Business Studies (Unit 2)

Measuring Workforce Performance

Businesses use three main performance indicators to measure the effectiveness of personnel. These are:

- Labour Productivity- Labour Turnover and Absenteeism

Labour Productivity, Labour Turnover and Absenteeism can provide evidence of business performance. Low productivity and high labour turnover/absenteeism may imply that the business is under poor management.

Businesses should compare these figures over time to look for a trend instead of just examining data from one year or one day. They should then compare the data with industry averages to see if they are having problems.

Labour Productivity

Labour Productivity is the output per worker over a specific period of time. Measuring productivity is relatively easy in manufacturing as the number of products can be counted, but businesses that offer services struggle to calculate it - for example, hospitals.

Labour Productivity is a very important way of measuring a firm’s performance as it has a direct impact on the cost of producing a unit. Here is an example…

Daily Wage Productivity (Per day) Labour cost (Per bench)

Dave’s Benches £50 5 £10

Tony’s Benches £50 10 £5

Tony produces more benches per day than Dave so the labour cost per bench is only £5 (compared to Dave’s £10) – this leaves more room for profit. Some businesses may use this as a way of undercutting others because they’re products are cheaper to produce so they can sell them for less, thus gaining more sales.

However, Labour Productivity does not always come down to who works harder. Modern equipment should speed up production and therefore increase productivity. Not all businesses can afford top machinery though, so better maintenance, extra shifts and small changes in Kaizen groups may help.

A skilled and well-trained workforce may also increase Labour Productivity by producing more at a faster rate, and making fewer mistakes. Motivation will also play a big part in productivity as motivated workers are likely to achieve more than un-motivated ones.

Labour Turnover

Labour Turnover is the measure of staff leaving a business’s workforce. The formula for calculating Labour Turnover is below…

Staff leaving per year / average number of staff * 100 = % Turnover Rate

For example: if 5 staff left a business of 50 staff the turnover would be 10%However, it is important to look at a business’s Labour Turnover trend, not just the figures for one year!

If a Labour Turnover rate is increasing, it may be a sign of workforce dissatisfaction. If this is the case, the business should look at whether the causes or internal or external. There are some examples below…

Internal External

Ineffective leadership/motivation More local vacancies

Wages are too low Better transport links

Businesses should make sure they get the right balance of Labour Turnover so that they can enjoy the positive benefits of losing staff without suffering the negative consequences too.

Positive Negative

New workers bring in new ideas and enthusiasm Additional costs of recruitment and selection

New workers are employed with needed skills Additional costs of training new staff

There are new ways of solving problems A loss of productivity while new staff settle in

Absenteeism

As well as Labour Turnover, Workforce Absenteeism can be a good indicator of satisfaction. It can be calculated with the following formula…

Average number of staff absent per day / total number of staff * 100 = % Absenteeism

Like with Labour Turnover, businesses should look for trends in Absenteeism instead of focusing on one day.

Organisational Structures

An organisational structure is the formal way that the management of a business is organised. It is often presented as a diagram and shows who is in charge of whom.

In the early stage of a business, it is not usually necessary to have a formal organisational structure as most of the day-to-day decisions are carried out by the owners. However, as a business grows more people become involved and so there is a need for a formal arrangement. A structure is put into place showing the roles and responsibilities of each employee.

The Level of Hierarchy shows the number of different levels between the top and bottom of the workforce.

The Span of Control refers to the number of people directly under the supervision of one manager. The ideal Span of Control will depend on the type of business, the nature of the task and the skills and attitudes of the workers. Below are examples of a narrow and wide Span of Control.

The blue employee on the second row of the Narrow Span of Control is accountable for at least 2 others, so for this business the Span of Control is at least 2. In the wider diagram the Span of Control is at least 5.

Benefits (Narrow) Drawbacks (Narrow)

Allows close control and managerial supervision Staff may feel over-supervised and untrusted

Communication can be good between small teams The narrow Span of Control may lead to a restricted scope to initiative – drives away enterprising staff

Those at the lower end of the hierarchy have a long career ladder in terms of promotion opportunities

Communication in the whole business may be slow as there are more levels of hierarchy – delays decisions

Benefits (Wide) Drawbacks (Wide)

Staff are able to make moderate decisions Lower hierarchy workers may become stressed

Less management means less overhead costs Managers may feel a loss of power

The Chain of Command shows the reporting system from the top to the bottom of the hierarchy (the route that information travels through in the organisation). The more levels of hierarchy in the structure the longer the Chain of Command is, so it takes longer for messages to get through – this could delay decisions.

