Management in Logistics and Transport PDF

CILT International Diploma
in Logistics and Transport
PD01
Management
in Logistics and Transport
AO/INT/0036 – V1.0
Acknowledgements
We are grateful to the following contributors for their authorship of the material contained
in this document.
Author: Andrew Marshall (CMILT)
Verifiers: Anthony Evans (MILT)
David Maunder (FCILT)
Ben Bvepfepfe (FCILT)
© Chartered Institute of Logistics and Transport (UK)
All rights reserved. No part of this publication may be reproduced, stored in a retrieval
system, or transmitted, in any form or by any means, electronic, mechanical,
photocopying, recording or otherwise, without the prior written permission of the Chartered
Institute of Logistics and Transport (UK).
AO/INT/0036 – V1.0 II
Introduction to Study
Welcome to the study guide for the unit PD01 Management in Logistics and Transport,
which is intended to assist students in successfully completing the CILT International
Diploma in Logistics and Transport.
The icons below represent key activities to be undertaken – specific activities that have
been set to assist learning and references are made to the recommended textbook.
Keywords and important information are reinforced, where appropriate. The aims are
clearly set out at the beginning of each module and key benchmarks are listed on
completion of these modules to enable you (the learner) to monitor your own progress.
Key to icons:
 Tasks
 Case study
 Suggested reading
 Reading List
Key Textbooks
Chopra, S., (2012). Supply Chain Management: Strategy, Planning and Operations. 5th
ed. Pearson.ISBN-13: 978-0132743952.
Fawcett, S., Ellram, L., Ogden, J., (2013). Supply Chain Management: From Vision to
Implementation. Pearson. ISBN-13: 978-1292022192.
Rushton, A., Croucher, P., Baker, P., (2014). The Handbook of Logistics and Distribution
Management: Understanding the Supply Chain. 5th ed. Kogan Page. ISBN-13: 978-
0749466275.
Lowe, D., (2002). Dictionary of Transport and Logistics. Kogan Page. ISBN-13: 978-
0749435714.
AO/INT/0036 – V1.0 III

Goldsby, T.J., Iyengar, D. and Rao, S. (2014). Definitive Guide to Transportation. Pearson
Education. ISBN-13: 9780133449099.
McKinnon, A., Browne, M., Whiteing, A. and Piecyk, M. (2012). Green Logistics. 2nd ed.
Kogan Page. ISBN-13: 9780749466251.
Waters, D. and Rinsler, S. (2014). Global Logistics. 7th ed. Kogan Page. ISBN-13:
9780749471330.
Christopher, M. and Tatham, P. (2014). Humanitarian Logistics. 2nd ed. Kogan Page.
ISBN-13: 9780749470876.
Manners-Bell, J., Cullen, T. and Roberson, C. (2014). Logistics and Supply Chains in
Emerging Markets. Kogan Page. ISBN-13: 9780749472405.
Harrison, A., van Remko, H. and Skipworth, H. (2014). Logistics Management and
Strategy: Competing through the Supply Chain. 5th ed. Pearson Education. ISBN-13:
9781292004150.
Brewer, A.M., Button, K.J. and Hensher, D.A. (eds.) (2001). Handbook of Logistics and
Supply-Chain Management. Emerald Publishing. ISBN-13: 9780080435930.
Tilanus, B. (1997). Information Systems in Logistics and Transportation. Emerald

Publishing. ISBN-13: 9780080430546.
AO/INT/0036 – V1.0 IV
Study Techniques
You should manage your time and set realistic targets for each module of the
specification. This unit consists of 90 guided learning hours. This figure is only a guide and
students must be aware that more time may be needed in some circumstances.
Work in quiet areas, with minimal distractions.
Make clear notes and bullet points where appropriate – make use of the highlighted
sections and icons within the course manual to guide you to the key information. Refer to
the recommended reading as directed. Develop all core information with wider reading.
Always remember that you will learn better when you have support available and that you
follow the learning process of reflecting, reconstructing alternative ways and then revising
what is done or thought about the subject. Support can be available via the Institute’s
Knowledge Centre as well as from colleagues and friends. Learning skills are important
also, more information is available in the bibliography at the end of this unit.
The International Knowledge Centre gives you access to information around the
world.
Tel: +44(0)1536 740167

Fax:+44(0)1536 740102
E-mail: knowledge@ciltuk.org.uk
Web-Site: www.ciltuk.org.uk
www.ciltinternational.org
Students taking the CILT International qualifications will have e-access to the online
Knowledge Centre resources for duration of their studies. The password will be
provided to the training provider and it is their responsibility to ensure that it stay
confidential for use only by students, lecturers and learning resource managers
within the specific institution.
AO/INT/0036 – V1.0 V
Contents
Introduction to Study ........................................................................................................... III
Key Textbooks .................................................................................................................... III
Study Techniques ............................................................................................................... V
List of Tables/Figures ...................................................................................................... VIII
Abbreviations ..................................................................................................................... IX
Course Overview ............................................................................................................... 11
Introduction ........................................................................................................................ 12
What is Management? ....................................................................................................... 12
1. Internal Organisation Dynamics ............................................................................ 17
1.1 Introduction ........................................................................................................... 17
1.2 Culture .................................................................................................................. 17
1.3 Organisational Structures ..................................................................................... 19
1.4 Change ................................................................................................................. 20
1.5 Empowerment ...................................................................................................... 22
1.6 Communications ................................................................................................... 25
1.7 Managing Self ....................................................................................................... 27
Recommended Further Reading........................................................................................ 30
Element One Bibliography ................................................................................................. 30
2. External Organisation Dynamics .......................................................................... 33
2.1 Introduction ........................................................................................................... 33
2.2 The Market ........................................................................................................... 33
2.3 Supply and Demand ............................................................................................. 37
2.4 Price Elasticity ...................................................................................................... 39
2.5 Competitive Advantage......................................................................................... 40
2.6 Market Structures ................................................................................................. 41
2.7 Marketing .............................................................................................................. 43
2.8 The Marketing Mix ................................................................................................ 46
2.9 Market Research .................................................................................................. 53
2.10 Marketing Tools .................................................................................................... 54
2.11 Strategy ................................................................................................................ 61
Suggested Further Reading ............................................................................................... 68
Element Two Bibliography ................................................................................................. 68
3. People Management ............................................................................................ 69
3.1 Introduction ........................................................................................................... 69
AO/INT/0036 – V1.0 VI
3.2 People Management - Background ...................................................................... 69
3.3 Leadership ............................................................................................................ 71
3.4 Recruiting Your Team ........................................................................................... 74
3.5 Team Building....................................................................................................... 77
3.6 Training and Development.................................................................................... 87
3.7 Motivation ............................................................................................................. 90
3.8 Managing Performance ........................................................................................ 96
3.9 Stress Management ............................................................................................. 99
3.10 Succession Planning .......................................................................................... 102
3.11 Communications ................................................................................................. 104
3.12 Regulatory and Statutory Requirements ............................................................. 105
3.13 Business Ethics .................................................................................................. 106
Suggested Further Reading ............................................................................................. 108
Element Three Bibliography ............................................................................................ 108
4. Business Planning .............................................................................................. 109
4.1 Introduction ......................................................................................................... 109
4.2 Types of Businesses .......................................................................................... 110
4.3 Sources of Financial Capital ............................................................................... 113
4.4 Finance ............................................................................................................... 116
5. Unit Assignment – Business Plan ....................................................................... 143
Suggested Further Reading ............................................................................................. 144
Element Four Bibliography .............................................................................................. 145
5.1 Summary ............................................................................................................ 145
5.2 Sample Examination Questions .......................................................................... 145
Bibliography ..................................................................................................................... 151
AO/INT/0036 – V1.0 VII

List of Tables/Figures
Figure 1.1 Evolving Management Approach ................................................................... 13
Figure 1.2 Continuum Diagram ....................................................................................... 15
Figure 1.3 The Kübler-Ross Model, or The Five Stages of Grief..................................... 20
Figure 1.4 Urgency versus Importance ........................................................................... 27
Figure 2.1 External Forces on Business ......................................................................... 34

Figure 2.2 Supply Curve ................................................................................................. 37
Figure 2.3 Price Demand Relationship ............................................................................ 38
Figure 2.4 Demand and Supply....................................................................................... 38
Figure 2.5 The Different Facets of a PESTLE Analysis for an Organisation ................... 56
Figure 2.6 Basic Value Chain .......................................................................................... 57
Figure 2.7 Worked Example of a SWOTS Analysis/Diagnosis ........................................ 60
Figure 2.8 Porter’s 5 Forces ............................................................................................ 64
Figure 2.9 Ways to Achieve Sustainable Competitive Advantage ................................... 66
Figure 3.1 The Differences between Homogeneous and Heterogeneous Groups .......... 78
Figure 3.2 Knowledge Required and Held ...................................................................... 88
Figure 3.3 The Relationship between Effort and Outcomes: How Motivation Levels Affect
Overall Performance and Delivery ..................................................................................... 93
Figure 3.4 Explaining the Effort/Satisfaction Cycle.......................................................... 94
Figure 3.5 Goal Theory set out in Cyclical Form ............................................................. 96
Figure 3.6 Objectives Review.......................................................................................... 98
Figure 3.7 The Core Stages of Succession Planning .................................................... 102
Figure 4.1 Types of Businesses .................................................................................... 110

Figure 4.2 Cashflow ...................................................................................................... 124
Figure 4.3 Company Cashflow ...................................................................................... 126
Figure 4.4 The Hockey Stick Effect ............................................................................... 135
Table 2.1 Marketing vs. Sales ........................................................................................ 45
Table 3.1 Manager vs. Leader ....................................................................................... 71
Table 4.1 Sources of Capital within a Business ........................................................... 113

Table 4.2 Example of Profit and Loss .......................................................................... 122
Table 4.3 Profit and Loss and Cashflow ...................................................................... 129
Table 4.4 Inflation ........................................................................................................ 137
AO/INT/0036 – V1.0 VIII

Abbreviations
AGM Annual General Meeting
BCCI The Bank of Credit and Commerce International
CILT The Chartered Institute of Logistics and Transport
CIMA The Chartered Institute of Management Accountants
AGM Annual General Meeting
EGM Extraordinary General Meeting
EHRC Equality and Human Rights Commission
EU European Union
HR Human Resources
IT Information Technology
JIT Just In Time
KPI Key Performance Indicator
NPV Net Present Value
PBIT Profit Before Interest and Tax
R&D Research and Development
RDC Regional Distribution Centre
ROCE Return On Capital Employed
ROI Return On Investment
SCA Sustainable Competitive Advantage
SMART Simple, Measurable, Achievable, Realistic, Timely
SME Small to Medium Enterprises
PESTLE Political; Economic; Social; Technological; Legal and Environmental factors
SWOT Strengths, Weaknesses, Opportunities, Threats
DVSA Driver and Vehicle Standards Agency
AO/INT/0036 – V1.0 IX
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AO/INT/0036 – V1.0 X
Course Overview
This core unit presents the fundamental management knowledge required
of managers in logistics and the transport industry. It covers aspects of the
internal and external structures of an organisation, the governance of the
people within the organisation and those financial and other planning
techniques necessary to maintain organisational health. It aims to deliver
the understanding and competence of those key elements of management
practice that are fundamental to both commercial and non-commercial
organisations.
The unit consists of these elements:
1.0 Internal Organisation Dynamics

2.0 External Organisation Dynamics
3.0 People Management
4.0 Business Planning
AO/INT/0036 – V1.0 11
Introduction
Before beginning element one, it may help to prepare if we spend a little
time examining what is actually meant by ‘management’ and then move on
to consider some management roles. It will also be of benefit if you
attempt the initial self-test tasks, as these have been included to help you
to produce short written answers whilst considering your own organisation.
In turn, producing written answers of this type will help many Learners to
re-establish essay skills which may not have been exercised for some
time.
What is Management?
Early contributors to the theory of management included both practising
managers and academics.
Generally, the practising managers would reflect upon their own

experiences and observations, seeking to expound theories which would
have practical uses, and enable others to apply the theories in reality.
These theories tended to be very practical in nature: how to organise a
workforce or the types of organisational structure to have, etc. These
early theorists have been labelled as ‘Scientific Managers’, or ‘Classical
theorists’.
These academics, or social scientists, as they were sometimes called,

focussed upon the human behavioural aspects of work. Initially this was
around seeking greater efficiencies, by looking at such areas as the
effects upon the employee of their surroundings, and work practises.
Later this moved on to areas such as motivation, and communication.
These later theorists were known as the ‘Human Relations theorists’. A
fundamental idea behind the later theories is that it is peoples’ needs that
are the decisive factor behind achieving organisational successes, in the
area of effectiveness.
In the late 1960s/early 1970s, there was another group of theories

emerging. These were the Systems and Contingency approaches. The
basis of these theories was that as an organisation interacts with its
environment, there would be no one theory that would guarantee
12 AO/INT/0036 – V1.0
company, or organisation wide, success. Instead, the organisation would
need to mix the application of theories according to its needs at the time;
these needs would result from the internal/external pressures it faced at
any given time. Whilst this approach went some way to meeting business
needs, it still needed to be enhanced in order to allow the business, or
organisation, to ‘predict and manage’.
In order to help predict and cater for current and possible future need,
modern management approaches tend to focus strongly on strategic
issues. This is a focus on ‘doing the right things’, as opposed to ‘doing
things right’. Some areas of importance here are: organisational culture,
quality management, empowerment and relationship management.
Figure 1.1 Evolving Management Approach
AO/INT/0036 – V1.0 13
 Task 1.1
In 250-300 words, explain the key differences between the different

approaches to the theory of management.
Management has been described in many alternative ways by many

different people; there is no one generally accepted definition of the term
‘management’. Many people believe that the definition of Henri Fayol,
from 1916, still holds true today. He said:
“To manage is to forecast and plan, to organise, to command, to co-

ordinate and to control.”
(Fayol, 1916)
 Task 1.2
In 150 – 200 words, explain your views on this statement, what it means
to you, and whether you think that the statement is as true today as it
was when made.
Your role as a manager within an organisation is not necessarily an easy

one. There are many factors which may influence choices and decisions,
over which you may have limited control. Some managerial problems are
simpler than others, and some may be extremely complex. Simple
problems are sometimes referred to as ‘bounded’ problems, and complex
problems as ‘unbounded’. In order to assist in the understanding of the
differences please read the box below. Obviously this is used merely to
highlight the more apparent differences; there will clearly be some point
where a bounded problem becomes an unbounded problem, and this point
will likely vary from problem to problem, and will depend upon the
characteristics and the contingencies involved (see Figure.1.2 Continuum
diagram).
14 AO/INT/0036 – V1.0
Figure 1.2 Continuum Diagram
Simplicity Complexity
The likely differences in characteristics of:
A simpler (bounded) problem A complex (unbounded) issue
E.g. E.g.
 Smaller scale  Large scale problem

 Small number of people involved  Errors (in calculations / forecasting or
 What needs to be known, is known judgement) may have huge impacts
 Results of error are minimal  Difficult to prioritise
 Similar problems faced before  A ‘new’ problem
 Some likely solutions known  No known solutions
 Can be ‘treated’ in isolation  Will impact on rest of organisation
If you look at the continuum diagram above, you can readily see when a
problem is clearly complex or simple. What you cannot readily see is the
exact point where the situation changes, or by exactly how much.
 Task 1.3
Choose 3 roles within your organisation; using 250 – 300 words, define
these roles.
Explain why you define these roles in this way.
AO/INT/0036 – V1.0 15
16 AO/INT/0036 – V1.0
1. Internal Organisation Dynamics
1.1 Introduction
We begin the first element by examining internal organisational dynamics
of business, to enable you to meet the standards’ requirements of
Management in Logistics and Transport unit.
Learning Outcomes
After studying this element you will be able to:
 Understand the internal dynamics of organisations and the factors that

determine them;
 Understand how an organisation achieves its objectives;
 Understand the importance of change and why it takes place;
 Understand the information needed to meet corporate objectives.
These are the expected outcomes which relate to the standards for the
first element of Management in Logistics and Transport unit. You should
keep a focus on these outcomes in order to ensure that by the end of the
element, you are able to meet the standards required. If you feel that you
cannot meet these outcomes, you should allow additional time to raise
your knowledge and/or understanding to the required standard.
1.2 Culture
The internal dynamics of any organisation can
be said to be largely attributed to that
organisation’s culture. The questions are - what
is culture, and how can it be defined within
business terms? Culture can, in essence, be
described as “the way we do things around
here”. It is about the shared values and beliefs
that exist within the organisation.
AO/INT/0036 – V1.0 17
These values and beliefs can arise from many varied sources; company
rules and regulations, organisational policies and procedures. The
leadership style that is prevalent within the organisation, the influence of
Trade Unions within the organisation, stories that are told within the
organisation about events that have occurred, etc.
The culture of one organisation may be widely different to that of another

organisation, but it is likely that the culture of one organisation will be
broadly similar throughout the whole organisation.
In new or very young organisations it is relatively easy to mould the culture

according to the beliefs of the ‘leadership’. Employing people with the
same set of basic business beliefs and ethos, closely working with
employees and pointing them in the directions the management team
require to be followed. However, in a large, well established, organisation
that has been in existence for several years, changing the organisational
culture (or even small parts of it) can be extremely difficult. At best it will
change over a period of time. Often this period is measured in terms of
years as opposed to months because to change culture within an
organisation is a lengthy process and not something that can be effectively
achieved, and most importantly sustained, by short term initiatives.
The issues surrounding cultures within an organisation are further

exacerbated, for an international organisation, by the differing cultural
beliefs and practises between and within countries.
 Task 1.4
In 400–500 words, explain the culture within your organisation. Where

does it come from? How is it shaped?
18 AO/INT/0036 – V1.0
1.3 Organisational Structures
The structure of an organisation plays a huge role in its performance. It
impacts upon various elements, including the productivity, efficiency,
morale, and the very culture of the organisation itself. The choices of how
to structure an organisation are seemingly endless.
There are certain factors that play a key role in determining the structure
of an organisation. They include the tasks that are to be undertaken and
achieved, the skills of the people within the organisation, the culture of the
organisation, and the technology available.
One of the key questions is whether to centralise or decentralise. These

activities involve the decision of whether or not to delegate authority, and
some control, from the central functions (normally Head Office) down to
more local levels. This frees up time for more senior managers to focus
their attention on strategy as opposed to operations; speeds up the
decision making processes, and can actually motivate those staff that are
given more autonomy. There are, though, some potential downsides. An
organisation can lose consistency as one area may either outperform, or
under-perform, its colleagues. It requires the senior management to be
able to ‘let go’ without interfering, and it requires the organisation to have
at its disposal a number of more capable managers.
 Task 1.5
In 500–600 words, describe the structure of your own organisation and

comment upon its strengths and weaknesses. Having described the
structure, explain how your organisation could improve its organisational
control structure, justifying each of your improvement recommendations.
AO/INT/0036 – V1.0 19
1.4 Change
Organisations can face change for a variety of reasons. Some of these
may be voluntary decisions, seeking to make proactive changes for the
benefit of the business, or they may be involuntary, necessary changes
reacting to market forces. A new competitor may have come on the
scene, or a new product been launched that has impacted upon their
market share, for example.
Making changes does not necessarily mean that these changes are either
innovative or radical. Within a more established organisation, where
current systems and procedures are also well established, the harder the
changes will be to make. This could be said to be because people
generally need to be persuaded of the value of change, particularly if a
current way of working appears to them to be effective. Change merely for
the sake of change is usually far harder to implement, as people do not
buy into that concept and resistance to change can prove both costly and
time consuming to any organisation.
Figure 1.3 The Kübler-Ross Model, or The Five Stages of Grief
20 AO/INT/0036 – V1.0
Examine the diagram in Figure 1.3. The period of change generally starts
on the left with notification of the impending change, when there is
normally a slight improvement immediately the change is known about!
Some of the causes of this can be, for example, people’s fear of losing
their jobs, and a ‘wanting’ to be seen to be willing and to be seen as an
employee that ‘embraces change’.
This is commonly followed by a rapid drop in performance due to any new

procedures, the uncertainty surrounding them, and peoples’ general
anxious reactions to change.
As the procedures become better understood, the performance improves,

until the performance again plateaus (at, one hopes, a higher level than
before the change was made) as the changes become more accepted and
ingrained.
In addition, the morale of the workforce, during any period of change, is

likely to follow a similar curve to that of their performance. The greater the
change, and the larger its impact on the workforce, the larger the impact
upon morale, and the deeper the curve is likely to drop. Employees within
an organisation need a huge amount of support through periods of large-
scale change and effective communication is an essential element of any
successful change management.
 Task 1.6
Consider some recent long term change activity within your own
organisation, or within a sector of industry with which you are familiar
and, in no more than 300 words, comment upon any apparent errors
that were made by senior management in relation to that change and
how those apparent errors could have been avoided.
AO/INT/0036 – V1.0 21
1.5 Empowerment
This is a term that is often used in a number of ways. In terms of its
meaning in business, it is used to convey an organisational technique
where members of staff are given greater freedom to act, greater ability to
control both their own destiny, and that of the organisation. Those people
who are empowered are given the authority and power to act on their
business beliefs, and are also given the responsibility for achieving a set
level of performance. With empowerment comes both responsibility and
accountability. Empowerment is not necessarily given to all employees,
nor is it normally given in one discrete package; it is often given a little at a
time. Much like building a house of bricks, one lays one brick at a time
and one row at a time.
In relation to empowerment, span of control is always an issue. For

