Unit 2 Business Structures and Process

QUICK REVISION GUIDE FOR
ADVANCED SUBSIDIARY GCE IN BUSINESS STUDIES

SYLLABUS CODE WBS02
FOR EXAMINATION IN MAY/JUME 2016
Unit 2: Business Structures and Process Prepared by Richard Ogutu page 1

PREPARED BY MR. RICHARD OGUTU

MARKETING OBJECTIVES AND STRATEGY
What is marketing? Marketing is a management process of identifying customers’ needs and want,
anticipating future wants and satisfying them profitably.
If we break this definition we get the following

Management process: it is continuous activity not a onetime act and usually formulated by the managers
Identify customers’ needs and wants: Businesses do this through Marketing Research
Anticipating future wants: Finding out where is the market is heading and the future trends, changing
environment
Profitable: The products that the business develops should be easy, affordable; practical to produce and
most of all should be profitable to the business.

NB: Unique selling point (USPs) : This is particular features of the product or service that a business offers its
customers, characteristics that set it apart from the competitors. Its main target of marketing department
NB: marketing objectives should be smart, an acronym that stands for:

Specific
Measured
Attainable
Realistic
Time specific

MARKETING STRATEGIES
Strategy – niche or mass marketing, benefits and limitations of these strategies
MASS MARKETING NICHE MARKETING
Sell ordinary things to very large numbers of Targets a smaller market in which there is a
people at quite cheap prices particular focus/firm wishes to concentrate on.
Businesses can get high volume sales but at a Serve specialist consumers and this can give high
fairly low profit margin meaning that there is little profit margins. Small businesses are especially
difference between what it costs to make the suited to niche marketing.
product and what the business can sell for it
Mass marketers focus on high sales at low prices Focuses on markets that are not reached by
mainstream providers
Uses expensive forms of media to reach out to the Their budget is not wide enough to support
people. Spend a lot of money on advertising on mainstream media advertising. The most common
radio and television way of advertising for them is through the internet.
Examples would be through e-mails. They could
also use magazine advertising but this would be on
a very small scale such as trade journals.
while niche marketers focus on high sales at high In Niche marketing the product is tailor-made for
prices customers
Advantages of Niche Market

Simplify your business so you can streamline your efforts.
Streamline your marketing costs and efforts. You no longer need to advertise to a broad general target
Less competition – the firm is a “big fish in a small pond”
Clear focus - target particular customers (often easier to find and reach too)
Builds up specialist skill and knowledge = market expertise
Can often charge a higher price – customers are prepared to pay for expertise
Profit margins often higher
Customers tend to be more loyal
Disadvantages of Niche Market

Greater difficulty in gaining high profit levels due to smaller market size.
Lack of “economies of scale”
Risk of over dependence on a single product or market
Likely to attract competition if successful
Vulnerable to market changes – all “eggs in one basket”

Tuesday 21 January 2014– WBS02/01
Tuesday 4 June 2013 – Morning -6BS02/01
Tuesday 4 June 2013 – Morning– 6BSA2/01
Monday 21 may 2012– 6BSA2/01

WHAT IS MARKETING MIX
The 'marketing mix' is a set of controllable, tactical marketing tools that work together to achieve company's
objectives.
Elements of the marketing mix are often referred to as 'the 4 ps':

 Price – The price is the amount a customer pays for the product. It is determined by a number of factors
including market share, competition, material costs, product identity and the customer's perceived value of
the product. The business may increase or decrease the price of product if other stores have the same
product.
 Promotion – Promotion represents all of the communications that a marketer may use in the marketplace.
Promotion has four distinct elements - advertising, public relations, word of mouth and point of sale.
 Place – Place represents the location where a product can be purchased. It is often referred to as the
distribution channel. It can include any physical store as well as virtual stores on the
Internet.
Developing the marketing mix

Analyse the situation
Identify the market segment
Target the market
Develop marketing mix

PRODUCT
Product: Design and quality, competitiveness, packaging, etc…
Role of product in marketing mix

Product can be goods or service.
Goods are of two types:
 Consumer goods: Goods which are consumed by people such as chocolate, washing machine, television etc.
 Producer goods: Goods which are used by producers or manufactures to produce further goods and services
e.g. bottling plant, machinery, trucks etc.
Services are also of two types
 Consumer services: e.g. taxi, car repairing, schools etc

 Producer Services: e.g. factory insurance, advertising agencies.
Features of a successful product
 It satisfying the needs and wants of the customers.
 It provides value for money to the consumers.
 Usually distinctive from other ‘me too’ products.
 Stimulates interest of the consumers.

Product Life Cycle
A Product life cycle shows the different stages through which a product goes from development to decline.

Introduction Stage
Product launched into the market.
Sales grow slowly.
Informative advertising is done.
Firm might not earn a profit at this stage.
Price skimming may be used if the product is new invention and has no competitors.
Competitive pricing may be used if it already has lot of competitors.
Growth Stage
Sales grow rapidly.
Persuasive advertising may be used.
Prices may be reduced if faced by stiff competition.
Firm starts earning profits.
Maturity Stage
Sales increase slowly and reach the highest sales figures.
Competition is at the maximum level as many new ‘me too’ products may be in the market.
Promotional pricing might be a good option.
Profits are at the highest level as the firm is also getting economies of scale.
Repetitive advertising is done to remind the consumers.
Saturation Stage
Sales are stagnant.
Maximum competition but no new competitors and the market is already crowded with the same types of
products.
Promotional pricing or competitive pricing may be a good choice.
Advertising efforts at its highest point.
Decline Stage
Sales start to decline.
Profits start to come down.
Marketing research it done to find out whether this decline is permanent or temporary. If the decline is
permanent in nature then stop the production of the product, otherwise implement extension strategies.
Advertising is reduced.
EXTENSION STRATEGY
Introduce new variations of the original product
Try to sell the product in different markets.
Make small changes in the colour, design or packaging
Start a new advertising campaign.
Add more retail outlets to boost sales.
Finding new uses of the product
Persuasive advertisement
Bringing out associates product to boost the original market
Changing the specification or components
NB: Extension strategies aim to prolong the maturity stage of a product. Successful extension strategies may
result in something like this: Nevertheless, it must be noted that businesses manufacture more than one product.
They should have a product in growth stage to counteract an older one which is declining.
Short life cycle product(Fad)
This is a product with a very short term life cycle

Tuesday 21 January 2014 – Afternoon 6BSA2/01
Tuesday 24 May 2011 – Morning– 6BSA2/01

PRODUCT PORTFOLIO
This is the full range of products sold by the business. It will usually be carefully designed to reach as many
market segments as possible. Portfolio analysis is used to position products so that together, they attract as
much of the potential customers as possible. Firms must be aware of the positon of each product so that they
can manage their product portfolio
Cadbury Product portfolio
Advantages of expanding product range
Advantages would be giving more choices to your customers, that suit to different market segments and
price range
Shows the company as an innovator
Branding awareness
Wide product portfolio helps the business to cater to different segments of the market
Expanding product range can increase revenue and may increase profitability
Disadvantages of expanding product range

Extra production costs
Extra storage cost
New products may not bring any great profit. There are companies out there who have a large selection of
products but they make the most money only from few of their products. But they do not cut the production
of the less profitable products because they have a name and brand.

Disadvantages would be that you would have a lot of stock and you would need lots of resources to develop
different products, only to be copied by your competitors
BOSTON MATRIX
An alternative way of classifying the product
Introduction to the Boston Matrix
Owning a product portfolio poses a problem for a business. It must decide how to allocate investment (e.g. in
product development, promotion) across the portfolio.
A portfolio of products can be analysed using the Boston Group Consulting Matrix. This categorises the
products into one of FOUR different areas, based on:
Market share – does the product being sold have a low or high market share?
Market growth – are the numbers of potential customers in the market growing or not
The Boston Matrix makes a series of key assumptions:
 Market share can be gained by investment in marketing

 Market share gains will always generate cash surpluses
 Cash surpluses will be generated when the product is in the maturity stage of the life cycle
 The best opportunity to build a dominant market position is during the growth phase

STARS
 Stars are high growth products of high market share competing in markets where they are strong compared
with the competition
 Often Stars need heavy investment to sustain growth.
CASH COWS
 Cash cows are low-growth products with a high market share

 These are mature, successful products with relatively little need for investment
 They need to be managed for continued profit - so that they continue to generate the strong cash flows that
the company needs for its Stars
PROBLEM CHILD
 Problem child is products with low market share operating in high growth markets
 This suggests that they have potential for becoming stars in future
 But may need substantial investment to grow market share at the expense of larger competitors
 Management has to think hard about Problem child. Which ones should they invest in? Which ones should
they allow to fail or shrink?
DOGS
 The term “dogs” refers to products that have a low market share in unattractive, low-growth markets
 Generate negative cash flow
 Dogs may generate enough cash to break-even, but they are rarely, if ever, worth investing in
 So firms will want to avoid having too many.