Communication Flows describe the communication within the structure. The growth of a business and the implementation of new layers may have a negative effect on Communication Flows. Here are some examples...

- Vertical communication within the structure becomes slower and less effective- There may be slower communicating feedback from the bottom to the top- There may be a need for formal departmental meetings with notes taken – making the business more

bureaucratic

Centralisation and Decentralisation describes how decision-making power and authority is distributed within an organisation. In a centralised structure the power and control is in the hands of the top layers, while in a decentralised structure this power is delegated to people lower down.

Some organisations may use a combined approach, for example in a school. Decisions about resources and lessons will be made by teachers (decentralised), while decisions in regards to things such as college aims and objectives will be made by senior managers (decentralised).

Delegation is when an organisation passes authority down the hierarchy. Delegation can be very motivating for the staff on the lower levels of the hierarchy, but may also have a negative effect on managers at the top of the structure as they may feel a loss of power. Delegation may also provide managers with more time.

To gain the benefits from delegation, and organisation must ensure they think about the following…

- Meaningful tasks are delegated, not just the ones that nobody wants to do- Staff are trained to do the jobs they are expected to do- Staff should feel trusted without over-supervision, or the business returns to a narrow structure

Workload/Job Allocation is the amount of work assigned to a worker in a specific period of time.

Workforce Roles

Workforce Roles explain the different tasks that individuals are responsible for. There are three concepts closely associated with job roles…

- ResponsibilityCarrying the burden of blame for an error even if the task was performed by someone else

- AuthorityHaving the power to carry out a decision or perform a task

- AccountabilityThe extent to which an individual is held responsible for their decisions and actions

Directors – those who deal with setting overall aims and objectives. There are two types of directors…

- Executive directorsAppointed to the board as they represent an important division or department

- Non-executive directorsFrom outside the business. They bring an independent view in order to protect shareholders interests

Managers – These people are responsible for organising and making sure tasks are performed by others.

Line Managers – These are people immediately above someone else in an organisational chart.

Team Leaders – These workers are chosen by an organisation to lead and manage a particular team or project

Supervisors – This is the lowest management position. They are responsible for the day-to-day performance of a small group, for example: a team or shift. Their job is to see that all members of the team are productive and resolve any problems that may arise. They do not usually have the power to hire or fire staff, but may pass on recommendation to higher levels in the structure.

Project Teams – These are usually made up of people with different skills from various departments. This helps make integrated decisions for projects.

Matrix Management – This is where staff work in Project Teams in addition to their responsibilities within their own departments, and therefore can be answerable to more than one manager.

How Organisational Structures affect Business Performance

Growth of a business usually means growth in the number of people involved. Therefore, it becomes more and more important to make sure that everybody is clear about their role and to who they are answerable to.

As businesses expand it is important to put into place organisational structures that accommodate growth. Below are some possible problems which may arise from a poor organisational structure…

- There may be mistakes due to poor communication (leaving customers unsatisfied with the service)- Accidentally replicated tasks due to pure communication (thus costing the business more)- There may be a poor quality of performance due to things being overlooked- Different functions and departments may fail to work together successfully (delays for customers)

In the past it was very common to find tall and narrow hierarchical structures…

- There were many layers of management- Narrow spans of control (there is not much delegation)

- They were expensive to run because lots of management salaries needed to be paid- There was a longer chain of command with a possible negative impact on communication

In the present many businesses prefer to go with a flatter structure…

- There were fewer layers of management (this may make decision-making quicker)- Each manager has a wider span of control (therefore delegation is essential)- There may be increased responsibility for managers (however this may not always be welcomed)- There is greater independence for workers (they tend to enjoy the extra responsibility)- There is a reduction in overhead costs

Remember that there is no perfect organisational structure or span of control. What works for one business may be completely wrong for another.

Recruitment and Selection

Recruitment and Selection is the process of seeking prospective new employees or members for an organisation to fill open positions. It involves defining the job, attracting suitable candidates and selecting those best suited to fill it.