instance, just how many direct reports should one person have? How
many can they cope with? What is the optimum number? Perhaps there
are no absolutely right answers to these questions, as this will always
depend upon the capabilities of each individual. However, it is often the
case that the higher up in the organisational hierarchy the position is, the
more complex business relationships become, and therefore the fewer
direct reports there should be. Many people have argued that, whilst at
the lower levels of organisational management, where, for instance, a
supervisor may be dealing with employees carrying out routine tasks, it is
acceptable to have a larger span of control whereas at higher managerial
levels it is not. It is generally accepted that at management levels a span
greater than six people starts to become a little unwieldy, and many more
than that will soon become unworkable.
What is undeniable however is the fact that, if this part of an organisation’s

structure is not correct it can have a huge impact upon the overall
efficiency of the business.
22 AO/INT/0036 – V1.0
The following table helps to explain the differences between delegation
and empowerment and the different behaviours expected from managers
and staff within each scenario. It distinguishes the key differences in
outcomes that will be generated, and how the shift of responsibility and
action moves from the manager to the employee. Being able to diagnose
the behaviours present in your own work setting, (e.g. by team or across
the organisation) can be key to trouble-shooting blockages to progress
and to implementing business efficiencies.
Table 1.1 The Differences between Delegation and Empowerment
AO/INT/0036 – V1.0 23
 Task 1.7
It is generally accepted that managers may empower and delegate but

they cannot delegate their responsibility. Produce a statement of not
more than 50 words to either support or argue against this viewpoint.
24 AO/INT/0036 – V1.0
1.6 Communications
Communications in business are one of the major keys to success. But
communication, methods of communication and ensuring effective
communication are complex issues that have the capacity to seriously
damage unprepared or unaware organisations. There are many different
types of communications, from reports to emails, from one-to-one
meetings to large seminars, from fax to phone to social media. But one
thing amongst all of these remains a constant. That is the fact that the art
of communicating is threefold:
 Listening. Really listening to what is being said, both by those above

you, and especially by those below you. Remember, good
communication is a two-way process.
 Using the correct medium for your message. An informal face-to-face

chat and a formal report both have their place; you should consider
when best to use them.
 Ensuring that your message is understood, and tailored for the

audience. Your message needs to be understandable by the intended
audience. Do not give your board level presentation to those working
on the shop floor; do not use words/phraseology that they may not
comprehend. It may sound smart, and appear to impress but, in reality,
you may only be impressing yourself! Remember, if your audience has
not understood your message, or you have patronised them to a degree
where they feel alienated, or even insulted, then you are at fault, not
them.
In management circles,
communication is often most notably
encountered because it is commonly
accepted that all managers, at some
point in their career, will be required
to give a presentation. That could be
to senior management, or to staff on
the shop floor.
AO/INT/0036 – V1.0 25
Whilst it can easily be argued that preparation is the key, as many people
like to prepare their presentation content and then practise giving their
presentation, it must be recognised that this preparation may not work for
all people as it can lead to a presentation more resembling a recital than
original thought.
Another way to prepare to communicate in this way is by learning what the

content is about, understanding your subject matter fully, and writing the
presentation in a ‘bullet point’ format. Many managers prefer to think a lot
about what they want to say and the points they want to stress, without
actually practising giving the presentation. In this way, the presentation
often appears more natural, and less stilted.
It is for you, as the individual to decide what works best for you. If the first
method doesn’t work, try the second. If that doesn’t work for you, then try
something different. Clearly there are many more than just these two
methods, and it is about finding whatever way helps you to get the correct
message across to your audience. Understanding your message, and
your audience, are inextricably linked items.
 Task 1.8
You are the Managing Director of a multi-national organisation, with a

large unionised workforce. You are about to undergo a period of
massive change due to the loss of your monopoly, and the resultant
increase in competition. In approximately 1,500 words give a detailed
description of your communication and information plans.
26 AO/INT/0036 – V1.0
1.7 Managing Self
You have to take responsibility for managing your own time, and hence
your own effectiveness at work, whether that means cutting out things that
are unnecessary, or prioritising your workload.
Figure 1.4 Urgency versus Importance
HIGH
DISCOURAGE ACT UPON

U DELAY IMMEDIATELY
R
G
E
IGNORE DEVELOP
N
ACTION PLAN
C
Y
HIGH
LOW
IMPORTANCE
There are other tools available to help you, or you and your team, to
prioritise, but this as illustrated in Figure 1.4 is one of the simplest. It is a
four-box matrix that shows urgency against importance. Draw the box on
a sheet of paper and write your current task within the relevant box. This
will help you focus on those tasks that need to be done as a matter of
priority, and those that do not.
Those things that are both urgent and important need to be acted upon
immediately. If something is not urgent and is not important, then ignore
it. It is not worth your time to do it. Arguably if you have the time to do
these less important tasks, then you may have too much time on your
hands and need to be more usefully employed!
If something is important, but not urgent, then develop an action plan. In

this case, you have the time to enable you to do it well, so take advantage
of that fact.
AO/INT/0036 – V1.0 27
Urgent but unimportant items are often harder to deal with. Quite often
they are merely interruptions, and distractions. However they may need
you to be tactful in the way that you either delay your attentions, or
discourage the interruption. Because they are often seen by someone in
the organisation as a priority, you may be required to act in an assertive
manner to avoid being diverted from more important issues.
 Task 1.9
Consider yourself as a manager and assess whether or not your current

personal attributes, in relation to delegation, assertiveness,
communication skills and personal effectiveness are sufficient for you to
be an effective manager within your own organization. Identify all your
strengths and any shortcomings you believe you may have.
Once this has been prepared, itemise your findings and ask at least
three managers, peers, colleagues, or team members, etc. who are able
to be make objective comments, to assess whether or not they agree
with your self-assessment, giving their reasons. Use these findings to
develop a programme of change plan aimed at your own personal
development.
28 AO/INT/0036 – V1.0
 Task 1.10
In May 2011, volcanic ash from the Grimsvotn volcano in Iceland meant
that flights to and from Glasgow International Airport in Scotland were
temporarily suspended. This suspension meant that airlines, including
British Airways, Aer Lingus, Easy Jet, Ryanair and Avinor had to cancel
flights into, and out of, Glasgow Airport. In addition it meant that
thousands of travellers were effectively stranded at different locations
throughout Europe including Glasgow itself.
If you had been the on-duty airport manager at Glasgow Airport at the
time of this closure:
1. Explain, in approximately 200 words, how you could have

effectively communicated the closure and required actions to all airport
staff.
2. Explain in approximately 200 words, how you could have

effectively communicated the closure and required actions to the various
airline representatives.
3. Explain in approximately 200 words, how you could have

effectively communicated the closure and required actions to the various
groups of travellers.
Using your three explanations consider the most appropriate control

structure to allow such rapid communication and what on-going changes
the airport is likely to need to implement to ensure future travellers do
not face such disruption in the event of another similar incident.
This final task concludes module one, but you should consider whether or
not your knowledge and understanding of the material actually enable you
to meet the standards, as outlined at the beginning of the module. If you
feel there may be some gaps, you should re-read, as necessary, or do
some additional reading to enable the standards set to be attained.
AO/INT/0036 – V1.0 29
 Recommended Further Reading
 Cole & Kelly, (2011). Management Theory and Practice. 7th ed.
SOUTH-WESTERN CENGAGE. ISBN: 9781844805068.
 Handy, C., (1993). Understanding Organizations. 4th ed. Penguin
Business. ISBN: 9780140156034.
 Hofstede, G., (1997). Cultures and Organisations. McGraw-Hill.
 Mintzberg, H., (1983). Structure in Fives: Designing Effective
Organisations. Prentice-Hall.
 Moss Kanter, R., (1984). The Change Masters – Corporate
Entrepreneurs at Work. Allen & Unwin.
Element One Bibliography

Atkinson, P., (1988). Achieving Results Through Time Management.
Pitman.
Back, K. & Back, K., (2005). Assertiveness at Work. 3rd ed. McGraw Hill.
ISBN: 9780077114282.
Covey, S.R., (1989). The Seven Habits of Highly Effective People. Simon
& Schuster.
Drucker, P., (2007). The Practice of Management. Taylor & Francis. ISBN:
9780750685047.
Fayol, H., (2013). General and Industrial Management. Martino Fine

Books. Translated by Storrs, C.ISBN: 9781614274599.
Handy, C., (1993). Understanding Organizations, 4th ed. Penguin

Business. ISBN: 9780140156034.
Hofstede, G., (2001). Cultures Consequences: Comparing Values,

Behaviors, Institutions and Organizations Across Nations. 2nd ed. Sage
Publications. ISBN: 9780803973244.
30 AO/INT/0036 – V1.0
Hofstede, G., (1997). Cultures and Organisations. McGraw-Hill.
Kotter, J.P., (2012). Leading Change. Harvard Business Review Press.

ISBN: 9781422186435.
Kubler-Ross, E., (1973). On Death and Dying. Routledge. ISBN:

9780415040150.
Lewin, K., (1951). Field Theory in Social Science. Harper.
Mintzberg, H., (1973). The Nature of Managerial Work. Harper & Row.
Mintzberg, H., (1979). The Structuring of Organisations – a Synthesis of

the Research. Prentice-Hall.
Mintzberg, H., (1983). Structure in Fives: Designing Effective

Morgan, G., (1986). Images of Organisations. Sage.
Moss Kanter, R., (1984). The Change Masters – Corporate Entrepreneurs

at Work. Allen & Unwin.
Peters, T., (1988). Thriving on Chaos: Handbook for a Management

Revolution. Macmillan.
Peters, T. & Waterman, R., (2004). In Search of Excellence: Lessons from

America’s Best-Run Companies. Profile Books Ltd. ISBN:
9781861977168.
Pugh, D. & Hickson, D., (1976). Organisational Structure in its Context.

Gower.
Reddin, W., (1970). Managerial Effectiveness. McGraw-Hill.
Schein, E., (1951). ‘The Mechanics of Change’, in Bennis, W.G., et al

(eds). Interpersonal Dynamics. Dorsey Press.
Schein, E., (2010). Organizational Culture and Leadership. 4th ed. John
Wiley & Sons. ISBN: 9780470190609.
AO/INT/0036 – V1.0 31
Stewart, R., (1994). Managing Today and Tomorrow. Macmillan. ISBN:
9780230375413 (eBook).
Trompenaars, F. & Hampden-Turner, C., (2012). Riding the Waves of

Culture. 3rd ed. Nicholas Brealey Publishing. ISBN: 9781904838388.
Urwin, L.F., (1952). Principles of Management. Pitman.
Woodward, J., (1965). Industrial Organisations – Theory and Practice.

OUP.
32 AO/INT/0036 – V1.0
2. External Organisation Dynamics
2.1 Introduction
Element two of this core unit examines external dynamics which impact
upon organisations as this component is aimed at enabling you to meet
the standards’ requirements of Management in Logistics and Transport
unit.
Learning Outcomes
 Understand what is meant by market orientation;

 Know the importance of an appropriate marketing mix;
 Understand the principles of supply, demand and price;
 Understand the contribution to competitive advantage from effective
logistics thinking;
 Understand the types and mechanics of trade-offs in logistics and
transport;
 Understand the impact of local, national, EU and international
legislation on logistics operations;
 Know the importance of sustainability in logistics and transport.
second element of Management in Logistics and Transport unit and you
should keep a focus on these outcomes in order to ensure that by the end
of the module you are able to meet the standards required.
2.2 The Market
2.2.1 The External Business Environment

Although business organisations differ in many ways, they have many
common features, for example the transformation of inputs into outputs.
This process of transformation takes place in an environment comprising
of external factors that are complex and require careful analysis in order
for sustainable management decisions. Business activities are affected in
a variety of ways by this external environment that comprises political,
economic, social, technological, legal and other market related forces.
AO/INT/0036 – V1.0 33
Some factors may tend to have a more immediate effect on the
organisation and as a manager you will be expected to analyse these
environmental factors that are likely to impact on the success of your
organisations’ performance. We will now look at some of these in the
sections that follow.
Figure 2.1 External Forces on Business
Businesses interact with other businesses and, in a very large number of

instances, with individuals too; this interaction can involve both the buying
and selling of goods and services. Wherever this interaction takes place is
known as the market. The term ‘market’, in a business sense, refers to
both the physical and these days’ virtual places, and also to the processes
through which similar items are manufactured, bought and sold.
As an example, let us look at the

car market. All of the following
examples are a part of the overall
car market, but can be markedly
different: the large, global car
manufacturer (X); the retail
outlets selling new cars for X,
manufacturers selling component
parts to X (e.g. seats/starter motors/springs/clips etc.), the second hand
cars sales company, accident repairs shops, and independent after sales
34 AO/INT/0036 – V1.0
service. All of these are covered under the term ‘working in the car
market’.
Markets, as can be seen from the example above, are clearly large
entities. Markets are often broken down into more reasonable sized
chunks, known as segments. The segments are broken down further into
niches. Each market (whole), segment or niche will act as a market in its
own right, with organisations vying for position. Taking the above car
market as an example:
The car market can be broken into segments by (e.g.) quality of vehicle, or
type. Top of the range cars such as Rolls-Royce or Bentley do not
compete in the same market as Ford or Fiat, but they do compete against
each other in an exclusive niche market for luxury cars; Chrysler do not
compete for sales of their Jeep against BMW’s Mini, but they do compete
against other 4x4 manufacturers.
Competition between companies in the same market segment is often

based on either price or quality, to a degree sufficient that the company in
question is able to remain within the particular segment. This needs
careful control to avoid becoming a potential competitor in other adjoining
market segments unless the adjoining segments are seen as potential
new markets. For instance, Mercedes, a traditional manufacturer of
medium to high quality large cars, moved into a completely different
market segment when it produced the small Mercedes A Class.
However, if the company chooses to stay within its traditional market

segment then marketing activity, if not based on price or quality, often
focuses on product differentiation, where the company seeks to gain
market and market segment advantage by being seen to offer a product
which is similarly priced and of a similar quality to the competition, but is
different because it has an improved standard of fitment or additional
features, etc.
AO/INT/0036 – V1.0 35
 Task 2.1
Compare two similarly priced products which are found in the same
market segment, and identify the different product features that enable
each to maintain market position within that particular segment. From
your findings, use no more than 150 words to explain whether or not you
believe these differing features are real or simply perceived.
36 AO/INT/0036 – V1.0
2.3 Supply and Demand
Supply can be simply defined as the quantity of product, or service, that a
supplier is willing and able to supply at a given price.
Figure 2.2 Supply Curve
£16.00
£14.00
£12.00
£10.00
£8.00
£6.00
£4.00
£2.00
£0.00
4 8 12 16 20 24 28 32 36 40 44 48 52 56 60
Supply
Figure 2.2 shows the supply curve for a company selling widgets. In the
example shown, at a price of £1.00, the company is prepared to sell 4
widgets, and at a price of £10.00 they are prepared to sell 40 widgets.
There is a direct relationship between price and quantity. If the price rises
the supplier is willing to produce more to market, if the price falls the
supplier will hold back supply.
Demand represents the buying side of the market. It refers to the volume
of product that buyers are prepared to buy at a given price. In Figure 2.3
we see that as the price rises the demand falls. As there is a relationship
between price and supply, so too there is a relationship between price and
demand. Generally speaking, as price rises demand falls.
AO/INT/0036 – V1.0 37
Figure 2.3 Price Demand Relationship
£16.00
£14.00
£12.00
£10.00
£8.00
£6.00
£4.00
£2.00
£0.00
4 8 12 16 20 24 28 32 36 40 44 48 52 56 60
Demand
Figure 2.4 Demand and Supply
£16.00
£14.00
£12.00
£10.00
£8.00
£6.00
£4.00
£2.00
£0.00
4 8 12 16 20 24 28 32 36 40 44 48 52 56 60
Demand Supply
If we look at Figure 2.4, we see both the demand and the supply curves
plotted on one graph. The point at which the 2 lines cross is known as the
point of equilibrium; in our example that point is at £8.00 and 32 widgets.
That is to say that at a price of £8.00, the buyer is prepared to buy 32
widgets and the supplier is prepared to sell 32 widgets. In theory, and in
the perfect world, this situation could last indefinitely with both parties
being satisfied.
However competition, on either the side of buyer or seller, will impact upon
this situation. For this not to happen, using our example, you would have
to have two suppliers producing the 32 widgets between them, and each
prepared to accept the same price.
38 AO/INT/0036 – V1.0
Further than this the products would have to be identical - a commodity
product, so that the buyers in effect had no preferences, and each supplier
would need to be as equally efficient at producing the widget as the other
supplier. In reality this situation rarely occurs.
The moment there are 2 suppliers, each supplier will work to achieve a
larger market share than the other. They often try to achieve this through
what is termed ‘differentiation’ of their product. Differentiation can be
realised in a number of ways: price, quality, availability and after sales
service are some of the options open to the supplier. These options now
give the buyer choice between otherwise identical products.
2.4 Price Elasticity

This term refers to the effect of a change to price upon demand of the
product. How much does the demand vary in relation to the variance in
price?
It is measured thus:
% change in quantity demanded / % change in price = price elasticity

of demand
Using our example of the widgets, as above, let us assume that a price
rise of 20%, from 25 pence each to 30 pence each, leads to a 25% drop in
demand. We would have the equation:
25% / 20% = 1.25.

The price elasticity of demand is therefore 1.25. As this figure is greater
than 1, the price elasticity of demand is said to be elastic. Conversely, if
this figure was less than 1 then it would be said that the price elasticity of
demand was inelastic.
There are obviously many factors that come into play here. For example
how necessary is the product to the customer? What alternatives are
there? What pricing strategies have competitors adopted?
AO/INT/0036 – V1.0 39
This final alternative relating to pricing strategy sees many businesses in
the passenger transport sectors exercising price discrimination much more
readily, and much more drastically, than the freight sector; thereby seeking
to engineer elasticity by encouraging alternative travel patterns aimed at
operating at marginal cost whilst maximising resource utilization. It might
be argued that this is a good example of a logistics based ‘trade-off’ in the
passenger sector although it is perhaps not widely considered as such,
observers tending to consider more traditional ‘cost v quality’ or
‘centralisation v distribution mileage’ type scenarios when examining
logistics and supply chain trade-offs.
2.5 Competitive Advantage

Clearly organisations do not exist in vacuums. They exist in markets
where generally competition is keen, if not fierce. Organisations
constantly seek to fix or improve their market position and, most
importantly, seek to sustain any competitive advantage they may have. In
the logistics and supply chain industry, competitive advantage is widely
regarded as ‘the essential factor for ultimate success’.
The statement above is certainly true in regard of the fact that

shareholders seeking an adequate return on their investment (ROI) or
seeking to invest in companies able to give an appropriate return on
capital employed (ROCE) will definitely prefer to invest in those companies
able to demonstrate competitive advantage. It is also a fact that this
statement applies to every business in every industry and yet many other
industries, especially those where monopolies and oligopolies thrive, seem
not to consider competitive advantage as such a vital element of business
success.
What is becoming more widely accepted within business as a whole is that

many of the ‘best practice’ procedures, methodologies or applications
which originated in the logistics and supply chain sectors are suitable for
wider application into generic business and, as such, have the ability to
enable competitive advantage for the parent organisation.
40 AO/INT/0036 – V1.0
 Task 2.2
In approximately 100 words, summarise what you believe to be the main

elements of competitive advantage either currently enjoyed, or which
should be aspired to, by your organisation.
2.6 Market Structures

This term refers to the context in which the organisations in a market
compete. How many organisations are there? Who is the largest and
most important?
Some markets are a

monopoly, although today
these are now rare. A
monopoly is where one
company or provider has total
dominance, controlling all of
the supply of a product or service. Within the UK for example, the
Competition Commission monitors markets to ensure that where a
monopoly exists, defined as one firm having over 25% of market share,
that this position is not overly abused. Similarly in other countries
monitoring take place through various methods and entities.
What is more common in modern business is what is termed an oligopoly.

