Firms must consider
to meet the needs of its customers and its operations. the optimum level of
At the same time, however, an excessive amount of inventory.
inventory reduces solvency by tying up funds. Excess
inventories also increase insurance expense, property
taxes, storage costs, and other related expenses. These Days of inventory outstanding measures the
expenses further reduce funds that could be used number of days it will take a company to sell all of
elsewhere to improve operations. Finally, excess its inventory.
inventory also increases the risk of losses because of Let’s calculate the the inventory turnover ratio and
price declines or obsolescence of the inventory.35 days of inventory outstanding for Arçelik.
The inventory turnover is a ratio showing how inventory turnover = 9.630.207 / ((2.140.057
many times a company’s inventory is sold and + 2.124.946)/2)
replaced over a period of time. It shows how often a = 4,5 times
company replaces its inventory. The more times the days of inventory outstanding = 360 / 4,5 =
inventory is sold and replaced during the year, the 80 days
more likely the company is to be successful. But
The inventory turnover ratio measures how
don’t forget, the turnover ratio is meaningful only
many times, on average, inventory is sold during
when comparing with other firms in the industry
the year. Inventory turned over 4,5 times in 2015;
or a company’s prior turnover ratios.
it means that Arçelik sells its entire inventory
within 80 days’ period.
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7
having more risk. Conversely, firms that obtain a

larger proportion of funds from equity financing
incur smaller debt payments and therefore have
8
less risk.36
Calculate and explain the
meaning of Inventory turnover
ratio of Arçelik Company for Financial leverage represents the degree
the year 2014. to which a firm uses borrowed funds to
finance its assets.
Measures and Evaluation of Long-

Term Solvency Solvency ratios, also called leverage ratios,
Long-term solvency is about a company’s measure a company’s ability to sustain operations
ability to survive for many years in financial terms. indefinitely by comparing debt levels with equity,
Solvency analysis evaluates the ability of a company assets, and earnings. Solvency ratios show a
to pay its long-term debt and the interest on that company’s ability to make payments and pay off
debt. its long-term obligations to creditors, bondholders,
and banks. Better solvency ratios indicate a more
creditworthy and financially sound company in
the long-term.
Debt-to-total assets ratio

The debt-to-total–assets ratio measures the
percentage of total financing provided by creditors.
It measures a company’s total liabilities as a
percentage of its total assets. Debt financing is riskier
than equity financing because debt must be repaid
at specific points in time, whether the company
is performing well or not. Thus, companies with
higher levels of liabilities compared with assets are
considered highly leveraged and riskier for lenders.
Firms that borrow a large proportion of their

funds, have a high degree of financial leverage. The debt-to-total-assets ratio measures the
Increasing amounts of debt in a company’s capital percentage of total financing provided by
structure means that the company is becoming more creditors.
heavily leveraged. Financial leverage represents
the degree to which a firm uses borrowed funds
to finance its assets. This can favorably affect the The debt to total assets ratio is computed by
firm’s owners when the firm performs well, because dividing total debt (both current and long-term)
the earnings generated by the firm can be spread by total assets.
among a relatively small group of owners. When debt-to-total assets ratio = total liabilities /
the firm experiences poor performance, however, total assets
a high degree of financial leverage is dangerous.
Firms with a high degree of financial leverage incur The higher the percentage of debt to total
higher fixed financial costs (interest expenses) that assets, the greater the risk that the company may be
must be paid regardless of their levels of sales. unable to meet its maturing obligations. The lower
These firms are more likely to experience debt the ratio, the more equity “buffer” is available to
repayment problems and therefore are perceived as creditors if the company becomes insolvent. Thus,
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from the creditors’ points of view, a low ratio of Times interest earned
debt to total assets is desirable. Times interest earned, sometimes called the
debt-to-assets ratio = 5.236.297 + 3.826.374 interest coverage ratio, measures a firm’s ability to
/ 13.738.508 cover its interest payments. This ratio shows how
= 66% many times the interest expenses are covered by the
To start with, debt to asset ratio indicates the net operating income, income before interest and
proportion of a company’s assets that are being tax, of the company. It is computed by dividing
financed with debt, rather than equity. Arçelik’s debt income before interest expense and income taxes
to asset ratio is 66% in 2015. The meaning of this by interest expense.
percentage, Arçelik financed about 66% of assets with times interest earned = earnings before interest
its liabilities. In other words, Arçelik financed about and taxes (EBIT) / annual interest expense
34% of assets with its equity. Therefore, Arçelik’s total The higher the times interest earned, the more
liability amount is more than total equity amount. It likely the firm can meet its obligations.
means that there can be financial risk for Arçelik, so it
can be signal for a weakness in solvency.
Measures and Evaluation of
Profitability
Debt-to-equity ratio Investors and creditors are interested in
A measure of the amount of long-term financing evaluating not only a company’s liquidity and
provided by debt relative to equity is called the solvency, but also its profitability. Profitability is
debt-to-equity ratio. This ratio measures the company’s ability to earn a satisfactory income.
percentage of debt tied up in the owner’s equity. Profitability ratios measure the income or
Generally, this calculation uses only long-term debt operating success of an enterprise for a given
debt-to-equity ratio = long-term debt / total equity period of time. A company’s income, or the lack
A higher debt to equity ratio indicates that more of it, affects its ability to obtain debt and equity
creditor financing (bank loans) is used than investor financing, its liquidity position, and its ability to
financing (shareholders). Highly leveraged companies grow. As a consequence, creditors and investors are
are usually more vulnerable to business downturns interested in evaluating profitability. For analyzing
than those with lower debt-to equity ratios. profitability, we mainly focus on the income
statement. Remember, we classify the income
statement according to the sales, operating profit,
A measure of the amount of long-term
income after tax amount or net income, and if
financing provided by debt relative to
there are any unusual gains or losses.
equity is called the debt-to-equity ratio.
Profitability ratios measure the income

If debt is risky, why have any? By using the or operating success of an enterprise for a
other’s money, we can increase the company’s given period of time
profitability. We call it as a financial leverage effect.
Despite its riskiness, debt is a flexible tool of
financing business operations. The interest paid on
debt is tax-deductible, whereas dividends on stock Gross profit margin (GPM)
are not. Because debt usually carries a fixed interest To start with, the most important part of the
charge, the cost of financing can be limited, and income statement is the first section which consists
leverage can be used to advantage. If a company of sales and cost of the sales. The difference between
can earn a return on assets greater than the cost sales revenue and cost of goods sold (COGS) is the
of interest, it makes an overall profit. However, gross profit of the company.
the company runs the risk of not earning a return gross profit margin = (sales – cost of goods
on assets equal to the cost of financing the assets, sold) / sales
thereby incurring a loss.37
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7
The difference between sales revenue and The operating profit margin (OPM) is a
cost of goods sold (COGS) is the gross measure of overall operating efficiency and
profit of the company. incorporates all of the expenses associated
with ordinary business activities.
Gross profit and gross Net profit margin (NPM)

profit margin have Net profit margin shows how much of each
different meanings. sales amount shows up as net income after all
expenses are paid. Net profit margin is calculated
by net income dividing by sales revenue.
Gross profit margin indicates the percentage
net profit margin = net income / sales
of revenue available to cover operating and other
expenditures. A high GPM suggests that the firm has
good cost management controls of its operations.
A high GPM also indicates that a business can Net profit margin measures profitability
make a reasonable profit on sales, as long as it after consideration of all revenues and
keeps overhead costs in control. If business is slow expenses, including interest, taxes, and non-
and profits are weak, a high margin could indicate operating items.
overpricing. A low GPM, especially relative to
industry norms, could indicate underpricing. As
an industry becomes more competitive, this ratio Net profit margin measures profitability
declines. In general, the GPM should be stable, not after consideration of all revenues and expenses,
fluctuating much from period to period, unless the including interest, taxes, and non-operating items.
industry has been undergoing changes that affect It also indicates how well the company converts
the costs of goods sold or pricing policies. sales into profits after all expenses are subtracted. A
higher net profit margin means that a company is
more efficient at converting sales into actual profit.
Operating profit margin (OPM) The higher the profit margin, the more pricing
Operating profit also known as earnings before flexibility a firm may have in its operations or the
interest and tax (EBIT) is a part of a company’s greater cost control initiated by management.
income statement. The operating profit margin is
an important indicator of the company’s earning
power from its current operations. Operating profit Return on assets (ROA)
is any income directly related to the operations of The return on assets ratio measures the overall
the business. The operating profit margin (OPM) profitability of assets in terms of the income earned
is a measure of overall operating efficiency and on each dollar invested in assets. It is computed by
incorporates all of the expenses associated with dividing net income by average total assets.
ordinary business activities. return on assets =net income / total assets
operating profit margin = operating income The ROA provides a broad measure of a firm’s
/ sales performance. ROA gives an idea as to how efficient
Like GPM, the higher the OPM, the more management is at using its assets to generate
pricing flexibility a company has in its operations. earnings. The higher ROA means that assets are
This pricing flexibility provides greater safety used efficiently.
during tough economic times. A higher OPM
could also be a sign of the degree of cost control
management. The return on assets ratio measures the
overall profitability of assets.
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7
Return on equity (ROE) because less equity will be used and the net profit
Return on equity (ROE) is about the will be distributed among fewer shareholders.
profitability of the owners’ equity. Of course, In this chapter, we briefly introduced
owners are interested in how much they have accounting and financial analysis, as main business
earned on their investment in the business. This activities. The details will be explained through a
ratio shows how much net income the company variety of accounting and finance courses in the
earned for each dollar or Turkish lira invested by following semesters. Remember, the importance
the owners. It measures how much profit each and scope of accounting and financing functions
dollar or lira of owners’ equity generates. change according to the size and the resources of
return on equity = Net Income / Owners’ equity the business entity.
The higher ROE will increase the wealth of its The financing function of a business will be
owners. The benefit comes from earnings reinvested explained also briefly in the next chapter.
in the company at a high return on equity rate that
in turn gives the company a high growth rate. This
ratio has to be used carefully because ROE can Return on equity (ROE) shows how much
be high if a company is heavily leveraged. Using net income the company earned for each
high levels of financial leverage can increase ROE, dollar invested by the owners.
Further Reading
Turkish SMEs’ Use of Financial Statements statements to make decisions, (2) have more
for Decision Making confidence in their financial statements than
“With a sample of 91 small Turkish firms, those who do not use financial statements to
this study examines the factors that affect the make decisions, and (3) have greater knowledge
use of financial statements, and the important about financial statements than owners who do
information they contain, to make decisions. not use financial decisions to make decisions.”
A principal components analysis identifies ….
three key variables that determine the use of Source: Vanauken, H. E., Ascigil, S., & Carraher,
financial statements: experience, confidence, and S. (2016). Turkish SMEs’ use of financial
knowledge. .…. statements for decision making. The Journal of
The analysis provides three main findings: Entrepreneurial Finance 19 (1).
Owners of Turkish SMEs who use financial Retrieved at http://digitalcommons.pepperdine.
statements to make decisions (1) are more edu/jef/vol19/iss1/6
experienced than those who do not use financial
258
7
In Practice
Uniform Chart of Accounts Purposes of financial statements