There are a number of reasons why a recruitment process may begin…

- Employees leaving jobs due to retirement- Promotions within the organisation (internal) or new employment elsewhere (external)- The need for additional workers due to growth, reorganisation or product development

The Recruitment Process

Establish the number and type of employees needed Usually done within a department in larger businesses and by a top manager or owner in smaller ones.

Carry out a job analysis for each vacancy to identify all duties and responsibilities involved.

Create a Job Description and Person Specification.

These documents are very important for both recruitment and selection as they are used to…

- Draw job adverts- Assess the suitability of candidates- Form the basis of interview questions

Job Description – Explains the nature of the job and often contains the following…

- The title of the job- Main duties and responsibilities- The Line Manager to report to

Person Specification – Outlines the abilities, qualifications and qualities required of the employee in order to carry out the job properly. The main features are…

- Educational and professional qualifications required

- The necessary skills or experience- Suitable personality of the character

Selection Process Techniques

Interviews – The most common form of selection. These can consist of a one-to-one interview or to a panel.

Benefits Drawbacks

Advertise the vacancy internally or externally to catch the attention of suitable candidates.

- Local and national newspapers- Online

Draw up a short-list of the most suitable applicants for interview.

Draw up a short-list of the most suitable applicants for interview.

Decide on the most suitable candidates using appropriate selection methods.

Appoint the successful candidate and inform those who have been unsuccessful.

Selection Process – Involves choosing applicants who are most closely matched to the job criteria.

They are relatively cheap to conduct Can be influenced by interviewer bias or prejudice

They allow info to be obtained by both sides

Test/Work Examples – These aptitude tests measure the level of ability of the candidate

Psychometric Profiling – These examine the personality and attitudes (for example: how well a candidate can work under pressure or their effectiveness as a team-player)

Assessment Centres – These are used to get more in-depth assessments of a candidates suitability by putting them into real-life role plays and simulations. Although generally effective, assessment centres are very expensive and tend to be used for filling senior management positions.

Internal/External Recruitment

Internal Recruitment – This where an employer recruits from within the workforce. It can be done by redeploying or promoting a worker from elsewhere in the organisation.

Advantages Disadvantages

More likely to be cheaper and quicker than external May not always be an option as there may not be enough people within the business

Promotions are motivational for current employees The current employees may not have required skills

There is often no need to induction training May result in stagnation as new ideas may not come

External Recruitment – This is where people are employed from outside of the business. Various methods of external recruitment can be used…

- Media Advertising- Job Centres- Recruitment Agencies

Advantages Disadvantages

There is a wider range of candidates to choose from Can be expensive and time-consuming

The candidate may already have the skills required so there would be no need for training

It can have a demotivating effect on current workers who did not get the promotion

When choosing the method of recruitment businesses must bear in mind the following…

- The cost of the recruitment method- The size of the recruitment budget- The location and characteristics of the likely candidates

Training

Training is work-related education where employees learn new skills or develop skills that they already possess. Types of training include…

- Induction TrainingThis is aimed at newly-appointed workers by helping become familiar with the business as soon as possible. This should help them become fully-productive faster. It often includes: Policy and Procedures, a tour of the organisation and details of the employment (holidays, sick leave, etc)

- On-the-job TrainingEmployees do not need to leave their workplaces as they get trained while carrying out their job. Methods may include: mentoring, coaching and job rotation. Workers will remain productive while receiving this type of training and it is usually cheaper, however the trainer must have skills.

- Off-the-job TrainingEmployees work their workplace in order to receive new instructions. This may involve using training facilities within the organisation or facilities provided by external organisations, for example: universities and independent training providers. This type of training allows the trainee to concentrate fully on learning instead of having to work at the same time, but a disadvantage is that it causes a loss of production.

