Unit 5

The role of operations management

5.1 The role of operations management

● About the management process of creating goods (production and consumption goods)
and services that people want to purchase, using resources available to the organisation
in question.
● Businesses earn a profit production process by adding value in the production process
● i.e → the price that customers pay for the good or service is greater than the costs of
producing that product
● To produce goods and services, businesses need to combine human, physical and
financial resources in an effective way.
● These resources are collectively known as the factors of production:
○ Land → these are natural resources needed to produce goods and services.
Examples include water, timber, sand, plants and animals
○ Labour → This refers to human effort used to produce goods and services
○ Capital → this refers to non-natural (or man-made) resources used in the
production process. Examples include tools. Machinery, motor vehicles, physical
premises and infrastructure.
■ Needed for the full production process to be achieved, or to fulfil the
chain of production
■ One decision affects the whole chain of production
○ + Entrepreneurship (the fourth factor) → the person who organises the factors
of production and creates goods and services

Goods, services and products

● Product: output of the operations management department. Could be a good or a
service
● Goods: products that are tangible
● Services: intangible products
The production process
Inputs → Production processes → Outputs
(factors of production) (adding value) (physical goods and intangible services)

5.1.3 Ecological, social and economical sustainability

● Sustainability: ability to continue a behaviour indefinitely.
○ A business should organise its operations in such a way as to ensure that actions
today do not have a negative impact on future generations.
○ Sustainability refers to the ability of an organisation to continue its business
activities indefinitely: its operations today do not jeopardise the opportunities for
future generations
○ There are three areas of sustainability that businesses should consider (triple
bottom line (or 3Ps of sustainability):

→ Economical sustainability (Profit)

: Economic sustainability focuses on businesses making the most efficient use of their
resources so that the future of the company and its stakeholders is not adversely
affected by decisions made today.
● Using resources, both natural and manufactured, efficiently and responsibly
● It is able to encourage businesses to focus their strategies on long-term rather
than short term profitability targets, and the long-term consequences of economic
activities
● This also has a direct impact on people's job and careers in the future

→ Ecological sustainability (Planet)

○ Refers to sustainable use of the planet’s natural resources so that the current
level of consumption does not jeopardize the resources available for future
generations
○ Without ecological sustainability, business activity will eventually deplete the
planet’s natural resources
○ Unsustainable business activities:
■ Overfishing
 ■ Deforestation

→ Social sustainability (People)

: Social sustainability is the ability of a business not only to meet the needs of its current
stakeholders, but also to support the needs of future generations of stakeholders.
○ Enable people of the current and future generations to enjoy a decent quality of
life
○ Operations management can achieve greater Social Sustainability to:
■ Designing production systems that are safe and healthy for employees
■ Designing work and workplaces to allow for social interaction
■ Creating jobs in low-income areas
■ Reducing pollution
■ Removing social barriers such as gender inequalities, human resources
allocated more efficiently in society
● Women being provided equal opportunities in the workplace
■ Gender equality
○ Business could adopt Maslow pyramid of needs
5.2 Production methods
Job production:
Job production is producing unique items that are tailor-made to meet the needs of individual
customers.
Advantages Disadvantages Possible examples

It is the most flexible High labour costs (due to the

production method, allowing
output to be catered to the
specific requirements of the
customer
need to hire highly skilled and
experienced employees) and
limited opportunities for
economies of scale mean
that job production can be
very expensive

Due to its uniqueness and Long production times as job

exclusivity, the production of
the good or service is of an
exceptional quality standard
This also means that a
premium price can be
charged (because of the
product’s originality and
exceptional quality). This
means the profit margin will
be higher
production cannot rely on
technologies used for mass
produced, non-standardised
output in order to meet
specific needs of customers
● E.g → time needed to
meet and consult with
the individual
Bridges
Construction of roads,
schools, hospitals and hotels
Garden landscaper
Hair cuts
Movies (films)
Tailor made suits
Portrait paintings
Private music lessons
Wedding dresses

Workers are likely to be

highly motivated as they are
exceedingly skilled workers
who produce work that is
original and which they can
be proud of.