An oligopoly is where the market is dominated by a relatively small
number of large organisations; a good example of which, in the UK at
present, is the retail food market dominated by a small number of major
supermarket chains, for example, Tesco, Asda [a subsidiary of Walmart],
Sainsbury’s, Morrisons and others like Woolworths, in South Africa;
Carrefour and Lulus, in the Gulf Region.
AO/INT/0036 – V1.0 41
There are supporters of the view that a monopoly is a positive thing. They
argue that neither services nor goods are unnecessarily duplicated.
Profits, which are likely to be higher than if there was no monopolistic
situation, can be ploughed back into the business to improve the product
or service, and for research and development; and that organisations with
a monopoly will be more efficient due to being able to benefit from
economies of scale. ‘Economies of scale’ refers to the theory that where a
task is performed on a large scale, or a product made in vast volumes,
then the task will be carried out more effectively and efficiently, than if it
were done on a smaller scale. For example, if I make 100 widgets that
cost me 10p each to produce, an increase of production quantity to 1,000
widgets will cost me 9p each to produce, assuming all other factors remain
the same., Therefore if I make 1,000,000 widgets they will cost me 5p to
produce. [All figures are for example purposes only].
The opposing view, and one that is more widely held, is that monopoly
situations are not ideal circumstances within markets, because lack of
competition leads to higher prices than would be charged in a competitive
market, leading to greater profits for the organisation; output tends to be
lower; and organisations tend to be inefficient, there being no threat to
their dominant position.
In either case, and in all markets, these external influences need to be

appreciated and managed by the management teams within organisations
if their potential benefits are to be maximised and used effectively, and
any potential or actual damage or risk that may result from them is to be
minimised.
 Task 2.3
From a retail customer perspective, produce a list of positive and

negative factors of a retail sales monopoly. For this exercise use a
monopoly of your choice. It doesn’t matter if you are unsure about actual
percentage market share, simply use a local example. . From your
findings, do you think the monopoly you have chosen acts for or against
the customer? Give your reasons.
.
42 AO/INT/0036 – V1.0
2.7 Marketing
2.7.1 Introduction to Marketing
 Task 2.4
In no more than 350 words, describe the impact of both competition and
globalisation on an organisation of your choice.
Marketing, as so many things in management, has been defined in a

number of ways by a number of people. The definition that many people
find the most useful is the one from the UK Chartered Institute of
Marketing. They define marketing thus:
The management process responsible for matching resources with

opportunities, at a profit, by identifying, anticipating, influencing and
satisfying customer demand.
Given the source, if we look closer at this definition, it is perhaps not

surprising that it puts marketing at the centre of business operations.
Ultimately, whether an organisation makes a product or sells a service, it

needs customers; and whether we call them customers, clients, or
something else is merely semantics. However, businesses and
organisations don’t just need customers today, but for tomorrow, the day
after that and the day after that. Customers are the lifeblood of any
commercial or service provision organisation.
The better an organisation can satisfy its customers, the more likely that
they will return, and the more likely that they will recommend others to buy
from the organisation or to use its services. In order to satisfy the
customers, the organisation will need to be able to identify them into
specific market segments, by demographics for example; so that the
organisation may be able to influence the choices that they have.
AO/INT/0036 – V1.0 43
Whilst satisfying current demand can be difficult, the anticipation of
demand can be much more difficult and complex. For instance, if you are
an organisation at the cutting edge of technology producing high-tech
equipment for public consumption, it can be very difficult indeed for people
to judge as to whether they require what you make, especially if there is
nothing similar on the market at present. When Apple first released their
‘I-Pod’ nobody really foresaw the huge demand for digital music on the
move; there had been nothing as advanced before. In fact, it could be
argued that the introduction and later sales of this revolutionary product
were largely successful because of an effective marketing strategy by
Apple.
The definition above also indicates that marketing is at the hub of the
business environment. It mentions ‘the management process for matching
resources with opportunities’. In order to be able to do this within an
organisation, a department must have the internal power to be able to
make the necessary business decisions, and as these decisions will
impact on other departments, e.g. finance, R&D, manufacturing, sales,
etc. It seems only logical that if one agrees with the definition then the
marketing department is a key element in the business equation.
2.7.2 Sales or Marketing?

Many organisations refer to a Sales and Marketing department. The
question to be asked is should these two departments be organised as
one unit? Your answer will probably depend upon your view of the
function of the marketing and sales departments.
Traditionally, sales departments have been considered as departments

that focussed on the transaction of the sale; the sale of the product, and
highlighting the features of what they sold. There was little importance
placed upon servicing the customer, or the quality of the product that was
normally seen as the production teams’ responsibility. In general terms
there was a lot of ‘short-term’ activity and a ‘short-term’ culture where
people were very much focussed upon the sales for that day or that week.
In more recent times, marketing departments have moved a long way

towards the customer. Today, for an organisation’s marketing department
44 AO/INT/0036 – V1.0
to be successful, they will have to concentrate upon and develop the
relationship between the organisation and the customer. The focus is now
upon retaining customers for the long term; repeat custom. The tendency
is very much to sell the benefits to the customer, not the features of the
product. A long-term view is taken, which embeds the ethos of high-level
customer service, and drives a culture where quality is the duty of all
members of the organisation, not just one or two departments.
Whilst it can be argued that there are many synergies, and even overlaps,
between the sales department and the marketing department, if one takes
the modern view of marketing, that it is a more holistic endeavour within
an organisation, then there must also be synergies and overlaps between
marketing and all other departments.
An organisation can also use a set of controllable variables that can give it
market advantages over the competition for example applying the
‘marketing mix’ concept.
Table 2.1 Marketing vs. Sales
AO/INT/0036 – V1.0 45
 Task 2.5
Marketing departments can be too powerful in many organisations’.

Argue either for or against this statement, giving your reasoning, in
approximately 300 words.
2.8 The Marketing Mix

The strategy of a marketing department will be focussed on achieving the
organisation’s marketing objectives, and will be concerned with influencing
what is known as the Marketing Mix; this mix has four main elements
which are known as ‘The 4 Ps’. They are: Product, Price, Place and
Promotion. These have been expanded to seven with the addition of
People, Processes and Physical Evidence, especially for service
industries like logistics and transport. Let us now look at each of these in
turn.
2.8.1 Product
A product is whatever the organisation puts to the market for consumption!
A product is whatever the organisation puts to the market for consumption!
It is not only a bottle of beer, or a car, something that is tangible. It may
also be a service; a taxi ride, or a repair to a washing machine, for
example.
Products may be grouped into three distinct types:
 An innovative product. Something that is completely new to the

market place. Again, the Apple ‘I-pod’ is a good example of this.
Another example, of more recent years, would be 3DTV.
 An adaptive product. This refers to a product that is modified in some

way in order to extend its appeal. Coca Cola is an example here; their
base product ‘Coca Cola’ has been adapted in recent years to have
different specific flavours, lemon, lime and vanilla.
46 AO/INT/0036 – V1.0
 An imitative product. This type of product is the one that follows the
leaders! A type of product which is designed, and built, to be as close
as legally possible to another, which is already successfully on the
market examples being the Apple IPhone and Samsung Galaxy mobile
phones.
Organisations have a choice with their products in terms of where to

position them in the market. This choice is usually based upon the quality
of product. If we ignore Price, then quality is arguably the most important
issue regarding the product. It is a way in which an organisation can
differentiate its product from those of its competitors. This can be done by
either the quality of the product itself, or by other factors such as the
quality of the after-sales support, e.g. warranty terms and period, etc.
AO/INT/0036 – V1.0 47
2.8.2 Price
The question for most businesses and organisations in relation to price is:
How do you position your product in the market place? Let us use two of
these distinct types as examples.
An innovative product is likely to cost far more to produce, due to such

things as research and development costs, or the speed you need to
move in order to get the product to market quickly. To move quickly
generally costs more, but you can achieve what is known as ‘first mover
advantage’. This type of advantage is probably best demonstrated in the
West if one considers Hoover and its vacuum carpet cleaners. Even
today, in the U.K., people commonly use the term ‘hoovering up’, when
they talk of vacuuming the carpets. First mover advantage, in most cases,
means that innovative products are able to charge a premium price; they
are at the market first, with a product that is wanted, and they have a
monopolistic position. They are also able to charge whatever the market
will bear.
An imitative product on the other hand will have cost less to make, due at
least in part to the lack of research and development costs. Assuming that
the product is broadly similar to the product it is imitating, and the features
are similar too, then the main way in which it can be made more appealing
is in terms of price. The pricing is important. Not too cheap, unless it is
then perceived as a poor quality choice; yet too near the price of the
original and it may fail to attract sufficient numbers of customers away
from the existing product. Other common ways in which an organisation
can use price to make it attractive offering better payment terms, perhaps
some form of low interest or interest free credit terms or extended or
delayed credit repayments.
 Task 2.6
Use approximately 300 words to describe the marketing mix for a

product or service produced or supplied by an organisation with which
you are familiar. What changes would you recommend in order to make
improvements?
48 AO/INT/0036 – V1.0
2.8.3 Place
The term ‘Place’ relates to how accessible or available the product is. It is
absolutely no use whatsoever to make a product or have a service on
offer, which people cannot access. It can, in fact, be extremely damaging
because if you create a product that people want and then make it
inaccessible, you run the high risk of tarnishing the image of the product
itself.
In the logistics industry in particular, making sure that your product is

available depends as much on your distribution network as it does on your
production. These two functions are inextricably linked in bringing your
product or services to market - if either one fails, then you fail.
Remember, the key role that a distribution network plays is getting the
right product to the right place at the right time.
In today’s markets, most organisations offer both physical and virtual

outlets for their products, that is to say that they offer their products in
shops and on-line. This wasn’t always the case. For example Dell, the
computer company, originally only offered their products from their own
website. “Our products are not available in the shops”, was one of their
more popular marketing statements. However, Dell do now use approved
outlets around the world and also have their own outlets.
2.8.4 Promotion
Promotion is a very wide ranging term that covers all of the activities that a
marketing department will undertake in order to sell their product. This
can be in the form of advertising, trade magazine features, or indeed any
other form of informative announcements or posters, etc. The aim is to
both inform current and prospective customers of their wares, and to
encourage purchases.
AO/INT/0036 – V1.0 49
 Task 2.7
Using an example of your choice, describe the promotion associated

with the product or service. Assume that you are the Marketing Director,
with responsibility for this product or service, what beneficial changes
would you make to its promotion, and why?
2.8.5 People
People employed in our organisation will influence the quality of service
we provide within the market. This is important not only for service
industries but equally essential for those providing tangible products. A
happy, skilled and motivated member of staff is likely to treat customers
well rather than one who is unhappy and demotivated. Many organisations
today invest heavily in human skills development and are always looking
for opportunities to create motivated teams that will deliver the expected
customer service levels.
Some staff come into contact with customer in their day-to-day work. This
group of employees sometimes referred to as ‘frontline staff’ are important
as they present an image of the organisation to customers and other
stakeholders.
2.8.6 Processes
The processes of delivering the product or service to the market place
have an effect on how customers will perceive your organisation. For
example how easy is it for customers to access your product or service or
how are complaints handled in the event that this arises? It may be
necessary to think about after sales support and probably how well the
delivery of product or service is likely to be.
50 AO/INT/0036 – V1.0
2.8.7 Physical Evidence
The above term is usually used to describe the image that is portrayed by
an organisation’s physical assets, including its staff. So the company’s
physical premises, movable assets like vehicles will influence the
perceptions of customers and other key stakeholders. This is particularly
important for service industries like transport, hotel and catering. Let us
assume you take a vehicle for repair to a certain repair workshop. You
arrive and somehow you discover a disorganised set up with litter in
evidence and equipment in need of replacement. It is likely that you will
think twice before leaving your vehicle with this service provider. Physical
evidence therefore is a key element of the marketing mix.
2.8.8 Marketing Services

A service can be described as an activity that one party carries out for
another, which is both tangible and intangible which does not result in
ownership. For example:
 When a plumber comes to fit a new sink; the service purchased is their
time, knowledge, and physical capability, relating to the fitting of the
sink. The purchase of the actual sink is a separate transaction.
 A solicitor advises a client about a legal matter; the service bought is

both their time and their knowledge, in giving the advice.
As far as marketing is concerned, services have some characteristics that

make them different from products. For example:
 Ownership Once purchased, a service is not owned, merely utilised.
 Intangible One cannot see a service prior to buying it.
 Inseparable The service cannot be separated from the service

provider. A service is both produced and consumed at the same time
and place.
 Perishable If the service is not consumed, then that particular service

is lost forever.
 Variable The quality of the service produce/provided may vary from

time to time, or from person to person.
AO/INT/0036 – V1.0 51
Using the example of our solicitor
above: one buys the service of
being given advice, something one
cannot touch or hold (intangible),
you may have a document, but this
is only something that ‘relates’ to
the advice, NOT the advice itself;
the service itself still belongs to the
solicitor (ownership), and they
remain free to provide this to
others; just because the solicitor has given good advice on similar subjects
before, does not necessarily mean that they will give good advice this time
(variability).
For clarity, in order to illustrate the other two differences shown above, we
will use the example of the plumber. A plumber is not able to fit your sink
if they are not in attendance at the place you want the sink fitted
(inseparable); if the plumber decides to take a day off, that day cannot be
stored for later usage, that time is lost forever (perishable).
Public passenger transport services are another excellent example of the

5 characteristics described above.
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2.9 Market Research
Market research relates to obtaining information that will enable an
organisation to out-position its competition. It is all about finding
something that can give it some competitive advantage. What is it that
customers, and prospective customers, want? What are the issues and
factors that affect their purchases? What other choices are there already
in existence in the market place? Are all of the customers’ needs being
met at present?
An organisation is then able to utilise this information to bring a new

product to market, or to modify, update or improve a current product or
service, and to gain some competitive advantage.
The aim of this type of organisational research is to reduce the level of

uncertainty risk to an acceptable level, prior to ‘going to market’. Once in
the market, research can tell the organisation how things are progressing
with a product by monitoring the performance. As an on-going activity,
research helps an organisation understand how it fits into its market, and
compares to its competitors.
 Task 2.8
You are the Marketing Manager for an organisation wishing to launch a

new bus service. You have been asked to conduct market research
aimed at identifying possible passenger levels. Explain in 250-300
words, how you would approach and carry out this task, giving reasons
for your proposed actions.
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2.10 Marketing Tools
There are many, and varied, tools used by marketing departments to
analyse both the market place, and the current position. Remember that
these ‘tools’ are not intended to be taken in isolation, but merely used to
paint an overall picture. It must also be remembered that they can also
contain subjective material because there are occasions when not
everyone is as objective as they could be. This is especially true when
people are asked to look objectively at a product or service that they have
owned or used for a period of time.
The information in all analyses is there to be challenged. It is often only by

challenging things in a positive way, that enables product improvements to
be realised and current situations to become improved.
2.10.1 PESTLE Analysis

PESTLE is an acronym that refers to the following factors: Political;
Economic; Social; Technological; Legal; Environmental. Others have used
PEST; SLEPT: or STEEPLE as acronyms for the tool used for external
environmental analysis. For example STEEPLE would refer to factors like
social, technological, economic, environmental, political, legal and ethical.
Remember these are only tools of analysis and as with many analytical
tools. These are used as an ‘aide memoir’ to ensure that all relevant
aspects are covered in the analysis.
Political issues can vary from a change in government in a particular

country, to wider issues, including such things as political unrest in certain
countries, as demonstrated by the 2011 riots in London and other cities in
the UK. In addition, the availability of workers from the newer EU member
states is another typical politically charged issue in the UK and other EU
member states.
Other factors include the nature of political systems and government

involvement in the working of the economy.
Economic factors will look at the macro-economic factors, and will include
economic growth rates, the cost of energy, raw materials, interest and
exchange rates, for example.
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For a larger organisation this analysis may look at whether it is more
beneficial to manufacture in country A or country B. An impact to consider
here would be taxation, political and cultural issues, child /slave labour and
government incentives.
These factors would likely appear in both economic and political analyses.
The social factors will go beyond generally accepted demographics, and

will consider lifestyle changes, trends in consumption, and the impact of
television, radio and newspapers. The employment rates and levels of
education are key factors that may impact on organisational
performances.
The impact of technology has been huge over recent years, and there is
no sign of this diminishing. The impact of technology needs to be
considered in light of the product, or service and the methods of getting it
to market.
Legal considerations are often allied to, and associated with, political
issues and are constantly changing. Legality and compliance need to be
closely monitored and managed.
Environmental factors have globally become more important in recent

times, with issues such as the use of sustainable resources, increasing
concerns over pollution and other externalities generated by industry and
transport and especially the impact upon the developing world now more
important to consumers than ever before.
Ethical issues have become a major area of concern for organisations and
their supply chain operations. For example working conditions, child labour
and human rights are key issues that have featured prominently and
negatively affected the market share of some organisations and their
relationship with the general public.
The diagram overleaf summaries the key features of the PESTLE analysis
and the type of factors you would expect to see within each segment of
the analysis.
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Figure 2.5 The Different Facets of a PESTLE Analysis for an Organisation
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2.10.2 Value Chain Analysis
Each step in the overall process of taking something from raw material to
end product is a link, or step in the overall chain. Each step should add
some value to the end product with each step adding value that is at least
equal to the best in class provider externally - if not then one would need
to question why it is being undertaken in house, and not being externally
sourced. Clearly there are times/reasons when an organisation is content
to undertake something internally even though others may be able to do it
cheaper externally – commercial confidence is one example.
Clearly there are times/reasons when an organisation is content to

undertake something internally even though others may be able to do it
cheaper externally – commercial confidence is one example.
Figure 2.6 Basic Value Chain
Purchasing Production Quality Storing Distributing Sales Financial Cash After

raw control procedures flow sales
materials and costs
Figure 2.6 shows a basic value chain. Each link in the chain will be
reviewed as a separate entity to ensure that the maximum amount of
value can be added for the minimum amount of resource.
The value chain analysis technique is also used to analyse the

performance of competitors within the market sector. However this is only
practical for those elements where transparency exists. It is unlikely that
competitors will be open about all that they do, and where secrecy exists
one cannot analyse performance without huge amounts of supposition and
subjective input.
AO/INT/0036 – V1.0 57
2.10.3 Benchmarking
This is the comparison of one item, product, process or service against
another. Generally the items measured will be processes, or outputs, and
are measured from one company to another; or one unit to another.
However, the two companies do not have to be in the same market, or

indeed the same industry! A supermarket chain may, if it wants to,
benchmark its HR function against that of a white goods manufacturer.
The key things that are required for benchmarking to succeed are
openness and honesty. As both a management tool and a marketing tool,
benchmarking is increasingly being used in both the private and public
sectors.
2.10.4 SWOT Analysis

This technique is commonly used to identify the competitive position of an
organisation. It looks at both internal and external factors, influences and
issues.
SWOT stands for Strengths, Weaknesses, Opportunities, and Threats.