The introduction of the Uniform Chart • To provide useful information in the
of Accounts as of 1 January 1994 marks the decision making process of investors,
beginning of a new era for Turkish accounting creditors and other related parties.
practice. The Communiqués introduced by the • To provide useful information to evaluate
Ministry of Finance on the Uniform Chart of future cash flows.
Accounts regulate the basic concepts and principles • To provide information on assets, liabilities,
of accounting in addition to providing a guideline change in such items and operating results.
for the preparation and presentation of financial Characteristics of information in the financial
statements. statements
This regulation primarily aims at ensuring In order to help the decision maker,
a true and fair reflection of the operations and understand financial statements easily and
results of companies by imposing common criteria quickly, they should be comprehensive,
for the accounting of each and every transaction appropriate to needs, reliable, comparable, and
as well as their conclusive presentation. be timely prepared and presented.
Basic concepts of accounting are as follows: The framework of the Uniform Chart of
1. Social responsibility concept Accounts
2. Entity concept Companies are required to establish their
3. Going concern concept accounting systems according to the framework
4. Cut-off concept of the uniform chart of accounts.
5. Monetary unit concept Discuss:
6. Costing concept
1) Explain the basic accounting concepts.
7. Objectivity concept
Why accounting concepts are important in
8. Consistency concept
financial reporting?
9. Full disclosure concept
2) How can you record the transactions in this
10. Prudence concept
chapter according to the Turkish Uniform
11. Materiality concept
Chart of Accounts? (Search for the full
12. Substance over form concept
list of chart of accounts and journalize the
transactions by using code numbers)
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7
Defining accounting and relevant

LO 1 terms
Accounting organizes and summarize financial information so

decision makers can use it. All the data related to economic
events and transactions must be collected, categorized, summa-
rized and analyzed in order to convert to financial information
helpful to decision makers. Accounting consists of three basic
activities—it identifies, records, and communicates the eco-
Summary
nomic events of an organization to interested users.

Bookkeeping is the recording of a firm’s financial transac-
tions. Bookkeeping is the act of recording and organizing of
financial transactions in the accounting system in accordance
with the generally accepted accounting principles (GAAP). It
ensures that records of the individual financial transactions are
correct, up-to-date and comprehensive. Today bookkeeping is
done with the use of computer software.
LO 2 Identify the users of accounting

information
Users of accounting information can be divided broadly into two

groups: internal users and external users. Internal users of acco-
unting information are managers who plan, organize, and run a
business. These include marketing managers, production super-
visors, finance directors, and company officers. There are several
types of external users of accounting information. The informati-
on needs and questions of external users are very different.
Describing and distinguishing the

LO 3 areas of accounting
The two most common accounting areas are financial accoun-

ting and managerial accounting. Other fields include cost acco-
unting, environmental accounting, tax accounting, accounting
systems, international accounting, not-for-profit accounting,
and social accounting.
Financial accounting focuses on reporting to external par-
ties such as stockholders, investors, governmental agencies, cre-
ditors, banks, and suppliers.
Managerial accounting is concerned with providing infor-
mation to internal decision makers, such as the company’s ma-
nagers. Managerial accounting uses both financial accounting
and estimated data to aid management in running day-to-day
operations and in planning future operations.
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7
Describing the profession of

LO 4 accounting
Accountants can be classified as private and public accoun-

tants. Private accountant works for a business firm in any posi-
tion not included in public accounting. Accountants and their
staff who provide services on a fee basis are said to be employed
in public accounting.
In Turkey, the profession was largely self-regulated under
Summary
the Law on Certified Public Accountancy (CPA) and Sworn-
in Certified Public Accountancy (Law No. 3568). The Law
defines accounting and auditing as a profession. Accordingly,
accountants who have been awarded a license by Union of
Chambers of Certified Public Accountants (TÜRMOB) are
entitled to render professional services.
Understanding the recording

LO 5 process
An accounting system is a composition of methods and pro-

cedures for collecting, classifying, summarizing, and reporting
a business’s financial and operating information. Accounting
systems must effectively collect, accumulate, and report the
companies’ transactions.
The accounting cycle is a set of steps that are repeated in
the same order every period to keep track of what happened in
the business and to report the financial effect of those transac-
tions.
Accounting relies on a system of accounts, with the name or
title of each account intended to capture the nature of the items
in the account. An account is a detailed record of increases and
decreases in a specific asset, liability, or owner’s equity item.
Companies will prepare financial statements at the end of each
period by using the balance of accounts.
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7
LO 6 Identifying the content and purpose

of the basic financial statements
The most important financial statements are the balance sheet,

the income statement, and the cash flows statement.
A balance sheet, or statement of financial position, is a financial
statement that reports a business’s assets, liabilities, and equity
on a specific date. This relationship is described by the follo-
wing basic accounting equation:
Summary
Assets = Liabilities + Owner’s Equity

An income statement presents the revenues and expenses of
a company for a specific period of time. Net income is measu-
red as the difference between revenues and expenses:
Net Income = Revenues - Expenses
The statement of cash flows reports the net increase or dec-
rease in cash during the period and the ending cash balance.
LO 7 Explaining and understanding the

financial statement analysis
The basic financial statements provide much of the informa-

tion users need to make economic decisions about businesses.
Financial ratios provide a quick and relatively simple means of
assessing the financial health of a business.
Liquidity refers to a firm’s ability to meet short-term ob-
ligations. Liquidity ratios give a picture of a company’s short-
term financial solvency. Efficiency (activity) ratios show how
efficiently a company operates and uses its assets. Debt ratios
show to what extent and how well a company uses borrowed
funds to finance its operations. Profitability ratios use various
profit margin analyses to show return on sales and capital, as a
measure of how well a company is using its resources to gene-
rate profits
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7
1 What are the three basic activities of accounting? 6 Which was established with the authority to
set and to issue Turkish Accounting and Financial
a. Identifying, recording, and communicating Reporting Standards (TASs and TFRSs) that are in
b. Evaluating, recording, and identification full compliance with IFRS Standards and to deter-
c. Evaluating, managing, and financing mine the application scope of those standards?
d. Social responsibility reporting, identifying, and a. Chambers of Sworn-in CPAs
comparing
b. Union of Chambers of Certified Public Acco-
Test yourself
e. Operating efficiency, recording efficiency, and untants of Turkey
ethical issues
c. Public Oversight, Accounting and Auditing
Standards Board of Turkey
2 “Accounting is the means by which business d. The Capital Markets Board of Turkey
information is communicated to the all information e. Banking Regulation and Supervision Agency
users.” Based on this signification, which of the follo-
wing describes the accounting in the proper content? 7 Which transactions below will be recorded
a. Accounting is “the hidden face of business.” chronologically?
b. Accounting is “the books of business.” a. The income statement
c. Accounting is “the language of business.” b. The balance sheet
d. Accounting is “the heart of business.” c. Trial balance
e. Accounting is “the hidden figures of business.” d. The ledger
e. The journal
3 Which one is the act of recording and
organizing of financial transactions in the 8 Which transaction is recorded in the
accounting system in accordance with the generally following journal entry?
accepted accounting principles (GAAP)?
Date Account Titles Debit Credit
a. Controlling b. Bookkeeping
May1, 2017 CASH 30.000
c. Analyzing d. Closing 50.000
EQUIPMENT
e. Decision making
CAPITAL 80.000
4 Which of the following users is an internal a. In May 1, 2017, the owner invested $30.000
information user?
cash and an equipment its value is $50.000 in
a. Creditors order to establish the business.
b. Taxing authorities b. In May 1, 2017, the owner invested $30.000
c. Middle level managers cash and purchased an equipment its value is
d. Customers or clients $50.000.
e. Current and prospective investors c. In May 1, 2017, the company purchases equip-
ment, paying cash of $30.000.
5 Which area of accounting is concerned d. In May 1, 2017, the company buys equipment
with providing information to internal decision on account (credit), agreeing to pay $50.000
makers? within 60 days.
e. In May 1, 2017, the company buys equipment
a. Financial accounting $50.000 on cash but the remainder is paid by
b. Corporate governance using capital.
c. Auditing
d. Managerial accounting
e. Bookkeping
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7
9 Which ratio measures the ability of the firm to 10 Which one below will report a business’s
pay its current liabilities? assets, liabilities, and equity on a specific date?
a. Average payment period (APP) a. The profit or loss statement
Test yourself
b. Current ratio b. The income statement

c. Asset turnover c. The statement of cash flows
d. Debt-to-equity ratio d. Non-current assets
e. Gross profit margin (GPM) e. The balance sheet
1. a If your answer is incorrect, review 6. c If your answer is incorrect, review