Batch production:
Batch production involves producing items in identical groups. Small changes are made in each
batch so that a range of customers’ needs can be fulfilled.
● If a company is going to adopt a batch production system effectively, it must have a
range of similar products to meet different consumers' needs.
 Advantages Disadvantages Possible examples

Average costs of production Less flexibility for customers

are lower than if job
production is used, because
batch production enables the
organization to have greater
economies of scale
compared with job
production, as they can only
select from a range of
standardised output

Fewer workers are needed as Greater need for capital

there is a reliance on expenditure, such as the
machinery and purchase of machinery and
mechanisation capital equipment. Also
greater need for working
capital as the business needs
to purchase a lot more stocks
(inventory such as raw
materials)
Customers have a greater Machinery needs to be
choice. This is likely to lead to cleaned and/or changed
more sales. (reconfigured in order to
produce another batch of
products
Bread
Casual clothing (such as
t-shirts or various sizes and
colours)
Cookies (biscuits)
Food items for buffet meals
Home furniture
McDonald’s burger meals
Shoes

It reduces the risks This reduces productivity and

associated with concentrating can be costly
on the output of a single
product

It is suitable for making

products when the level of
demand for them is not
enough to justify using mass
production

Flow/mass production:
● These two methods of production have some similarities. Both are capital intensive and
will produce on a large scale. Both should also enjoy significant economies of scale.
Mass production:
● Mass production is the highly automated assembly of a product.
● Likely to be capital intensive as it uses more machinery relative to workers. It involves
production lines where workers remain at a single station, performing the same task over
and over again, perhaps thousands of times a day.
Flow production:
● Flow production (also called process production) involves the continuous production of a
single product
 ● Flow production is likely to be even more capital intensive than mass production.
Workers may not be involved directly in the production process at all.
Advantages
As products are mass
produces, the business
benefits from economies of
scale, i.e lower costs per unit
of output. This means it can
charge lower prices and/or
enjoy higher profit margins.
Therefore, customers benefit
from better value for money
As production is capital
intensive, a large volume can
be created, and often
continuously on the
production line. Hence, the
business benefits from a
faster rate of production.
Automation results in lower
labour costs as fewer people
need to be hired, and for
shorter periods of time.
DIsadvantages Possible examples
The business has to rely on
selling a large volume of
output in order to break even.
Requires effective stock
management systems.
Inventory can be very
expensive for a business
Beer
Start-up costs are likely to be Bottled water
high. Businesses need to Buttons
invest in specialised capital Canned soft drinks
equipment, robots, machinery Paper clips
and production systems. Toothpicks
zips
A technical breakdown will
cause major problems for a
business. Staff can become
easily demotivated
Mass production on its own
does not sell physical goods
that are produced. It still
requires marketing support in
order to inform and persuade
people to buy these products
on a large scale.
Automation results in higher
labour costs as fewer people
need to be hired, and for
shorter periods of time.
Labour intensive output (as
with job production) requires
workers to have rest breaks
 and to be paid for their
overtime

Cellular production:
→ (Or cell production) is a form of lean production technique that involves teams of people
working on a certain section of the production process
● Each team (or cell) works on a significant part or complete unit of output within the
overall production process
● Cell production is an extension of flow production, but splits production into
self-contained units or items
● Team members are skilled at a number of different roles, hence avoiding the
monotonous nature of flow/mass production
5.3 Lean production and quality management
Lean production
: Producing goods and services with the minimum of wasted resources while mainitning high
quality
→ Minimum of wasted resources: Minimum quantity for factors of production available
● Lean production is a philosophy based on the idea that levels of waste can always be
reduced
● The overall objective of this production method is to produce quality output with fear
resources thas is waste reduction, greater efficiency and elimination of non-value added
activities
● Lean means cutting out anything in the production process that adds complexity, cost,
and time and does not add value to the customer

Less waste
● The seven main sources of waste in industry have been identified as: TIMWOOD
○ Transportation – moving components between work stations or from suppliers.
○ Inventory – building up excessive stocks, resulting in storage costs.
○ Motion – staff risking injury while making the product.
○ Waiting – delays in the production process.
○ Over-processing – adding features to a product that are not required by the
customer and therefore do not add value.
○ Over-production – producing an inventory of finished goods before they are
needed. This can lead to wastage in fast-moving markets.
○ Defects – finished goods that do not meet quality control standards.
Example:
Principal methods

→ continuous improvement
● It involves businesses holding regular, scheduled meetings where staff are invited to give
their opinions and suggest improvements.
● Not all ideas are taken forward, but at least some will be of value to the business

Advantages Disadvantages

A range of ideas are suggested, so the It may lead to lost production time as a result
company is more likely to make the ‘best’ of meetings and evaluation of ideas, possibly
decision. reducing productivity.
 Employees may have a greater knowledge of Involving staff in improvements may result in
the problem than managers/directors who them demanding higher wages for increased
may traditionally make decisions. responsibility.