SUMMARY
Ideally a business would prefer products in all categories (apart from Dogs!) to give it a balanced portfolio of
products.
The main values of using the Boston Matrix include:
 A useful tool for analyzing product portfolio decisions

 The BCG-Matrix is helpful for managers to evaluate balance in the companies’ current portfolio of Stars,
Cash Cows, problem child and Dogs.
 The model is simple and easy to understand.
 It provides a base for management to decide and prepare for future actions.

However, the model can be criticised in several ways:
Market growth is an inadequate measure of a market’s attractiveness. Market growth is not the only
indicator for attractiveness of a market.
Market share is an inadequate measure of a products ability to generate cash. High market share is not the
only success factor.
The focus on market share and market growth ignores issues such as developing a sustainable competitive
advantages
The product life cycle varies
Sometimes Dogs can earn even more cash as Cash Cows.
The problems of getting data on the market share and market growth.
Does not take account of environmental factors
Tuesday 3 June 2014– WBS02/01

ASSIGNMENT:
How current social trends may affect the composition of the marketing mix:
Product, e.g. use of recycled materials, ethical sourcing

Price, e.g. online sales, price comparison site
Promotion, e.g. viral marketing, social media
Place, e.g. cloud, online distribution.

PRICE

Law of demand: If Price rises demand falls because people will not be able to buy the same quantity of product
with the same money they have.

Negative sign-The mathematical value which is derived from the calculation is negative. A negative value
indicates an inverse relationship between price and the quantity demanded. However, the negative sign is
ignored.
IMPLICATIONS OF PED FOR PRICING STRATEGIES

Tuesday 3 June 2014 – Morning– Afternoon 6BSA2/01
Thursday 20 January 2011 – 6BSA2/01

INCOME ELASTICITY OF DEMAND (YED)
The Income Elasticity of Demand (YED) measures the rate of response of quantity demand due to a change in a
consumer’s income.
% CHANGE IN QTY D
(YED) =
% CHANGE IN INCOME
Normal goods: an increase in income leads to an increase in consumption, demand shifts to the right.
Thus YED is positive for normal goods.
Inferior goods: Income elasticity is actually negative for inferior goods, the demand curve shifts left as
income rises. As income rises, the proportion spent on cheap goods will reduce as now they can afford to
buy more expensive goods. For example demand for cheap/generic electronic goods will fall as people
income rises and they will switch to expensive branded electronic goods.
 Income elastic: a given change in income leads to a greater than proportionate increase in demand for the
good or service. Examples of income elastic goods: foreign travel, good wines, smart motor cars, eating in
restaurants
 Income inelastic: a given change in income leads to a less than proportionate increase in demand for the
good or service. Examples: bread, staple foods generally, cheap stores, and all lowly-regarded brands.
Why does a firm want to know YED?

There several reasons why a firm would want to know YED, including the following:
Pricing policy. Knowing YED helps the firm decide whether to raise or lower price following a change in
consumer incomes. If incomes are falling and YED is positive, a reduction in price might help compensate
for the reduction in demand.
Diversification. Firms can diversify and offer a range of goods with different YEDs to spread the risks
associated with changes in the level of national income. For example, a car manufacturer may produce cars
with a range of YED values, so that sales are stabilized as the economy grows and declines.
YED and the business cycle. Changes in real national income tend to be cyclical. The demand for normal
goods increases when the economy is expanding, but decreases when the economy is contracting.
Conversely, the demand for inferior goods is counter-cyclical.

Above the line
Activities include advertising
 Advertising means communicating with the customers through a paid media. Advertising is of two types:
Informative advertising is when the message communicated includes information about size, quantity,
ingredients, composition, configuration or content of the product. The idea is to influence people to buy
products buy showing the superiority of the product in terms of quantity or quality. This type of advertising
is usually common with technological products such as mobile phones or computers.
Persuasive advertising is when the message communicated focuses on persuading the customers to buy the
product through celebrity endorsements, or use of glamour.
Usually advertisements have an element of both informative and persuasive advertising.
Mediums of advertising
 Television
 Radio
 Newspaper and magazines
 Posters/billboards
 Leaflets/direct mail

Below the line
Activities include all other promotional activities except advertising i.e.
Sales promotion
It includes activities like
 price reduction,
 giving out free gifts with every purchase,
 organising competitions,
 point of sale display,
 demonstrations,
 after-sales service,
 giving out free samples
Sponsorships
It includes sponsoring sports events or cultural shows or fashion shows
Public relations
Organizing press conferences in giving out information about new products or carrying out some social service
activity
Personal selling
where a representative from the company influences the customers to buy the product. It is common for
products which are expensive or custom designed. Sales person at a car showroom is a typical example of
personal selling

MARKETING MIX-PLACE
The fourth P of marketing is Place. If a product is very good, well promoted and the best prices offered still
customers would not be able to buy if it is not easily available to them. Thus, distribution is of vital importance

PRODUCTIVITY AND EFFICIENCY
What is meant by efficiency?
Efficiency refers to organizing production so that waste is minimised and costs are the lowest possible. it also
means using resources in the most economical way possible. This means keeping cost to a minimum; business
try to organize their activities so that there is no wasting of employee time or of capital equipment they use.
Factors influencing efficiency

Location of production
Quality and availability of labour
labour turnover
What is meant by Productivity?

Workforce productivity is the amount of goods and services that a worker produces in a given amount of time.
Other definition
It refers to the volume of output produced from a given volume of inputs or resources
Productivity is the ratio of outputs to inputs.
If the firm becomes more productive, then it has become more efficient, since productivity is an efficiency
measure.
Labour productivity
TOTAL OUTPUT IN A GIVEN TIME PERIOD

= OUTPUT PER WORKER
QUANTITY OF LABOUR EMPLOYED

Capital productivity
TOTAL OUTPUT IN A GIVEN TIME PERIOD
= OUTPUT PER CAPITAL INPUT
QUANTITY OR VALUE OF CAPITAL EMPLOYED
How to improve productivity?

human capital, Raising the skill level of the workers through training
Using more technologically advanced equipment in the production process.
Improving the motivation level of the employees
By managing the available resource in a more efficient way.
Improved working Conditions
Insufficient Training to motivation
Lack of Knowledge of Process/development.
Lack of Materials Availabilities.
sufficient Skilled personnel’s/ workers
proper Production Planning
process innovation,
organizing resources,
Access to finance.
Capital Intensive vs. Labour Intensive
A business is capital intensive if it requires heavy capital investment in buying assets relative to the level of
sales or profits that those assets can generate.
Characteristics capital intensive business
high depreciation costs

high barriers to entry
Large amounts of fixed assets on the balance sheet
A labour intensive business is one in which the main cost is that of labour, and it is high compared to sales or
value added.
Just a capital intensive business may attempt to reduce operational gearing by, for example, leasing or renting
assets, a labour intensive one may try to reduce operational gearing by outsourcing or automation.


PRODUCT OR SERVICE DESIGN
DESIGN MIX
Function
Aesthetics
Economic manufacture
The Design mix is basically a triangle which contains three aspects of design that all products need to address in
the research and development stage. The design mix takes into account economic manufacture, function and
aesthetics. The following image shows the Design mix:
Function
Firstly the product has to be able to function and do the job that it is being sold to do
It must also be reliable and work every time the user chooses to use it.
In addition the product may contain features and gadgets which gives the product a Unique Selling Point
over competitors' products which make the product easier to use or improves the product's functionality in a
number of tasks.
Economic Manufacture
Involve producing at minimum cost while retaining quality that buyers are looking for.
It is important that your product is financially viable and is cost effective in production i.e. producing at
minimum cost while retaining quality that the buyer is looking for
This has to be important because if the variable cost per product increases then this cost is passed on to the
consumer in the form of a higher price.