“Definition of accounting”. “Governing organizations”.
2. c If your answer is incorrect, review 7. e If your answer is incorrect, review “The

“Definition of accounting”. accounting cycle”.
3. b If your answer is incorrect, review 8. a If your answer is incorrect, review “The

“Definition of bookkeeping”. recording process illustrated”.
4. c If your answer is incorrect, review “Internal 9. b If your answer is incorrect, review

users”. “Measures and evaluation of liquidity”.
5. d If your answer is incorrect, review 10. e If your answer is incorrect, review “The
“Managerial accounting”. balance sheet”.
264
7
Where can you find financial information about a

company?
Financial information of companies can be obtained through a variey of

sources. Companies will prepare and publish their financial statements in
Your turn 1 order to communicate with decision makers. Financial statements are reliable

sources for evaluating companies’ financial condition. So you can use their
financial statements to get information about their financial conditons.
Give an example for a type of information that will be important

if you want to invest in a company as a shareholder (owner).
If you want to be one of the owner or shareholders of company, you will invest
your own money or other assets in the company for an unlimited time to earn
Your turn 2 profit. But especially in fluctuated circumstances the company’s ability to earn
profit will be uncertain. Therefore, profitability of the company will be one of the
most critical issues for the success of an investment. Consequently, the profitability
and earning power of the company will be one set of information to seek for.
The financial statements of company must be audited, why?
The financial statements are communication tools between a company and

external users. External information users are not inside the company even
its owners (unless owners are managers) and they can not directly access
Your turn 3
the information. They have to use published financial statements. Financial
statements must report the true picture of a company. If independent third
parties approve the correctness of financial statements, then these statements
are assessed as realiable sources which can be used in decision making processes.
A company borrowed money from the bank for 3 months. Show

the effects of this transaction on the accounting equation.
Accounting equation: Assets = Liabilities + Owners’ Equity

If a company borrows money from a bank, company’s cash will increase. Cash is
an asset meaning that the asset side of the equality will increase. In this case, the
Your turn 4 company borrowed money for a limited time, only for 3 months, so at the due
date company must pay back the loan. It means company’s debt is increasing and
debts are parts of liabilities so right side of equality will also increase the same
amount.
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7
Explain what an account is and how it helps in

the recording process.
An account is a record of increases and decreases in specific asset, liability,

and owner’s equity items. Each one of the items that will be reported in the
Your turn 5
financial statements must be followed in a separate journal, because financial
statements will be prepared by using tha balance of each account.
Explain the necessity of classifying the assets as current and

non-current.
A classified balance sheet groups together similar assets and similar liabilities,
using a number of standard classifications and sections. This is useful because
items within a group have similar economic characteristics.
Assets that management expects to convert to cash, or to sell, or to
consume during the normal operating cycle of the business are current assets.
Your turn 6 To understand the company’s ability to continue to the daily activities and
operations we must see the asset items that are related to operating activities
like cash, inventories. They will be consumed or used in short term and we
have to report them as current assets. All other assets are noncurrent assets.
Non current assets’ usefelness will continue for the longer time, at least longer
than one year and they are not vary as liquid items, therefore we must report
as different section on the balance sheet.
Calculate and explain the meaning of current ratio of Arçelik

Company for the year 2014.
To calculate the current ratio of Arçelik Company for the year 2014 we have
to look at the Balance Sheet (Statement of Financial Position) of 2014. In the
Balance Sheet you will see the current asset and current liabilities. Calculation is:
8.471.757 / 4.430.803 = 1,9 times
Your turn 7
Current ratio for 2014 is 1,9 times. Arçelik can pay its short term debts
1,9 times by using its current assets. There is no risk for short term creditors.
Also Arçelik has Net Working Capital, because current ratio is higher than
1; it means the company can continue its daily operations after payment of
current liabilities.
Calculate and explain the meaning of inventory turnover

ratio of Arçelik Company for the year 2014.
Actually to calculate the inventory turnover ratio we should use average

inventory amount. If you paid attention in previous sections, for calculating
Your turn 8 the inventory turnover for 2015, we used the average inventory amount.
Therefore, for calculating the mentioned ratio we need to obtain data from
2013 balance sheet of the company.
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7
endnotes
1 Horngren, C. T., Harrison, W. T., & Oliver, M. S. 19 Weygandt, et. al., op. cit., p. 29.
(2012). Accounting (9th ed.). Prentice Hall, p. 3. 20 Warren, et. al., op. cit., p. 9.
2 Harrison, W. T., Horngren, C. T., Thomas, W., 21 https://www.ifac.org/about-ifac/membership/country/
& Suwardy, T. (2014). Financial Accounting:
turkey
International Financial Reporting Standards (9th ed.),
Global Edition. Pearson Educated Limited, p. 4. 22 https://www.ifac.org/about-ifac/membership/country/
3 turkey.
Weygandt, J. J., Kimmel, P. D., & Kieso, D. E.
(2009). Accounting Principles (9th ed.). John Wiley 23 https://www.ifac.org/about-ifac/membership/country/
& Sons, p. 5. turkey.
4 Ibid. 24 Harrison, W. & Horngren, C. T. (2008). Financial
5 Accounting (7th ed.). Pearson, p. 6.
Harrison, et. al., op.cit., p.10.
25 https://www.ifac.org/about-ifac/membership/country/
6 Kimmel, P. D., Weygandt, J. J., & Kieso, D. E.
turkey
(2009). Financial Accounting: Tools for Business
Decision Making (5th ed.). John Wiley & Sons, 26 Harrison & Horngren, op. cit.
Inc., p. 6. 27 Madura, J. (2007). Introduction to Business (4th
7 Horngren, C. T., Srikant, M. D., & Rajan, M. V. ed.). South-Western, Cengage Learning, p. 572.
(2012). Cost Accounting: A Managerial Emphasis 28 Stickney, C. P., Weil, R. L. & Schipper, K. (2010).
(14th ed). Pearson Education, Inc., p. 3. Financial Accounting: An Introduction to Concepts,
8 Kimmel, et. al., op. cit. Methods, and Uses (13th ed.). South-Western,
9 Horngren, Cengage Learning, p. 43.
et. al., op. cit.
29 Ibid., p. 52.
10 Ibid.
30 Monger, op. cit.
11 Kimmel, et. al., op. cit.
31 Needles, B. E. & Powers, M. (2007). Financial
12 Ibid., p. 7.
Accounting (9th ed.). Houghton Mifflin, p. 158.
13 Webster, W. H. (2004). Accounting for Managers. 32 Stickney, et. al., op. cit., p. 184.
McGraw-Hill, p. 6.
33 Warren, et. al., op. cit., p. 692.
14 Monger, R. (2010). Financial Accounting: A Global
Approach. John Wiley & Sons, Inc., p. 7. 34 Stickney, et. al., op. cit., p. 244.
15 Horngren, et. al., op. cit. 35 Warren, et. al., op. cit., p. 752.
16 Weygandt Jerry J., Kimmel, P. D., & Kieso, D. E. 36 Madura, op. cit., p. 582.
(2009). Accounting Principles (9th ed.). John Wiley 37 Needles, op. cit., p. 726.
& Sons, Inc.,p. 29.
17 Horngren, et. al., op.cit., p. 4.
18 Warren, Carl S., James M. Reeve, & Duchac,J. E.
(2007). Accounting (22th ed.). South-Western,
Cengage Learning, p. 9.
267
Chapter 8 Managing Financial Resources
1 2
Learning Outcomes
Identify main decision fields of business

finance. Describe main functions of financial markets.
3 Explain the significance of short-term-financial

planning. 4 Understand the roles of basic tools used in
long-term financing.
5 Distinguish most widely used techniques in

the capital budgeting process. 6 Describe risk and distinguish various types of
financial risks.
7 Discuss how financial decisions influence

shareholder value. 8 Explain why ethics is important in finance.
Chapter Outline
Overview of Business Finance Key Terms
Financial Markets Capital structure
Short-Term Financial Management Capital budgeting
Long-Term Financing Economic profit
Capital Investment Decisions Budget
Financial Risk Management Corporate governance
Shareholder Value Management Enterprise risk management
Ethics in Financial Management Working capital
268
8
In the new millenium, we have been OVERVIEW OF BUSINESS