The decision to involve staff helps them to

feel valued, improving motivation.

Just in Time
→ Just-in-time (JIT) production aims to minimise costs by reducing or even eliminating the stock
being held by a firm.
● JIT works on the principle of placing smaller, regular orders that are delivered just in time
for them to be used.
● Sophisticated IT systems allow new products to be ordered from suppliers the instant
they are scanned at the sales checkout.
● Firms liked to hold large quantities of stock 'just in case'
○ this system of inventory control proved expensive: It led to high storage costs and
potential waste if the good went out of date or was damaged in storage.

Advantages Disadvantages

It improves cash flow by reducing stock It carries high risks. Production may halt if a
holding small part of the supply chain breaks down.
Any delay in delivery becomes critical for
production.

It has positive benefits for stock-holding It restricts a firm’s ability to react to massive,
costs. With less warehouse space needed unexpected orders.
and less chance of waste and damage, costs
are reduced.

With less stock holding, there may be more
room available for production, which could
increase capacity.
It may not be suitable for businesses with
seasonal demand (such as fireworks
manufacturers), where large inventories are
typically built up ready for short periods of
high demand.

Purchasing economies of scale may be lost

as order sizes are reduced, leading to higher
costs.

Kanban
→ Kanban regulates the supply of components in a factory through the use of a card system.
● Kanban is a stock control system that uses signals or cards to ensure supplies arrive at
the production line just when they are needed.
● Similar aim to JIT, which is to reduce stocks.
● Kanban is based on the idea of internal customers: anyone in the organisation who
relies on the quality of your work.
 Advantages Disadvantages

Lower levels of stock put pressure on staff to Mistakes are more likely to stop the entire
avoid waste. Mistakes are less likely and production line as replacement stock
quality will rise. components may not be available.

Less space is needed on the production line; Delays in deliveries or incorrect orders can
this space can be used for other more lead to production staff running out of
profitable uses. materials to work with.

Andon
→ A notification system that alerts workers to potential problems in the manufacturing process.

​
● Sensors are fitted to various parts of a production line, designed to measure things such
as broken components or malfunctioning machinery.
● If Andon detects a problem, the system either communicates it by displaying a warning
light or may even stop production altogether.

Advantages Disadvantages

Problems are spotted quickly, so large Complex systems may be expensive to

amounts of defective goods are not install.
produced.

Engineers can be directed straight to the Workers will need to be trained in using the
location of the problem so that it can be fixed system and fixing problems.
quickly.

^ Workers may demand extra wages for

taking on additional responsibility.

Quality management
● A quality product meets or exceeds the needs of its target market.
● Quality is defined by the target market of a product
 ○ Decisions about quality need to reflect a firm’s customers.

Methods of quality management

→ Quality control:
● Quality control occurs at the end of the production process.
● Finished goods are inspected to assess whether they meet a set of agreed criteria.
● There are two approaches to carrying out quality control:
○ Inspectors check the quality of every finished good.
○ Inspectors check the quality of a sample of finished goods.
● The approach that is used will depend on the nature of the product: If the product is
extremely expensive or made to order, it makes sense to inspect every finished good
● This approach will not be possible for companies involved in mass production, producing
thousands of items every single day.
○ In such situations, inspectors are required to check just a sample of the finished
goods.

Advantages Disadvantages

Use of professional inspectors should Products are only checked at the end of
lead to fewer mistakes in the inspection the manufacturing process. This can allow
process. significant stocks of faulty products to
build up.

If inspectors are only checking a sample

of finished products, faulty goods may be
missed.

→ Quality assurance:
● Quality assurance systems attempt to overcome these problems by involving all staff in
the quality process.
● Emphasis is placed on staff checking their work, rather than on final inspection.
● When using a quality assurance system, a business considers quality in every
operation’s decision it makes.
○ Product design: if quality meets consumers needs
 ○ Production process: products not damaged during manufacturing
○ Component delivery: only reliable suppliers
○ Regular inspections: to ensure staff is trained

→ Quality improvement:
● If a firm adopts a quality improvement policy, it will see quality improvement as a
continuous process in which it is always possible to improve product quality.
● Three key areas:
- Total quality management
● Every employee is jointly responsible for maintaining the overall quality of the
final product.
● One of the aims of TQM is to operate with zero defects: it aims to prevent errors
from happening in the first place.
● staff are always encouraged to consider the needs of their internal customers.
This should encourage teamwork and greater levels of communication.
● TQM is a method of lean production.