Aesthetics
Refers to the perceived beauty, a sense that something is pleasing to the eye
Therefore a product appeals to the senses; it may well sell better.
For example: You don't buy a Lexus because of its fuel economy or speed but because it feels so nice to
drive it and sit in the luxurious cabin.
NB: Changes in the elements of the design mix to reflect social and economic trends, e.g. changes in type of
materials and technology used in design to minimize waste, resource depletion


CAPACITY UTILIZATION

Capacity utilization
Capacity utilization measures the actual output as a percentage of maximum potential output, per period of
time. A firm’s productive capacity is the total level of output or production that it could produce in a given time
period. Capacity utilization is the percentage of the firm’s total possible production capacity that is actually
being used.
CU (%) = ACTUAL OUTPUT PER MONTH (OR PER ANNUM) X 100%
______________________________________________
MAXIMUM POSSIBLE OUTPUT

For example,
If a firm could produce 1200 units per month, but is actually producing 600 per month, its capacity utilization is
as follows:
Capacity utilization (%) =
600 x 100%
___________________________________________________
1200
= 50%

Financial implications
A firm’s level of capacity utilisation determines how much fixed costs should be allocated per unit, so as a
firm’s capacity utilisation increases, the fixed costs (and therefore also, total costs) per unit will decrease.
For example, if the firm above had fixed costs of £12,000 per month, the fixed costs per unit would be £20
per unit at 50% capacity utilisation, but only £10 per unit at 100% capacity utilisation.
It therefore follows that a firm should be most efficient if it is running at 100% capacity utilisation.

Potential drawbacks full capacity
 There may not be enough time for routine maintenance, so machine breakdowns may occur more frequently
and orders will be delayed
 It may not be possible to meet new or unexpected orders so the business cannot grow without expanding its
scale of production
 Staff may feel under excessive pressure, leading to increased mistakes, absenteeism and labour turnover
 If the factory space is overcrowded, work may become less efficient due to the untidy working conditions
 It may be necessary to spend more on staff overtime to satisfy orders, increasing labour costs
In general, businesses would feel most comfortable at something between 80 to 90% capacity utilisation
because fixed costs per unit are relatively low and there is some scope to meet new orders or carry out
maintenance and training.
Causes of under-utilisation of capacity
There are a number of reasons why a firm might be experiencing low capacity utilisation, including the
following:
New competitors taking market share or causing over-supply in the market

Fall in market demand due to changes in consumer tastes or fashion
Unsuccessful marketing
Seasonal demand – this is especially apparent in the tourist industry where firms like hotels and leisure
parks are full in the summer but see much lower utilisation at other times of the year
Problems arising from low capacity utilisation
Higher fixed costs per unit mean reduced profitability

Spare capacity can portray a negative image, particularly in a business where it can be seen that it is no
longer busy
Staff can become bored and demoralized if they don’t have as much to do, especially if they fear losing their
jobs
Benefits of low capacity utilisation
A firm may have more time for maintenance and repairs and for staff training, to prepare for an upturn in
trade
There may be less stress for employees than if they were working at full capacity
The firm can cope with new orders; firms in expanding markets may expect to have low utilisation whilst
they build their sales

Thursday 4 June 2015 – WBS02/01
Monday 19 January 2015– WBS02/01

Thursday 19 January 2012 – Morning– 6BSA2/01

INVENTORY CONTROL/STOCK CONTROL
Inventory control: Is the process by which the business ensures that stocks of inputs are adequate to meet the
production requirements, and that stocks of the finished products are readily available to meet customers’ needs.
Types of Stock
Raw material
Work in Progress/Semi-finished goods
Finished goods
Plant and machinery spare parts.
Inventory control/Stock control charts
Maintaining a balanced stock level is important. Stock control chart is one of the methods to maintain optimum
level of stock at all times.
How to explain the curve
Depletion of stocks as a result of usage or sales is represented by the sloping lines. The rate of depletion can
be identified from the gradient of the lines. The steeper the gradient, the faster the depletion.
When stocks fall to the reorder level, a new batch is ordered.
But there is a gap between the order being made and the delivery of supplies, this time gap is known as the
lead time. The gap between the minimum stock level and the zero stock level is known as buffer stock.
Buffer stock are kept to ensure that the business never completely runs out of either inputs or finished
products
Re-order level is the stock level at which further supplies must be reordered.
Re-order Quantity the quantity that is reordered
Maximum stock-the most stock that the firm is able and willing to hold
Minimum stock-if stock falls below this level the firm is in danger of running out of the supplies
The following decision need to be taken when managing the stock levels through a stock
control chart
The size of the buffer stock

The maximum level of stock to be held
The reorder quantity
The reorder level
Problems due to Overstocking( holding too much stock)

More stock more wastage.
Risk of stock becoming obsolete.
Holding stock cost money (High storage costs, higher insurance cost and opportunity cost)
Working capital is tied up leading to cash flow problem
Problems due to Stockout (total depletion of stock)

The lower the buffer stock level, the greater will be the likelihood of stockout. Stockout involves costs in terms
of:
Lost production
Customers demand could not be met leading to loss of customer goodwill and business losses
Frequent orders and handling cost may lead to higher cost for the business.
Ways of increasing efficiency and keeping down the cost of holding stocks
Producing good quality product and good customer service that maintain good reputation
Paying suppliers on time gets a business good reputation. Firms are able to get items on short notice
A lot of care about stock control especially in case of perishable goods
A build-up of stocks due to slow sales should be quickly recognized and orders can be cut to avoid holding
unnecessary stocks


LEAN MANAGEMENT OR PRODUCTION
Therefore Lean production is set of techniques used by business to cut down any waste in operations (time and
operation). It is an integrated approach to design, technology, components and materials. The point of adopting
lean management techniques is to increase efficiency and develop a competitive advantage over rival firms is to
reduce
The ten rules of lean production can be summarized:

 Eliminate waste
 Minimize inventory
 Maximize flow
 Pull production from customer demand
 Meet customer requirements
 Do it right the first time
 Empower workers
 Design for rapid changeover
 Partner with suppliers
 Create a culture of continuous improvement (Kaizen)
Lean production techniques

Reducing lead times
Just in time (JIT) production
Continuous Improvement (Kaizen )
Total Quality Management (TQM) and zero defect production - see notes on quality management
Time based management
Simultaneous engineering

Just-In-Time (JIT) production and stock holding
JIT is a method of managing production that involves holding minimum stocks in order to maximize efficiency
Finished goods are produced just in time for them to be sold, rather than weeks or months ahead.
The parts that go into finished product (components) arrive just in time to be put together to make a final
product, rather than being stored in a warehouse.
Requirements of successful JIT production are:
A flexible, multi-skilled workforce needed

Strict quality control with zero defects
Excellent relationship with suppliers and subcontractors.

Continuous Improvement (Kaizen):
This technique focuses on continuous improvement of all functions of a business from manufacturing to
management and from the CEO to the assembly line workers. By improving the standardized activities and
processes, Kaizen aims to eliminate waste.
Attention to quality issues

Reducing defects (zero defects) so that products are right first time
Training and developing employees’ skills in other ways
Reducing product development times so that the business responds more quickly to changing customer
needs
Competitive advantage and short product development lead time

Competitive Advantage:
The advantage a firm gets over its competitors by offering customers greater value, either by charging lower
prices, because their costs are lower or, adding value that provides better service and justifies charging higher
prices.
Short Product development lead time:
Refers to the length of time between the first emergence of the product concept and its launch into the market

Advantage of Short Product development lead time
Creates a fast mover advantage. The firm will be first into the market and can enjoy super-normal profits
(exceptional profit) until other firms are attracted to the market and catch up.
Ways of Shortening Product development lead time include
Simultaneous engineering-making sure that different department tackles different aspects of the development
process at the same time, rather than one after another. Teams can be working on design, engineering and
marketing features of the product.
Time based management-shorter production runs run make it possible to update the product frequently.
Flexible capital and training for multi-skilling will make the business much more adaptable when change is
needed.
Main advantages of lean production
Waste of time and resources substantially reduced or eliminated

Unit costs are reduced, leading to higher profits
Working area is less crowded and easier to operate in
There is less risk of damage to stock and equipment
New products launched more easily

QUALITY MANAGEMENT TECHNIQUE
Quality product: A good or service that meets customers’ expectations and therefore fit for purpose
Quality standard: The expectations of customers expressed in terms of the minimum acceptable production
Advantages of producing quality products and services
Easier to create customer loyalty

Saves on costs associated with customer complains, for example compensation, replacing defective products
and loss of consumer goodwill
Less advertising may be necessary as the brand will establish a quality image
A higher price can be charged therefore profitable in the long run

Quality- how can it be achieved?
There are three stages in the development of quality:
Quality Control
Quality Assurance
 Continuous improvement
 Quality circles
 Customer consultation
Total Quality management (TQM)
QUALITY CONTROL
It is the traditional method of maintaining quality and involves inspecting, detecting and cutting out components
or final products which fall below set standards. This process takes place after these products have been
produced. Quality control is carried out by Quality control department which inspects and tests the finished
products.
Weaknesses of Quality control
Requires inspectors who have to be paid thus increasing cost

Inspection with an aim of finding fault or looking for problems is too late and ineffective
Time consuming especially when looking for the origin of fault
Takes away from workers the responsibility of for enhancing quality
It may involve considerable waste as defect products are scrapped.