The strengths and weaknesses are, in the main, the internal factors; whilst
the opportunities and threats are largely the external factors.
The internal factors will come from the ‘Ps’ we discussed in the marketing
mix, as well as issues from other areas of the business such as HR,
finance and production, and other tools such as the value chain analysis.
The STEEPLE analysis and competitor analyses will form the basis of the
external factors.
The intention is to make organisations think deeply about what the key
issues are for the future of that organisation, extracting and utilising any
relevant information from a variety of sources. The marketing plan, as part
of the business plan, will then address these issues.
58 AO/INT/0036 – V1.0
Using a template such as the one shown can help with the development of
as SWOT assessment.
Figure 2.7 overleaf provides a worked example for a company trying to

decide whether or not to change their warehousing and delivery system to
a full integrated model, drawing on systems analysis and customer/staff
feedback to help clarify the issues with the current approach, and to help
identify the functionality of new enhanced system solution.
Use of this type of diagnosis tool provides and quick and effective way to
identify risks, opportunities and other key issues at the outset of a project
or task, and can be used in a ‘high level’ manner (i.e. carried out by
managers and senior members of an organisation) and also to tackle
detailed issues concerning a specific business operation (i.e. carried out
by those delivering the project). It is also a very effective way to encourage
engagement by staff and customers and to look at an issue in a fair and
equitable way.
AO/INT/0036 – V1.0 59
Figure 2.7 Worked Example of a SWOTS Analysis/Diagnosis
 Task 2.9
Sales and marketing are all about the same thing really!
Discuss this statement in relation to an organisation of your choice,
using no more than 600 words.
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2.11 Strategy
2.11.1 What is Strategy?
There are many different
definitions of the word strategy;
probably nearly as many as the
number of books written on the
subject. It has become one of the
most topical of business subjects.
So what is it all about? A broad
definition of the word, in business terms, could be; “Strategy relates to the
activities undertaken by an organisation in order to achieve its long term
aims”.
Here are some further comments, or definitions, on the subject:
‘Strategy is the great work of the organisation. In situations of life or

death, it is the Tao of survival or extinction. Its study cannot be
neglected.’
Tzu (circa 100BC)
‘Strategy is about winning…Strategy is not a detailed plan or

program of instructions; it is a unifying theme that gives coherence
and direction to the actions and decisions of an individual or
organisation.’
Grant (1998).
One of the most renowned thinkers, and authors, on the subject of

strategy, Kenichi Ohmae said:
‘What business strategy is all about is, in a word, competitive

advantage. The sole purpose of strategic planning is to enable a
company to gain, as efficiently as possible, a sustainable edge over
its competitors. Corporate strategy thus implies an attempt to alter a
company’s strength relative to that of its competitors in the most
efficient way.’
Ohmae, (1982).
AO/INT/0036 – V1.0 61
The latter definition is probably the one that most readers, particularly
those readers already working in the logistics and transport industry, will
most readily identify with.
One of the most important things, to remember about strategy, is that it

refers to a ‘long term’ view of where the organisation wants to be. When
we refer to long term, in relation to strategy, we are talking about some 5-
10 years forward! However in current environments the planning horizons
have been severely reduced requiring constant review of these long-term
strategies.
Ohmae, (1982), talks of competitive advantage, sustainable advantage,

whilst Grant (1998), talks about winning. A combination of these elements
brings us to “sustainable competitive advantage”, a phrase that
encapsulates these sentiments. It refers to not only seeking ultimate
solutions in terms of competitive advantage but of sustainable solutions
that are able to endure.
Almost any organisation may be able to develop a short-term competitive

edge over the competition by such initiatives as lowering prices, big
advertising campaigns, etc. But if the advantage obtained is not
sustainable, it may be detrimental to the organisation in the longer term,
especially where the expected results and/or rewards fail to match the
effort and expenditure.
E.g., assuming that organisation A and organisation B are competitors,

both selling a commodity item, i.e. not differentiated, and that their
operations are similar. If organisation A decides to lower its prices against
its competition but does nothing else; then all that happens is that
organisation A is eating into its profit margin. If organisation A continues
with this action and organisation B retaliates, we now have a ‘price war’.
The winner will be the one who can hold out the longest. That will
normally be the one with the greatest resources. In this very simplistic
case, the winner will be the one with the largest financial resources. If this
is not organisation A, then their advantage is not sustainable!
62 AO/INT/0036 – V1.0
This is often the situation that newcomers to a competitive market face.
The dominant players may well use their financial position to attempt
market domination; to squeeze the newcomers out.
 Task 2.10
In 200-250 words describe the differences between strategic planning

and operational planning, and how they both impact upon your role
within your organisation.
 Task 2.11
Describe in detail the strategic positioning of your organisation or one

part of your organisation, or one product or service.
What improvements could your business undertake, in order for them to
obtain an improved sustainable competitive advantage, and why?
Please explain in 850-1,000 words.
2.11.2 Sustainable Competitive Advantage

Undeniably, the aim of any business is to have an advantage in the market
place. It makes total business sense therefore that this advantage is held
for as long a period as is possible. For this to occur, then the advantage
must not only be held, it must be sustained. This leads to the questions;
what exactly is sustainable competitive advantage and how do
organisations develop a sustainable competitive advantage?
Another approach to assessing the competitive environment is by applying

the ‘Five Forces’ analysis tool. In this tool Michel Porter identified five key
forces that are likely to influence the degree or level of competition with a
market.
AO/INT/0036 – V1.0 63
For example the level of bargaining power of either suppliers or buyers will
have an effect on the level of competition with the market. Similarly the
availability of substitute products and the barriers to new entrants into the
market will also influence the degree or level of competition in the market.
Figure 2.8 Porter’s 5 Forces
THREAT
of
New entrants
The Industry
Bargaining Bargaining
power power
of of
Suppliers Buyers
Competitor
rivalry
THREAT
of
Substitute
products
This diagram of Porter’s 5 Forces, as with most of the early strategic

literature of the 1970s and 1980s, focuses upon the external environment,
and is used to identify the industry’s key success factors.
Clearly it is entirely possible for two, or more, established and stable

organisations to analyse the industry in which they compete and then to
reach the same, or at least very similar conclusions. Arguably this could
lead to there being no advantage held, or if there is an advantage, then
the organisation that holds that advantage does so merely through the
benefit of good fortune.
64 AO/INT/0036 – V1.0
Grant, (1998) argued that once the analysis of the external environment
had been undertaken, then sustainable competitive advantage was
obtained through the analysis and development of the organisation’s
internal environment. The strategy undertaken would depend upon the
organisation itself - the organisation’s resources and capabilities, its goals
and values, and its systems and structures.
The organisation’s resources are categorised into 3 main categories:
Tangible - the physical aspects such as buildings and equipment, or the

financial aspects, such as cash in the bank or access to funds.
Intangible - includes such things as the technology used, the reputation of

the organisation, and the culture within the organisation; and
Human - examples of which are the skills and knowledge of the

employees, the effectiveness of the internal communications, and the level
of motivation within the organisation.
Because resources are rarely able to be productive on their own, it is

usually the way in which the resources are assembled and deployed that
is the key. For example, a chef is a resource in a restaurant, but without
the right ingredients, cooking equipment, and waiting staff, they would be
unproductive, and the results very poor indeed.
‘Organisational Capabilities’ is the term given by Grant (1998) ‘to refer

to a firm’s capacity for undertaking a particular productive activity’. Grant
makes no differentiation between the words ‘capabilities’ or
‘competencies’, although others do. An organisation is able to measure
the effectiveness of its capabilities by benchmarking them against other
organisations. This is covered in the marketing section of this module.
It is the analysis and assessment of both the industry’s key success

factors, and the organisation’s own capabilities, which leads to the
formulation of the organisation’s strategy. This will often include an
analysis of the competition and an assessment of what is required to
outperform or beat it for the foreseeable future, as well as analysis of
customers and potential customers and their actual and expected
requirements.
AO/INT/0036 – V1.0 65
This type of strategy is what leads to competitive advantage. In addition,
as the industry’s key success factor can be argued to be a constant for all
industry participants, it is the ‘organisation’s capabilities’ element of the
equation that can provide a superior level of competitive advantage.
In turn, to ensure that any competitive advantage gained is sustainable,

we need to ensure that the capabilities, and/or the resources from which
they are derived, are also sustainable. Grant, (1998) talks about the
sustainability advantage, being reliant upon three factors. These factors
are Durability, Transferability, and Replicability.
The diagram below simply shows how Durability, Transferability, and

Replicability fit together to support the competitive advantage of the
organisation. The durability facet is at the top of the pyramid because of its
importance in ensuring the long term sustainability of the organisation,
whereas the aspects at the bottom of the pyramid are those that need to
minimised to protect the USP (Unique Selling Point) of the product.
Figure 2.9 Ways to Achieve Sustainable Competitive Advantage
66 AO/INT/0036 – V1.0
Durability refers to the fact that some resources have a longer shelf-life
than others. Given the nature of modern technology, and the speed at
which it develops and changes, any advantage based upon a
technological aspect is likely to be short-lived. Whereas something like
reputation, a part of the overall makeup of the brand and image, is
doubtless longer lasting.
Transferability refers to the ease with which competitors can obtain the
resources necessary to imitate a successful strategy. The easiest way to
acquire a resource is to buy it. Some resources are easily and fully
transferable, for example raw materials, or machinery. Others are not
easily transferable, such as the way in which whole teams of people work
together, or the company culture that allows some form of differentiation.
Replicability refers to the fact that if a resource cannot be readily bought

then it must be copied. Some things are easier to copy than others. How
obvious something is to a competitor is one aspect. The style and layout
of a shop is easy to replicate, the hidden back-room processes are not.
Clearly, the harder it is for a competitor to either purchase or replicate your

resources or capabilities, then the more long-lasting your sustainable
competitive advantage will be.
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 Suggested Further Reading
 Cole & Kelly, (2011). Management Theory and Practice, 7th ed.
published by SOUTH-WESTERN CENGAGE Learning. ISBN:
9781844805068.
 Drucker, P., (2007). The Practice of Management. Taylor & Francis.
ISBN: 9780750685047.
 Grant, R., (2012). Contemporary Strategy Analysis. 8th ed. John
Wiley & Sons. ISBN: 9781119941880.
 Hamel, G. & Prahalad, C.K., (1994). Competing for the Future.
Harvard Business School Press. ISBN: 9780875847160.
 Ohmae, K., (1982). The Mind of the Strategist. McGraw-Hill. ISBN:
9780070479043.
 Porter, M.E., (1980). Competitive Strategy: Techniques for Analysing
Industries and Competitors.
 Tzu, S., (c. 100BC). The Art of Strategy: A New Translation of Sun
Tzu’s Classic “The Art of War.” trans. R.L.Wing, Doubleday, (1998).
Element Two Bibliography

9780750685047.
Grant, R., (2012). Contemporary Strategy Analysis. 8th ed. John Wiley &
Sons. ISBN: 9781119941880.
Hamel, G. & Prahalad, C.K., (1994). Competing for the Future. Harvard
Business School Press. ISBN: 9780875847160.
Kotler, P., Harris, L., Piercy, N.F., & Armstrong, D., (2014). Principles of
Marketing. 6th ed. Pearson Education Limited. ISBN: 9780273743194.
Mintzberg, H., (2000). The Rise and Fall of Strategic Planning. Pearson
Education Limited. ISBN: 9780273650379.
Ohmae, K., (1982). The Mind of the Strategist. McGraw-Hill. ISBN:
9780070479043.
Pascale, R., (1991). Managing on the Edge. Penguin.
Porter, M.E., (1998). The Competitive Advantage of Nations. Palgrave
Macmillan. ISBN: 9780333736425.
68 AO/INT/0036 – V1.0
3. People Management
3.1 Introduction
Element three of this core unit examines the management of people, more
commonly referred to as human resource management. This subject is
another vital component of management for those managers seeking to
gain and sustain competitive advantage, and is the next component aimed
at enabling you to meet the standards’ requirements of Management in
Logistics and Transport unit.
Learning Outcomes
 Know the principles for recruiting and selecting staff;

 Understand the importance of and the process for developing and
motivating people;
 Understand the principles of team development and management;
 Understand the key legal requirements for working with other people.
third element of Management in Logistics and Transport unit. You should
keep a focus on these outcomes in order to ensure that by the end of the
module you are able to meet the standards required.
3.2 People Management - Background

In the past, it was often true to say that one needed no, or very few,
qualifications to undertake the role of manager; in some cases, and in
some organisations, this may still be true today. Whilst today the training
required by and for managers is still not as formalised as, for example,
that for the roles of solicitors or doctors, most organisations have realised
that managers need to be trained and developed, and that effective
management training is an essential element of business success. In the
past, it was often the case that the best salesman becomes the next sales
manager. This happened in spite of the fact that very often the skills
needed to carry out the task of selling something may be inherently
different from the skills needed to manage that task, and the multitude of
associated tasks that go to make up the role of a sales manager.
AO/INT/0036 – V1.0 69
The most important part of managing an
organisation, (where an organisation
may be defined as consisting of more
than one person), is managing the
people within that organisation. You
should remember that managing people
is not the same as managing machines.
Two machines of the same make/model
may be set up to operate and perform in an exactly identical manner and,
should they have the same fault, may be mended in the same way.
People are simply not like that. We are, each of us, unique. We have
different personas, different performance characteristics, different
priorities, needs, wants and desires and different aspirations etc.
The following, by Charles Handy, is a very useful and insightful, definition

of Industrial Organisations.
“Organisations are not machines, even though some of us running

them would dearly love them to be so. They are communities of
people, and therefore behave just like other communities. They
compete among themselves for power and resources; there are
differences of opinion and of values, conflicts of priorities and of
goals. There are those who want to change things and those who
would willingly settle for a quiet life. There are pressure groups and
lobbies, cliques and cabals, rivalries and contests, clashes of
personality and bonds of alliance”.
(Handy, C., 1999).
It is suggested that you re-read this statement, not in order to memorise it,
but in order to fully understand what is being said, and its implications.
As managers we need to get the best out of our people. As Drucker,

(1954) first said, over half a century ago:
“Management is concerned with the ‘systematic organisation of

economic resources’ and its task is to make these resources
productive”.
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People definitely are an economic resource of an organisation, but
machines are not.
 Task 3.1
Using Handy’s statement above, identify and describe at least three

different types of groups within your organisation, using 200-250 words.
Include brief explanations of what makes them different and their
differing needs and wants.
3.3 Leadership
What is leadership? How does it differ from management?
Table 3.1 Manager vs. Leader
In order to answer these questions we must accept that there are at least
three differing viewpoints.
 Some say that both leadership and management are one and the same
thing, and that good leadership is merely another way to describe good,
and effective, management.
 When Allan Leighton was Chairman of Royal Mail plc. he said, in an

interview on BBC Radio 4, “managers do things right, but leaders do
the right things”. This is an interesting distinction and maybe, at his
very senior level in business, this may be true because at the most
AO/INT/0036 – V1.0 71
senior levels of management there may be a requirement for far more
strategic thinking and planning, for the future than there is for managing
the present. However, at any managerial level there will still be some
requirement for ‘managing the present’, and it is this requirement which
forms the ‘doing things right’ part of his description. You may notice
how similar this quote is to the ethos of the modern approach to
management. This is probably because Mr Leighton is an exponent of
the modern approach, and is an alumnus of Harvard Business School.
 Another way to think of the blend of leadership and management is to

imagine them as two pieces of coloured plasticine, a blue piece and a
yellow piece. Once rolled together to form a ball you will see blue
streaks, and you will see the yellow streaks. However, where the two
colours have blended, you will also see the varying shades of green.
This is the part of the mix where the two colours cannot be separated,
they are now inextricably linked. This example can be likened to the
fact that a good manager will have good leadership qualities, and a
good leader will have good management qualities; the two inter-woven
components being essential in order to produce a truly effective
manager/leader. Arguably this balance is a necessity; after all it is
extremely rare to find a management role where one will only ever
require one or the other, and not both of these skill-sets.
These may be just three ways in which to look at leadership. There are
many, many different definitions of the meaning of the word leadership;
there is generally, though, a common notion to all of them. That is, that
leadership is, in essence, the influencing of others to follow a particular
aim or direction.
 Task 3.2
In your own words describe the major differences between a manager

and a leader. Is one always better than the other? Imagine your
manager as firstly a leader, and secondly as a manager, and describe
the likely impact this would have upon you as a team member? Which
would be your preference, and why?
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One may argue that under certain conditions it is not possible to have true,
and full, democracy within a team. Some leaders may feel that they have
to ‘tell’. The very left of the Tannenbaum and Schmidt continuum model
‘makes decision and announces’ the team what to do. This may be due to
such things as time constraints, or there may be no scope for manoeuvre
in order to meet a particular customer’s needs, etc. There are, though,
other reasons for leaders to behave in this way. For instance, a lack of
leadership skills may well leave the leader unable to ‘engage’ and with no
alternative other than to ‘dictate’. This autocratic approach may be due to
a number of reasons from, for example:
 A lack of confidence;
 A fear of losing face if it isn’t them who makes key decisions;
 A fear of losing their new-found position, and the associated kudos;
 Concern about losing the newly attained higher income;
 General insecurity.
This may be demonstrated if we consider the excellent salesman who was

promoted to sales manager. Just because they were good at the ‘doing’
does not mean they will be good at the ‘managing’. If this person is now in
a situation where they do not have the skills to manage effectively, they
may well resort to telling, as opposed to a more democratic approach.
Whilst we have considered the example of a new manager it should also

be noted that in many organisations, especially those with older, more
traditional, promotional regimes, where promotion may have traditionally
been achieved by seniority and not necessarily competence, many ‘older’
managers may well feel threatened by perceived, or actual, threats
stemming from younger, better qualified, more IT literate or better able
junior staff.
AO/INT/0036 – V1.0 73
3.4 Recruiting Your Team
When recruiting staff, you as a manager have an absolute duty to the
organisation to choose the best person for the role. This must be done
irrespective of whether or not family members or friends may apply. For
an organisation to improve it must select the best people available for the
roles in question, without fail. Not to do so has the potential to jeopardise
the future direction and success of the organisation. As an example, if we
consider the recruitment of a member of staff who would attract a salary of
circa £25,000 per annum, and expected role tenure of 3 years, the
recruitment decision will be far in excess of £100,000. Whilst this may be a
considerable sum, the question that must be asked is “what price could be
placed upon under-performance or ‘missed opportunities’ that may arise
through failure or incompetence if the wrong person is recruited?”
 Task 3.3
Assume that you are the Managing Director of one of the largest airports
in the world. Due to expansion, you need to recruit a number of Air
Traffic Controllers.
Describe each step of your preferred recruitment process, from start to

finish, and explain why you have chosen each step. You should aim to
complete this task in not more than 750 words.
Before you are in a position to recruit,

you must identify, assess, and
analyse the role to be filled in order to
accurately determine the qualities and
skills needed by any potential post
holder. If the role is unlikely to
change in its design, then many
organisations may recruit a person
whose skills and experience most
closely match the role. This is known as person-job fit. However, this
approach carries with it some element of risk.
74 AO/INT/0036 – V1.0
For example, should the role change in its design, then the recruited
person may no longer fit the role; unless they also change and change in
this context will this usually mean additional or further training which may
be costly to the parent organisation or perhaps beyond the capabilities of
the post holder.
If the organisation feels, or knows, the role is likely to change, it may be

more prudent for you to seek a recruit with a good person-organisation fit.
This type of recruitment needs detailed analysis of the individual, detailed
assessment of the work involved, careful consideration of current and
required team dynamics and alignment with all the key values of the
recruiting organisation. If a fit can be found using this type of methodology
then arguably the risk has been lessened.
It is quite normal for all the applications for a post to be assessed and
graded prior to the interview stage. This is usually done by matching data
contained in Curriculum Vitae to the job description and person
specification appertaining to the role. Once the candidates who best
appear to meet the requirements for the post have been identified, they
may be called for interview, whilst those failing to closely match what is
required should be notified accordingly.
Face to face interviews are, by far and away, the most common form of
selection used today. However, it must be noted that they are potentially
full of hidden pitfalls. In addition, especially in small and medium sized
businesses and organisations, they are often undertaken by people not
necessarily fully equipped, or competent, to carry them out. It is essential
that organisations try to minimise risk during recruitment, although actual
techniques to enable this will naturally vary from organisation to
organisation. What is a fact is that many potential risk minimalisation
techniques may or may not be applicable under certain circumstances.
For instance, in an attempt to lessen the risk of recruiting the wrong

person, many organisations elect to carry out what are known as
competency based interviews. These are interviews whereby each
candidate is asked exactly the same questions, in exactly the same order
as every other candidate. Whilst this makes the whole process more
AO/INT/0036 – V1.0 75
objective and equitable for the candidates, in one sense, even this
approach has flaws. The process tends to be disjointed, and does not
flow; these interviews are awkward for both interviewer and interviewee.
The interviewer is unable to fully explore particular responses in any
depth, as this veers away from the prescribed format, and it may also be
difficult for the interviewee to show their particular strengths and aptitudes,
unless the right question is raised.
Hunter and Hunter, (1984) demonstrated that face to face interviews have
a predictive validity of 0.14, based on a scale of 0 (chance prediction) to 1
(perfect prediction). This finding means that whilst the organisation may
obtain the best interviewee from the interview there is a potentially high
risk that they may not be able to recruit the best person for the role; which
was the sole purpose of the whole interview process. This validity factor
also confirms that it is very difficult to assess skills and abilities in an
interview environment. These findings may well lead you to suppose that
the only real way of recruiting the ‘best person for the job’ every time
would be to trial each applicant for a period of time. Clearly this too would
be both impractical and costly be subject to additional inherent risks.
 Task 3.4
Describe the risks to your organisation if ‘trialling’ each job applicant

were feasible. Give the reasons for each of the risks identified.
As you may be aware, recruitment is not an activity which should be taken

lightly or undertaken by anyone who does not possess the required skills
that will ensure the organisation is enhanced by the new entrant or the
newly promoted current employee. To reflect and underpin this statement,
modern businesses have given over much of their recruitment activity to
recruitment specialists, either internal departments, such as Human
Resources (HR) or external agencies, specialising in recruitment.
76 AO/INT/0036 – V1.0
 Task 3.5
Consider the advantages and disadvantages of internal recruitment

departments and external recruitment agencies. Use your findings to
assess, in no more than 500 words, the types of roles and managerial
levels of positions within an organisation for which internal recruitment or
external recruitment may be the preferred options.
3.5 Team Building