- Quality circles
● A quality circle is a group of employees who meet regularly to discuss potential
improvements to product quality.
● Employees usually come from diverse areas of the company to allow a range of
different viewpoints to be considered.
- Benchmarking
● Benchmarking is the process of comparing yourself with the best and seeing
what you can learn from their techniques
● Two steps
1. Identify which companies have the best processes.
2. Work out how they do things and try to learn from those processes.
5.4 Location
● Deciding on the optimal location for a new business, or relocation for an existing one
● Most important decision
● Selecting the best sites will have a significant effect on many departments of the
business and the profitability of and chances of success of the firm

● Three key characteristics:

a. Strategic in nature as they are long term and have an impact on the whole
business
b. They are difficult to reverse if an error of judgement is made due to the costs of
relocation
c. They are taken at the highest management levels and are not delegated to
subordinates

Quantitative factors
→ Measurable in financial terms and will have direct impact on either the costs of a site or the
revenues from it and its profitability

Problem Disadvantages to business

High fixed site costs ● High break-even level of production

e.g managers salary ● Low profits -- or even losses
● If operating at low-capacity utilisation,
unit fixed costs will be high

High variable costs ● Low contribution per unit produced

e.g labour ● Low profits - or even losses
● High unit variable costs reduce
competitiveness

Low unemployment rate ● Problems with resolving suitable staff

● Staff turnover likely to be a problem
● Pay levels may have to be raised to
attract and retain staff

High unemployment rate ● Average consumer disposable

incomes may be low -- leading to
relatively low demand for
income-elastic products

Poor transport infrastructure ● Raises transport costs for both

materials and finished products
● Relatively inaccessible to customer
● Difficult to operate a just-in-time (JIT)
 stock management system due to
unreliable deliveries

Site and other capital costs such as building or shop-fitting costs

● This varies from region to region within our country and between countries.
● The best office and retail sites may be so expensive that the cost of them is beyond the
resources of all but the largest countries
● The cost of building of a Greenfield site one that has never previously been developed
must be conferred with the costs of adapting existing buildings on a developed site

Labour costs
● The relative importance of this as a locational factor depends on whether the business is
capital or labour-intensive
● If production is labour intensive, it may make sense to move operations to a country that
has a low minimum wage

Transport cost
● Businesses that use heavy or bulky raw material such as steel making will have a high
transport if suppliers are at the great distance firn the steel plant
● Access to efficient transport networks allows customers to visit stores and suppliers to
deliver raw materials.

Market potential
● The level of sales made by a business can depend directly on location.
● In addition certain locations can add a status and image to a business and this may
allows value to be added to the production on the eyes of the consumers

Government grants
● Government grants across the world are very keen to attract new business to located in
their country
● Grants may be offered to add to act as an incentive
● Existing business operating in a country can also be provided with financial assistance to
retain existing jobs or attract new employment to deprived areas of high unemployment

Land costs
● Prime locations cost money
● A shop on a busy high street will pay considerably more in rent than one a few streets
back. If a firm does not need the benefits of an expensive location, it makes little sense
paying for one.

Techniques to decide de location

Profit estimates
● By comparing this estimated revenues and costs of each location, the site with the
highest annual potential profits may identified

Investment appraisal

Break-even analysis

Qualitative factors
Are non-measurable factors that may influence business decisions. Cannot be measured in
financial terms

Ways of re-organizing production:

Outsourcing → To contact another business to undertake some or all of the additional work.
This is common to occur if a business receives orders that it cannot easily fulfil because of lack
of capacity.