QUALITY ASSURANCE
This is a system of agreeing and meeting quality standards at each stage of production to ensure consumer
satisfaction.
Features of the Quality Assurance
Occurs both during and after the production, and is concerned with trying to stop faults from happening in
the first place(continuous improvement)
The business will make sure quality standards are set and then it will apply these quality standards in the
production process.
Involves self-checking by workers of their own output against the agreed standard(Quality circles)
Quality assurance is the responsibility of the workforce, working in teams, rather than an inspector.
Why is it important for the businesses to establish quality-assurance system?
To promote team-work since staff are involved

To set good quality standard for all stages of production
To reduce cost of final inspection
To reduce total quality cost
To gain accreditation for quality awards. This can give business real status. The most widely recognized
quality award within the EU is ISO 9000

ISO 9000- an internationally recognized certificate that acknowledges the existence of a quality procedure
that meets certain conditions
To obtain ISO certificate the firms has to demonstrate that it has:

Staff training and appraisal methods
Methods of checking on suppliers
Quality standard in all areas of business
Procedures for dealing with defective products and quality failures
 Quality circles: A small group of employees (6-12) in same area of production who meet regularly to
study and solve all types of production problems
i. Quality circles meet

ii. Identifies problems
iii. Collect and discuss information
iv. Recommends a solution
v. Management considers the proposals
vi. Feedback
vii. Quality circles
 Consumer consultation: Ensuring that customers view are taken into account. Done through market
research

TOTAL QUALITY MANAGEMENT (TQM)
Total Quality Management, TQM, is a method by which management and employees can become involved in
the continuous improvement of the production of goods and services. It is based on the principle that everyone
within a business has a contribution to make to the overall quality of the finished product or service. Therefore
TQM is not a technique; it is a philosophy of quality being everyone’s responsibility. It is a combination of
quality and management tools aimed at increasing business and reducing losses due to wasteful practices.
Requirement for the success of TQM

Committed leadership
Communication skills
A change in culture
Increased training
Closer customer relationships
Closer supplier relationship
Zero-defects mentality- a system in place to spot defects as they occur, rather than through inspection, with
constant performance measuring and monitoring
A recognition of quality in all aspects of management
Recognition, celebration and reward
Quality Circles-Employee involvement and empowerment
Benefits of TQM
Improved quality
Increased productivity
Increased market share
Competitive advantage
A motivated workforce
Increased profits
A reduced waste as a result of zero defects
Arguments against TQM

High cost of implementation e.g. retraining, time etc
Unrealistic expectation about employee commitment

THE BUDGET
A budget is a detailed financial plan for the future. It is an estimate, or informed guess, about what you will
need in monetary terms to do your work. Budgeting-The process of financial planning
The two parts of a budget document:

Expenditure-Money that will need to be spent to get your planned activities done
Income-Money that will need to be generated to cover the costs of getting the work done
Benefits or purpose of Budgeting
The budget is an essential management tool and it performs the following purpose:
Budgets set targets. It helps people to work towards a set target.

The budget tells you how much money you need to carry out your activities.
The budget forces you to be rigorous in thinking through the implications of your activity planning. There
are times when the realities of the budgeting process force you to rethink your action plans.
Used properly, the budget tells you when you will need certain amounts of money to carry out your
activities.
The budget enables you to monitor your income and expenditure and identify any problems.
The budget is a basis for financial accountability and transparency. When everyone can see how much
should have been spent and received, they can ask informed questions about discrepancies.
NB: The above purpose can also be used to explain the importance of budgeting

DIFFERENT BUDGETING TECHNIQUES
The two main techniques for budgeting are incremental budgeting (use of historical figures) and zero based
budgeting.
Use of historical figures/Incremental budgets
Incremental budgets uses last year’s budget as a basis and an adjustment is made for the coming year
Key features
Figures are based on those of the actual expenditure for the previous year
A percentage is added for an inflationary increase for the next year.
This is an easy method that saves time but it is the “lazy” way and is often inaccurate.
This budgeting technique is only suitable for organizations where each year is very similar to the previous
one in terms of activities.
Very few dynamic organizations or projects are so stable that this budgeting technique really works for
them.
NB: Extrapolation is used in setting a budget. Extrapolation means using data from the recent past and
assuming that any trend that can be seen will continue into the future provided nothing unexpected happens.

EXAMPLE
Sales in three periods are given as KSHS. 10,000,KSHS.20,000, KSHS. 30,000. An extrapolation of the fourth
year would be?
Zero based budgets
Involves setting up a budget each year and budget holders have to argue their case to receive any finance
Key features
In zero based budgets, past figures are not used as the starting point.
The budgeting process starts from “scratch” with the proposed activities for the year.
The result is a more detailed and accurate budget, but it takes more time and energy to prepare a budget in
this way.
This technique is essential for new organizations and projects, but it is also probably the best route to go in a
dynamic organization that is proactive in taking on new challenges.
Comparing budget and forecasts: A budget is a plan, while a forecast is a prediction of what might happen in
future
Variance analysis is process by which the actual performance of the organizations is compared with the
original targets, and reasons for the differences investigated.

Reasons why Variance analysis is essential part of budgeting
 Measures differences from the planned performance of each department both month by month and at the
end of the year
 Assist in analyzing the cause of deviations
Types of variances
Favourable variance
Adverse variance
Favorable Variance
Favorable variance exist when the difference between the budgeted and actual figure leads to a higher-than-
expected profits
Example
It has an effect of increasing profits

Increases sales revenue
Adverse variance
Adverse balance exist when the difference between the budgeted and actual figure leads to a lower-than-
expected profits

Example
It has an effect of reducing the profits

Direct material cost is higher than the budget
Causes of Favorable variance and adverse variance
Adverse variance Favorable balance

Sales revenue is bellow budget either because units Sales revenue is above budget due to higher-than-
sold was less than planned for or the selling price expected economic growth or problems with one
had to be lowered due to competition. of the competitors’ products.
Actual raw materials costs are higher than planned Raw material costs are lower either because output
for either because the output was higher than the was less than planned or the cost per unit of
budgeted or the cost per unit of materials increased material was lower than the budget.
Adverse variance Favorable balance

Labour cost is above budget either because wage Labour costs are lower than planned for either
rates had to be raised due to the shortages of because of lower wage rates or quicker completion
workers or the labour time taken to complete the of the work.
work was longer than expected
Overhead costs are higher than the budgeted, Overhead costs are lower than the budgeted,
perhaps because the annual rent rise was above perhaps because the advertising rates from TV
forecast companies were reduced.

Exercise
Complete the following table:
Financial Budget Actual result Variance Favorable or

variables (pounds) (pounds) (pounds) Adverse
Sales revenue 15,000 12,000
Direct cost 5,000 4,000
Overhead costs 3,000 3,500
Net profits 7,000 4,500
Importance of Variance Analysis

Variance analysis is used as a controlling tool. Managers can take suitable remedial actions to achieve the
desired objectives if there is a variation of the actual performance.
It acts like a barometer for measuring business efficiency.
Through regular variance analysis, ‘weak spots’ can be ascertained and remedial actions can be taken.
Variance analysis aids framing of more accurate budgets in the future.
Variance analysis can be used for comparing the departmental performance of the organization.

Limitations of Budgeting
Though budgeting is major management activity, it has some useful functions for businesses and organizations,
it does have great limitations.
Lack of flexibility to take care of unforeseen expenditures

Training need must be met.
Budgeting is a time consuming and costly job. The development of budget includes many repetitive steps
before the budget is finally approved.
Budgets are based on assumptions that often turn out to be inaccurate.
Lead to unnecessary spending: Budgets also cause great deal of waste. People’s main goal is to meet the
budgets especially when they realize that they have under-spent


FORECASTING SALES
Sales forecasting involves estimating futures sales revenue, costs and profits. This is done through market
research
Importance of sales forecast
Minimizes risks as a result of making decisions without knowing what is going to happen in the future
(whether the market exist for your product or not)
Sales forecast is part of a business plan that can be used by the business to secure a loan
Factors affecting total sales that a firm will make
The market size

The market structure-where and who are the potential customers
Competition that affects the market share
The market trend- whether it’s growing or declining or static
The investment in terms of time, money needed to sell the product
Predicting future sales level
Interpretation of the past data (also called time series analysis)

Market research to look at the trends or patterns i.e. whether it’s growing or declining or static
The research should also look into cyclical fluctuations-changes associated with business cycle of boom,
recession, depression and recovery
Businesses need to study seasonal fluctuations- important for tourism, farming businesses and greeting card
producers.