As we noted earlier, people are different. This fact alone means that
teams, even those that are made up of people with similar skills, will be
made up of a group of people with individual specialisations, likes, dislikes
and aptitudes. Part of the art of management is to utilise all of the skills
from within your team, where and when required, for the benefit of the
whole organisation.
The size of a team which may

report directly to you as a
manager or director (direct-
reports) is important. Too small
a team and you arguably lose
the benefit of having a team in
the first place. A team that is too
small may well suffer from such
things as a limited number of ideas and/or insufficient skills to enable it to
function effectively. Too large a team and it may become unwieldy, and
face the risk of fragmenting into smaller splinter groups. For the team
leader, there also exists the problem of managing a large number of
direct-reports. Whilst this will obviously depend greatly on the skills of the
team leader, it is generally felt that, at senior level, a team containing more
than 10 direct reports has the capacity to cause issues. However, as the
greater number of people in a team gives rise to the greater knowledge
and skill base, which may well be an overriding business priority, often the
only answer is to have, where allowed, as large a team as you can handle
effectively.
AO/INT/0036 – V1.0 77
Whilst this statement may appear somewhat vague it must always be
remembered that any manager will get more from a team of 6 managed
effectively, than from a team of 12 managed ineffectively. Ultimately, it is
often the individual manager’s skills, and the nature of the team role within
the organisation, that actually determine the optimum team size!
If we accept that a team is a group of people, then we must consider the

two principal types of groups in the workplace. These types of groups are
known as homogenous and heterogeneous.
The diagram below shows in picture from the difference between these 2
groups. Simply, the homogeneous group tends to unite around core
values and beliefs and work as an effective team unit, but the
heterogeneous group tend to work is isolation which can lead to conflict.
Figure 3.1 The Differences between Homogeneous and Heterogeneous Groups
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A homogenous group is a group whose members share similar views,
beliefs and values. The group members are likely to enjoy relatively high
levels of team happiness and face low levels of conflict. The other type of
group is a heterogeneous group. This group will tend to have a greater
propensity for being creative and innovative but the downside is that a
heterogeneous group is more likely to face greater levels of friction and
disharmony.
With both types of group there are other common problems which you as
a manager should recognise and strive to eliminate or minimise.
Issues always need to be monitored and possibly dealt with, especially

where an issue may become a factor likely to affect team performance and
effectiveness. Examples include:
 Hidden agendas. The best way to deal with these is to try to

bring/flush out issues at an early stage. Try to create a trusting, open
environment. Clearly this is no guarantee that people will be open and
honest about their agendas, however if you have created an open and
honest atmosphere where people feel able to voice opinions without
fear, reprisals, or ridicule, then you may consider you have done all that
one reasonably can.
 Group anxiety. This often relates to newcomers to the group, conflict

and criticisms. People have a habit of treating newcomers with an air of
scepticism, so there needs to be a defined process for integrating them
into the team. One solution is to give them a mentor who can support
them over the initial integration period. You can reduce conflict by
ensuring that all members are given an equal opportunity to have
contributed to discussions, and to be listened to. You as an effective
manager should strive to give feedback to team members; be honest,
but, where critical feedback may be appropriate, this should be given in
a positive and constructive way. It is also worthy of note that simple
tasks such as thanking people for the efforts they have made, whether
successful or not, can go a long way to reducing group anxiety.
AO/INT/0036 – V1.0 79
 Groupthink. This can be a major problem in groups, and is one that is
more likely to occur in homogenous groups, which are made up of
people who tend to be of like-minds. It is a situation where the ties to
the group are so strong that it inhibits questioning and critical analysis
of the issue(s) at hand because one, or more, of the group feel that to
voice an alternative opinion may be seen as being disloyal to the other
group members. It can even be so strong as to lead to contradictory
evidence being ignored, and the chosen path being blindly followed.
Case studies have shown that one of the eight common symptoms of
groupthink is pressure brought to bear on any team member who
expresses dissent against the chosen path of the team. (Adapted from
Janis, (1971).
3.5.1 Self-Directed Work Teams (SDWT)

A team does not necessarily mean a departmental team. A self-directed
work team is usually a small group of people, not necessarily taken from
the same department, who will work together on a project, and then
disband when the project is complete. This is a very effective type of team
and its characteristics are shown below:
Typical Characteristics
 Organises itself;
 Prioritises work;
 Makes decisions;
 Manages itself and individual team members.
Optional Characteristics
 May work without immediate supervision;
 May select, hire, promote or discharge its members.
For an SDWT to be effective it must have a clear purpose, which is

understood by every member, and be results oriented. It needs a strong
leader who participates fully and the individual strengths of each member
must be recognised.
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Effective communication – both within the team and externally – is
paramount, as is mutual trust and support among the members. All
members must be enthusiastic about the project they are undertaking.
Who should be on the Team?
Team members should not be clones of yourself! A balanced team needs

a variety of individuals who possess a variety of skills and can make a
variety of contributions to ensure a higher chance of achieving the goal. A
typical SDWT might contain the following:
Manager Conceptual Radical – someone to

thinker think the impossible
Technician – Diplomat Critical Planner

the practical
observer
one
How Does the Team Evolve?
 Stage 1: Forming
Members of the team need to get to know one another and accept that
they are all working together with the common purpose of completing
the project.
AO/INT/0036 – V1.0 81
 Stage 2: Storming
There will inevitably be a shuffle for relative positions in the team.

Discussions (and arguments) need to take place about methods of
tackling the project.
 Stage 3: Norming
Once a balance has been found, norms of behaviour will be established

and a cooperative spirit developed.
 Stage 4: Performing
The team matures and learns how to handle complex challenges.
 Stage 5: Adjourning
Once the goal has been achieved, the team breaks up. This needs the
same handling as team building.
Team Communication
Effective communication within the team is essential for success, and

there are various structures, as demonstrated below.
Mesh Tree Star
Linear
Mesh
 All members talk to one another;
 Combined knowledge is available to all members;
 Fewer steps to transfer information – less chance of errors;
 Good for complex tasks.
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Star
 Team communication through one member (usually the leader);
 Information can be interpreted or modified before being passed to the

team;
 Good for simple tasks and control;
 The leader may have too much power.
Linear
 Commonly used, but ineffective structure;
 Results in poor teamworking;
 Danger that information will become distorted or misinterpreted as it is

passed down the line.
Tree
 Common in companies that are organised by function;
 Useful when tasks and responsibilities are subdivided;
 Information passes up and down the tree according to pre-set rules;
 Danger that information will be distorted as it passes down the tree;
 Poor team working structure.
Team Roles
Belbin, (1993) describes team roles as follows:
 The Implementer
Practical organiser through scheduling and planning.
Main Strengths Possible Weaknesses

Common sense Lack of flexibility
Self-discipline Tendency to be unresponsive to
unproven ideas.
Ability to transform discussion into
practical steps and strong
organisational skills.
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 The Chair
Good organiser who has a capacity for treating and welcoming all
potential contributions on their merits without prejudice.

A strong sense of objectives Lack of creative ability
An ability to sum up group A tendency to be reserved
achievements
A disciplined approach
Good at working with others
 The Shaper
Pushes decisions forward and looks for the best course of action.
Tends to be an extrovert and passionate about the task itself.

Strong drive A tendency to irritation, provocation
and impatience
Challenges inertia, ineffectiveness
and complacency
 The Innovator
Provides creative input to the team.

A source of ideas and knowledge Lack of self-discipline
Often of high intellect A tendency to lose interest once the
initial fascination has passed.
 The Monitor Evaluator
Analyses suggestions from within and outside the team and evaluates
their feasibility in terms of the team’s objectives.

Analytical skills Lack of inspiration
Discretion and objectivity A tendency to be over critical
Ability to spot flaws
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 The Team Worker
Primarily concerned with team maintenance and is perceptive of the

feelings, needs and concerns of the group.

An ability to respond to people and Indecisiveness in moments of crises
situations
Promotes team spirit A tendency to avoid conflict
Is supportive, understanding and
diplomatic.
 The Finisher
Helps the team to meet deadlines by attending to details and following

things through.

Ability to push colleagues to finish A reluctance to ‘let go’
things
Checks for errors A tendency to worry about small
things
Painstaking and conscientious
Review the section above again, and consider your own strengths and
weaknesses. Where do you feel you would fit?
AO/INT/0036 – V1.0 85
Team Building Summary
 Teams don’t build themselves;
 Team building is a key management responsibility;
 Team members must be trained in hard and soft skills;
 Consider the self-directed work team;
 Managers become facilitators, not supervisors;
 Don’t expect teams to be conflict-free;
 Team targets must be:
- Goal oriented;
- Realistic;
- Achievable;
- Measurable;
- Time-specific;
- Refer to the later section on setting objectives, in section 3.8, and

note the similarities.
 Task 3.6
Describe, in full, the key differences between effective and ineffective

teams. Explain in approximately 300 words, what actions you would
take in order to turnaround an ineffective team. Give the reason for each
proposed action.
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3.6 Training and Development
Once you have your team, it is
time to decide how to get the
best from it. As a manager,
you and your team have
certain tasks to perform, and
roles to carry out within your
organisation. In these days of
constant change, where organisations are seeking improvements at an
ever increasing rate, it is highly unlikely that either individual roles or
individual or team tasks will remain constant for long. Therefore both the
manager and the team will need to be trained or developed to be better
able to operate in any new role or perform any new tasks.
Firstly, there is a distinction to be made. It is important that you appreciate

that ‘Training’ and ‘Development’ are not different words used to mean the
same thing. Training refers to: teaching skills relevant to the performance
of the current role, perhaps in the form of refresher training; or for teaching
new skills due to changes in the role, perhaps due to technological
advances. Development refers to teaching someone new skills for maybe
a change in role, or in order to progress up the corporate ladder.
These are not normally skills necessary for the person to carry out their
current role. Development is a more forward looking decision. Again,
using the example of the salesman moving to sales manager,
development is required because the skill-set required is different.
Many members of staff, and even some managers, believe that once they
have been trained to carry out a certain task then that is the requirement
met and there is no longer any further need for training.
Obviously, this is totally wrong and an incredibly naïve way of working!

Clearly, if anyone fails to keep abreast of changes in modern techniques,
or fails to keep up with the technological advances in a chosen field, then
a skill-gap starts to appear.
AO/INT/0036 – V1.0 87
Figure 3.2 Knowledge Required and Held
100
% of 90
knowledge 80 Knowledge
held 70
60 Required
50
40 Held
30
20
10
0
Periods of Time
The above graph (Figure 3.2) shows that the skill required to carry out a
role is at 100%. For the purpose of this exercise we will assume that our
fictitious character had the full set of skills to start with; but failed to
undertake any further training. As technology advances the skills required
become greater in number; this new level of skill becomes the 100% target
required; as our fictitious character has not undertaken any further
training, the skill set they now have is less than the 100% that they
require. As time progresses, this gap is ever increasing, assuming still no
training is undertaken. The difference between the two lines (the shaded
area) represents the skill-gap. Clearly there comes a point in time where
not only is our character unable to perform the role to the highest
standards, but is unable to perform the role to an acceptable standard.
This is a situation that requires managing.
Both training and development should be seen as on-going elements of

any employment or career. All staff members need to be trained or
developed throughout their careers. However, as a cautionary note: whilst
in relation to training it may always be best to seek to train people to carry
out their tasks/role to the very best of their capabilities, and dependent
upon the resources available. This may not be the case with development.
In the case of development it can happen that should someone become

developed to a point where they now have the skills to perform at a level
well above their current role it is essential that an opportunity for them to
obtain a rise to that level presents itself within a reasonable timescale.
88 AO/INT/0036 – V1.0
This is due to the fact that by successfully developing a person their
expectations for career progression will have been raised. Failing to meet
this expectation can lead to them becoming demoralised and frustrated,
and to possibly seeking alternative employment. In this case, the
organisation may well lose the skill-set that they have spent time, effort,
and money developing and the team may lose a valuable team member.
Training and development can take a number of forms, and may be

undertaken either internally or externally to the organisation. This is
normally dictated by the type and nature of the training and/or
development required. In addition to the choice of internal or external,
there also exists the choice of formal routes of development, e.g. courses
such as the one you are currently studying, college and university courses;
and also other less formal routes such as coaching and mentoring, or
counselling, etc.
Every manager seeking to train or develop either themselves, or their

team, must select the most appropriate training and development
interventions in order to meet the agreed aims and objectives of that
training or development. Sometimes this may mean selecting solutions
that may be seen as less attractive by some team members, but the over-
riding consideration must be that, whilst endeavouring to meet personal
training and development needs and wants, the needs of the organisation
must be paramount.
 Task 3.7
You are the Operations Director of a large road haulage company.

Design two programmes: one to meet the training needs of your drivers,
and the other to meet the development needs of your recent intake of
management trainees [university graduates].
Use 850-1,000 words to do this, including in your answer an explanation

of any difference of approach required for either group.
AO/INT/0036 – V1.0 89
3.7 Motivation
In relation to motivation there are at least four important and valid
questions:
 What is it?
 Why is it important?
 How does it affect the individual?
 How can the motivation of others be influenced?
‘With the best will in the world, and the best board, and the best
strategic direction in the world, nothing will happen unless everyone
down the line understands what they are trying to achieve and gives
of their best to achieve it.’
(Harvey-Jones, 1988.)
This true statement was made from a manager’s perspective. As a

manager, a part of your role is to ensure that your team give their best to
the task in hand. In order to assist you to do that you will need to
understand what it is that drives your team members; in short you will
need to understand how they are motivated.
 Task 3.8
Use no more than 200 words to explain whether or not you believe that
increased salaries or offers of promotion are always motivational.
Theories should not be taken in isolation; they all form a part of the overall
picture of what motivation actually is. A theory is merely the expression of
a theorist, and it is a fact that theorists often try to say similar things
expressed in very different ways.
It is often valuable to challenge theories, and form your own opinion.

Remember, some of what is said can be construed as being contextual.
For example, Maslow’s Hierarchy of Needs (1954), clearly argues that a
person will not be motivated by safety needs, until their physiological
needs have been met. Whilst this may be true it may also be challenged.
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For instance: put yourself in the position of somebody facing immediate
mortal danger, and also cold, wet, and hungry. Clearly the physiological
needs of a warm dry place and a tasty meal can wait until the mortal
danger has passed.
Thus far we have looked at the earlier theories of motivation, which are
known as the ‘content theories’ because they have focussed the content of
motivation including the factors that drive behaviour in the workplace. We
will now move on to look at what are referred to as the ‘process theories’.
These are the theories based around how to motivate people.
 Task 3.9
Explain, in no more than 300 words, the key differences between

Expectancy Theory, Equity Theory, and Goal Theory.
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Expectancy Theory is not based on what will happen, but on the person’s
perception of what will happen. For instance:
 If person ‘A’s’ perception is that s/he is unable to perform effectively,

perhaps due to a lack of skills, experience, tools, or even confidence,
then s/he will not make the necessary effort to enable effective
performance.
 If person ‘A’ now knows that an increase in effort will lead to an

increase in performance, it follows that they now must also believe that
this increase in performance will lead to the expected rewards. The
term ‘rewards’ could be exchanged for the term ‘outcomes’ as these
can be both rewards and punishments! If one’s perception is that poor
performance may lead to punishment, it is likely to act as a motivator to
make you perform better!
 Lastly, person ‘A’ must believe that the rewards will be available. If the
promise of rewards, or the threat of corrective action, has been made
previously and then not acted upon, it will be harder for person ‘A’ to
believe that any reward will be forthcoming. It is also important that
whatever the reward offered, it is one that is desired by the people it is
being offered to. The reward will only act as a motivator if it is one that
is wanted. Imagine a group of workers who are offered more money as
an incentive to produce more widgets; if that group of workers are all
young family people, with young children and high outgoing family
expenditure, it is likely that this will be an incentive. However, if that
group of workers are all of an older generation, whose children have
perhaps married and left home and who have low outgoing family
expenditure, it is likely that it will be less of an incentive, if it is an
incentive at all!
If motivation is considered to be a factor leading to success, then the

issues above are the sorts of issues that a manager will need to fully
consider along with all the associated problems before any sort of reward
or remuneration scheme can be put into effect.
The diagram overleaf shows the chain process between effort and
outcome, and the part that levels of motivation have to play in reaching the
overall goal.
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Figure 3.3 The Relationship between Effort and Outcomes: How Motivation Levels
Affect Overall Performance and Delivery
AO/INT/0036 – V1.0 93
Equity Theory relates to what person ‘A’ knows that person ‘B’ receives,
calculated against what person ‘A’ gets themselves; this information is
then measured against person ‘A’s’ judgement of person ‘A’s’ self-worth to
the organisation, against person ‘A’s’ perceived worth to the organisation
of person ‘B’.
With Equity Theory it is important to remember that this can only really be
applied to extrinsic comparables; that is to say things such as salary, car,
and promotions etc. This is due to the fact that it is almost impossible for
anyone to judge how intrinsically satisfied another person is compared
with how satisfied you are yourself.
Given that the level of personal satisfaction is highly individual, the cycle
shown in Figure 3.4 will be personal to an individual person, and they will
set their own goals/limitations and satisfaction thresholds. The important
point is that this is in a cyclic relationship, so depending on the levels of
effort, motivation and ‘wanting the goal’ the individual personal thresholds
could either deteriorate or enhance over time. External forces and
unforeseen incidents can also break the cycle and alter levels of personal
motivation, resulting in either an increase or decrease in the quality of the
output and sense of reward achieved.
Figure 3.4 Explaining the Effort/Satisfaction Cycle
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Having now read and considered this subject in more detail, please re-
think about the task below. Note how, if at all, your answer may differ from
the one you gave earlier.
 Task 3.10
Please read the statements below and answer the accompanying

question.
A manager once said to his workers: “If you can produce one of these
items on your machine in less than 15 seconds and work at that rate
every day from now on, I will give you a weekly bonus worth £150.00, if
that doesn’t motivate you to increase production, then I don’t know what
will!”
A colleague with the manager said: “No! You have it all wrong! I think
you should tell them that if they carry on working at the current rate and
don’t increase production you will terminate their employment at the end
of the week and employ only those people who will work at the rate you
require”.
Use 400-500 words to explain the impact that these two differing
approaches are likely to have upon the motivation of the workers, and
explain what the reactions of the workforce might be to each of the two
approaches.
Which of these two styles would you wish to work under, as an

employee? Do you think that your view would differ if you were the
manager, and expecting employees to carry out the tasks for you? If so,
why do you think this to be the case?
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3.8 Managing Performance
Once you have what you consider to be the right team; or indeed, as for
most managers, the team with which you are going to work, which may not
be of your choosing; and you have agreed the team’s training, and/or
development needs, it is now time to get on and do the task of work for
which the team exists.
Many companies today manage performance through a process known as

‘management by objectives’; this practice follows ‘Goal Theory’. Goal
Theory relates to the belief that motivation is driven by the need of
individuals to achieve goals or objective that they have set for themselves.
The motivation is provided by the goal itself, and the thrill of the chase!
Ownership of the goal is important too, the goals are not things that can be
forced upon the individuals. ‘Management by Objectives’ was a phrase
first used by Peter Drucker, (1954).
The diagram below sets out ‘goal theory’ in picture form. At each stage in
the cycle the individual will need to maintain their own levels of motivation
and commitment, and take ownership of each stage in the process.
Figure 3.5 Goal Theory set out in Cyclical Form
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When setting objectives you must remember that they need to be
‘SMART’;
Specific the objective must be precise about what is required to be

achieved.
Measurable the outcomes need to be quantifiable.
Achievable is the objective an achievable one? (Remember

‘Instrumentality’ from Expectancy Theory, from the study of
motivation – if deemed to be unachievable then no extra
effort to achieve is likely).
Realistic Are the resources available to enable this objective?
Time Bounded State when the objective is to be achieved by.
Any ambiguity in the objective, at the time of setting it, will result in chaotic
discussions and/or negotiations at the time of review. It is far better to set
truly SMART objectives, in a fair way, at the outset. As most personal and
team objectives are set and agreed they must also be reviewed in order to
assess whether or not they have been completed, either in full or in part.
At such review meetings, it is then a simple case of yes/no, as to whether
the objectives were fully met, met in part or not met. However, as a
manager when setting objectives you must remember that objectives must
be an agreement between the 2 parties, the person receiving the objective
must ‘buy-in’ to it for it to be successfully completed.
Now the discussion as to why the objectives weren’t hit is a completely

different ball-game! The setting and monitoring of objectives should not
be an annual event. There should be an annual review, yes, but an
annual review of a process that has been on-going throughout the year.
This should follow, in some form or another, the control loop shown below.
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Figure 3.6 Objectives Review
1. Year start:
Set objectives
2. Carry out 3. Monitor
actions [measure]
6. Decide action 4. Compare

necessary results and
targets
5. Analyse
position
7. Year end:
Achieved yes/no
The above diagram (Figure 3.6) shows the process to follow. Step 1 is
used at the beginning of the year, with steps 2 – 6 used continuously
throughout the year; step 7 is the final step at the year end. Then the
whole process would start again afresh for the next year.
It is often suggested that at step 6 it may be decided that

goals/targets/objectives can be revised; as objectives are often linked to
some form of remuneration. If this is the case then serious consideration
needs to be given prior to undertaking any changes.
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 Task 3.11
For your own role, and utilising the techniques you have studied in this
section, set 4 objectives for the next 12 months; using 200-250 words to
detail the expected outcomes and how they will be measured.
Also show the short-term targets, explaining both how these will be
monitored and measured, and how they fit into the overall objectives.
3.9 Stress Management