Reasons for outsourcing:

● Reduction of operating costs: ‘buy in’ specialist services as and when needed instead of
employ specialist that would not be working all the time
● Increased flexibility: removing unnecessary parts from the staff payroll and starting to
buy services only when needed. This turns fixed costs into variable costs
● Improved company focus: a business can concentrate on the main aims and tasks of the
business and outsource completely another function
● Access to quality service: that is not available internally. Many outsourcing firms employ
quality specialists that small businesses could not afford to employ directly.
● Freed up international resources: If the HR department of an insurance company is
closed, the the office space and computer facilities could be made available to improve
customer service

Outsourcing evaluation
● Outsourcing will continue to increase as businesses continue to aim at operational
effectiveness and more opportunities. BUt there are always risks
● Before doing a business-process outsourcing
○ Cost benefit analysis: it would be time-consuming and expensive to reopen and
reestablish if the outsourcing failed
○ Identify the core activities that must be kept under the direct control of the
business

Offshoring → The relocation of a business process done in one country to the same or another
company in another country
Reasons for offshoring:
→ The driving and restraining forces of offshoring are similar to the ones of outsourcing.
Additionally we have the following:
● Low-cost countries offer substantial benefits → major reason
● Even though higher subcontractors in foregin countries implies a high cost, and
offshoring has high transport and communication costs. These ones are outweighed by
the potential profits → finance department
● Multinational consider offshoring to low-wage economies to maintain their
competitiveness - India, China, East Europe
● Subcontracting businesses are likely to easily higher unskilled or semi skilled workers in
developing countries
5.5 Production planning
Managing the supply chain, and stock (inventory levels) → Operations management
responsibilities

Supply chain management

: All the steps it takes to get a good or service from the supplier to the final customer.
● Optimised supply change:
○ Reduce costs
○ Minimise transportation
○ Eliminate bottlenecks
○ Maximise customer value

Supply chains consider many factors when choosing suppliers:

● Cost
● Reliability
● Product quality
● Lead times
○ How long it takes gor a supplier to make a delivery

Stock control → JIT and JIC

JIT: just in time
● Just-in-time stock control is the principle of placing smaller, regular orders for resources,
which are delivered just in time for them to be used.
● This reduces storage costs and waste.
● Advantages:
○ Reducing stock holding improves cash flow
○ With less warehouse space needed and with less chance of waste and damage,
costs are reduced.
○ With less stock holding, there may be more space available for production, which
could increase capacity
 ● Limitations:
○ Production may halt if a small part of the supply chain breaks down. Any delay in
delivery becomes critical for production.
○ It restricts a firm’s ability to react to significant, unexpected orders.
○ It may not be suitable for businesses with seasonal demand where large
inventories are typically built up ready for short periods of high demand.
○ Purchasing economies of scale may be lost as order sizes are reduced, leading
to higher costs.

JIC: Just in case

● Buffer stocks are additional quantities of stock kept by a company in case of need.
● Just-in-case stock control involves holding relatively large levels of buffer stocks so that
a business can continue to operate when faced with an unforeseen event.
● Advantages:
○ Production can continue if the supply chain is disrupted.
○ Unexpected orders can be fulfilled quickly.
○ Larger orders should lead to purchasing economies of scale
● Disadvantages:
○ Storage costs are higher
○ Increase risk of wastage
○ Reduces liquidity

● JIT stocks are minimised or eliminated.

● JIC stocks are held at a sufficient level to act as a buffer during delays

Advantages Disadvantages

Stocks of raw materials can be used to allow the There are high opportunity costs of working capital tied
firm to meet increases in demand by increasing up in stock
the rate of production quickly

Raw-material supply hold-ups will not lead to There are high storage costs
production stopping

Economies of scale from bulk discounts will There is a risk of goods being damaged or becoming
reduce average costs outdated

Stocks of finished goods can be displayed to ‘Getting it right first time’ → a key component of lean
customers and increase the chances of sales production → matters less than with JIT (just-in-case
stock management approach) as other supplies are kept
in stock to replace defective times

Stocks of finished goods can be used to meet Space used to store stock cannot be used for productive
sudden, unpredicted increases in demand → purposes
customers can be satisfied without delay

Firms can stockpile completed goods to meet

anticipated increases in demand as with seasonal
goods or products such as toys at festival times

Stock Holdings
● Opportunity costs
● Storage control
● Risk of obsolescence

Costs of not holding enough stockes

● Lost sales
● Production stopped and employees with nothing to do
● Special offers could be expensive
● Small orders quantities