Motivation

Taylor (Money is a motivator and workers should be constantly supervised)

The work of Taylor shaped the views of managers on motivation for most of the twentieth century and remains influential today. His ideas formed the basis for the mass-production assembly lines (like in car factories) in the twentieth century. Putting this scientific management into practice involves…

- Eliminating wasted time and resources in production- Closely supervising workers and controlling their methods and speed of work (possibly through the

use of a conveyor-belt system which dictates the speed they must work at- Introducing a Piece-Rate system where workers are paid for each unit that they produce

Taylor’s ideas to improve efficiency became known as Scientific Management. He believed that managers could find the best way to complete a job through observation. He set out a number of recommendations…

Taylor MayoMaslow Herzberg

- Managers should study the tasks being carried out by workers and identify the quickest way of completing each one. Any unnecessary tasks should be eliminated

- The skills of each employee should be matched to the task that they are assigned to- All workers should be supervised and controlled, and those who do not work efficiently are punished- Workers should be financially rewarded for being efficient

A number of objections have been raised concerning Taylor’s theory…

- The theory assumes that there is a scientific best way to organise production, but this does not account for different organisations and employees

- The approach treats workers as machines to be used and controlled, perhaps creating a bad atmosphere between workers and managers

- Money is not the only motivator, nor is it the most important for everybody. Taylor’s ideas ignore the personal and social needs of individuals at work

Mayo (Breaks, team-work and staff perform better if they have good relationships with managers)

Initial experiments suggested that regular rest-breaks boosted productivity. This led Mayo to call for more humane treatment of employees at work. Every change that Mayo suggested brought higher productivity. Mayo drew two conclusions from the surprising results of his workplace experiments…

- The importance of team-workThe experiments had led to groups of individuals becoming a team where members worked closely together. A sense of team-spirit motivated employees to work harder

- Managers to take an interestWorkers responded well to being observed. This suggested that managers who communicated closely with workers and showed an interest in them would be rewarded with higher productivity. This is referred to as the Hawthorne Effect

Mayo’s findings led to a number of practical conclusions for motivating workers…

- Getting the physical conditions of work and the financial rewards right is less important than getting the right social conditions (team-work and communication are essential)

- Giving workers the opportunity to be involved in making decisions and to be creative is more likely to motivate them than Taylor’s assembly-line approach

- Personnel departments that focus on the well-being of workers are central to business success

However Mayo’s theory has been criticised on at least two grounds…

- The experiments themselves were far from scientific. Only small groups of workers were observed and subsequent experiments have failed to confirm the findings

- Workers will not always share the goals of managers, despite their best efforts. Trade Unions may see these efforts as management attempting to fool workers into boosting productivity when there is little to gain for workers in doing so

Maslow (Believed in the Hierarchy of Needs)

Maslow suggested that all human beings have the same types of needs and that these could be organised as the Hierarchy of Needs. Physiological needs are at the bottom of the hierarchy (for example: food, water and shelter). Maslow believed that this was the most fundamental of human needs.

Once the needs of one level the hierarchy have been met it no longer remains a focus or motivation. Instead, it is the next level of the hierarchy that individuals seek to satisfy. Motivation stems from each individuals desire to have their next level of needs met.

Maslow’s theory has important practical implications for business…

- To motivate a workforce requires an approach that will identify the level of need of each individual- Each worker will first need sufficient pay to provide their basic physiological needs- Financial rewards alone will not motivate workers. Boosting esteem and developing talents will be

crucial, but without decent pay and job security they were worthless

Opponents of Maslow have found his theory unconvincing on several grounds…

- Any generalisation about ‘levels’ of human needs is bound to have exceptions. Businesses may find that they have workers who place little value on gaining praise or developing their potential

- Even if Maslow’s theory holds good, workers may not seek all levels of need within the workplace They may be satisfied with their wages alone from their job and get other needs from leisure time

- Matching rewards to needs for each and every worker is an impossible task in practice

Self ActualisationTraining, challenges and opportunities to develop skills

Esteem NeedsRewards for achievement (promotions and status)

Love and Belonging NeedsOpportunities for team-work and positive relationships

Safety NeedsHigh standards of Health & Safety and job security

Physiological NeedsDecent pay to enable needs to be met (food, water)

Herzberg (Motivators and Hygiene factors)

Herzberg’s results from an experiment shows that six factors, including achievement and recognition, were frequently mentioned as causing satisfaction at work. Other factors such as company policy and working conditions were mentioned as caused of dissatisfaction.

He used this research to develop the Two-factor Theory of motivation (motivators and hygiene factors).