Difficulties of estimation of sales forecast
Unavailability of correct past sales data and poor interpretation of data

Lack of enough resources to carry out market research
Seasonal fluctuations- Affects tourism, farming businesses and greeting card products
Business cycles
Changes in market trends


WHAT IS WORKING CAPITAL?
Working Capital is the cash available to the business for carrying out its day to day activities. A healthy
working capital position is a measure of both a company's efficiency and its short-term financial health.

Working capital in the account
Balance sheet: Balance sheet shows the value of a business’s assets and liabilities on a particular date. It
records what the firm owns (assets), what it owes (liabilities), what it is owed and how it is financed (owner’s
equity
The working capital ratio is calculated as:
Current Assets: all those assets which are owned by the business for a short period of time. Example Cash,
stock, debtors
Current liabilities: These are defined as obligations or debts of the business which have to be settled within one
year. Example includes Creditors and bank overdrafts, stock.
Implication
Positive working capital means that the company is able to pay off its short-term liabilities.
Negative working capital means that a company currently is unable to meet its short-term liabilities with its
current assets (cash, accounts receivable and inventory).

Why pay attention to the Working Capital
If a company's current assets do not exceed its current liabilities, then it may run into trouble paying back
creditors in the short term.
A declining working capital ratio over a longer time period could also be a red flag that warrants further
analysis. For example, it could be that the company's sales volumes are decreasing and, as a result, its
accounts receivables number continues to get smaller and smaller.
Working capital also gives investors an idea of the company's underlying operational efficiency. Money that
is tied up in inventory or money that customers still owe to the company cannot be used to pay off any
of the company's obligations

What are the top 10 tips for managing working capital for new businesses?
Always bear in mind the desired balance between inflow and outflow of funds
Match significant cash outlays with similar cash inflow amounts
Whenever possible, reach agreements with suppliers to stagger major cash outlays
Obtain a reasonable line of credit based on the net value of the business
Maintain a good relationship with your banker; never hide information that could compromise the trust you
have established
Collect amounts due from customers as quickly as possible, and do not hesitate to offer discounts for fast
payment terms
Do not hesitate to ask for deposits from certain customers, or for certain types of contracts
Obtain better conditions, such as longer payment terms, from suppliers

CONTINGENCY
Definition of Contingency-A potential negative economic event which may occur in the future
In finance, managers often attempt to identify and plan for any contingencies that they feel may occur with any
significant likelihood
CONTINGENCY FINANCE PLANNING
Banks are often out to make profit for their shareholders and much of that profit come from business customers.
Rather than rushing to the bank, business should make sure that they have reviewed their internal procedures
first
What the businesses can do

Factoring
Good relationships with the customers
Good relationships with the Suppliers
Overdraft
Bank loans
Holding appropriate level of stock
introduction of extra cash into the business by the owner/shareholders
1. Factoring
What is factoring? It is selling your invoices/debt to a factoring company (debt factor).
You get cash quickly, and don't have to collect the debt.
However, you lose some of the value of the invoice.
The factoring company gets the debt and has to collect it.
They make a profit by paying you less cash than the face value of the invoice.
Advantages
 Avoid the hassle of collecting bad debt

 Smooth your cash flow
 Immediate cash is obtained.
Potential disadvantages
 The firm does not receive 100% value of the debt

 The fact that your clients have to deal with the factoring companies
2. Holding appropriate level of stock
Running down stocks to take care of any contingency
+ Reduces opportunity cost and storage costs of having inventory.

-Risks disappointing customers if there are not enough stock le

3. Overdrafts
Allows you do draw more from your bank account than you have.
+ Overdrafts can vary every month, making it flexible.

+ Interest only needs to be paid only to the amount overdrawn.
+ They can turn out cheaper than loans.
- Interest rates are variable, and often higher than loans.
- The bank can ask for the overdraft back immediately anytime.
4. Bank loans: money borrowed from the bank.
+ Quick to arrange.
+ Variable lengths of time.
+ Lower rates than overdraft is offered if a large company borrows large sums
- Must be repaid with interest.
- Collateral is needed to secure a loan

DIFFERENCE BETWEEN CASH AND PROFITS

WHY BUSINESSES FAIL
Lack of experience : Many reports on business failures cite poor management as the number one reason
for failure. New business owners frequently lack relevant business and management expertise in areas such
as finance, purchasing, selling, production, and hiring and managing employees.
Insufficient capital (money)/Cash-flow problems:A common fatal mistake for many failed
businesses is having insufficient operating funds. Business owners underestimate how much money is
needed and they are forced to close before they even have had a fair chance to succeed. They also may have
an unrealistic expectation of incoming revenues from sales
Poor location: Whereas a good business location may enable a struggling business to ultimately survive
and thrive, a bad location could spell disaster to even the best-managed enterprise.
Poor inventory management /Poor stock control: Poor inventory management might lead to too
much of cash being blocked as stock. Excess stock also brings in additional cost burden of maintaining it
and the risk of getting obsolete or damaged.
Over-investment in fixed assets: Blocking too much of cash in fixed assets can again pose danger for
the business and can contribute to business failure.
Poor credit arrangement management: Business might take too much of debt and might find it
difficult to service them. Poor credit management, forward planning and cash flow problems might
contribute to it.
Personal use of business funds: Owners of small business usually don’t differentiate between
business funds and their own funds. The risk of utilizing business funds for personal use by the owner might
lead to cash shortage for the business
Poor sales estimates, overestimation of sales
Overtrading engage in more business than can be supported by the market or by the funds or resources
available
poor management of cash flow,
poor inventory control,
attitude of lenders to releasing funds,
changing market conditions,

CHANGING MARKET CONDITIONS
Economic factors affecting business

These are some of the economic environment factors which affect business
At what stage of the business cycle is the economy? If the economy is going through a recession it is
obvious that businesses generally will not be doing well due to low aggregate demand in the economy. On
the other hand, a boom period will lead to higher business profits and revenue for most of the businesses in
the economy.
Inflation rate. High rate of inflation leads to lower purchasing power for consumers resulting in lower
demand for goods and services. Moreover, a higher inflation rate will make business uncompetitive in the
international market leading to lower sales for the business.
Prevailing interest rates. Higher Interest rates will lead to a fall in the aggregate demand in the economy
thus leading to difficulty for business to find customers willing to buy its product. Lower interest rates will
lead to an increase in demand in the economy.
Unemployment level. High level of unemployment in the country can also adversely affect a business.
People will not have enough money to purchase a firm’s product.
Labor costs. High labor cost will result higher production costs. This will make a firm’s product more
expensive as compared to other firms affecting its sales and profit margin.
Levels of disposable income and income distribution. High level of disposable income is good for business
producing luxury goods. A large disparity in income distribution will promote businesses dealing in luxury
goods as well as inferior goods.
Taxes. High level of taxes will lead to low disposable income and contraction of demand in the economy.
Business will find it difficult to attract consumers.
Tariffs. Tariffs are taxes and imposed on imported goods. If the tariffs are low the domestic market may be
flooded with cheap imported goods and the local businesses will have tough time selling their products.

Monday 19 January 2015 – Morning WBS02/01

DIFFERENT TYPES OF ORGANIZATIONAL STRUCTURES
Organizational structure refers to the levels of management and division of responsibilities within a business,
which could be presented in an organizational chart.
In an organization of any size or complexity, employees' responsibilities typically are defined by the following:
 What they do,

 Who they report to,
 And for managers, who reports to them.
Over time these definitions are assigned to positions in the organization rather than to specific individuals. The
relationships among these positions are illustrated graphically in an organizational chart.
Organizational charts-Eventually, when a business grows larger and employs many people, they will have
to create an organizational chart to work out a clear structure for their company. Here is an example of an
organizational chart.

Here are the most important features of the chart:
It is a hierarchy. There are different levels in the business which has different degrees of authority.
People on the same level have the same degree of authority.
It is organized into departments, which has their own function.
It shows the chain of command, which is how power and authority is passed down from the top of the
hierarchy,
Shows span of control, meaning how many subordinates one person controls, of the business.
Advantages of an organisational chart:

The chart shows how everybody is linked together. Makes employees aware of the communication
channel that will be used for messages to reach them.
Employees can see their position and power, and who they take orders from.
It shows the relationship between departments.
Gives people a sense of belonging since they are always in one particular department.