experiencing enormous advances in technology FINANCE
and communication systems which generate new
Business finance is one of the main fields of
opportunities and challenges for businesses all over
decision making for business managers. Business
the world. In today’s business world, companies
finance focuses on decisions such as whether to
have to struggle in highly competitive markets
invest in a new factory building; to borrow from
to achieve their goals and be successful. These
a bank; to finance the purchase of a machine; and
goals include surviving, growing, making profits,
what percentage of the profit should the company
and increasing market share in the industry they
distribute as dividends.
are operating. Above all, the ultimate goal of
businesses is to maximize the wealth of the owners
or investors of the business. In other words,
business managers concentrate their efforts on Business finance comprises decisions of
increasing the wealth of shareholders through businesses which are basically related to
value creation. As the performance of a business investment and financing of assets of a
is expected to be reflected in the stock price, the business.
shares of successful companies tend to appreciate
and provide capital gains for investors. Moreover,
profitable companies can also provide dividend Business finance decisions are related to the
gains for their shareholders, if they distribute some resources of a business and they can be grouped
of their profits to the shareholders in the form of as investment decisions, financing decisions and
dividends. Thus, managerial decisions influence operating decisions as shown in Figure 8.1:1
the performance of companies and creation of • Investment decisions
value or wealth for the shareholders. Making sound investment choices in line with
In fact, managers can be thought of as agents business strategies and economic analysis.
of owners of a company. The shareholders in a • Financing decisions
way act as the principal owners who delegate Selecting the optimum mix of internal and
the management of the business to professional external funds to finance the investments of the
executives. As a result, managers undertake business.
major strategic and daily operational decisions • Operating decisions
on behalf of the owners of a company, and Employing the resources of the business to
they must work to serve the best interest of efficiently generate profits.
the shareholders. Hence, they must manage
the resources of the company efficiently and Figure 8.1 Business Finance Decisions
effectively to enhance the goal of shareholder
value maximization. During the value creation
process, business managers must undertake a
wide variety of business decisions. All decisions
Investment Financing Operating
involve trade-offs meaning some benefits can Decisons Decisons Decisons
be achieved only at the expense of some costs.
Business decisions must be carefully evaluated to
consider the benefits and costs associated both
in the short and long-terms. Effective decisions
should support the long-run performance of a
business rather than the short-term achievements. When businesses manage
financial decisions
effectively, they can
improve the overall results
of their activities and the
value creation process.
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8
Managing Financial Resources
Investment Decisions
In order to carry out their activities and accomplish their goals in line with their strategies, businesses
must own some resources, as also explained in Chapter 7. To invest in these resources, managers must
make careful analyses as they allocate funds for these
resources. Investment decisions mainly include decisions
related to current assets, which can be converted into Current assets can be converted into cash
cash in a relatively short period, namely within one year; in a relatively short period.
fixed assets, which can be converted into cash in a longer Fixed assets can be converted into cash in a
time of period, that is to say, in more than a year. In fact, longer time of period.
current assets are more liquid assets. They are referred to as
working capital which consists of investments such as cash,
marketable securities, accounts receivables, and inventory. Fixed assets, on the other hand, comprise less
liquid investments such as land, building, machinery, equipment etc.
Since investment decisions influence how the funds of the business are engaged, they require cautious
planning and implementation. Businesses usually establish capital budgets to plan for long-term
investments.
Financing Decisions
Financing decisions involve decisions about how much
Financing decisions involve decisions
profit to distribute as well as how to finance the resources
about how much profit to distribute as
of the company. As businesses invest in assets to carry on
well as how to finance the resources of the
their operations, they must make decisions regarding how
company.
to finance these resources. The main sources of finance for
companies can be grouped as:
• Internal Funds
Internal funds are generated by retaining those profits Internal funds are generated by the profits
which are not distributed as dividends to the shareholders. which are not distributed as dividends to
These types of funds provide financing sources for the the shareholders.
company to be reinvested in the business for growth. The
retained earnings of the company become a part of equity External funds are generated by borrowing
and they provide equity financing. from financial institutions, by issuing
• External funds bonds, or by issuing shares of stock.
External funds are provided from creditors; by
borrowing from financial institutions, by issuing bonds, or
by issuing shares of stock. Funds provided by creditors in the form of bank loans or bonds issued by the
company convey debt financing, whereas funds provided through stock issues convey equity financing.
The combination of internal funds and external funds
creates the financing structure, in other words the capital
structure of the company. Companies strive to find the The combination of internal funds and
optimum capital structure that would maximize the profit external funds creates the financing
of the company with an acceptable level of risk. structure, in other words the capital
structure of the company.
The best mix of debt financing and equity financing
depends on the type of the industry in which the company
operates and general economic conditions as well. Moreover,
it depends on the following factors:
• Level of risk that management can be assumed in case of unpredicted events.
• Level of earnings to cover the interest payments associated with debt financing and dividend pay-
ments associated with equity financing.
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8
• Level of control that management seeks FINANCIAL MARKETS

to maintain as issuing new shares of stock Since businesses operate within the financial
brings new shareholders to the company who system of the economy, they interact with financial
have voting rights as owners of the company.
markets and institutions. Businesses cooperate
• Costs of debt financing and equity financ-
with financial markets and financial institutions to
ing at the time of capital structure decisions.
implement appropriate financial decisions within
• Conditions in the financial markets.
the dynamics of business environment.
Firms attempt to pursue the best mix of debt and
equity financing in theory. However, in practice, there
is no magical formula
to attain the optimum Financial markets are institutions and
financing mix. Firms procedures which facilitate the transfer
usually make capital Capital structure decisions of funds through financial transactions
structure decisions on are made on the basis of involving financial claims.
the basis of market market timing, managers’
timing, managers’ risk risk appetite, flexibility of
appetite, flexibility management, and other Some economic units (households, business
of management, and factors. firms, governments, and foreigners) spend more
other factors.2 than they earn during a certain period. Revenues of
these so-called saving-deficit units are not sufficient
to cover their expenditures. On the other hand,
Operating Decisions some economic units earn more than they spend.
Operating decisions focus on the efficient use Hence, revenues of these so-called saving-surplus
of resources to create competitive advantage in the units exceed their
market by developing effective and cost efficient expenditures. Some
systems and processes such as production, service, mechanisms are
information, and technology. Businesses need to needed to ease the Stocks and bonds are
manage the cash flows and financing needs which flow of funds from most widely used financial
arise from daily operations. Operating decisions surplus units to deficit securities in the financial
mainly affect the revenues, costs, and profits of units. Suppliers of markets.
the company. Business managers utilize budgets funds and demanders
and economic analysis tools to evaluate operating of funds come together in financial markets to
decisions. Indeed, operational results provide exchange savings or funds in return for financial
information to assess the performance of the claims or securities (Mishkin & Eakins, 2012).3
company, and they also provide information for
The Borsa İstanbul is the sole exchange entity of Turkey.
future strategic decisions.
The financial manager of a

company is considering how
much of the net profit can be
distributed to the stockholders
as dividends and how much of
the net profit can be retained
in the company to be a part of
equity. What type of finance
decision is in considered by the internet
financial manager? http://www.borsaistanbul.com/en/home-page
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Functions of Financial Markets

Financial markets serve many roles among which are:4
• Efficient allocation of capital
Financial markets help channel funds into profitable investments and boost economic growth
• Price discovery
Prices of financial assets are formed in the market by the interaction of demand and supply for these
securities.
• Liquidity
Investors can sell their investments and turn them into cash in financial markets.
• Risk Sharing
Financial institutions such as commercial banks, Financial institutions such as commercial
mutual funds, and pension funds create and sell assets with banks, mutual funds, and pension funds
different risk characteristics for different type of investors. create and sell assets with different risk
characteristics for different type of investors.
Structure of Financial Markets
Financial markets can be classified as:5
• Money markets: Markets where short-term securi- Money markets include short-term
ties like commercial paper and treasury bills are securities like commercial paper and
traded. treasury bills.
• Capital markets: Markets where long-term securities
like bonds and stocks are traded. Capital markets include long-term
securities like bonds and stocks.
Stocks are traded in the

capital markets since they
have no maturity.
They can also be classified as: Initial public offerings of shares of stock
• Primary markets: Markets in which securities are takes place in primary markets.
offered for the first time.
• Secondary markets: Markets in which currently Currently outstanding securities are traded
outstanding securities are traded. in secondary markets.
Companies go public in primary markets through initial public

offerings (IPOs). The annual ‘Best Initial Public Offering’ prize sponsored 2
by Swedish East Capital, Europe’s leading investment company, was awarded Identify the type of markets
to Halkbank in Turkey in 2007. Shares equivalent to 24.98% of the bank involved when you buy or sell
were sold for $1.849 billion. For the initial public offering of shares, the shares of stock of a company
number of total requests both inside and outside Turkey amounted to 17.4 listed at Borsa İstanbul.
billion TL ($12.9 billion), a figure 8 times more than the volume of the
initial public offering itself. Recently, Turkish fashion retailer Mavi Jeans
announced its plans for the listing on Istanbul’s stock Exchange. Mavi Giyim’s initial public offering (IPO) bids
were collected in June 2017 and trading is seen priced at 43-51 lira per share. (http://www.reuters.com/article/
turkey-mavi-ipo-idUSI7N1II01F)
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SHORT-TERM FINANCIAL MANAGEMENT