- MotivatorsFactors that have the potential to motivate workers by providing job satisfaction. They include…

A sense of achievement Recognition of effort Interesting work Responsibility Opportunities for promotion

If a job includes these motivators, workers will want to work and will enjoy their work.

- Hygiene FactorsThe factors that can cause dissatisfaction are all related to the working environment. They include…

Company Policy Relationships with supervisors, managers and colleagues Working conditions Pay and status Security and job security

Herzberg believed that although these factors helped stop dissatisfaction, they will not motivate workers – this is down to the Motivators listed above.

Several practical conclusions can be drawn from the Two-factor Theory…

- To motivate a workforce a business must make sure that hygiene factors are being met- The motivators must be present (ensuring that the job is meaningful and interesting, making sure that

workers are trained to do their jobs well and that they have the opportunity to develop their skills)

Herzberg’s theory has encountered major criticisms…

- Research has failed to suggest that his theory is applicable to workers in every type of business- Some jobs, especially low-skilled ones, cannot easily be enriched, and workers may not seek

responsibility and advancement

Piecework

Piece-rate work is where workers get paid per unit they produce. There is no basic of shift-pay for this type of workers so there is no sick-pay, holiday-pay or pension either. Piecework is used mostly in manufacturing.

Advantages Disadvantages

There is hardly any supervision, just quality control at the end. If work isn’t acceptable the worker isn’t paid

Waste levels can be high and workers may put through bad work in order to get paid

Work is usually faster There is no incentive for good quality

Fast workers are rewarded with more money Workers may only work hard if they need the money (for example: near Christmas, summer holidays)

Workers may not want to change the way they work in fear of losing money

Performance-Related Pay

This is for employees who are considered to work above average. It is used ti recognise achievement.

Advantages Disadvantages

It encourages staff to work hard It may be difficult to measure if targets are achieved

Allows employees to work on SMART targets Rewarding individuals doesn’t promote team-work

Profit Sharing

This provides staff with a share of annual profit (John Lewis). It is seen as a reward rather than an incentive.

Advantages Disadvantages

Encourages staff to consider their contribution to the overall business

Profit given is usually a small amount and may be seen as a meaningless token of gesture

May encourage staff to try and cut costs for the business as they will receive more of the profit

If the business pays out large sums, it may affect dividends for shareholders

Fringe Benefits

These are other forms of rewards which are not direct money. Some examples include: company cars, gym memberships, staff discounts, health insurance and high pensions, etc.

These financial payments are designed to move workers into doing something (perhaps something that they don’t really want to do) but will do as the reward is too good to refuse.

Job Design

Job Design is the thought process of deciding which tasks each employee must do, what equipment they use, what decision-making power they have and whether they work alone or in a team, etc.

The aim for most employees these days is to create jobs with maximum scope for motivation. In the past, Taylor influenced job design with simple, repetitive tasks that were easily monitored (for example: working in a toothpaste factory).Nowadays, Herzberg has influenced Job Design which is associated with employee involvement, job enrichment and job enlargement.

Job Enlargement

This is the general term for anything that increases the scope of a job. Job enlargement is easier to modify than job design, and can be done in 3 ways…

Job Enrichment

According to Herzberg, enriching a job gives workers the opportunity to use their abilities. However, it can be difficult to enrich some jobs, for example: a supermarket worker.

Job RotationSwitching tasks of similar difficulty

Reduces boredom

Doesnt reduce receptiveness

Job LoadingIncreasing a job load (redundancies?)

Doing more of the same job

Job EnrichmentExtra responsibilities and challenges

Provides job satisfaction

Extra workload

Businesses may choose to enrich jobs by using Job Rotation (this can allow workers to cover for others, perhaps using multiple skills), or by organising workers in groups where there is an opportunity for feedback and improvement discussions.

Empowerment

This is the delegation of tasks which give workers the authority to manage large-scale projects. They can plan the work, organise the work and complete the work.

Advantages Disadvantages

It can give power and control to employees over their working-lives

Workers need to be trained and management should have confidence in their ability before empowerment

It is a reflection of the Maslow and Herzberg theories Some workers may not want empowerment

It should improve products and customer care as the decisions are coming from staff working directly with

the businesses customers

Team-Working

Team-working is the idea of organising employees into small or large teams in an attempt to maximum staff satisfaction and involvement. There are different types of teams, for example: functional teams (crew at McDonalds) and Geographic teams (IKEA Nottingham, Derby, etc).