Stress arises from a whole host of founding reasons but normally it arises
when someone perceives that they are unable to cope with the demands
being made upon them. It does not matter whether they are capable, or
not, of coping with the demands it matters whether they perceive they can
or cannot.
It is important to note that in the international context, the level of ‘stress’

that may occur in the workplace will be different according to culture and
the ways of working; for example the number of hours that people are
culturally expected to work over the day, ‘overtime’ and work ethics will
vary in terms of what is acceptable.
Work-life balance and the amount of time that employees are expecting to
spend with families or pursuing other activities and commitments will also
be very different. The tutor will need to sensitize this element of study
against the prevailing conditions in their local country according to
legislation and culture.
Arguably there are varying levels of stress; from one end of the spectrum
being ‘this is difficult’, to the other end being medically defined stress and
potentially leading to some form of breakdown. Certainly there are many
physical conditions that manifest themselves as a direct result of stress;
these include such things as: high blood pressure, poor sleep patterns,
loss of concentration, nervousness, headaches and etc.
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It is the duty of every manager to monitor their team and try to identify
individuals who may be suffering stress and exhibiting any of the
symptoms, so that they may be helped through it and, if possible, the
reasons behind the stress eliminated from the working environment of the
individual concerned. However, it is also a fact that more and more stress
is becoming an integral part of modern life and the modern work
environment.
Also true is the fact that stress is becoming (or has become) an overused
word in the workplace! In its purest form the word relates, in this context,
to a situation where a person’s perceived inability to cope has led to
detrimental health issues; clearly this cannot, and should not be tolerated
at any time.
However, the word stress is also used, in work terms, to mean “this is
difficult to do”, or “this is harder than I’m used to”. In fact, it can be argued,
that in these cases getting slightly ‘stressed’ is exactly what one needs to
do! Stress is a sign that our body is preparing us for action. When
stressed, the body gets pumped with naturally produced chemicals, such
as adrenalin; this raises your heartbeat, and your mind becomes much
more focused. These things allow us to deal more effectively with
situations than we would otherwise be able to. E.g. making a tight
deadline, or giving a presentation to a very large group of people. In these
circumstances limited stress can help us complete tasks successfully
under times of pressure, and can sometimes give us the edge over others.
Indeed, many staff members need some degree of stress in their working
life as a form of ‘motivation’ in itself. For instance, it is commonly
acknowledged that people who work in dangerous or hazardous
environments find the associated stress one of the main reasons they
enjoy the work and chose the career in the first place. Certainly this is true
of many service personnel who actively seek out a working environment
that most of us would find unable to endure and simply too stressful to
contemplate.
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The potential ‘positives’ of stress are often under-played in the modern
workplace, where it is only the negatives which attract managerial
consideration but, as a manager, all aspects in the workplace need to be
analysed and, if possible, recognised as having the capacity to provide
benefits to the organisation. For that reason alone, a manager should
appreciate that some team members may well welcome the opportunity,
for various reasons, to be challenged and work in a more stressful way. In
this way stress, properly managed and controlled, may actually prove to
be beneficial to both the individual and the organisation.
 Task 3.12
Use approximately 300 words to explain the negative impacts of stress

in the workplace, and what can be done by all parties concerned to
overcome them. Include in your answer whether or not you believe that
there is any place for stress in the workplace.
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3.10 Succession Planning
Not all succession plans are as formalised, as smaller organisations may
not have the same numbers of possible candidates to consider. However,
it is the concept of Succession Planning that should be the focus, and not
simply the methodology.
To help explain the core principles of succession planning, we have set

out the process in the diagram below. This is a continuous cycle that
needs to be adopted by businesses of all sizes and types, and entry into
the cycle can take place at any point. Constant evaluation and re-
evaluation is necessary to remove unnecessary risk from the organisation
and to ensure that the organisation moves forward from strength to
strength.
Figure 3.7 The Core Stages of Succession Planning
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The aim of Succession Planning is to
ensure that no ‘unfillable’ gaps occur
within the structure of an
organisation. One of your many
functions as a manager is to ensure
that your site/department is
functioning at an optimum level, and to ensure that this level is both
sustainable and sustained. A key part in ensuring that sustainability is
achieved is to ensure that there is a pool of talent available to fill roles as
they become vacant or as new roles are created and existing role
requirements change. No function should be dependent on a single
member of staff being the only person within the organisation with the
capabilities and/or skills to carry out the particular tasks or duties.
For example, if you were the manager of a workshop that carried out
welding repairs, then you would need to have more than one welder
available. You need to consider the possibilities of the person becoming
unavailable to the organisation, for whatever reason. Consider also the
possibilities of long-term illness, and other eventualities. Remember
Murphy’s Law; ‘whatever can go wrong, will go wrong’. Remember too
that things tend to go wrong at exactly the time when they are required to
perform best!
 Task 3.13
Draw up succession plans covering approximately 5 roles within your

own organisation. If you cannot identify five roles use 5 roles from any
organisation of your choice.
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3.11 Communications
Communication, mentioned earlier, is about the exchange of information
between individuals, or groups, through different media. The main aim of
communicating is to share information, in order to engender a better
understanding.
As far as organisations are concerned, the meaning does not change! It is

about a two-way sharing of information, both down the line and up the line.
The most important thing to remember about communicating is that the

aim is to have your message both heard and understood. Checking and
testing the understanding of a message is therefore very important.
The paragraphs below highlight this importance and relate to the

Managing Director of a small company who was in charge of one small,
poorly performing unit, employing some five people. He said that time and
time again he had visited the site and talked to the staff and told them of
the likely consequences if performance did not improve. After six months
there had been no change. He visited the site and informed all of the staff
members that the unit was going to close down. He told me that he was
astounded at the reaction to this news from the staff members. They
could not believe it was going to happen. But he said, “I had told them
and told them, what else could I do”?
He said that it was then that he realised that if they hadn’t believed it
possible, then they hadn’t understood the message he had been giving
them; and if that were the case, then it was his fault for not ensuring that
the message was understandable to them.
The recollection above clearly demonstrates that it is all very well and
good for the message giver to understand the message, but then we
would all expect that. The golden rule is that the message needs to be put
in such a way, and in such a format, and using such terms, that it can be
understood by the least knowledgeable recipient. If that means that the
more knowledgeable recipients feel slightly patronised, then that is,
arguably, a price well worth paying, although excessive patronisation
carries its own dangers, as we noted earlier.
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 Task 3.14
You have arranged a meeting for 20 members of staff, in order to relay

some bad news. Please deal with the following 3 issues:
1. Create an agenda for the meeting.
2. Describe how you would prepare the location. What would the
location be like, and why?
3. How do you intend to give the news to the staff members?
3.12 Regulatory and Statutory Requirements

It is essential for managers at all levels to have a fair understanding of the
legal aspects of employment. The prospective costs to the organisation,
and potentially to the individual too, are high. This is not only in financial
terms, but also in terms of damage to reputation.
Whilst many managers do keep abreast of legislative requirements, it is

essential that managers also keep abreast of the constantly changing
statutory requirements and legislation, as mentioned earlier. For instance,
in the UK, the new Equality Act of 2010 brought together 116 individual
pieces of legislation into a single act and merged 9 anti-discriminatory Acts
and Regulations and created a new discrimination law for the UK. .
Further details on this can be found on the UK’s Equality and Human
Rights Commission (EHRC) website. www.equalityhumanrights.com
 Task 3.15
For a country with which you are familiar, produce a full, and detailed,
employment contract for the job of a bus driver that complies with all the
relevant major legislative requirements.
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3.13 Business Ethics
Ethics have become something of far greater importance in the business
world in recent years, particularly following scandals relating to UK
Members of Parliament claiming expenses, telephone hacking carried out
by some of Rupert Murdoch’s News Corporation staff, and UK Bankers
seeking to influence the LIBOR bank rate.
The costs of unethical behaviour can be total for the business and
employees, as witnessed by the closure of the News Corporation’s News
of the World newspaper. In addition, reputations have been tarnished;
and public confidence lost in the press as a whole. All of this is completely
aside from any legal proceedings being taken.
Clearly this example of outrageous and unethical behaviour on the part of

individuals and organisation certainly exceeded the boundaries of the law.
No organisation lives in a bubble; all organisations have involvement with

either suppliers or customers - most have both. Assume that you have an
organisation that is a large concern; you have a dominant position in the
market, you have many suppliers, most of which are small. You wish, as
do most organisations, to increase your margins. If you were to decide to
use your market strength to squeeze cheaper prices from your suppliers,
and at the same time gain better, more expensive prices from your
customers, would that be an ethical way to behave? Many would argue
that it is not!
In another context one could ask whether or not it is ethical to take ‘gifts’
from either clients or suppliers. Perhaps this then moves on to ask do
these same rules apply at festive or celebratory times. Are they bribes?
Or are they merely tokens of appreciation? At what financial level does a
token become a bribe? Clearly this complex area requires the attention of
any manager or potential manager.
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 Task 3.16
Imagine that your manager has said to you, “being ethical and socially
responsible is OK I suppose, but it is costing us money in the short-term,
why should we bother?”
Answer this question using 400-500 words.
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9781844805068.
 Handy, C., (1999). Understanding Organisations. Penguin Group.
ISBN: 9780140156034.
 Drucker, P., (2007). The Practice of Management. Taylor & Francis.
ISBN: 9780750685047.
 Maslow, A., Frager, R. and Fadiman, J., (1987). Motivation and
Personality.Pearson. ISBN: 9780060419875.
Element Three Bibliography

Handy, C., (1999). Understanding Organisations. Penguin Group. ISBN:
9780140156034.
9780750685047.
Janis. I. J., (1972). Victims of Groupthink. Houghton Mifflin.
Hunter, J.E. and Hunter, R.F., (1984). Validity and utility of alternative
predictors of job performance. Psychological Bulletin, Vol. 96.
Harvey-Jones, J., (1988). Making It Happen: reflections on leadership.

Harper-Collins.
Maslow, A., Frager, R. and Fadiman, J., (1987). Motivation and

Personality.Pearson. ISBN: 9780060419875.
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4. Business Planning
4.1 Introduction
Element four, which is the final module of the core unit, addresses the
business planning in order to give the knowledge and understanding you
need to be able to interpret financial data, appraise financial risk and
prepare a business case. This is the last component aimed at enabling
you to meet the standards’ requirements of Management in Logistics and
Transport unit.
Learning Outcomes
 Know the structure and use of a business case;

 Understand the ownership of businesses, their internal structure and
their sources of finance;
 Understand the use and management of budgets;
 Understand the principles of costing, pricing and the requirement for
profit;
 Understand the concepts of financial and non-financial performance
appraisal;
 Know how to appraise investments and minimise financial risk.
final element of the Management Unit and you should keep a focus on
these outcomes in order to ensure that, by the end of the element, you are
able to meet the standards required.
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4.2 Types of Businesses
There are various different types of business organisation, in terms of their
structure. The seven most common are:
Figure 4.1 Types of Businesses
 Sole trader - this is a business owned by one individual who may or

may not employ other people. The source of funding for this type of
business operation is normally from personal funds and the profits
accrued are for the sole trader. This form of businesses is popular with
logistics and other transport operations, for example owner truck
drivers, taxi operators. It has been estimated that in the UK over 80 per
cent of all businesses are sole traders.
o There are advantages and disadvantages for this type of

business form for example advantages include direct control
on operations with all profits accruing to the sole trader.
Major disadvantages appear to be around access to other
sources of funding should the business expand and also the
risk sharing should things go wrong.
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 Partnership - this is a relationship between individuals who decides to
carry out a business in common with a view to profit. The partnership,
like the sole trader does not have a legal personality so that the
partners have unlimited liability both jointly and severally.
 Limited company – these are companies that have been set up under
a company’s act of a country. This form of organisation gives the
company a legal identity of its own, distinct from the individuals who
own it. In most countries legislation require the filling of numerous
documents including the Memorandum of Association and Articles of
Association with the Registrar of Companies. Usually a minimum of two
shareholders are required and shares cannot be offered for sale to
members of the public.
 Public limited company (plc.) – in some countries there is a distinct

difference made between public and private limited liability companies.
For example in the UK, certain conditions apply for plc’s:
o Minimum of two shareholders;
o At least two directors;
o Share offered for sale to the general public.
 Co-operatives – these are self-help organisations dedicated to

provision of low priced goods and services to members and share
profits. These movements with historical roots in anti-capitalism
sentiments now operate numerous transport companies, factories,
farms and other property development businesses.
 Social Enterprise – not for profit organisations set up often to deliver

improvements in human and environmental well-being. A social
enterprise is an organization that applies commercial strategies to the
way in which the business is run - rather than maximizing profits for
external shareholders.
 Charitable Trust/Charity – these are organisations set up under

specific legislation and are normally intended to provide support to
those in need and to assist with social, medical or environmental
welfare). For example funding for humanitarian logistics and support for
countries and communities in need will come in part from charities.
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Normally these will need to be formally registered and there are specific
rules concerning governance and the role of the Trustees for the
charity.
You will notice that most organisations with logistics and supply chain
operations take one form or another depending on the nature of operation.
Each one provides advantages and disadvantages that must be explored
in decision making processes.
There are laid down and expected standards of behaviour for all of these
types of business, which have arisen through both law and judicial review.
 Task 4.1
You are a sole trader and your accountant has suggested that it would
be better for you if you started to trade as a limited company. Use no
more than 600 words to describe in full the steps you would need to take
to do this. Briefly include an explanation of how this process varies from
the requirements to set up a partnership. (It may help if you also visit the
following website: http://www.companieshouse.gov.uk.)
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4.3 Sources of Financial Capital
All businesses need capital in
order to start up, and operate.
But where do they obtain this
capital from? Firstly there are
two basic sources, internal
sources and external sources.
On the start-up of a business
there will not be any internal source of capital available as the company
has yet to operate, because of this we will begin by looking at external
sources. These can be further broken down into three categories, short
term, medium term, and long term.
The table below identifies the different sources of capital that are open to
an organisation.
Table 4.1 Sources of Capital within a Business
Internal External
SOURCE OF CAPITAL
Short Medium Long Short Medium Long
Term Term Term Term Term Term
Retained Profits X
Tighter Credit Control X X
Reduce Inventories X
Delay paying trade invoices X
Ordinary shares X
Preference shares X
Debentures X
Right issue X
Bank Overdraft X X X
Trade Credit X
Term Loan X
Finance Lease X
Operating Lease X
Mortgage X X X
Debt factoring X X
Invoice Discounting X
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Long term sources are both share capital and loan capital. The main two
types of share capital are ordinary shares and preference shares.
Ordinary shareholders are deemed to be owners of the business, and
have the right to vote at Annual General Meetings (AGMs), and
Extraordinary General Meetings (EGMs) on the decisions of the business.
Their stake is at risk if the business becomes insolvent, and they therefore
expect a higher dividend in order to compensate their risk. Preference
shareholders face less risk, and have a guaranteed dividend payment; but
they are not, in strict terms, owners of the business and have fewer rights.
Loan capital takes three common forms.
Debentures are long term loans to the business, the debenture holders
are deemed to be creditors, and are paid interest on their loans until the
loan is redeemed. Generally debentures are secured against assets, so
as to protect the debenture holder from loss.
Mortgages are another form of long term loan; these are, as with most
householders, secured loans against the land and buildings. The risk here
for the business is the fear of rising interest rates and therefore costs.
For some businesses, especially those where the risk is high, the
opportunity to obtain a loan is restricted; for these types of business often
the source of capital comes from venture capitalists and is referred to as
venture capital. Venture Capitalists are organisations who specialise in
loaning to higher than average risk ventures, but for a higher than average
return.
The cost of any loan will always take into consideration the risk involved.
Often the most expensive form of capital is from venture capitalists, as
they are prepared to take high risks for high returns; the cheapest form of
loan is often a mortgage, as the bank has secured land and buildings
against the loan and therefore has little risk. Shareholders will, generally,
fall somewhere between the two.
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Hire-purchase agreements, and some forms of leasing agreements, are
examples of medium term loans. There are various items that may be
purchased using these agreements, examples may include IT hardware,
PC and printers etc., or in some cases vehicles. Hire-purchase, or
leasing, agreements are a form of a loan, and both do away with the need
to find all of the upfront capital in order to facilitate an outright purchase.
Short term loans come in the form of obtaining trade credit, normally for a
period of between say thirty and ninety days, purchasing items from
suppliers on account. Another form is the short term loan, or overdraft
facility, from your bank. Overdrafts are considered as short term loans
because, although they may appear to be in place over long periods, they
are always reviewed every twelve months and are not free to simply run
into medium or long term periods.
Once a business is trading effectively, internal sources of capital may

come from retained profits. Rather than using profits to give increased
payments to owners, e.g. dividend payments to shareholders, the profits
can be re-invested in the business. Assets that are no longer utilised by
the organisation can also be sold off to generate finance. In addition
assets held by the organisation may be depreciated; deducting
depreciation from profits makes provision for the replacement of old plant
etc., this is a form of profit retention, and thus a source of internal finance.
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4.4 Finance
4.4.1 An Introduction to Financial Management
One of your primary roles as a manager is to transfer resources into
outputs; whether that output is the production of a tangible item, or an
intangible service. The difference between a manager and another
member of staff is two-fold; on the one hand being a manager is about
having the necessary authority to make decisions as to how resources are
utilised, and on the other hand it is about having accountability for those
decisions taken. A manager is accountable for the transformation of
resources to outputs; to be held accountable for this process is in the
nature of the role.
Clearly this transformation from resource to output will need to be

evaluated in order to assess how this process compares with other similar
processes within the organisation, or from external competitors. One
method of evaluation, but by no means the only method, is to place a
value on the aforementioned transformation. Accountants are traditionally
the people who value these transformations, and the value they place
upon them is a monetary one.
As discussed previously, it is not the only value that can be ascribed; but it
is an indicator, and as such should be one of the considerations taken on
board when making decisions. It is frequently, but incorrectly, often
believed to be the only consideration undertaken! The weight given to
financial considerations may depend upon the strategy employed by the
organisation. If they are competing in a particular market on a basis of
price, then the financial considerations may carry more weight than if they
are differentiating their product(s) on the basis of quality.
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For you as a manager a point
worthy of note here is that whatever
you are tasked to do, to whatever
standard, or quality, you must
endeavour to do it for the best price
or lowest possible cost to the
organisation; do not waste valuable
and expensive resources! By doing
something for a better price or lower
cost gives your organisation the choice of decreasing the price charged, or
increasing its profit.
Clearly there is more to accounting than merely valuing one action against
another, but this is what forms the basis. The aim of finance is to measure
the performance of the business, from how profitable it is, how viable it is,
how it finances itself in terms of debt or equity, to how well it performs both
as a complete unit, and individual departments.
4.4.2 Financial Tools

Company Accounts
Within the UK, it is a statutory requirement that registered companies

publish formal company accounts; the aim of which is to convey accurate
information to the stakeholders of that company including shareholders,
other investors, employees, suppliers, and customers, etc. The main
philosophies behind this requirement are: that the formal accounts are a
method by which all of the directors of a company can show how they are
‘managing’; and it allows stakeholders to make informed judgements.
Put simply, this is the method by which the directors are held to account
for how they have managed the process of transforming the resources into
outputs.
This accountability must be presented in a particular basic format. The

accounts must contain: a report from the directors, a report from the
auditors, a profit and loss account for the period in question, a balance
sheet for the period in question, and any notes to the accounts.
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Whilst it is not a statutory requirement, many larger businesses also
provide a cashflow statement too.
If you have not already visited this site, the website of Companies House
in the UK can provide more details and a visit is recommended:
http://www.companieshouse.gov.uk.
Director’s Report
This is usually a précis outlining what the company has done in the
previous year, and a list of all directors showing their particular
responsibilities. It will include a summary of the financial results, with a
commentary on performance; it is likely that this will include some detail as
to why, or perhaps why not, certain targets were hit, or missed.
Auditor’s Report
This is generally brief, but clearly this will depend upon the complexity of
the organisation. It is a confirmation that the accounts have been
checked, and that they are in order.
It will contain a formal statement, which will most likely use some legal
term such as ‘the accounts are ‘true and fair’’, to confirm this fact.
The principal aim of an auditing company is to provide an objective,

impartial review of the accounts, and ensuring that there is compliance
with legal requirements. The fairly recent case of Enron, in the USA,
shows that this does not always happen. In this case it was both Enron
and their auditors that collapsed as a result of manipulation, malpractice,
or incompetence. Enron were accused of manipulating statements on
their performance in order to keep their share price high, and Arthur
Anderson, the auditing company, were accused of shredding vital
documents.
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The problem in this instance probably stemmed from the fact that when
companies work together for as long as they did, and with such closeness,
a relationship builds up. In this case it could have been Anderson’s
unwillingness to upset its client, and lose a valuable contract, that caused
it to act in this way. Perhaps there is an argument here for not allowing
the same auditors to audit the accounts of one company for too many
years in a row! However that could be seen to be over regulation. In turn
it could also be argued; how could it be over-reaction as it was a one-off
event? In any case, it is food for thought!
 Task 4.2
In 150-200 words, explain the role of a non-executive director and give a

justified opinion on whether or not you believe them to be an irrelevance.
The Balance Sheet
A Balance Sheet is not a summary of performance, nor is it a review of

any particular period. A Balance Sheet is a snapshot of the ‘value’ of a
company at a particular point in time; it shows the worth of a company.
Contained in the Balance Sheet are the values of everything owned -
assets and the values of everything owed - liabilities. It is known as a
‘Balance’ Sheet because the assets will balance with the liabilities.
Assets Liabilities
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In essence the premise of the Balance Sheet starts with the basis that a
company in itself is worth nothing! If that sounds a little strange, here is
the explanation.
If a company is started from nothing, then at the time of inception it is

worth £0. If, in order to start the company going £1,000 is invested by
investors, owners, shareholders and etc., then the company has £1,000 in
the bank. This is an asset of £1,000.
However, that investment is owned by the investors and shareholders, and

they must be paid back at some stage in the future. This is therefore a
liability of £1,000 for the company.
Asset = £1,000: liability = £1,000. (Balanced)
Using this very simple analogy demonstrates the basic concept of a