Companies can generate more cash flows and value by managing their working capital efficiently.
Working Capital Management

Working capital includes current asset investments of the firm, which comprises assets that can be
converted into cash within one year. Current assets include cash, marketable securities, accounts receivables,
inventory, and other short-term investments of the firm. Companies need to sustain a sufficient level of
working capital to ensure that short-term obligations are met on time. Net
Working Capital on the other hand refers to the current assets of the firm
less the current liabilities.
Companies usually utilizes the self-liquidating principle to maintain Companies may invest
a proper level of working capital. According to this principle, temporary heavily in working capital
investments are financed with temporary sources while permanent asset which consists of more
investments are financed with permanent sources.6 liquid assets to enhance
Working capital can be financed by: liquidity. However, these
• Accrued wages and salaries, investments usually yield a
• Accrued taxes, lower return compared to
• Short-term loans provided from commercial banks, finance compa- fixed investments.
nies or factors,
• Issuing commercial papers (short-term promissory
notes).
With respect to how much cash should be held, special Net Working Capital refers to the current
attention is needed. Financial managers must establish a assets of the firm less the current liabilities.
proper balance between holding too little cash and too much
cash. Too much cash means forgoing profitable investment
opportunities whereas too little cash means increased risk insolvency.7
Short-Term Financial Planning

Companies need to plan for the future to predict future
financing requirements and prepare for future needs. Pro Pro forma income statement exhibits
forma financial statements (mainly balance sheet and forecasted revenues and expenses for a
income statement) are prepared for this purpose. Through future period.
these pro forma statements financial managers forecast
revenues and expenses of the planning period together with Pro forma balance sheet displays forecasted
the level of funds which will be invested in current assets assets and total financing provided by debt
and fixed assets. and equity financing at a future date.
Pro forma income
statement exhibits forecasted
Being unable to meet revenues and expenses for a
maturing liabilities leads future period. Pro forma balance sheet displays
to insolvency. forecasted assets and total financing provided by To plan for future cash
debt and equity financing at a future date. flows, financial managers
In cases when it is estimated that the total utilize cash budgets which
financing forecasted will not cover the future asset investments, the shortage present cash balances of
should be financed. Financial managers must prepare plans to finance the the company at future
financing requirements that will arise. Otherwise, companies may face dates.
insolvency risks.
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In addition to pro forma financial statements, Basic Tools of Long-Term

financial managers employ budgets for short-term Financing
planning. A budget is a plan to show how much
money a person or organization will earn and how
much they will need or be able to spend. Trade credit
Suppliers may extend trade credit to their
customers for a long time especially when they sell
A budget is a plan to show how much fixed assets. The terms of the credit are negotiated
money a person or organization will earn between the supplier and the business.
and how much they will need or be able to
spend.
Leasing
Companies may choose to lease machinery,
equipment, and other fixed assets to finance the
purchase of them for a long-term, which is called
3 capital lease. It is a lease agreement by which
the lessee rents the property and makes regular
What are the main functions of
payments to the lessor for a specified number of
budgets?
months or years. The lessor agrees to transfer the
ownership rights to the lessee after the completion
of the lease period. Capital or finance leases are
LONG -TERM FINANCING long-term and non-cancellable in nature.
Companies usually prefer to finance their long-
term assets with long-term resources such as
long-term trade credit extended by their suppliers, Capital lease is a lease agreement by
long-term leasing, long-term bank loans, issuing which the lessee rents the property and
bonds or issuing stock. The financial manager’s makes regular payments to the lessor for a
goal is to provide the appropriate level of long-term specified number of months or years.
financing at the minimum cost with an acceptable
level of risk. The business must be able to generate
cash flows to pay back the debt and refrain from Bank loans
going bankrupt. Banks may grant a business a line of credit by
which the business can borrow funds to fulfill its long-
term financing needs. Banks usually prefer to extend
Companies usually finance their long-term long-term credit to large companies with a sound
assets with long-term resources such as credit history and may ask for a collateral since long-
long-term trade credit extended by their term financing is riskier than short-term financing.
suppliers, long-term leasing, long-term
bank loans, or by issuing bonds or stocks.
internet
http://www.businessdictionary.com/
definition/corporate-governance.html
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Banks usually assess the credit worthiness of companies to establish a credit relationship with companies
by in view of 5 C’s of credit as shown in Figure 8.2.
Figure 8.2 Five C’s of Credit
Character Capacity Capital Collateral Conditions
• Character. Banks evaluate the experience and track record of the business owners and managers
in the industry.
• Capacity. Capacity refers to considering your other debts when determining the ability to repay
the loan.
• Capital. Capital refers to the value of your assets less your liabilities. In simple terms, capital
reflects to how much you own (for example, car, real estate, cash, and investments) minus how
much you owe.
• Collateral. Collateral refers to any asset of a borrower a lender can use to pay the debt if the bor-
rower is unable pay back the loan.
• Conditions. Banks may evaluate the industry and competition as well as general economic con-
ditions.
Issuing bonds
Firms may issue bonds as a form of debt financing. A bond is a promissory note with a fixed
A bond is a promissory note with a fixed interest rate, interest rate, contractual payments, and a
contractual payments, and principal. principal.
As the party issuing the bonds, the company sells the
bonds to bond investors and provides financing. In return,
the company promises to pay back principal (face value / par value) of the
bond at maturity (e.g. 3 years, 5 years) together with interest payments at
certain intervals called coupon payments, which are rewards for the bond Interest payments for
holders who in a way lend their money to the company. borrowings from banks
Bonds may be sold for a value equal to the par value or maturity value. or bondholders are tax
If they are sold below the par value, they are called discount bonds. On the deductible. Therefore,
other hand, if the price or market value is above the par value, they are called after-tax cost of borrowing
premium bonds. is the interest cost less the
For example, in May 2017, Vakifbank issued international bonds for USD tax benefit.
500,000,000 maturing in 2022 with a 5.625% coupon. Bonds were sold at
a price of 99.892. USD. Therefore, these bonds are discount bonds.(See more:
http://cbonds.com/news/item/911585)
Issuing stocks
Firms may issue shares of stock to raise capital as a form of equity financing. Stocks represent ownership
interest in the business and its assets. Companies raise capital by issuing shares of stock. Financing decisions
involve debt or equity financing. Bond issuances provide debt financing whereas issuing shares of stock
provide equity financing. Stocks can be issued in the form of preferred stock or common stock. Preferred
stock is a hybrid security that resembles bonds as it pays a fixed amount of dividend and resembles common
stock as it provides equity financing and has no maturity.
Financing decisions involve debt financing or equity financing. Bond issuances provide debt financing
whereas issuing shares of stock provide equity financing for companies.
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Financing decisions involve debt or equity

4
financing. Bond issuances provide debt
financing whereas issuing shares of stock Do stockholders receive
provide equity financing. dividends out of the net profit
of the company each and every
If a company goes bankrupt, creditors who year?
provide debt financing for the business have the
highest priority, meaning they receive their claims
CAPITAL INVESTMENT
first. Then comes the preferred stockholders in terms
of priority of claims. What remains can be used
DECISIONS
to cover the claims of the common stockholders. Capital investment decisions are related to
Thus, common stockholders are sometimes named long-term investments of businesses. Therefore,
as the residual owners of the company.8 they involve a higher level of risk compared to
short-term investments, namely working capital.
Financial managers help managers of the company
to assess the profitability of investments and select
Preferred stock is a hybrid the best investment alternatives.
security. Activities of planning and evaluating investment
projects is called capital budgeting. The capital
Stocks grant the holders: budgeting process involves economic analysis
and selection of projects according to some criteria
• Limited liability in case of bankruptcy
determined by the management of the company.9
(limited with the amount of investment).
• Claim on income in the form of dividends.
• Claim on assets if the business goes bank-
Activities of planning and evaluating
rupt.
investment projects is called capital
• Voting rights in the election of the Board
budgeting.
of Directors.
• Preemptive rights.
The capital budgeting process involves
Preemptive rights gives the preferred stockholders
economic analysis and selection of projects
the right to purchase new shares of stock proportionate
according to some criteria determined by
with their existing share of ownership.
the management of the company.
Preemptive rights gives the preferred Investment decisions can be grouped as:
stockholders the right to purchase new 1. Assessing the profitability of a single in-
shares of stock proportionate with their vestment project.
existing share of ownership. 2. Assessing the relative profitability of com-
peting investment projects.
An example of a share of stock. 3. Selecting the best investment projects in a
portfolio of projects with a limited budget.
Companies need to invest in fixed assets to
carry out their operations, to differentiate their
products; to improve product quality; or create
cost advantages. It is almost impossible for a
firm to survive and grow without making capital
investments. However, it is difficult to find
remarkably profitable projects in efficient markets.
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Efficient markets are markets where all valid the future. Managers decide to accept the project if
information is available to all participants at the the project adds value to the firm, otherwise they
same time, and where prices respond immediately reject the project.11
to available information. Firms utilize various techniques to assess
profitability of investment projects. Some
techniques incorporate time value of money. In
Efficient markets are markets where
these techniques, expected cash flows are discounted
all valid information is available to all
back to present to come up with the present value of
participants at the same time, and where
future cash flows. Future cash flows are discounted
prices respond immediately to available
with the cost of capital of the firm. The present value
information.
of all future cash flows is compared with the initial
investment outlay. If the present value of future cash
flows is greater than the initial outlay, it means that
the marginal cash flows generated by the project not
only cover the investment outlay, but it generates
internet some net worth, which is called the Net Present
http://www.businessdictionary.com/ Value (NPV) of the project.
definition/efficient-market.html
Net Present Value (NPV) shows the