Key features of team-working include…

- They may be multi-skilledEverybody can do everybody else’s jobs

- They’re working togetherThis helps to get things done faster

- KAIZEN GroupsThis is a continuous improvement (thinking of the future as well as the present)

However, if the group norms within the team are such that they disadvantage the teams efforts, it may be damaging for the business.

Job Design with Organisational Structure

In tall, hierarchical structures with many layers, the opportunity for empowerment is restricted. Most jobs in these organisations will be heavily supervised and at best, job rotation and small task-delegation may be all that is included in job design. In flatter structures with wider spans of control, it may be necessary to delegate tasks, include job enrichment and empower staff, as management may not be able to oversee all events.

Operations Management: Overview

Operations Management is turning a customer order into a delivery. It is the central business function from creating the product to delivering it to the customer.

Design – A product or service that meets the needs of a particular customer. This is where the Operations team work closely with the Marketing team.

Supply Chain – In the manufacturing process the heart of the operation will be in the factory, where a collection of materials and components are turned into a finished product.

Working with Suppliers – Very few businesses produce 100% of a product. Almost all suppliers do most of the operational work, so organisations need to coordinate all their suppliers and the quality of their work.

Managing Quality – This is not easy to define as many customers have different views on quality. There are certain basic objectives that should be met though…

- The product or service does what the customer expects- It should arrive on time and in good condition- It must last as long as the customer expects- Customer Service should be helpful and effective- After-sales should be effective

Using technology effectively – Technology evolves quickly. Within the Operations department the key requirement has been to find software that will satisfactorily manage the day-to-day processes.

Customer Service – This is an operational tool to improve the basic product for customers.

Customer Service

Customer Service is term used to describe all contact with a customer – both directly and indirectly. Effective Customer Service should meet or surpass expectations that customers have of the business.

Customer Service is usually delivered in the following ways...

- Face to face- On the phone/internet

The following are effective ways of meeting customer expectations…

- Train all staff to be able to provide the Customer Service level that the business hopes to achieve- Monitor and improve Customer Service and Quality standards

There are also some benefits of good Customer Service for a business…

- Customers should develop brand loyalty- Free word of mouth promotion- Increased efficiency

Quality Management

Quality is usually defined by a customer as many customers have different opinions of what quality is. However, to ensure basic quality a business must ensure that a product is fit for use and satisfies (or preferably beats) customers’ expectations.Quality management applies to both services and products and should always be an ever-rising target.

Quality Management is a highly competitive issue. In any market where a customer has a choice of different businesses, quality aspect is crucial.When a business is able to establish a reputation for good quality they will usually encounter the following advantages…

- Higher levels of repeat-purchases- Brand building- Able to enforce a Price Premium due to quality and the brands reputation- It makes products easier to place (for example: Cadbury’s will find it easy to have their new chocolate

bar stocked at Tesco due to how massive the brand is. A new, start-up business will probably encounter difficulty)

The importance of quality is related to the level of competitiveness in the market. If the competitiveness is fierce the quality of the product may help win the customer’s decision.

Quality Management should be very important to a business or they may encounter the following…

- There could be a loss of sales and/or brand reputation- Retailers may be unwilling to stock products- They may have to cut prices in order to get sales- A loss of customer confidence

The ideal scenario for a business is to handle quality problems before they reach the consumer. For example: businesses should be inspecting finished goods before they go on sale.However, although a small business may have the time to inspect each individual product, this is much harder for large businesses and so they have to take a more systematic approach like the following…

Prevention > Detection > Correction > Improvement

Total Quality Management – This way of looking at quality issues requires commitment from the entire business. The business considers quality in every stage of a product’s design.

Quality Control – This is based on inspection and is the traditional way for businesses to manage quality. A quality control inspector checks that the units meet minimum acceptable standards – this is usually every 100th

or 200th unit produced.

Quality Assurance – This is a system that assures customers that detailed processes are put in place to ensure the quality of their products. Raw materials are quality-checked as soon as they arrive and a documented system is put into place to cover all stages of the product’s production process.

Quality Management is very expensive, especially as workers are away from their jobs in training. It may take time to show and to benefit the business, and to be effective it must be a balance of cost and benefits.