Stock control chart

● An easy way to monitor and analyse stock levels.
● These charts record when stocks are delivered and when they are sold.
● They can then be used to make decisions about when to order new stocks and in what
quantities.
● The main parts of a stock control chart are:
○ Maximum stock level: the total amount of inventory a firm wishes to hold, using
current storage facilities.
○ Buffer stock level: stock that is held just in case there is an unexpected order or
late delivery. Buffer stock is a backup so that customers’ needs can still be met if
something unforeseen occurs.
○ Lead time: how long it takes a supplier to fulfil an order; the difference between
when an order is placed and when it is delivered.
○ Re-order level: the point when new stock is ordered from a supplier. This will
take into account the lead time and buffer stock level.
○ Re-order quantity: the amount of stock that is ordered from a supplier.
Example
 ● the shop is only big enough to hold 600 candy bars = maximum stock level
● Sales are represented by the downward sloping parts of the chart: When the shop has
only 300 bars left, it will place an order of 500 bars with its suppliers.
● The time it takes for the suppliers to deliver new stock is referred to as the 'lead time'.
○ This takes two weeks and is measured on the x-axis.
● In weeks 4, 8 and 12 new stock is delivered
○ This is represented by the vertical sections of the chart.
● The owners of the shop never want to be in the situation where they have no candy bars
left to sell = buffer stock: they have set a minimum stock level of 100 bars

Formulas
Unit costs
● The average cost of making one unit of output

Unit costs: Total cost / Output = $__

● If a firm can reduce its unit costs while maintaining quality, it can gain significant
advantages over rivals.
● If they reduce their prices, total sales should increase as customers will respond to the
price cut by purchasing more of the product.
○ The company's market share should also improve as it will be able to gain new
customers at the expense of its competitors.
● Alternatively, the company can choose to keep its prices the same.
○ This will not gain any new customers, but as profit margins will increase, net
profits will rise.

Productivity rate
● A measurement of the efficiency of resources used in the production process.
Productivity rate: Total output / Total input × 100 = _____ units of production
● Most common type is labour productivity
Labour productivity
● The average output per worker for a given time period (given in number of units of
output)
Labour productivity: Total output / Total number of workers = ____ units of production
● Therefore, the cost of staff wages will be split over a greater number of units of output,
thus reducing average cost.

How to improve productivity

● Strategies
1. Improve training and staff motivation
2. Improve management techniques.
3. Increase use of technology

Capacity utilisation
● The percentage of a firm’s total capacity that is currently being used
Capacity utilisation rate: Actual output / Productivity capacity × 100 = _____ %
● High capacity utilisation means that a firm is using its resources efficiently.
○ This should reduce average costs and hopefully increase profits.

Cost to buy
● The total cost of subcontracting production to a supplier
● This calculation will allow the company to calculate the total cost of outsourcing
production

Cost to buy: Price × Quantity = $____

Cost to make
● The total cost of production if manufacturing is kept in-house
Cost to make: Fixed costs + (Variable costs × Quantity) = $______
● In this context, fixed costs can be thought of as the overheads of running and
maintaining a factory.
○ This will include costs such as electricity or the wages of production staff.
● Variable costs are the direct costs of producing one product.

Make or buy?
Potential reasons to make Potential reasons to buy
Control over the production process and Specialist suppliers are likely to have
quality management is maintained. economies of scale, leading to lower average
costs.

Working conditions can be monitored and The company does not need to invest in
controlled production facilities,

If the company does not have the expertise to

make the product itself, it has no choice but
to subcontract this work to another supplier.
No entra esto

5.6 Research and development

Research and development: The systematic process of developing new ideas and processes
that may be turned into future products

Potential benefits of research and development

● Companies invest on R&D because of
1. Growth
● New products → expand in new markets or consolidate existing ones
● This idea links to ansoff matrix
2. Unique selling points
● Successful R&D → new and improved products that can be protected by a patent
● Allows them to increase sales and command a higher selling price
3. Improved brand image
● Companies that continue to release successful, innovative products develop a
strong reputation
○ Lead to customer loyalty and price leadership
4. Lower production costs
● Process innovation → improvements in the manufacturing process
● With the ideas of lean production + R&D → see how company can gain important
cost leadership over rivals

Potential constraints on research and development

● Companies have to consider other factors as HR and competitor actions when setting
R&D goals
● Having a large R&D budget does not necessarily lead to launching innovative profitable
products or a reputation for innovation