Since fixed assets are assets which can be turned amount of wealth that is expected to be
into cash in more than a year and are larger in created if the project is undertaken.
amount compared to investments in current assets,
they are considered to be more risky. Therefore,
companies must make careful analysis in order NPV is one of the widely used techniques to
to take proper capital investment decisions to evaluate profitability of investment projects. If
generate new products or new ways of improving the NPV of a project is found to be positive, this
existing products. New ideas for profitable projects implies that the project is profitable and can be
are usually generated within the firm especially in accepted. Another widely used technique closely
the research and development department. related to NPV is the Internal Rate of Return
In evaluating investment projects, managers (IRR). IRR is the discount rate that equates the
focus on the changes in the cash flows of the firm present value of future cash flows with the initial
when the project outlay of the project. If the IRR is above the
is undertaken. shareholders’ required rate of return, then the
Hence, incremental project should be accepted. However, if the IRR of
(marginal) cash Managers focus on the project is below the required rate of return, it
flows expected to changes in the cash flows should be rejected.
be generated by of the firm to evaluate
the investment the profitability of an
Internal Rate of Return (IRR) is the
project should be investment project.
discount rate that makes the NPV of the
considered.10
project equal to zero.
Typically, investment projects start with an
initial cash outflow which is called the initial
investment outlay and continue with usually cash Another way to assess whether the present value
inflows during the life of the project. The amount of future cash flows cover the initial outlay and
of the cash flows and the timing of the cash flows create additional value is to divide the present value
should be projected and should be assessed against of future cash flows by the initial outlay, which is
the investment outlay. Most of the time, it is hard called Profitability Index (PI). PI being greater than
to project the cash flows which will be generated in 1 indicates that the project’s present value of future
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8
cash flows exceeds the initial outlay and therefore it FINANCIAL RISK
is profitable. A PI value less than 1 implies that the MANAGEMENT
project should not be accepted.
Risk and return concepts are important for
investors and business managers in the process of
managing financial resources.
The payback period is the number of years
needed to recover the initial investment
outlay. Risk and Return
Return of an investment is the expected
benefits of the investment in the form of cash
Some other techniques ignore time value of flows. In a world of uncertainties, financial assets or
money, such as the payback period. The payback securities may generate returns different from what
period is the number of years needed to recover the is expected. Risk can be defined as the potential
initial investment outlay. Managers can make the variability in future cash flows. Observed return
decision to accept or reject the project by comparing may deviate from the expected return and the
the calculated payback period with the target deviations could be
payback period they set. If the project’s payback either positive (upside
period is less than the firm’s maximum desired risk) or negative
payback period, the project should be accepted. If (downside risk). Risk There is a positive
the project’s payback is usually measured relationship between risk
period is more than by standard deviation and return. Investors will
the firm’s maximum or variance, which is not be willing to assume
desired payback If a firm decides to the square of standard additional risk unless they
period, it should be place a budget limit on deviation: The greater expect to be compensated
rejected. In case they investment projects, then the variance or the with additional return.
are comparing two the proper decision is to standard deviation,
competing projects, select the projects which the greater the risk.12
the one with a shorter adds more value to the
payback period is firm, hence projects with
more preferential. In the highest NPV. Return of an investment is the expected
fact, the longer the benefits of the investment in the form of
payback period, the cash flows.
riskier the project.
Although this tool is easy to use, it is not very
desirable since it does not take into account the
Risk is usually measured by standard
timing of cash flows and how much they are worth
deviation or variance, which is the square of
as of today.
standard deviation: The greater the variance or
the standard deviation, the greater the risk.
5 Although there are many types of risk classes,

basic types of risk for a business can be classified as:
When comparing two mutually
• Credit risk (Default risk)
exclusive projects how can
The risk that a company or individual will not
managers decide on the relative
be able to pay the contractual interest or principal
profitability?
on its debt obligations.
• Market risk
The risk that the value of an investment to
fluctuate due to general market conditions.
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8
• Political risk diversification. It is also called systematic risk,

The risk that a country’s government will since it affects all the securities in the market. For
suddenly change its policies. example, the collapse of Lehman Brothers in 2008
• Operational risk initiated major shocks with a domino effect in the
Various risks that can arise from a company’s financial system of USA.
ordinary business
Investing in a portfolio of stocks, investors
can get rid of some of the risk by investing across internet
different securities which do not tend to move http://www.investopedia.com/terms/d/
precisely together. An investment portfolio is like diversification.asp#ixzz4iP2PMZDD
a pie that is divided into pieces of a variety of asset
classes and/or types of investments in different sizes
as shown in Figure 8.3. Diversification is a risk
management technique that mixes a wide variety Enterprise Risk Management
of investments within a portfolio. Financial risks have been controlled through
Figure 8.3 Investment Portfolio hedge funds and other tools over the years, often
by investment banks. In time, it was realized that
many risks could be prevented or their impact
reduced, through loss prevention and control
systems. These findings led firms to a broader view
Government Stocks of risk management.
bonds
Enterprise Risk
Management (ERM)
approach has emerged Shareholder value can be
to provide the means improved with the help
Corporate bonds to recognize and of Chief Risk Officer
mitigate risks with a (CRO).
holistic approach.14
Enterprise Risk Management (ERM) is an
integrated risk management approach, which
An investment portfolio is like a pie that considers risks in the context of business strategy and
is divided into pieces of a variety of asset manages them with a portfolio perspective through
classes and/or types of investments in well-defined risk responsibilities and strong risk
different sizes. monitoring processes. In ERM, there is a senior level
position usually called Chief Risk Officer (CRO)
who has the highest responsibility for overseeing the
Thus, we can also classify risk as:13 centralized risk management function.
• Diversifiable risk
We can reduce the risk of a portfolio through Chief Risk Officer (CRO) has the highest
diversification if different types of investments responsibility for overseeing the centralized
in the investment risk management function.
portfolio do not
perfectly move in the A portfolio constructed
same direction. of different kinds of
• Non-diversifi- investments will, on 6
able risk average, yield higher returns
Market risk and pose a lower risk than What is the main difference
cannot be eliminated any individual investment between Traditional Risk
through random within the portfolio. Management (TRM)
systems and Enterprise Risk
Management (ERM) systems?
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8
SHAREHOLDER VALUE MANAGEMENT

There is a growing emphasis on shareholder value creation and shareholder value management in the
business literature. Value based processes, measures and incentives have emerged to support shareholder
value management. As financial decisions play a vital role in the value creation of businesses, it would be
useful to emphasize how financial decisions influence shareholder value.15
Financial Decisions in Value Creation

We can analyze the role of financial decisions in creating shareholder value by grouping them under
different aspects.16
Investing aspect of value creation

Companies can create value if they can achieve economic returns above the cost of capital on their
existing and new investments. Hence, they must devise necessary processes and tools to implement efficient
economic analysis and managerial evaluation regarding investment choices.
Financing aspect of value creation

Financial decisions with respect to provision of long-term funds, distribution of profits as dividends,
and capital structure generate costs and benefits for the businesses. When companies make effective choices
related to financing decisions, they can enhance the goal of maximizing shareholder wealth.
Operating aspect of value creation

By offering the right products and services in a cost effective manner by When businesses develop
efficient economic analysis, companies can gain competitive advantage and mechanisms and tools to
generate long-term cash flows to enhance value creation. maintain proper investing,
Today, big companies and consulting firms employ a number of value based financing and operating
methodologies to track if companies are creating value. These methodologies decisions in line with
link performance of businesses to the market value or the stock price of the business strategies, they
company in order to monitor and improve business decisions, processes and can reinforce the value
policies. creation process.
Value-Based Methodologies
Various value-based methodologies have evolved especially after the 80’s to assess how management
actions reflect on the shareholder value results. Before the new millennium, the emphasis was on profit
margins, whereas nowadays new value measures are in place such as Economic Profit or Economic Value
Added (EVA) and Cash Flow Return on Investment (CFROI).17
Economic profit or economic value added (EVA)

Economic value added is a form of economic profit. EVA is a contemporary measure of corporate
success. Big companies like Coca Cola and Eli Lilly have used EVA as a metric to monitor shareholder value
creation. As EVA takes into account the cost of debt and equity capital, it enables managers to think like
shareholders when they are making investment decisions.18
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8
The following formula is used to calculate EVA:
EVA= NOPAT / (Capital Base, net of depreciation * WACC)
NOPAT: Net Operating Profit After Tax

WACC : Weighted Average Cost of Capital
If EVA is positive, then it means the company is adding value.
Cash flow return on investment (CFROI) Economic Profit or Economic Value

Added (EVA) is a form of economic profit.
Cash flow return on investment (CFROI) is the
indicator that helps a company to evaluate the performance
of an investment or product. It can also be termed as the
calculation that helps the stock market to set prices on the basis of cash flow. CFROI can be assumed
as the real rate of return the company earns on its portfolio of projects. CFROI metric is rooted on the
discounted cash flow valuation (Madden, 1999).19 Thus:
1. More cash is preferred to less.
2. Cash has a time value.
3. Sooner is preferred to late.
4. Less uncertainty is better.
The following formula is used to calculate CFROI:
CFROI = Cash Flow / Market Value of Capital Employed
ETHICS IN FINANCIAL MANAGEMENT