Working with Suppliers

Suppliers are other businesses that provide products or services to a firm. The relationship with suppliers is likely to have an impact on the business. Operational success of a business demands…

- Customers will expect high-quality products- Products must be delivered to customers on-time- Products must be in the right quantities

Some firms may be both a supplier to another business whilst also having other businesses supplying them with products or services. There are 6 key factors to consider when choosing a supplier…

Cost – Cheaper costs usually mean higher profit-margins so the incentive to find a cheap supplier is important to any firm. The size of the business will also have an impact on the agreed cost.

Quality – There may often be a difference between the prices that a supplier charges and with the quality of their goods. The cheapest supplier may have a reputation for bad quality. These sorts of suppliers may have bad implications for the business in the future…

- They may ruin the brands reputation- They may produce shoddy goods which need returning

Reliability – If a supplier fails to deliver products on time an organisation may consider them unreliable as this could delay a manufacturing process or lead to a disgruntled customer. Most new businesses have to rely on a ‘word of mouth’ system of reputation to find out who is the best choice of supplier. Depending on the power and size of the business, there may be the possibility to impose sanctions and penalties on suppliers who are unreliable (for example: Tesco will punish Cadbury’s for delivering products late on a regular basis, and could even cancel their contract)

Frequency – It often depends on the type of business and the type of production system used, but more often than not frequent deliveries are needed from suppliers. If a business does rely on frequent supplies it may be a good idea to look for suppliers in a local area. This is important for the following types of business...

- Businesses that need fresh produce- Business who use the Just in Time production system (ordering products just before they are needed)

Flexibility – Organisations may order many different combinations and quantities of products, and so businesses will need to consider whether their chosen supplier can deal with these different orders. Some products (like Sun cream) are more sought-after at certain times of the year so a large quantity will be needed at once.

Payment Terms – Most business transactions are on credit (buy now, pay later) rather than in cash. By using this system, businesses have the time to sell the goods and make profit before having to pay suppliers. Agreeing on payment terms is usually easier for larger businesses than smaller ones.

Lead Time – This is the time a supplier takes between receiving an order to delivering the goods.Just in Time – This is where businesses order products just before they are needed.

Technology in Operations Management

Few businesses have the favour of being able to ignore technological changes, as they may discover that the products or services that they offer, and the processes used to create them, may no longer satisfy customers.

New ideas are being developed on a regular basis, either by new inventions or innovations of older processes/technology.

Businesses have seen technological change in almost every industry…Some new technologies (like the internet) have had a huge impact over almost all industries. Technological change can affect raw materials and components used to create products, the production process itself, or the business systems that either support the sale of products or allow services to be delivered.

The introduction of new technology can threaten to undermine the workforce…People issues! Employees may feel at risk of being replaced by machinery, automated systems or direct services provided by the internet. Businesses should ensure that they maximise the benefits of new technology whilst keeping the disadvantages at their lowest.

New technology may adversely disrupt the smooth running of a business…There will certainly be a period of transmission when introducing new technology into any business. In order to avoid problems with the workforce, businesses must ensure that they are involved in the change. Inevitably technology will change the way in which people work. This means that the business may need to invest in staff training so that employees can adopt the new necessary skills.

Benefits of new technology Disadvantages of new technology

New technology should increase efficiency and thus cost reduction, speed up manufacture, increase productivity and reduce the need for humans.

Anything that has not been tried and tested may fail. A business committing itself to new technology may

be prone to delays or breakdowns.

New markets and products can be discovered by using advanced technology such as the internet, thus extending a business’s access to customers globally.

New technology can cost a lot of money – not just for initial purchase and installation, but also for maintenance and the training of employees.

Technology may also go ‘out of fashion’ quickly and may need to be replaced with newer stuff.

Technology may improve communication which allows the rapid exchange of information.

Robots usually mean fewer jobs, bringing potential problems to wider society. This may cause conflict

between the management and workforce.

New materials and new production processes bring more reliable and better-quality products.

Technology may cause insecurity among the workforce. People affected may resist the

implementation of these new technologies.

Robots and automated systems can take over boring tasks which people don’t want to do, thus probably

doing a better job and increasing productivity.

The chance of errors during production is decreased so waste is reduced, thus saving costs for the firm.