Balance Sheet, and it can be applied to any organisation. Take a huge
organisation like Microsoft, Apple or Google and the same logic still
applies.
If one were to take a large organisation, and realise all of its assets (i.e.
turn all of the assets into cash), and then pay off all liabilities, what would
remain would be a pile of hard cash. In effect this cash is the true ‘net
worth’ of the organisation (assets – liabilities = net worth). However this
pile of cash is actually owned by the shareholders, and would then be
divided up amongst them according to the number of shares that they
own; this would leave £0.
A Brief Note on ‘Shares’
In relation to ‘shares’, and ‘share-prices’, you should not be misled into

thinking that, if an organisation did as suggested in the paragraph above,
shareholders would receive back an amount per share that is equivalent to
the share price quoted on a stock exchange; the chances are that this
would not happen. If a company had 1,000 shares, then 1 share is, in
reality, equal to 1/1,000th of the ‘net worth’. People may be willing to pay
far more, or less, than this for those shares on a stock exchange. This is
more down to the ‘perceived value’ than anything regarding actual values.
A good example of this is the recent ‘dot com’ boom.
120 AO/INT/0036 – V1.0

This saw some companies, with poor income streams and low asset
worth, valued at extraordinarily high levels. This was based upon share
price value. If one took their numbers of shares and multiplied this by the
share price, then often they were up into the hundreds of millions of
dollars. This was purely a reflection of what people anticipated, or hoped,
the companies would be worth in the future, and not what they were worth
in reality.
Profit and Loss Account
A Profit and Loss account is a statement showing performance during a

particular period. Produced annually, quarterly, monthly or even weekly
by organisations it shows how they have historically performed during that
period. They are produced annually, and are included in the Annual
Report, to assist shareholders and other stakeholders to make
judgements; they are produced at more frequent intervals in order to assist
management in making decisions/choices.
There is not one ‘absolute’ format for a Profit and Loss account; and
different organisations have different preferences. However, there is a
conventional way that is generally adhered to. This is to show total
income, also known as revenue or turnover, normally split down into
different income streams; less the cost of sales - the costs that are
‘directly’ related to the production of the income. This leaves the gross
profit. We then deduct the overheads to leave the profit before tax.
The table shown overleaf (Table 4.2) is a fairly typical example of a Profit
and Loss, from a medium sized business employing some 35 people in a
service industry. You will see that it shows TOTAL INCOME of £194,412
for the month; split into the various income streams, e.g. Contract Hire
Fixed Income. It then shows TOTAL COST OF SALES of £167,076; these
are costs that can be directly attributable to the cost of gaining the income;
e.g. staff-labour costs, the costs of parts, etc. It then shows the GROSS
PROFIT, this is total income less the total cost of sales. This gives a
figure in £s. Often this is put in terms of a percentage, known as the
gross profit margin.
AO/INT/0036 – V1.0 121

This is obtained by the following equation:
Gross profit Total income x 100 = %

Using our example 27,336  194,412 x 100 = 14%.
Gross profit margin = 14%.
Table 4.2 Example of Profit and Loss
MONTH
All Figures are shown in £
Actual
Contract Hire Fixed Maintenance 99,300

Contract Hire Chargeable Income 87,600
Other Income 11,902
Income from Foreign Work 9,351
External Income (Contract Customers) 1
Customer Credits -19,538
Excess Mileage Allowance 5,796
TOTAL INCOME 194,412
Less Cost of Sales
Staff Costs 79,628
Spares & Accessories 46,151
Tyres 16,185
Maintenance by Contractor 16,190
Staff Transfers 4,551
Warranty Cost Recovery -1,260
VS Assist 5,633
TOTAL COST OF SALES 167,076
GROSS PROFIT 27,335
Gross Profit Margin %age 14%
Deduct Overhead Expenditure
Accommodation Costs 9,126
Other Overheads 1,431
Depreciation 0
TOTAL OVERHEADS 10,557
NET PROFIT BEFORE TAX 16,778

TAX 3,356
NET PROFIT 13,422
Net Profit Margin %age 6.9%
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Below gross profit, it then shows TOTAL OVERHEADS. These are
overheads incurred as a result of running your business, but not directly
attributable to generating income. Some examples of this may be:
accommodation costs, heating and lighting, depreciation, area
management or central head office costs, etc.
The deduction of these costs from our gross profit leaves us with our NET
CONTRIBUTION BEFORE TAX, and after the payment of tax we are left
with our NET PROFIT. This too is often shown as a percentage figure,
called the net profit margin. This is the same calculation as for gross
profit margin, but we substitute net profit for gross profit.
Net profit  Total income x 100 = %

Using our example
13,422  194,412 x 100 = 6.9%.

These margin figures are useful for management to benchmark the
performance of various sites. Knowing how much profit one site has made
relevant to other sites, in terms of £s, is important, but it is equally
important to know how they compare in terms of actual performance.
These margin figures help to quickly compare how one site compares to
another in terms of how well they are transforming their resources into
outputs.
However, care must be taken when comparing, to ensure that any

comparison is like for like! For instance, if one organisation were to show
a gross profit margin of 40% and another 25%, then you would need to be
aware of what was contained within the calculations. Using the above
table, we see that Accommodation costs are included as overheads, and
so do not feature in the gross margin figure. That was the choice of the
accountancy team that put together the Profit and Loss account for this
particular company. But, another company may decide that they would be
unable to generate any income without a building, and so decide to show
the accommodation costs within their cost of sales. This would then be
reflected in their gross margin.
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Both of these methods are acceptable. Therefore the advice to you, as a
manager, would be, assume nothing and check everything.
 Task 4.3
Try to obtain copies of your own organisation’s Balance Sheet and Profit
and Loss Account and comment on the data available in respect of the
financial ‘health’ of the organisation. If you cannot access the
information internally, use the information from any set of published
accounts.
Cashflow
Arguably, this is the single most important aspect to understand about

finance. More businesses fail due to cashflow problems than any other
single reason, and many of those that go out of business are, on paper at
least, profitable. This is because profitability and cash are two very
different things.
So, what is cashflow? It is, in simple terms, the movement of cash both in
and out of the business. See the diagram below:
Figure 4.2 Cashflow
Bank Stock
Account
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It may be argued that it could be best to leave cashflow in this simplistic
form. The company needs stock, they buy it with cash from the bank; they
sell it on and people pay cash for it, which is put straight into the bank, and
all stock is held for a minimal time.
However, business life is not as simple or straightforward as that. Most

organisations do at least a small part of their dealings on account. That is
to say that they sell their goods to you today, on the understanding that
you pay for it in the future.
It is a little like an interest-free loan, for a set period; mostly the payback
agreements are anything from 30 days to 180 days. Many governments,
including the one in the UK, have put pressure on larger organisations that
tend to demand longer terms from their suppliers - 90 days being the most
common, to reduce the time-to-pay as it makes life particularly harsh for
the smaller businesses.
Most organisations will set limits upon the value of these dealings in both
terms of £s and time, e.g. 30 days to pay, and a limit of £1,500 for the
account. This now brings in debtors and creditors to the cashflow
equation.
Debtors are people/organisations that owe the company money.
Creditors are people/organisations to whom the company owes money.
This can affect different industries in different ways, as much as it can

affect different companies in different ways. Think about the difference
between a high-street supermarket chain, and a construction company.
The construction company takes on large projects for which it is paid on
completion; it may therefore face many months, or years of cash going out
of the business (negative cashflow) before it receives payment of any cash
in (positive cashflow). The chances are that a business such as this will
need either huge capital reserves, or will need to service large loans in
order to sustain business.
AO/INT/0036 – V1.0 125

On the other hand, we have our high-street supermarket; the vast majority
of its customers will pay cash, as supermarkets tend not to give credit.
They are selling produce that they are likely to have received within the
past few days and the chances are that they will have sold most of this
produce before they themselves have to pay for it. With particularly fast-
moving items, they may have even sold it before being invoiced for it.
They now have cash in the bank for a product for which they haven’t yet
paid. They would now be able to utilise this money in other ways, until
they have to settle the account; be that by funding other initiatives, or
merely earning the interest on it.
Clearly, these examples offer up two extremes. Most organisations fall

somewhere between the two, but as a general rule they will err toward the
side of the construction company; there are not many industries which turn
around a product as rapidly as high-street supermarket chains.
Figure 4.3 Company Cashflow
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It is fair to say that most small to medium enterprises (SMEs), and larger
organisations, have both creditors and debtors, and hold some stock. It
follows then that they will experience some impact from these upon their
cashflow.
In the West there is a saying ‘Cash is King!’ This is because cash in the
bank is the most liquid asset of all - it can be used for any purpose and is
readily available. Liquidity is a term used to reflect the speed at which an
organisation can realise its cash.
Stock held, if it is still in demand and can be sold for the right price, is
almost as good. But how often do companies find themselves left with
obsolete stock? This is money lost; and this will clearly have an effect
upon cash in the bank. The organisation has, for whatever reason,
overstocked; it will therefore have been left holding goods that it cannot
sell for their true worth. If cashflow problems occur, then even stock that
is in demand often has to be sold off for less than its true worth in order to
realise cash more quickly than would otherwise be the case.
Looking at the diagram above, you will see (a) ‘payment to suppliers’; this
refers to payments falling due immediately, and relates to not only the
suppliers of the company’s stock, but also to any items such as rent or
rates, as may be applicable. This is the area where the real cashflow
problems arise, when a company is no longer able to settle the demands
of its creditors within the agreed timescale. If the creditors demand their
money, and the company cannot pay, the company is likely to go into
receivership. This is the most common reason for businesses to go out of
business.
It is often said that the main aim of a business is to make profit. Whilst this
may be argued, what is a fact is that the main aim of a business must be
to stay in business. Whilst making a healthy profit should be a natural part
of that process, there are many businesses which are on paper. Profit and
Loss showed that they made a profit, but which still went out of business
due to cashflow problems. In April 2010, the media giant AOL announced
that although still profitable, its terrible business results were directly linked
to cashflow problems.
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Another casualty to poor cashflow was the mighty Lehman Brothers in the
USA. Lehman actually showed healthy profits but had no cash with which
to pay off creditors.
It is most advantageous, with regard to cashflow, for a company to try and

move as much as is possible, in terms of £s, of the payment to suppliers,
from cash to account basis; and to seek the longest payment terms
possible. In Figure 4.3, this would be having as much in (b) as allowed by
the creditors.
All (a), (b), and (e) refer to payments to suppliers for stock, but (a) and (b)
refer to payments on account. The company receives stock from suppliers
on account (b), prior to the settling of the account through payment (a).
Paying on account, and receiving stock without having paid for it prior to
receipt, turns the supplier into a creditor. There are also non-account, or
cash, purchases made and these are shown by (e). Providing that the
company retains the ability to settle the account(s) on demand, the best
route here is to reduce (e) to the minimum, increase (b) to the highest
level necessary, and lengthen the settlement time of the account (a) to the
maximum possible.
Equally, (f) refers to cash sales, with the cash being received at the point
of sale. Allowing customers to buy on account (c), and allowing them to
have goods without paying for them at the time of collection, turns a
customer into a debtor. The debtor will settle at point (d). With this side of
the cashflow equation it is more beneficial to the business to have as few
people on account, and as many paying cash as possible. The example
used earlier of the high-street supermarket chains is the best example
here. But as mentioned earlier, the ability of a company to have that
position will depend upon their market, their own position in that market,
and their strength of position by comparison to their competition. So for
this side of the cashflow equation, maximise cash sales (f), minimise (c)
refusing accounts where they are not necessary, and where they are
necessary reduce the payment times to the lowest possible time (d).
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 Task 4.4
Explain cashflow in your own words. Highlight both the pitfalls to avoid,
and the ideas that can be implemented to improve it.
Table 4.3 Profit and Loss and Cashflow
The Difference between Profit and Cash
Period Period
Profit and 1 2 3 Cashflow 1 2 3
Loss
sales - cash 1,000 1,000 2,000 receipts - cash 1,000 1,000 2,000
1
sales - 2,000 3,000 5,000 receipts - credit 0 2,000 3,000
1
credit
Total sales 3,000 4,000 7,000 Total receipts 1,000 3,000 5,000
2 2
stock 1,000 1,250 2,000 stock - payment 1,000 1,250 2,000
wages 1,250 1,250 1,250 wages - payment 1,250 1,250 1,250
overheads 500 500 500 overheads - 500 500 500
payment
Total Costs 2,750 3,000 3,750 Total payments 2,750 3,000 3,750
Profit 250 1,000 3,250 Net -1,750 0 1,250
inflow/(outflow)
Cumulative 250 1,250 4,500 Cumulative -1,750 -1,750 -500

profit position
Assumptions made:
1. Table 4.3 shows the Profit and Loss and Cashflow for a new
business venture (in £s), and these are its first 3 periods of trading.
2. All payments in/out (for cashflow) are made on the same day of
each period.
3. As a new business it has to offer account terms of 30 days (1
period) in order to win business. (note 1 in Table 4.3)
4. As a new business it is unable to acquire stock on account.
(note 2 in Table 4.3)
5. Starting position at the bank = £0, with an overdraft facility of
£2,000.
Looking at the Profit and Loss above, you will see that after 3 periods of
trade the business is showing a positive position of having made £4,500
profit. However, this is not yet reflected in the bank account; the overall
position at the bank, after 3 periods is - £500.
AO/INT/0036 – V1.0 129

Even on a small concern such as this, there is already a variance of
£5,000. None of the profits made, ‘on paper’, have actually materialised
into £s in the bank yet.
 Task 4.5
Please now consider the following. What difference would it make if:
 Payments and receipts were at different times of the periods?
 Debtors had to be given longer terms [e.g. 60 days instead of 30].
 The company could be given stock on account. Consider 30/60/90

days.
 Task 4.6
Identify the issues surrounding the cashflow of the company, in Figure

4.3 above, and use 450-500 words to explain the potential problems it
faces and what effective measures it should take to alleviate them.
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General Finance Terms
Working capital Current assets – current liabilities.
Current assets Stock held, debtors, cash. (Whilst these are

current assets, consider the problems around
converting stock, and debtors into hard cash.
Some stock may be hard to move, at the price
required/expected, and some debtors might not
pay up on time, or might not pay up.
Liquid current assets Debtors and cash only.
Fixed assets Plant, buildings, land, etc.
Current liabilities Creditors falling due within one year. (E.g. tax,
dividends, loans, etc.)
Current ratio Current assets divided by current liabilities,

expressed as a ratio.
Quick ratio (also known as the ‘acid test ratio’) Expressed

as a ratio; this is the liquid current assets to
current liabilities.
Return on Capital Employed

ROCE (also known as the primary ratio). This,
by many, is considered to be the most
important measure of operational performance.
It is the profit before interest and tax (PBIT),
divided by the total capital employed.
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4.4.3 Budgetary Issues
What are Budgets?
A definition from the Chartered Institute of Management Accountants –

CIMA:
Budget. A plan expressed in money. It is prepared and approved prior to

the budget period and may show income, expenditure, and capital to be
employed.
Budgets are, in essence, a formalised table of expectations for the

financial performance of the forthcoming period, normally yearly. They
could be described as a line drawn in the sand.
The intention is for a budget to provide a planning framework, requiring

managers to plan/think ahead, and specify targets to be hit, and resources
required. It is a form of accountability for the managers; budgets are
designed to be ‘agreed’. It could be argued that they are a form of SMART
targeting.
Budgets are also a form of control, and financial monitoring. Variance

analysis will take place at regular intervals, so allowing any erring from the
pre-determined path to be corrected. This applies some pressure to
managers, which can be used as a performance improvement driver. If
there is a stretching target to be achieved, then there is an element of
motivational force in existence too.
Budget production tends to be an

iterative process. On the one hand
you have operational managers
‘bidding’ for what they believe they
require, and on the other you have
the senior level managers who know
what exists in the company pot to be utilised. Budgets are either produced
in a top-down fashion, where senior managers divide up the pot they have,
in a way they believe fits the operation; or the bottom-up method, where
operational managers produce their budgets in the hope that they fit with
what is available.
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There are problems both ways, and budgets seldom seem to be right first
time. Because of this iterative process, whichever method is used; draft
budget plans tend to bounce between one level and the other, maybe 2 or
3 times, until they are acceptable to both. Neither does it work where one
level ‘forces’ a budget on another! The level that had the budget forced
upon them, normally the operational level(s), does not then buy-in to the
process. This would certainly result in the loss of the motivational force
mentioned earlier. If operational managers have to have their budgetary
thinking ‘recalibrated’, in order for it to fit with the organisational demands,
then it is vital that the reasons are presented in an open/honest way.
People are more likely to act in a way required, if they know the reasons
leading to it being asked of them.
Incremental versus Zero Based Budgets
These are really quite simple issues to understand.
An incremental budget is one that is based upon the previous year’s

figures, whereby the previous year’s figures are adjusted. They may be
adjusted to reflect either known changes, or adjusted for beliefs. For
example, if prices have risen for raw materials, then this is a known
element; if it is believed that sales growth will be x% in the forthcoming
year, then this is a belief; both of these can be factored into the budget.
Incremental budgets are often used as they are far quicker, easier, and
cheaper to produce.
A zero based budget is somewhat different. Instead of saying what do you

expect to spend this year compared to last year? It says why do you
expect to spend any money at all? Justify all of your expenditure afresh.
It is in essence a fundamental review of all expenditure. This is clearly
time-consuming, and therefore can be very costly in terms of the
resources required to produce.
It is entirely possible for a compromise to be reached in the use of these

differing approaches; for instance, using the incremental approach for 2
years and with a zero-based approach every 3 years.
AO/INT/0036 – V1.0 133

Fixed or Flexible?
This choice will normally be determined by the senior management of an

organisation; and it may be dependent upon a number of factors. It may
be that within the culture of the organisation budgets are set, and are
sacrosanct. It may be that the amount of resource available is finite, and
very limited; or that the organisation is fighting in a shrinking market and is
seeking to consolidate its position. In any case, in order for an
organisation to set absolute fixed budgets, there should always be sound
commercial reasons for doing so.
Whilst there are many positives to setting fixed budgets; e.g. spend will not
exceed certain limits, it is highly likely that the organisation will likely focus
on ways in which to achieve greater cost savings, or ways in which to
achieve greater efficiencies from the same level of resource. However,
there are also some negatives, as people will take less risk, and
opportunities to grow the organisation may not be taken up especially
where the opportunity may mean extra expenditure or risk. On balance,
and where it is organisationally possible, it is accepted that the best
solution is to build in some flexibility to budgets.
Budgetary Issues
A major problem of budgets is known as the hockey stick effect. This

phenomenon generally results from fixed budgets, and is a form of
organisational ‘game playing’.
To explain this, you are to assume the following. The organisational

culture is such that budgets are set, they are fixed, and to go over budget
is seen as failure. Whilst this may seem inappropriate in many modern
businesses, it still remains more prevalent than many would imagine.
Managers working in this environment will often seek to build in some level
of contingency against failure, and against the unknown elements of the
future. The building of some ‘slack’ into budgets is very widespread
indeed.
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However making it obvious that slack has been built in, by bettering the
budget set with great ease, is not good for managers. In this situation a
manager may well have under-spent against budget for 10 months of the
year, and then in the last 2 months they allow spending to increase in
order to match the budget (see the ‘up’ line on Figure 4.4 below).
Figure 4.4 The Hockey Stick Effect
20
18
16
14
12
up
10
down
8
6
4
2
0
pd1 pd2 pd3 pd4 pd5 pd6 pd7 pd8 pd9 pd10 pd11 pd12
The opposite effect comes when the budget has been constantly
exceeded in the first 10 months of the year and the reasons for which are
not relevant. The manager is concerned about exceeding the budget, and
is likely therefore to curtail expenditure on non-essential, variable costs.
This situation can also arise when senior managers are much tougher
when setting budgets, making the assumption that all managers have
some level of in-built ‘slack’, they then remove this slack from the budgets
using an arbitrarily set figure. Where managers have not played the game
they could now face this situation at year-end.
4.4.4 Asset Purchasing

As we know assets are the items or property owned by an organisation,
which constitute the whole value of that organisation. Normally these
items will be over a certain set value, and will have a lifespan of over 3
years - items such as plant, equipment, and vehicles are examples.
Typical questions to be asked when intending to purchase assets are:

How do organisations decide which item to buy? How do they pay for it?
And how do they account for them on their books?
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Let us use the example of the purchase of a lorry. How do you decide, as
an organisation, which is the best lorry for you? Well clearly one needs to
ascertain that the lorry is suitable for the purpose intended. Is it the
correct size? Is it the correct design? Curtain-sider, tail-lift, box body, etc.
However, even when this decision making process has been completed, it
is highly likely that there are still a large choice of lorries that would
potentially fulfil your purpose.
What about price? Price is certainly important but it’s not just a question
of the cost of the lorry that needs to be considered. Generally
organisations will take a view as to the whole-life-costs of each lorry type
still left in the choice. With whole-life-costs, we do as the name would
suggest, and calculate the known (or estimated) costs for each lorry over
the planned life (or length of time the organisation wishes to keep it) of the
lorry. These costs will be different for each vehicle, and will include known
servicing costs over x miles, replacement tyres, fuel costs, etc. The only
additional consideration to this will be things like the known reliability of the
models considered and perhaps the location of the support dealership and
any associated downtime, etc.
The next question is how do we decide to pay for it? Do we lease? Do we

buy outright? For this each option must be appraised. If we take the two
examples of outright purchase, and leasing (without maintenance!), this is
in order to compare on a like for like basis, that is to say just the purchase
of the lorry. On paper it often appears that the cheapest option is the
outright purchase, as the total paid on a lease is greater than the outright
purchase cost. However, the purchase of an expensive item such as a
lorry calls for capital outlay at the time of purchase, and if this money is
spent then it is gone. That will mean that you cannot do anything else with
it, such as invest to earn interest or undertake other projects.
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4.4.5 Asset purchase and project – financial appraisal
Time Value of Money
In terms of financial appraisal, money has a time value. In short this

means that whilst £10 is worth £10 today, and £10 is worth £10 in 5 years’
time, the £10 in 5 years’ time is worth less than £10 in today’s money.
Confused? If so, think of it this way. If you owe £10, and have the choice
of paying £10 today, or £10 in 5 years’ time, you will most likely choose
the 5 years’ time option. Because, unless we have 0% inflation, or even
deflation, the £10 today will devalue year on year in terms of buying power
over the next 5 years.
Even if we were to assume that inflation was 3%, and was going to remain
static for the next 5 years, we can see from the table below, the impact
that it has upon the value of a sum of money, over a period of time.
Table 4.4 Inflation
Year Value
0 £10,000
1 £9,710
2 £9,430
3 £9,150
4 £8,880
5 £8,630
Table 4.4 shows that a sum of £10,000 is, after 5 years of inflation at 3%,
only worth the equivalent of £8,630 in terms of today’s money. The next
section explains how we arrive at these figures.
Note – it is common practice to write the current period of time as year 0,

as above.
AO/INT/0036 – V1.0 137

Net Present Value
Many of the most commonly used financial appraisal systems are based
upon this time value of money basis, e.g. Net Present Value, which we will
examine below.
NPV is known as a discounting technique. In essence this is what we

have just seen with our £10,000. We have discounted its future value
according to the discount rate. In this case inflation @ 3%, and the number
of time periods.
The calculation is shown as the factor:
1 / (1 + r)t
Where ‘r’ = the discount rate (3% written as 0.03) can be, for example, the
rate of inflation or the expected percentage return on a project. This
expected return can be adjusted to reflect the cost of capital, or the level of
risk for the project. And, where ‘t’ = the number of time periods, usually
years.
Using an example of 10% discount rate built up, in basic terms, from 3%
interest rate, 5% expected return, and a 2% risk factor, we would see the
following discount factors for the years shown:
Year 1 1 / (1 + 0.10)1 = 1 / (1.1)1 = 0.909
Year 2 1 / (1 + 0.10)2 = 1 / (1.1)2 = 0.826
Year 3 1 / (1 + 0.10)3 = 1 / (1.1)3 = 0.751
Year 4 1 / (1 + 0.10)4 = 1 / (1.1)4 = 0.683
Year 5 1 / (1 + 0.10)5 = 1 / (1.1)5 = 0.621
Using the above figures, we can see that if we had a project that was
going to return to us £10,000 in 5 years’ time, we can see that the Present
Value of this return would be £6,210 (£10,000 x 0.621 = £6,210); for a
project returning the £10,000 in 3 years the Present Value of the return
would be £7,510, etc.
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For projects, this method is used to measure the Present Values of
projected cashflows – both in flows and out flows in future years. The sum
of all of the Present Values is known as the Net Present Value.
If we now apply the NPV method to assess which choice is best for the
purchase of a lorry. Is it best to pay the full price of £50,000 now? Or, is
the lease price of £60,000 (£10,000 now, and then £10,000 each year)
over the next 5 years best?
The following assumptions have been made:
 The interest rate is expected to average 3% over the next 5 years
 A 5% return is included, as this could have been earned on the capital

through investment
 There is no risk element included in the calculation.
This therefore gives us a discount rate of 8%. This gives us the discount
factors for each year as shown below:
Year 1 1 / (1 + 0.08)1 = 1 / (1.08)1 = 0.926
Year 2 1 / (1 + 0.08)2 = 1 / (1.08)2 = 0.857
Year 3 1 / (1 + 0.08)3 = 1 / (1.08)3 = 0.794
Year 4 1 / (1 + 0.08)4 = 1 / (1.08)4 = 0.735
Year 5 1 / (1 + 0.08)5 = 1 / (1.08)5 = 0.681
So let us now calculate the cost of the lease terms in terms of Present
Value.
AO/INT/0036 – V1.0 139

Year Cashflow Discount Factor Present Value
0 £10,000 1.000 £10,000
1 £10,000 0.926 £9,260
2 £10,000 0.857 £8,570
3 £10,000 0.794 £7,940
4 £10,000 0.735 £7,350
5 £10,000 0.681 £6,810
Net Present Value £49,930
We can see that the NPV for the lease option is £49,930. We know that
the outright purchase option is £50,000 in present terms. Therefore in this
example the cheaper option, albeit by only £70, is the lease option! This is
clearly not a large saving, and therefore the discount factor is important.
However, if the company were to purchase 500 lorries, then this small
saving would become significant. In addition, any fluctuations in interest
rates, expected returns, or risk will also have a huge impact upon the best
decision to make.
140 AO/INT/0036 – V1.0

 Task 4.7
You are the Finance Manager of an organisation intending to procure

some new production equipment, the cost of which is to be £750,000.
The company selling the equipment has asked you how you intend to
pay for the equipment and have offered you an option to lease or buy.
You have been asked to compare both options over the seven year
period and recommend the preferred option.
If you want to lease the equipment the terms are that it will be a 7 year
lease period, with a 13% discount rate built up, in basic terms, from 5%
interest rate, 7% expected return, and a 1% risk factor.
Should you wish to purchase the equipment outright, you will benefit
from a 15% discount rate built up, in basic terms, from 5% interest rate,
8% expected return, and a 2% risk factor.
Produce both options, showing your workings and recommend the

preferred option to your Managing Director.
Payback
Payback is another investment appraisal technique that is commonly

used. It is a fairly simple technique used to determine the length of time
required in order to ‘pay back’ the initial investment. How does it work?
Let us look at an example of how it works. A project has an initial

investment of £200,000. The anticipated cash in-flows are £40,000 in year
1, £80,000 in year 2, £60,000 in year 3, £80,000 in year 4, and £20,000 in
year 5.
After 3 years we would have received cash in-flows to the total of

£180,000, leaving £20,000 outstanding. Our year 4 cash in-flow is
anticipated to be £80,000, and we have £20,000 outstanding, by dividing
20 with 80, we have 0.25. The payback on this project is therefore said to
be 3.25 years.
AO/INT/0036 – V1.0 141

There are both advantages and disadvantages with this method:
Advantages
 It is simple, both to understand and use;
 It is quick to use.
Disadvantages
 All cashflows are given the same weight, and the time value of money is
not considered;
 If a negative cash flow occurred after the payback point it is ignored.
 Task 4.8
Use 150 – 200 words to explain whether or not you believe the
additional work involved in NPV investment appraisal, as opposed to the
more simple ‘Payback’ method, actually benefits a company intending to
appraise a long term capital investment in buildings, intended to begin in
5 years’ time, when it is predicted that there will be economic stability
and steady, low rate, inflation.
142 AO/INT/0036 – V1.0

5. Unit Assignment – Business Plan
This final task is primarily aimed at assessing your understanding of the
subjects and issues which are contained within all four modules of the
Unit. It is designed to demonstrate your ability to function as a manager,
having to consider multiple factors in developing strategy aimed at
maintaining competitive advantage and sustainability for the organisation
concerned.
Learners completing this Business Plan may wish to consult with line
managers or senior managers within their own organisations to establish
whether or not there could be any of the findings that may be useful to the
organisation concerned and whether or not, where the organisation has
sponsored the Learner, there is an opportunity for the sponsoring
organisation to gain some benefit from the analyses involved.
This task requires you to produce a detailed 5 year Business Plan, for a
company, or a division/department of a company, of your choice. As
stated above, it is recommended that you use your present organisation, if
possible.
The Business Plan needs to be properly structured and is likely to include

the following:
A review of the current situation, in terms of:
 The organisation
- The type of ownership;
- The structure;
- The strategies (present and future);
- Its capabilities;
- Competitive advantages;
- The culture.
 People
- Leadership;
- Recruitment;
AO/INT/0036 – V1.0 143
- Training and development;
- Motivation and morale.
 Finances
- Profit and loss, or budgetary, performance;
- Cashflow performance;
- Asset management;
- The risks associated with these areas.
 Business ethics.
It is expected that all of the above statements and comments will be

analysed, perhaps using a SWOT, PESTLE, or similar technique, and this
analysis will be shown. Your analysis will lead you to identify any risks
associated with these areas, and how these risks will be managed,
minimised or nullified. This comprehensive and overarching analysis will
then lead to your reasoned and justified recommendations as to the best
path, in your own opinion, for the business to follow for the future quoted
timescale.
Throughout you are reminded that all analyses and recommendations are
to be supported by your own justified and reasoned statements which
detail why you believe your business plan will succeed.
9781844805068.
 Cole, S., (1987). Applied Transport Economics. Kogan Page.
 Angwin, D., Johnson, G., Regner, P., Scholes, K. & Whittington, R.
(2014). Exploring Strategy. 10th ed. Pearson. ISBN:
9781292007007.
144 AO/INT/0036 – V1.0

Element Four Bibliography
Cole, S., (1987). Applied Transport Economics. Kogan Page.
Angwin, D., Johnson, G., Regner, P., Scholes, K. & Whittington, R. (2014).
Exploring Strategy. 10th ed. Pearson. ISBN: 9781292007007.
Rushton, A., Oxley, J. & Croucher, P., (2014). The Handbook of Logistics
and Distribution Management. 5th ed. Kogan Page. ISBN:
9780749466275.
Hunter, J.E. & Hunter, R.F., (1984). Validity and utility of alternative
5.1 Summary
Completion of the Business Plan task brings the core module to a close.
The tasks contained within the unit have been set to enable Learners to
check their understanding of the content and to assess whether or not
they feel that they are sufficiently knowledgeable, given the level of the
Professional Diploma.
5.2 Sample Examination Questions

For those Learners being assessed by examination, the following
questions below are a random sample of past questions and are not in any
order of importance. They are purely included as example questions which
Learners should note to identify that many of the questions relate to a
given scenario and call for a degree of understanding of the theories
outlined in the Unit.
1. The nature of employment no longer involves people doing the same

closely-defined job for their entire working life but requires high-calibre
staff to demonstrate flexibility, initiative and the ability to cope with change.
Explain the impacts of this upon business.
AO/INT/0036 – V1.0 145

2. Explain the positive and negative implications for businesses related
to the recruitment of staff and discuss whether there may be any potential
problems (including legal ones) with engaging satisfactory staff.
3. You are a senior manager within a large transport company. Explain

how you would ensure that you were able to recruit the most suitable staff
for front line management positions. Indicate how you would ensure that
there was an adequate succession plan to meet the company’s needs in
times of expansion, development and restructuring.
4. All staff, both new and long-serving, must achieve high levels of
performance in current skills and develop new ones if their contribution to
the organisation is to be maximised. Explain the features and process of a
performance appraisal system intended to achieve this and illustrate some
of the potential benefits for both individuals and the organisation.
5. The cashflow forecast for a logistics company shows continual

negative balances despite all the physical resources being nearly fully
utilised. All work is done on account with invoices presented at the end of
each month. It is company policy to replace vehicles on a rolling basis with
one quarter of the vehicles being replaced with new ones bought for cash
each year. Deduce possible reasons for the cashflow problem and explore
some of the options to rectify the situation. How would you measure the
success (or otherwise) of these options?
6. In order to satisfy demand for the company’s services, a further

vehicle is required. On the basis of the figures below calculate the pay-
back period for the two options and hence choose the one most
appropriate to the company’s vehicle acquisition policy.
146 AO/INT/0036 – V1.0

Project Arrow Dart
Initial cost 18 22
Net cashflows
Year 1 7.0 6.5
Year 2 11.0 7.0
Year 3 11.3 8.5
Year 4 11.5 12.8
Year 5 11.9 14.3
7. Many companies have gone through “delayering” to take out

intermediate levels of management. Critically evaluate the effects of this
process on the organisation and the employees, illustrating your answer
with relevant examples of typical organisation structures.
8. Competitive advantage in logistics can come from the speed with

which operational decisions are made. What are the implications for a
company wishing to improve its performance in this area in terms of the
management of staff and the necessary information systems?
9. In favourable market conditions, your organisation is planning to

expand in the next five years, and thus requires an additional 20% of
middle managers. Devise a management development/training
programme to allow existing junior managers and supervisors to be given
the opportunity for promotion. What are the advantages and
disadvantages of promoting internally as above, as distinct from
recruiting?
10. In an attempt to reduce unit labour costs, your organisation has

decided to introduce a system of performance related pay. Devise such a
system for motivating technically qualified staff suitable for a sector of the
logistics industry with which you are familiar.
AO/INT/0036 – V1.0 147

11. It is common practice in the logistics industry for companies to have
policies on health and safety. In considering a logistics sector known to
you, what might be included in such a policy, in particular to meet any
legal requirements?
12. In order to integrate manual operatives more fully within your

organisation, your Chief Executive has decided to introduce team working.
What do you understand by this concept, and what effects might its
introduction have on the traditional role of the Supervisor?
13. Recently, a labour turnover problem has developed amongst semi-

skilled staff with between two and five years’ services. Discuss why this
problem might have occurred and suggest ways in which it can be
remedied.
14. A distribution company is preparing its yearly budget. Explain what

issues in its operational environment it should consider before setting its
budgets and on what basis it could prepare its sales budget. What
advantages might the company gain by moving away from a system of
incremental budgeting to zero budgeting?
15. Asset leasing by transport businesses rather than purchase is

becoming increasingly popular. Why should this be? How does this
practice affect cashflow and profitability of the company? Do the
measures of financial performance need to be adjusted as a result?
16. What is the difference between incremental and zero-based

budgeting? Imagine that your company is starting a new train service.
State which method you would consider more appropriate. How would
you implement such a system?
17. What do you understand by the time value of money? Why is it an

important consideration in investment appraisal?
18. Outline and compare the following investment appraisal methods

used by logistics organisations:
 Payback;
 Net present value.
148 AO/INT/0036 – V1.0

19. Outline the functions involved in the management of a large logistics
operation. What is the role of communication in carrying out each of these
functions successfully? Discuss the organisational problems associated
with developing good communications and indicate how far future
technical developments will hope to solve them.
We trust you have enjoyed this challenging module and wish you
every success with your remaining studies.
AO/INT/0036 – V1.0 149

150 AO/INT/0036 – V1.0

Bibliography
Atkinson, P., (1988). Achieving Results Through Time Management.
Pitman.
Back, K. & Back, K., (2005). Assertiveness at Work. 3rd ed. McGraw Hill.
ISBN: 9780077114282.
Cole, S., (1987). Applied Transport Economics. Kogan Page.
Covey, S.R., (1989). The Seven Habits of Highly Effective People. Simon
& Schuster.
9780750685047.
Fayol, H., (2013). General and Industrial Management. Martino Fine

Books. Translated by Storrs, C.ISBN: 9781614274599.
Grant, R., (2012). Contemporary Strategy Analysis. 8th ed. John Wiley &
Sons. ISBN: 9781119941880.
Hamel, G. & Prahalad, C.K., (1994). Competing for the Future. Harvard
Business School Press.
Handy, C., (1993). Understanding Organizations. 4th ed. Penguin

Business.
Harvey-Jones, J., (1988). Making It Happen: reflections on leadership.

Harper-Collins.
Hofstede, G., (2001). Cultures Consequences: Comparing Values,

Behaviors, Institutions and Organizations Across Nations. 2nd ed. Sage
Publications. ISBN: 9780803973244.
Hofstede, G., (1997). Cultures and Organisations. McGraw-Hill.
Hunter, J.E. & Hunter, R.F., (1984). Validity and utility of alternative
Janis, I. J., (1972). Victims of Groupthink. Houghton Mifflin.
AO/INT/0036 – V1.0 151

Angwin, D., Johnson, G., Regner, P., Scholes, K. & Whittington, R. (2014).
Exploring Strategy. 10th ed. Pearson. ISBN: 9781292007007.
Maslow, A., Frager, R. and Fadiman, J., (1987). Motivation and

Personality. Pearson. ISBN: 9780060419875.
Kotter, J.P., (2012). Leading Change. Harvard Business Review Press.

ISBN: 9781422186435.
Lewin, K., (1951). Field Theory in Social Science. Harper.
Mintzberg, H., (1973). The Nature of Managerial Work. Harper & Row.
Mintzberg, H., (1979). The Structuring of Organisations – a Synthesis of

the Research. Prentice Hall.
Mintzberg, H., (1983). Structure in Fives: Designing Effective

Mintzberg, H., (1994). The Rise and Fall of Strategic Planning. Prentice-
Hall.
Morgan, G., (1986). Images of Organisations. Sage.
Moss Kanter, R., (1984). The Change Masters – Corporate Entrepreneurs

at Work. Allen & Unwin.
Ohmae, K., (1982). The Mind of the Strategist. McGraw-Hill.
Pascale, R., (1991). Managing on the Edge. Penguin.
Peters, T., (1988). Thriving on Chaos: Handbook for a Management

Revolution. Macmillan.
Peters, T. & Waterman, R., (2004). In Search of Excellence: Lessons from

America’s Best-Run Companies. Profile Books Ltd. ISBN:
9781861977168.
152 AO/INT/0036 – V1.0

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CILT International Diploma

in Logistics and Transport

Author: Andrew Marshall (CMILT)

Verifiers: Anthony Evans (MILT)

David Maunder (FCILT)

Ben Bvepfepfe (FCILT)

© Chartered Institute of Logistics and Transport (UK)

AO/INT/0036 – V1.0 III

Tilanus, B. (1997). Information Systems in Logistics and Transportation. Emerald

Work in quiet areas, with minimal distractions.

Tel: +44(0)1536 740167

AO/INT/0036 – V1.0 VII

Figure 2.1 External Forces on Business ......................................................................... 34

Figure 4.1 Types of Businesses .................................................................................... 110

Table 2.1 Marketing vs. Sales ........................................................................................ 45

Table 3.1 Manager vs. Leader ....................................................................................... 71

Table 4.1 Sources of Capital within a Business ........................................................... 113

AO/INT/0036 – V1.0 VIII

The unit consists of these elements:

1.0 Internal Organisation Dynamics

Generally, the practising managers would reflect upon their own

These academics, or social scientists, as they were sometimes called,

In the late 1960s/early 1970s, there was another group of theories

Figure 1.1 Evolving Management Approach

In 250-300 words, explain the key differences between the different

Management has been described in many alternative ways by many

“To manage is to forecast and plan, to organise, to command, to co-

Your role as a manager within an organisation is not necessarily an easy

The likely differences in characteristics of:

A simpler (bounded) problem A complex (unbounded) issue

 Smaller scale  Large scale problem

Explain why you define these roles in this way.

After studying this element you will be able to:

 Understand the internal dynamics of organisations and the factors that

The culture of one organisation may be widely different to that of another

In new or very young organisations it is relatively easy to mould the culture

The issues surrounding cultures within an organisation are further

In 400–500 words, explain the culture within your organisation. Where

One of the key questions is whether to centralise or decentralise. These

In 500–600 words, describe the structure of your own organisation and

Figure 1.3 The Kübler-Ross Model, or The Five Stages of Grief

This is commonly followed by a rapid drop in performance due to any new

As the procedures become better understood, the performance improves,

In addition, the morale of the workforce, during any period of change, is

In relation to empowerment, span of control is always an issue. For

What is undeniable however is the fact that, if this part of an organisation’s

Table 1.1 The Differences between Delegation and Empowerment

It is generally accepted that managers may empower and delegate but

 Listening. Really listening to what is being said, both by those above

 Using the correct medium for your message. An informal face-to-face

 Ensuring that your message is understood, and tailored for the

Another way to prepare to communicate in this way is by learning what the

You are the Managing Director of a multi-national organisation, with a

Figure 1.4 Urgency versus Importance

DISCOURAGE ACT UPON

If something is important, but not urgent, then develop an action plan. In

Consider yourself as a manager and assess whether or not your current

1. Explain, in approximately 200 words, how you could have

2. Explain in approximately 200 words, how you could have

3. Explain in approximately 200 words, how you could have

Using your three explanations consider the most appropriate control

Element One Bibliography

Fayol, H., (2013). General and Industrial Management. Martino Fine