Chain of command and span of control:
Business A
 Has a long chain of command

 The longer the chain of command, the taller the business hierarchy and the narrower the span of control
Business B
 Has a wide span of control

 When the chain of command is short, the business will have a wider span of control
NB: In recent years, people prefer to have their business have a wider span of control and shorter chain of
command. In some cases, whole levels of management were removed.
In recent years, people have begun to prefer to have their business have a wider span of control and shorter
chain of command. In some cases, whole levels of management were removed. This is called de-layering. This
is because short chains of commands have these advantages:

Advantages short chains of commands
Communication is faster and more accurate. The message has to pass through less people.
Managers are closer to all employees so that they can understand the business better.
Spans of control will be wider, meaning that the manager would have to take care of more subordinates,
this makes:
 The manager delegates more
 Workers gain more job satisfaction and feel trusted because of delegation.
However, if the span of control is too wide, managers could lose control. If the subordinates are poorly trained,
many mistakes would be made.



CENTRALISATION AND DECENTRALISATION
Decentralization refers to a business delegating important decisions to lower divisions in the business. In a
centralized structure important decisions are taken at the centre, or higher levels of management.
Advantages of Centralisation
Effective utilisation of talents of the top management.

It reduces co-ordination problems as a unifying force integrates all operations.
It allows the development of a strong co-ordinates top management team.
There is uniformity of policies and plans across the organisation.
Centralisation organisations are best suited where resources and information has to move swiftly, especially
in emergencies.
Duplication of functions and facilities is minimised which in turn reduces costs.
Disadvantages of Centralisation
Due to the fact that all decisions are made at the top it might result in delays in decision-making and
communication.
Centralised power and authority might be abused.
Doesn’t give an opportunity to lower level managers/supervisors to develop their managerial skills.
Centralised organisation faces the problem of lower motivation levels among workforce.
The success of organisation depends on the competence of top executives which might be quite risky.

Advantages of Decentralization
Decentralization reduces the workload of top executives.

It improves job satisfaction and morale of lower level managers by satisfying their needs for independence,
participation and status.
Decision making is quicker.
It facilitates growth and diversification. As each product division is given sufficient autonomy for
innovation and creativity.
It gives opportunity to subordinates to exercise their own judgment. They develop managerial skills which
will be useful to the organisation in the longer run.
Managers feel more trusted and get more job satisfaction due to delegation.
The business can adapt to change much more quickly
Disadvantages of Decentralisation
Decentralisation increases the administrative expenses and each division or department has to be sufficient
in terms of physical facilities and trained personnel.
As each department or division enjoys substantial autonomy it might lead to co-ordination problems.
There might be lack of uniformity and inconsistent procedures as each department might have the authority
to formulate its own policies and procedures.

RECRUITMENT AND TRAINING
Manpower /Workforce Planning
It involves the planning for the future and finding out how many employees will be needed in the future by the
business and what types of skills should they possess.
It depends on the following factors
The number of people leaving the job

The projected growth in sales of the business
Technological changes
Productivity level of the workers
Finding out the skills of all current employees.
Talk to staff about who would want to retrain for new jobs.
The work of the Human Resources department

Recruitment and selection: Involves selecting and attracting the best workers.
Wages and salaries: Must be enough to motivate or attract workers.
Industrial relations: There must be effective communication between departments.
Training programmes: Must meet the training needs of employees and accomplish business objectives.
Health and safety: Must do things according to the law.
Redundancy and dismissal: Must obey all laws when firing workers.

Recruitment and Selection Process
1. The recruitment process starts with a vacancy arising.
2. Job analysis- The human resource manager will identify and record the responsibilities and tasks which are
related to the job.
3. Job description-lists the responsibilities and tasks to the candidates who apply for the position

4. Job Specification-It is a document which outlines the requirements, qualifications and qualities, skills and
knowledge required for the job.
5. Job Advertisement. It can be advertised internally (on the company notice board or newsletter) or may be
advertised externally in a newspaper or magazine. The advertisement will usually contain the elements of a
person specification with additional information like the name and profile of the company, date and time of
interview, address of the company and the contact person etc.
Internal recruitment: The vacancy can be filled by an employee already in the business. It might be suitable for
employees seeking promotion.
Advantages of internal recruitment:
Saves time and money.

The candidates' reliability, ability and potential are already known.
The candidates know the expectations and rules of the company.
Motivates other employees to work harder to get promoted too.
Disadvantages of internal recruitment
No new ideas or experience come into the business.

May create jealousy and rivalry between existing employees.
External recruitment. Most vacancies are filled with external recruitment, which always involves advertising
the vacancy. Here are some suitable media of advertising:
Local newspaper:
National newspaper:
Specialist magazines:
Recruitment agencies:
Government job centres.
6. Applications received and shortlisted. Once a job is advertised, there might be hundreds of application
received. All of the applications received might not be suitable for the job. Thus a short listing of the
applications will be done. The applications most near to the job specification will be called for interview and
those who do not qualify the criteria will be rejected.
7. Interview. The shortlisted candidates will be called for an interview to verify their qualifications, personal
qualities and aptitude for the job. It may involve a face to face discussion between the interviewer and
interviewee. The firm may also conduct skill test, aptitude tests or personality test if it deems fit so.
Interviews can be one-to-one, two-to-one, or a panel of people to interview people which is used to select
people for important jobs. Some businesses include tests in their selection.
Skill tests: To test the skills of the candidates.

Aptitude tests: To test how easily candidates can be trained/learn new things.
Personality tests: To test for people who have specific personal qualities which will fit into jobs – e.g. that
has a lot of stress; requires you to work with a team.
Group situation tests: To test how well applicants work with other people.
8. Selecting the suitable candidate. The candidate who scores the maximum in the interview will be selected
for the job and given an appointment letter.
Rejecting unsuccessful applicants
When applicants fail to get the job, they should be informed and thanked for applying
TRAINING
What is training?
Training involves improving the skills, knowledge and attitudes of employees so as to become more efficient and
productive. Training is often needed to do the following things. These needs can be long-term or short-term.
Objectives of Training
Introduce a new process or equipment.
Improve efficiency.
Decrease supervision needed.
Improve the opportunity for internal promotion.
Decrease the chance of accidents
Make workers multi-skilled and flexible
Adapt to change
Employees should know the benefits of training for them to take it seriously. Here are some objectives of
training:
Increase skills.
Increase knowledge.
Change attitude, raise awareness.
TYPES OF TRAINING:
There are three main types of training:
Induction Training
On-the -Job training
Off-the- job training
Induction training:
Introducing a new employee to their business/management/co-workers/facilities.
explaining the firm’s activities,
procedures followed in the organisation,
explaining the organisational structure,
Place of working etc.
Lasts one to several days.
On-the-job training:
A worker gets training by watching a more experienced worker doing the job. It is common for unskilled and
semi-skilled jobs. Thus the worker gets trained while he is performing his regular duties.
Only suitable for unskilled and semi-skilled jobs.

Cuts travel costs.
The trainee may do some work.
The trainer's productiveness is decreased because he has to show things to the trainee.
The trainer's bad habits can be passed to the trainee.
Off-the-job training:
This is when a worker goes away from the place of work to attend a special course.
The training can be in the form of a seminar, workshop or a college course.
Off the job training is usually conducted for managerial level employees
Methods are varied and usually more complex
Usually classroom training
Employees can learn many skills
LAISSEZ-FAIRE LEADERSHIP STYLE
Laissez-faire leadership, also known as delegative leadership, is a type of leadership style in which leaders
are hands-off and allow group members to make the decisions.
Characteristics of Laissez-Faire Leadership
Very little guidance from leaders