Ethics have become a significant topic in the business world especially after the ethical scandals
brought to public attention by the media in1980s. Many companies collapsed because of accounting
frauds and other ethical crimes. Today, ethical issues influencing businesses
include environmental issues such as pollution and animal rights, bribery,
insider trading in the financial markets, layoff of employees due to corporate
restructuring, and sexual harassment.20 Companies must comply
Dealing with ethical problems is an important challenge especially in the with legal regulations and
field of financial management. Financial decisions comprise issues connected corporate governance
directly with money which tends to highlight the vulnerability of financial principles to curb ethical
managers to ethical dilemmas. problems.
One of the most important scandals in the financial industry of Turkey is
the collapse of İmar Bankası in 2003. As stated in European Investment Bank’s
Economic and Financial Report 2004/02 about The Turkish Banking Sector: “The most recent reports of Imar
Bank to the BRSA, as late as late June 2003, indicated a total deposit amount of TL 750 trillion (around
$0.5 billion). The investigation of depositors’ documents, however, revealed that this amount was actually TL
8.1 quadrillion (more than $5 billion). The bank had also converted some offshore deposits (not covered by
government guarantee) and sold Treasury bills to the public even though it did not have a license to do so. The
bank maintained a double-accounting system throughout, where true information would exist at the branch
level but the headquarters would falsify it and then report to the Banking Regulation and Supervision Agency”
(https://www.econstor.eu/bitstream/10419/45294/1/656504056.pdf )
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Corporate Governance
Corporate governance is the framework of rules and
practices by which a board of directors ensures accountability, Corporate governance is the system of
fairness, and transparency in a company’s relationship with its rules, practices, and processes by which a
all stakeholders. Corporate Governance provides the business company is directed and controlled.
procedures for proper supervision, control, and information-
flows to serve as a system of checks-and-balances
Capital Markets Board of Turkey’s Corporate Governance
Principles consist of four main sections, namely shareholders,
internet
disclosure and transparency, stakeholders and board of
directors: http://www.businessdictionary.com/
definition/corporate-governance.html
• Shareholders
Shareholders have many rights such as to obtain and
evaluate information, right to participate in the general
shareholders’ meeting and right to vote.
• Disclosure and transparency
Companies should establish information policies with respect to shareholders and adhere to these policies
• Stakeholders
When a conflict of interest arises among the stakeholders, the
company should seek to adopt a well-balanced policy aimed at 7
protecting the rights of stakeholders.
Market manipulation should
• Board of directors be prohibited to protect
The board of directors should perform its functions in a rational shareholders according to G20 /
manner and act in accordance with the rules of good faith through OECD Corporate Governance
maintaining the balance between interests of the company and the Principles. What is market
shareholders and stakeholders. manipulation?
Ethics and Corporate Social Responsibility

It is claimed by academic and business authorities that companies have the obligation to assume social
responsibilities. Companies should consider the effects of their activities on their stakeholders. The main
stakeholders of the business are customers, suppliers, employees, environment, government, competitors,
investors and the society. Companies should consider the
affected parties’ rights and responsibilities (See Chapter 1).
Hence, when making a judgement, the situation is analyzed The main stakeholders of the business
to consider the harms and benefits of the situation to the are customers, suppliers, employees,
stakeholders affected together with the consequences of environment, government, competitors,
alternative decisions.21 investors and the society.
Internal Controls
To fight against fraud and corruption, companies can establish internal control systems. Typically,
implementation of internal controls involve the following steps:22
• Identification of possible internal and external threats,
• Identification of internal processes,
• Identification of process gaps using control assessment tools,
• Implementing internal controls to fill gaps with strong control processes,
• Testing the controls with an early warning system.
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Suppose you are an employee of a big Corporation the shares of which are traded in Borsa İstanbul. One of
your friends in the Office tell you that he accidentally heard the company is planning to make a big investment
which is expected to be very profitable and is likely to cause a dramatic increase in the share price. However, this
information has not been disclosed to public yet. You plan to use all your savings to invest in the shares of the
company hoping to make a huge fortune. You tell your spouse about your plans and she warns you that it may
be illegal. Which terminology is used for such cases? Is it legal? What are the likely consequences you will face in
case you implement your plan?
Further Reading
What is Value-Based Management? The thinking behind VBM is simple.

An Excerpt From Valuation: Measuring and The value of a company is determined by its
Managing the Value of Companies discounted future cash flows. Value is created
only when companies invest capital at returns
Recent years have seen a plethora of
that exceed the cost of that capital. VBM extends
new management approaches for improving
these concepts by focusing on how companies use
organizational performance: total quality
them to make both major strategic and everyday
management, flat organizations, empowerment,
operating decisions. Properly executed, it is an
continuous improvement, reengineering, kaizen,
approach to management that aligns a company’s
team building, and so on. Many have succeeded-but
overall aspirations, analytical techniques, and
quite a few have failed. Often the cause of failure
management processes to focus management
was performance targets that were unclear or not
decision making on the key drivers of value.
properly aligned with the ultimate goal of creating
value. Value-based management (VBM) tackles Source: http://www.mckinsey.com/business-
this problem head on. It provides a precise and functions/strategy-and-corporate-finance/our-
unambiguous metric-value-upon which an entire insights/what-is-value-based-management
organization can be built.
In Practice
There is an agency relationship between Sometimes, the owners of a firm may wish
the owners and the managers of the company. the firm to implement a risky investment project
The stockholders or owners act as (principles or hoping that it will increase the value of the
principals-senior officials?) and hire the managers company. However, managers may refrain from
to act in the best interest of the company. undertaking the risk as they may fear losing their
Sometimes, conflicts of interest may arise jobs in case the project fails.
between the principle and the agent as they may Discuss:
pursue different goals, which will lead to agency
Which mechanisms can be put into practice in
problems and accordingly agency costs.
order to align managers’ interests with those of
stockholders?
283
8
LO 1 Identifying main decision fields of

business finance
Business finance comprises decisions of businesses which are basically related to investment and
financing of assets of a business. Business finance decisions are related to the resources of a business
and they can be grouped as:
• Investment decisions
Making sound investment choices in line with the business strategies and economic analysis
• Financing decisions
Summary
Selecting the optimum mix of internal and external funds to finance the investments of the business
• Operating decisions
Employing the resources of the business efficiently to generate profits
LO 2 Describing main functions of

financial markets
Financial markets serve many roles among which are:

• Efficient allocation of capital
Financial markets help channel funds into profitable investments and boost economic growth
• Price discovery
Prices of financial assets are formed in the market by the interaction of demand and supply for these
securities.
• Liquidity
Investors can sell their investments and turn them into cash in financial markets.
• Risk Sharing
LO 3 Explaining the significance of

short-term financial planning
Companies need to plan for the future to predict future financing requirements. Through pro forma
statements financial managers forecast revenues and expenses of the planning period together with
the level of funds that will be invested in current assets and fixed assets. If the forecasted total
financing is not sufficient to cover the future asset investments, the shortage should be financed.
Financial managers must prepare plans to finance the financing requirements that will arise.
Otherwise companies may face insolvency risks.
284
8
LO 4 Understanding the roles of basic tools

used in long-term financing
Companies usually prefer to finance their long-term assets with long-term resources such as long-
term trade credit extended by their suppliers, long-term leasing, long-term bank loans, issuing bonds
or issuing stock. Basic tools used in long-term financing are:
• Trade credit
• Leasing
• Bank loans
Summary
• Issuing bonds
• Issuing stocks
LO 5 Distinguishing most widely used techniques

in the capital budgeting process
Firms utilize various techniques to assess profitability of investment projects. Some techniques
incorporate time value of money whereas some techniques ignore time value of money. Most widely
used techniques in the capital budgeting process are NPV, PI and IRR. If the NPV of a project is
found to be positive, this implies that the project is profitable and can be accepted. If the IRR is above
the shareholders’ required rate of return, then the project should be accepted. If the project’s payback
period is less than the firm’s maximum desired payback period, the project should be accepted.
LO 6 Describing risk and distinguishing

various types of financial risks
Risk can be defined as the potential variability in future cash flows. Basic types of risk for a business
can be classified as:
• Credit risk (Default risk)
The risk that a company or individual will not be able to pay the contractual interest or principal on
its debt obligations.
• Market risk
The risk that the value of an investment to fluctuate due to general market conditions.
• Political risk
The risk that a country’s government will suddenly change its policies.
• Operational risk
Various risks that can arise from a company’s ordinary business
285
8
LO 7 Discussing how financial decisions

influence shareholder value
Companies can create value if they can achieve economic

returns above the cost of capital on their existing and new
investments. When companies make effective choices related to
financing decisions, they can enhance the goal of maximizing
shareholder wealth. By offering the right products and services
in a cost effective manner by efficient economic analysis,
Summary
companies can gain competitive advantage and generate long-