Factors that stop companies turning high R&D budgets into successful products
1. Legal constraints
2. Human resources
● New products are invented by people (not machines/bank accounts)
● If companies don’t have the right mix of people working in their R&D departments → no
amount of budget will lead to success
3. Past experience and culture
 ● Culture is an effort that describes internal workings of a company
○ Some cultures may breed innovation more than others
● Companies that can instil a culture of teamwork and creativity are more likely to produce
innovative products
4. The level of competition
● Competitor’s R&D may result in them creating more new products
5. Market demand

Creativity and innovation

Creativity:
: is the process of generating new ideas and can be broken down into two ideas

Innovative creativity
● The process of creating something completely new
● Products developed are unique and usually create new markets for themselves
● Innovative creativity is risky
○ New markets it develops are untested so there is no way to know if it will be
popular
■ This unknown element is enough for companies to stop investing scarce
R&D funds into this area

Adaptive creativity
● Is changing or improving something that already exists
○ Everytime an updated laptop is released → example of adaptive creativity
● Is less costly and carries less risk than innovative creativity as companies are building on
what has gone before
● Adaptive creativity can be extremely profitable: new products are launched into mature
or growing markets with large customer bases

Innovation:
● Creativity is the conception of a new idea, while innovation is the commercial use of that
idea.
● Can be grouped into four different areas:

1. Product innovation:
● Process of developing and improving existing products.
● Examples: Apple Watch or hybrid cars such as the Toyota Prius.
2. Positioning innovation:
● when a product is marketed to a new target audience
3. Process innovation:
● Can be defined as developing new methods of production or product delivery.
 ● If successful, it will allow the company to deliver customers' orders within an
hour of them being placed, an extremely valuable unique selling point.
● Example: Amazon investing millions of dollars in developing the new drone
distribution service.
4. Paradigm innovation:

Factors affecting creativity and innovation:

● Pace of change within industry
● Organisational culture
○ A strong organisational culture is one where employees collaborate and work
together to test and improve new ideas
● Ethical considerations
5.7 Crisis management and contingency planning

Difference between crisis management and contingency planning

Contingency plan
● Outlines the immediate actions a company should take in the event of a crisis.
● It's all about askin what if?
● A firm is likely to have many contingency plans to know what to do, where to go, and
where to seek help if needed.
○ Ex:
■ theatre companies → understudies in case lead actors fall ills.
■ Schools practise drills so that students know what to do in the event of an
emergency such as a fire.
■ Governments even prepare national contingency plans that may be
needed in the case of a national crisis.

Advantages Disadvantages

Cost and time: Cost and time:

● If solutions to potential problems are
evaluated in advance = rapid
implementation, returning to normal
● Helps managers make rapid and well
judged decisions → minimising
chances of costly mistakes
● For plants to be relevant → need to
be reviewed and updated =
opportunity costs with time and
resources
● Take up considerable time to write,
practice and update
○ Small firms: this cost may be
too high
○ Large firms: may have teams
that focus on contingency
plans

Risks and safety: Risks and safety:

● Minimises the risk of potential ● People can react in unpredictable
accidents or loss of life ways and may develop rapidly
 ○ If plan does not take this into
account = its use is limited

Crisis management
● Concerns the steps a company can take to limit the damage caused by an unpredicted
event or change
● Aim → to return to normal operations businesses as quickly as possible → use a
contingency plan that was prepared in case the crisis arose
● Crisis management depends on:
1. Communication
● Effective communication with external and internal stakeholders is essential with
crisis
● Internal one-way communication with employees ensures understanding the
problem, the plan and their responsabilites
● Two-way communication can also be necessary → listentning to worker’s
perspectives help managers fully understand problems, find potential solutions
and increase motivation levels
● External communication: keeping an ongoing dialogue with suppliers +
customers + public = goodwill at the time it is needed the most
● Deciding not to communicate is risky because it may damage trust beyond repair
if it is subsequently discovered that there was a cover up
2. Transparency
● May be the best option at time crisis
● In disasters, people tend to be sympathetic and give the benefit of the doubt;
however if hidden information is discovered → sympathy will be gone
3. Speed
● The goal of crisis managemtn is to return to normal operation as rapid as
possible
● Rapid decision making and effective implementation of those decisions will help
achieving the goal
4. Control of situation
● A crisis is one of the few circumstances where an autocratic leader might be the most
effective
○ They make quick decisions and ensure that actions are carried out → lead to
effective response
● People may be motivated by a strong decisive leadership