Complete freedom for followers to make decisions
Leaders provide the tools and resources needed
Group members are expected to solve problems on their own
Power is handed over to followers, yet leaders still take responsibility for the groups decisions and actions
Benefits of Laissez-Faire Leadership
 Laissez-faire leadership can be effective in situations where group members are highly skilled, motivated
and capable of working on their own.
 Since these group members are experts and have the knowledge and skills to work independently, they are
capable of accomplishing tasks with very little guidance.
 The delegative style can be particularly effective in situations where group members are actually more
knowledgeable than the groups leader. Because team members are the experts in a particular area, the
laissez-faire style allows them to demonstrate their deep knowledge and skill surrounding that particular
subject.
 This autonomy can be freeing to some group members and help them feel more satisfied with their work.
Disadvantages of laissez-Faire Leadership
Laissez-faire leadership is not ideal in situations where group members lack the knowledge or experience
they need to complete tasks and make decisions. Some people are not good at setting their own deadlines,
managing their own projects and solving problems on their own. In such situations, projects can go off-track
and deadlines can be missed when team members do not get enough guidance or feedback from leaders.
In some situations, the laissez-faire style leads to poorly defined roles within the group. Since team
members receive little to no guidance, they might not really be sure about their role within the group and
what they are supposed to be doing with their time.
Laissez-faire leaders are often seen as uninvolved and withdrawn, which can lead to a lack of cohesiveness
within the group. Since the leader seems unconcerned with what is happening, followers sometimes pick up
on this and express less care and concern for the project.
Some leaders might even take advantage of this style as a way to avoid personal responsibility for the
groups failures. When goals are not met, the leader can then blame members of the team for not completing
tasks or living up to expectations.
If group members are unfamiliar with the task or the process needed to accomplish the task, leaders are
better off taking a more hands-on approach. Eventually, as followers acquire more expertise, leaders might
then switch back to a more delegative approach that gives group members more freedom to work
independently.
MOTIVATION AT WORK
What is Motivation?
Motivation is the reason why people work, and it drives them to work better. It is the initiation, direction,
intensity and persistence of human behavior.
Reasons for motivation may vary such as basic needs, an object, goal, state of being or ideal. Motivation for
behaving in a certain way could also be due to morality.
Therefore, managers try to find out what motivate workers and use them to encourage workers to work more
efficiency. This results in higher productivity, increased output, and ultimately higher profits.
Twyla Dell writes of motivating employees, “The heart of motivation is to give people what they really
want most from work. The more you are able to provide what they want, the more you should expect what you
really want, namely: productivity, quality, and service.
Importance of motivation in a business environment

A positive motivation philosophy and practice should improve productivity, quality, and service. Motivation
helps people:
Easier for business to achieve its set goals and targets
improves efficiency and productivity
Reduces wastage
lower level of staff turnover which leads to lower recruitment and training costs
Lower rate of absenteeism
Better quality of products which improves the business image in the long run
MOTIVATION THEORIES
We will discuss the following theories:
F.W. Taylor’s 'Scientific Management'
Maslow’s Hierarchy of needs
Herzberg’s motivation-hygiene theory
Mayo theory of motivation
F.W. TAYLOR’S 'SCIENTIFIC MANAGEMENT'

People work for personal gain.
If they are paid more they will work more effectively.
Break down workers job into simple processes and calculate how much output they should produce in one day.
If they achieve the target they will be given more money.
Advantages:
Workers are seen rather like machines, and this theory does not take into account non-financial
motivators.
Even if you pay more, there is no guarantee of a productivity rise.
It is difficult to measure an employee’s output.
MASLOW’S HIERARCHY OF NEEDS
He identified the needs that relate to obtaining basic requirements to sustain life, as well the higher order
psychological needs that can make work satisfying
Human beings has five types of needs

Physiological needs or basic needs which relates to food, shelter, warmth and sleep
Security needs or Safety needs i.e. to protect against danger and poverty
Social needs is having friendship, a sense of belonging
Esteem needs involves having status and recognition, achievement and independence
Self-actualization involves succeeding to your full potential
Businesses realize that the more levels of motivation are available to workers, the harder they will work.
Maslow also suggests that each level of motivation must be achieved before going to the next level. Once one
level of motivation is met, more of that will no longer motivate the employee.
Disadvantages
Some levels are not present in some jobs.

Some rewards belong to more than one level on others.
Managers need to identify the levels of motivation in any job before using it to motivate employees.
HERZBERG’S MOTIVATION-HYGIENE THEORY
To Herzberg, humans have hygiene factors, or basic animal needs of humans. We also have motivational
factors/motivators that are required for the human to grow psychologically.
Two theories of motivation as follows:
Hygiene Theory
Motivation
Herzberg’s' first component in his approach to motivation theory involves what are known as the hygiene
factors and includes the work and organizational environment. These hygiene factors include:
The organization
Its policies and its administration
The kind of supervision (leadership and management, including perceptions) which people receive while
on the job
Working conditions
Interpersonal relations
Salary
Status
Job security
These factors do not lead to higher levels of motivation but without them there is dissatisfaction. The second
component in Herzberg’s' motivation theory involves what people actually do on the job and should be
engineered into the jobs employees do in order to develop intrinsic motivation with the workforce. The
motivators are:
Achievement
Recognition
Growth / advancement
Interest in the job
Work itself
Promotion
Responsibility
These factors result from internal instincts in employees, yielding motivation rather than movement. Both these
approaches (hygiene and motivation) must be done simultaneously. Treat people as best you can so they have a
minimum of dissatisfaction. Use people so they get achievement, recognition for achievement, interest, and
responsibility and they can grow and advance in their work.
Therefore, the hygiene and motivation factors can be listed as follows:
Hygiene
Company policies and administration

Supervision
Working conditions and interpersonal relations
Salary, status and security
Motivators
Achievement
Recognition for achievement
Interest in the task
Responsibility for enlarged task
Growth and advancement to higher level tasks
MAYO THEORY
Elton Mayo believed that workers are not just concerned with money but could be better motivated by
having their social needs met whilst at work (something that Taylor ignored).
He introduced the Human Relation School of thought, which focused on managers taking more of an
interest in the workers, treating them as people who have worthwhile opinions and realising that workers
enjoy interacting together.
Mayo conducted a series of experiments at the Hawthorne factory of the Western Electric Company in
Chicago
He isolated two groups of women workers and studied the effect on their productivity levels of changing
factors such as lighting and working conditions.
He expected to see productivity levels decline as lighting or other conditions became progressively worse
What he actually discovered surprised him: whatever the change in lighting or working conditions, the
productivity levels of the workers improved or remained the same.
From this Mayo concluded that workers are best motivated by:
 Better communication between managers and workers
 Greater manager involvement in employees working lives
 Working in groups or teams.
 In practice therefore businesses should re-organise production to encourage greater use of team working
and introduce personnel departments to encourage greater manager involvement in looking after
employees' interests. His theory most closely fits in with a paternalistic style of management
WHY DO PEOPLE WORK?
There are three ways to motivate a workforce:
financial motivators
non-financial motivators
Financial motivators
Pay may be the basic reason why people work, but different kinds of pay can motivate people differently. Here
are the most common methods of payment:
Pay can be given in two ways
Wages
Often paid every week, sometimes in cash or sometimes into a bank account
It is a common way of remuneration for manual workers those who work in factories and warehouse. It can be
calculated in two ways:
Piece Rate/ piecework,: this is where the workers are paid depending on the quantity of products made. The
more they make the more they get paid. This system of wages is followed where the output can be counted.
 + Encourages workers to work faster and produce more goods.

 - Workers will often neglect quality, and businesses will need a quality control system which is expensive.
 - Workers who focus on quality will earn less. Tension is caused when some workers earn more than
others.
- If machinery breaks down, employees earn less. That is why there is a guaranteed minimum pay
Time Rate: This payment by the hour. The longer you work the more you get paid. This system of wages is
followed where the output cannot be measured.
 + Easy to calculate the wage of the employee.

 - Both good and bad workers get paid the same wages.
Salaries
Salaries are paid monthly and normally straight into the bank account. A salary is counted as an amount per
year that is divided into 12 monthly accounts. Salaries are usually a standard rate, but other rewards could be
given to employees:
Other rewards
Commission: A percentage is paid, usually to sales staff, depending on the value of goods they have sold.
Workers are encouraged to sell more.
Profit sharing: Employees receive a percentage of the profits made. However, they will get nothing if the
business doesn't make a profit.
Bonus: A lump sum paid to employees who have done well. It is usually paid at the end of the year or
before holidays. However, this could cause jealousy between workers. Giving bonuses to a team works
better.
Performance related pay: Employee pay is linked to the effectiveness of their work. It is often used in
organisations where it is hard to measure productivity. It uses the system of appraisal: employees are
observed and their colleagues are interviewed to determine their effectiveness. Afterwards, the immediate
superior of the employee has a meeting with them to discuss their effectiveness.
Share ownership: Employees receive some shares from the company. They will either benefit from
dividends or sell the shares when their price has risen. They will be more motivated because they feel like
a part of the company
NON-FINANCIAL TECHNIQUES TO IMPROVE STAFF PERFORMANCE
How managers can get the best from their staff
Delegation
Delegation refers to giving a subordinate the responsibility and authority to do a given task. However, the final
responsibility still lies with the person who delegated the job to the subordinate. Here are the advantages of
delegation for managers and employees, as well as why some managers choose not to delegate.
Pros for the manager:
By letting subordinate do smaller tasks; managers have more time to do more important tasks.
Managers are less likely to make mistakes if tasks are done by specialist employees.
Managers can measure the success of their task more easily.
Advantages for the subordinates:
Work becomes more interesting and rewarding.