term cash flows to enhance value creation.
LO 8 Explaining why ethics is

important in finance
Dealing with ethical problems are an important challenge

especially in the field of financial management. Financial
decisions comprise issues connected directly with money,
which tends to highlight the vulnerability of financial managers
to ethical dilemmas. To fight against frauds and corruption,
companies can establish internal control systems.
286
8
1 Bonds that sell above the face value are 6 What is the type of risk which leads the value
…………. bonds. of an investment to fluctuate due to general mar-
a. Discount ket conditions?
b. Premium a. Liquidity risk
Test yourself
c. Junk b. Credit risk
d. Convertible c. Default risk
e. Perpetuity d. Market risk
e. Political risk
2 The following features belong to stocks
except for….. 7 An investment project is deemed acceptable
a. Voting rights if the IRR of the project is ………….
b. Limited liability a. Smaller than the required rate of return of the
c. Residual claim on assets project.
d. Preemptive rights b. Larger than the required rate of return of the
project.
e. Claim on interest
c. Smaller than the profitability index of the
3 project.
What type of a business finance decision d. Larger than the profitability index of the project.
is the decision to purchase a new equipment e. Is equal to the profitability index of the project.
concerned with?
a. Investment 8 Any asset of a borrower a lender can use to
b. Short-term financing pay the debt if the borrower is unable pay back the
c. Long-term financing loan is a………………
d. Working capital a. Capital
e. Operating b. Capacity
c. Collateral
4 Which of the following securities are traded d. Lessor
in money markets? e. Exchange
a. Government bonds
9 Which of the following entitles common
b. Corporate bonds
stockholders to maintain a proportionate share of
c. Preferred stock
ownership in the firm?
d. Common stock
e. Commercial paper a. Preemptive rights
b. Covenants
5 Projected fixed asset investments of a
c. Voting rights
company for next year can be seen in the …….. d. Limited liability
e. Claim on income
a. Cash budget
b. Income statement 10 Which of the following capital budgeting
c. Balance sheet techniques ignores time value of money?
d. Pro forma income statement a. Net Present Value
e. Pro forma balance sheet b. Internal Rate of Return
c. Modified Internal Rate of Return
d. Payback Period
e. Compound Value
287
8
1. b If your answer is incorrect, review “Finan- 6. d If your answer is incorrect, review “Finan-
cial Markets”. cial Risk Management”.
2. e If your answer is incorrect, review “Finan- 7. b If your answer is incorrect, review “Capital
cial Markets”. Investment Decisions”.
3. a If your answer is incorrect, review “Over- 8. c If your answer is incorrect, review “Long-
view of Business Finance”. term Financing”.
4. e If your answer is incorrect, review “Finan- 9. a If your answer is incorrect, review “Long-
cial Markets”. term Financing”.
5. e If your answer is incorrect, review “Short- 10. d If your answer is incorrect, review “Capital
Term Financial Management”. Investment Decisions”.
The financial manager of a company is considering how much of

the net profit can be distributed to the stockholders as dividends

and how much of the net profit can be retained in the company to
be a part of equity. What type of finance decision is in considered
by the financial manager?
The financial manager, is considering a financing decision in this case. Finan-

your turn 1 cing decisions involve decisions about how much profit to distribute as well as
how to finance the resources of the company.
Identify the type of markets involved when you buy or sell

shares of stock of a company listed at Borsa İstanbul.
your turn 2 When people buy or sell securities that are already being traded in the market,
they are making transactions in the secondary markets.
What are the main functions of budgets?
The main functions of budgets include planning, coordination and commu-

nication. Budgets provide targets and gives direction to achieve goals of the
your turn 3 business. Budgets help coordinate efforts of different functional areas of the bu-
siness. Targets and results are communicated to functional managers to ensure
commitment and corrective action.
288
8
Do stockholders receive dividends out of the net profit of the

company each and every year?
Stockholders do not necessarily receive dividends each and every year. It is up

to the management to decide whether to distribute or how much to distribute

your turn 4 dividends out of the net profit. Net profit not distributed but retained in the
company becomes an addition to the retained earnings and thus becomes part
of shareholders’ equity providing equity financing for the business.
When comparing two mutually exclusive projects how can

managers decide on the relative profitability?
Mutually exclusive projects refer to a sect of projects out of which only one
your turn 5 project can be selected for investment. In case of mutually exclusive projects, the
project with highest net present value or the highest IRR or the lowest payback
period is preferred.
What is the main difference between Traditional Risk

Management (TRM) systems and Enterprise Risk Management
(ERM) systems?
The main difference between ERM and TRM is that ERM takes a top-down,
your turn 6 enterprise-wide view of all risk exposures whereas TRM attempts to manage risk
in distinct silos. ERM systems integrate all risk-management functions, such as
collecting data, risk analysis and risk prevention.
Market manipulation should be prohibited to protect

shareholders according to G20 / OECD Corporate Governance
Principles. What is market manipulation?
Manipulation is the act of artificially inflating or deflating the price of a security.

your turn 7 In most cases, manipulation is illegal. For example, completing transactions to
give a false impression about supply or demand may drive the stock price to an
artificial level.
289
8
Suppose you are an employee of a big corporation the shares

of which are traded in the Borsa İstanbul. One of your friends
in the Office tells you that he accidentally heard the company is
planning to make a big investment which is expected to be very
profitable and is likely to cause a dramatic increase in the share
price. However, this information has not been disclosed to public

yet. You plan to use all your savings to invest in the shares of the
company hoping to make a huge fortune. You tell your spouse
about your plans and she warns you that it may be illegal. Which
terminology is used for such cases? Is it legal? What are the likely
consequences you will face in case you implement your plan?
This case is considered as insider trading. Insider trading is buying or selling a

your turn 8 stock based on material information that is not available to the general public.
It is unfair and harms capital markets by destroying investor confidence. Insider
traders can face criminal penalties as well as financial penalties.
endnotes
1Helfert, E. A. (2001). Financial Analysis Tools and 13Ibid.
Techniques. McGraw-Hill. 14Sayılır, F. (2016). Enterprise Risk Management
2Keown, M. P. (2014). Foundations of Finance. and its Effect on Firm Value in Turkey. Journal of
Pearson. Management Research, 9(1), 86-99.
3Mishkin, F. S., & Eakins, S. G. (2012). Financial 15Helfert, op.cit.
Markets and Institutions. Pearson. 16Ibid.
4Ibid.
17Ibid.
5Keown, op. cit. 18Grant, J. L. (2003). Foundations of Economic Value
6Ibid. Added. Wiley.
7Ibid. 19Madden, B. J. (1999). Cash Flow Return on
8Ibid. Investment Valuation. Butterworth-Heineman.
20Boone, L. E. (2005). Contemporary Business.
9Ross, W. J. (2007). Fundamentals of Corporate
Thomson-South Western.
Finance. McGraw Hill.
21Ibid.
10Keown, op. cit.
22Reading, S. A. (2013). Internal Auditing.
11Goetze, N. (2015). Investment Appraisal. Springer.
The Institute of Internal Auditors Research
12Keown, op. cit. Foundation.
290

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Introduction To Business

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3

Prof.Dr. Güneş Nezire ZEYTİNOĞLU

CHAPTER 1 Assoc.Prof.Dr. Vichuda POLATOĞLU

Prof.Dr. Kadir VAROĞLU

CHAPTER 2 Prof.Dr. Cenk SÖZEN

CHAPTER 3 Prof.Dr. Güneş Nezire ZEYTİNOĞLU

CHAPTER 8 Asst.Prof.Dr. Özlem SAYILIR

Copyright © 2017 by Anadolu University

Graphic and Cover Design

Typesetting and Composition

All rights of this book belong to Anadolu University.

THE CONCEPTS OF BUSINESS..................... 3 MANAGEMENT – TERMS AND

1 Define the basics of business, the benefits of

Describe the external environments of

Define the basics of economics, explain the

3 different economic systems and supply and

5 Define business ethics and discuss corporate

Chapter Outline Key Terms

THE CONCEPTS OF BUSINESS

Business – Terms and Definition

and communities (shown in Figure 1.1). Stockholders or shareholders own

Figure 1.1 Major Stakeholder Groups

Businesses must create value-added products

Table 1.1 The Reasons Competition is Desirable for Businesses

Table 1.2 Types of Businesses

Major Functional Areas in a Business

of the organization as a whole. Lastly, the research and development

Table 1.3 Major Functional Areas of Business

Human Resources or HR:

Marketing and Sales:

Finance and Accounting:

Research and Development:

THE EXTERNAL ENVIRONMENTS OF BUSINESS

The Economic Environment

The Technological Environment It is important for the marketing and sales

Figure 1.2 Amazon.com e-commerce

• Amazon AWS offers new

Source: Retrieved from https://www.amazon.com/p/feature

Empowerment refers to giving an

The Global Environment

Table 1.4 Dimensions of the External Business Environments

use resources or the study of decision-making.11

Financial Capital • Credits

Natural and physical resources

An economic system is a country’s

Communism is a political and economic

conditions (see the next section). The incentives for

Table 1.5 Major Economic Systems

Ownership Completely or partially Owned and controlled Blend of individuals and

Business decisions Mostly made Individuals and Blend of individuals and

Forces of Demand and Supply

a product customers will buy include, for example, taste,

Table 1.6 Supply and Demand Schedule

Price (TL) Number of Burgers Supplied Number of Burgers Demanded

Demand and Supply Curves

One of the dangers of a shortage situation is that

The market price reflects

Table 1.7 Determinants of Demand and Supply

Source: https//www.thebalance.com/five-determinants-of-demand, http://www.boundless.com/economics

Table 1.8 Degrees of Competition

Gross domestic product

Real economic growth rate is expressed as

Table 1.9 Turkey GDP Statistics