Employees feel important and trusted.
Helps train workers, giving them better career opportunities.
Why some managers don't want to delegate:
Managers are afraid that their employees will fail.

Managers want total control.
Managers are scared that the subordinate will do tasks better than them, making them feel insecure.
Delegation must mean:
A reduction in direct control by managers or supervisors.

An increase in trust of workers by managers or supervisors.
Consultation
What is consultation? The opportunity to provide and receive information and to participate in meaningful
discussion on relevant matters affecting the way we do or manage things in the workplace.
Why consult?
Involvement by all members of the team means that any workplace changes will be more readily accepted
and implemented
Everyone wants to be informed and asked for their ideas
What are the outcomes of good consultation versus lack of consultation?
Good consultation
Greater agreement
Increased staff morale
Greater commitment to the change or decision made
Lack of consultation
Sabotage and resistance

Disgruntled unhappy staff
Negativity and criticism
Team working
This is where a group of workers is given responsibility for a particular process, product or development. The
group is free to decide the way the job is done and how to organize the job. Each worker is involved in decision
making and is responsible for the results. This creates a sense of purpose and commitment to the job at hand
thus leading to greater job satisfaction.
Flexible working
Flexible employment pattern
A system of flexible working hours gives employees some choice over the actual times they work their
contracted hours. Such a system can be a good way of recruiting and retaining staff - since it provides an
opportunity for employees to work hours consistent with their other commitments (e.g. child care).
Advantages of flexible working hours
Employees have greater freedom

Can make traveling easier (e.g. avoiding commuting during the normal rush-hour)
Improved morale and reducing absence and lateness
Reduction in overtime and less lost time since long lunch breaks or late arrivals are not recorded as time
worked
Disadvantages of flexible working hours
Costs involved in administering the scheme

If the premises are open longer, there may be increased costs for lighting and heating
Employees will not be in work at certain times and therefore it may not be suitable for organizations where
continuous cover is necessary
Non-financial Motivators/incentive
There are other factors that motivate people in a business, and they are often called perks or fringe benefits.
They may be having free accommodation, free car, etc... However, when you look at it, it is just money in
different forms. Here is a list of these motivators:
Children's education.
Discounts on company products.
Free Healthcare.
Company vehicle.
Free accommodation.
Share options.
Expense accounts.
Pension.
Free holidays.
Job satisfaction:
Employees will become more motivated by enjoying the job they do. Job satisfaction can come in different
ways. However, there are some factors that demotivate employees if they are not satisfied, and must be
satisfied before the motivators can take effect. Here are some things that make workers' jobs satisfying:
Pay.
Promotion.
Working conditions.
Fringe benefits.
Management
Working hours.
The nature of the work itself.
Colleagues, etc...
Ways of improving job satisfaction

Job rotation
 Where workers switch from one job to another
 So a worker is doing different jobs on different times
 Usually these jobs are of the same type and do not involve any extra responsibility or skills.
 The idea is to give variety to the worker
Job enlargement
 Refers to adding tasks of a similar level to a worker's job
 It involves increasing the scope of a job or broadening the task assigned to the worker.
 More variety in the job carried out by the worker leads to more job satisfaction.
Job enrichment
 Refers to adding tasks of a higher level to a worker's job
 Workers may need training, but they will be taking a step closer to their potential
 Workers become more committed to their job which gives them more satisfaction.
 They take part in decision making and problem solving.
 They help set targets and accept responsibility for the organization and the quality of their own work.
Benefits of workers participation
Worker participation, may be expected to have the following benefits
 Effect of dampening employee grievances

 Lower labour turnover
 Improved motivation levels
 Increased Productivity and efficiency
 Less conflict between management and employees and thus better employer-employee relations
 Contribution to decision making
Tuesday 4 June 2013 – Morning -6BS02/01
REDUCING LABOUR COST
Dismissal: Means when a worker is told to leave the job because of his behaviour is unsatisfactory or he has
repeatedly failed to carry out his duties. It is because of fault of the employee.
Redundancy/ retrenchment: Redundancy happens when a person is told to leave the job because his skills are
of no more use to the organisation. This may happen due to many reason, for example,
 A business is closing down a factory.

 A business wants to cut costs by reducing the number of employees.
 A business has merged/taken over another and there is too many staff in certain departments.
 New machinery replaces workers.
 A business is losing sales and wants to cut the production level or cost and may lay off employees
 The product is taken out of production altogether
NB:
Employees are given some money to compensate for their lost job.
 The money is often negotiated with trade unions.
 Some governments have laws that make businesses pay for their workers this way.
If only some employees are to be made redundant, trade unions will agree with the fairest way to see who
goes. These terms are negotiated with the HR department.
Sometimes there will be voluntary redundancy by members.
 Older workers.
 There may be some who wants to leave because they have other ideas.
ASSIGNMENT: Read and make short notes on the following:
Flexible contracts
Part-time working
Wish you well.

Unit 2 Business Structures and Process

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Unit 2 Business Structures and Process

Uploaded by

Copyright:

Available Formats

QUICK REVISION GUIDE FOR

ADVANCED SUBSIDIARY GCE IN BUSINESS STUDIES

Unit 2: Business Structures and Process Prepared by Richard Ogutu page 1

Unit 2: Business Structures and Process Prepared by Richard Ogutu page 5

If we break this definition we get the following

Unit 2: Business Structures and Process Prepared by Richard Ogutu page 6

NB: marketing objectives should be smart, an acronym that stands for:

Unit 2: Business Structures and Process Prepared by Richard Ogutu page 8

Strategy – niche or mass marketing, benefits and limitations of these strategies

MASS MARKETING NICHE MARKETING

Advantages of Niche Market

Disadvantages of Niche Market

Unit 2: Business Structures and Process Prepared by Richard Ogutu page 10

Tuesday 4 June 2013 – Morning -6BS02/01

Tuesday 4 June 2013 – Morning– 6BSA2/01

Monday 21 may 2012– 6BSA2/01

Unit 2: Business Structures and Process Prepared by Richard Ogutu page 12

Elements of the marketing mix are often referred to as 'the 4 ps':

Developing the marketing mix

Unit 2: Business Structures and Process Prepared by Richard Ogutu page 13

Role of product in marketing mix

 Consumer services: e.g. taxi, car repairing, schools etc

Unit 2: Business Structures and Process Prepared by Richard Ogutu page 14

Unit 2: Business Structures and Process Prepared by Richard Ogutu page 15

Short life cycle product(Fad)

This is a product with a very short term life cycle

Unit 2: Business Structures and Process Prepared by Richard Ogutu page 17

Tuesday 24 May 2011 – Morning– 6BSA2/01

Unit 2: Business Structures and Process Prepared by Richard Ogutu page 19

Cadbury Product portfolio

Advantages of expanding product range

Disadvantages of expanding product range

Unit 2: Business Structures and Process Prepared by Richard Ogutu page 20

Introduction to the Boston Matrix

The Boston Matrix makes a series of key assumptions:

 Market share can be gained by investment in marketing

Unit 2: Business Structures and Process Prepared by Richard Ogutu page 21

 Cash cows are low-growth products with a high market share

Unit 2: Business Structures and Process Prepared by Richard Ogutu page 22

The main values of using the Boston Matrix include:

 A useful tool for analyzing product portfolio decisions

Unit 2: Business Structures and Process Prepared by Richard Ogutu page 23

Tuesday 3 June 2014– WBS02/01

Tuesday 21 January 2014– WBS02/01

Unit 2: Business Structures and Process Prepared by Richard Ogutu page 24

Product, e.g. use of recycled materials, ethical sourcing

Unit 2: Business Structures and Process Prepared by Richard Ogutu page 25

Unit 2: Business Structures and Process Prepared by Richard Ogutu page 28

Unit 2: Business Structures and Process Prepared by Richard Ogutu page 29

IMPLICATIONS OF PED FOR PRICING STRATEGIES

Unit 2: Business Structures and Process Prepared by Richard Ogutu page 30

Tuesday 3 June 2014 – Morning– Afternoon 6BSA2/01

Thursday 20 January 2011 – 6BSA2/01

Unit 2: Business Structures and Process Prepared by Richard Ogutu page 31

Why does a firm want to know YED?

Unit 2: Business Structures and Process Prepared by Richard Ogutu page 32

Activities include advertising

Unit 2: Business Structures and Process Prepared by Richard Ogutu page 34

Unit 2: Business Structures and Process Prepared by Richard Ogutu page 35

Unit 2: Business Structures and Process Prepared by Richard Ogutu page 36

Factors influencing efficiency

What is meant by Productivity?

TOTAL OUTPUT IN A GIVEN TIME PERIOD