Automated Stock Control Systems – These are based on laser-scanning bar codes.

- It allows the computer system to keep up-to-date records of stocks of each item- It can be used to reorder stock automatically – also by only reordering what it actually selling, thus

reducing costs- All the information is stored on a database

Advantages Disadvantages

It is a quick and easy way of keeping track It leads to a loss of jobs

It knows what is and isn’t selling

Reorders products when they’re close to sell-by dates

Computer-Aided Design – This system works digitally, allowing designs to be saved, changed and re-worked without having to start from scratch or having to produce expensive prototypes. It shows a 3D version of drawings and rotates to show the back and sides. It is also relatively affordable and hugely powerful.

- It can be linked to Computer-Aided Manufacture to provide accurate production- It is useful for unique designs- It increases productivity and rarely makes errors, thus reducing costs

Advantages Disadvantages

It improves productivity The software may be expensive

It is good for hard-to-make, unique designs It leads to a loss of jobs

Robotics

Advantages Disadvantages

They are programmed to do the same thing over and over again, so repetitive tasks are completed with

100% accuracyThey are expensive to purchase, install and maintain

They prove cheaper than people in the long-run (as long as they are used effectively)

They are inflexible and cannot be easily changed to switch jobs

There are many interesting robotic-related jobs They lead to a loss of jobs

Electronic Data Interchange

Electronic Data Interchange is a permanent link between computers on different sites, enabling specified types of data to be exchanged (for example: Heinz’s link with Tesco so they can keep track on soup sales)

- It encourages JIT operation as a much more feasible approach- It encourages cooperation between businesses and suppliers

Advantages Disadvantages

It improves communication between businesses It may lead to a loss of jobs

It saves time

Database Management – Communicating via a database is an ever-growing method. A database is a store of information that can be rearranged and sorted in numerous ways. They can store millions of customer details.

Organisations gather this information from…

- Customers filling in names and addresses when they make purchases- Warranty Cards- Loyalty Cards- Buying databases from specialist companies

If a business stores information on a database they must comply with the Data Protection Act 1984 and register with the Data Protection Registrar.

Databases are used for many reasons – Tesco tracks what customers buy so they can send Clubcard customers the appropriate deals and coupons. They may also be used for…

- Mailing lists- Junk mail- Telephone sales

Making Operational Decisions

Operations Management is the function of business that turns plans into delivered goods or services. Operational decisions are therefore the key to the success of a business on a day-to-day basis. Operational Targets are the numerical goals set by management at the start of the year.

Why is setting Operational Targets helpful?

- They give staff something to work towards- They give the organisation something to check its performance against- Achieving targets is a key indicator of successful Operations Management

Different businesses have different Operational Targets, but most include…

- Maintaining High-QualityProducing products as quickly as possible can lead to mistakes and wastage. In order to set targets for unit cost and capacity utilisation an organisation must consider quality

- Reducing Unit CostUnit Costs are the average cost per unit of output. It is calculated by Total Costs/Output. Unit Cost is of great significance to the competitiveness of any business. If Operations Managers can reduce the cost to levels equal or below that of the organisations main rivals, and maintain an appropriate level of quality, then profitability should be much higher.

How to cut Unit Costs…

- Cut Variable Costs and Fixed Costs- Increase Sales Volumes without increasing Fixed Costs

This can lead to…

- Businesses will be able to cut selling prices and increase demand- Or, businesses may be able to keep selling prices constant whilst increasing profit margins

- Increase Capacity UtilisationAll businesses have a maximum capacity output. 100% Capacity Utilisation is known as Full Capacity.

Most businesses do not operate at full capacity because it does not allow for…

- Maintenance or repair of equipment- Staff training- Time to discuss problems or new ideas

Capacity Utilisation is calculated by Current Output/Maximum Possible Output * 100 = %

Capacity usually depends on the businesses…

- Buildings- Machinery- Labour

It is much more difficult to identify a precise Capacity Utilisation figure for services because…

- It may take a different amount of time to see each customer (for example: in a doctors)- Demands may exceed capacity at certain times of the day- Most service businesses cope with fluctuating demand by employing part-time or temporary staff

It is also important to understand the differences between Fixed Costs and Capacity. Fixed Costs are fixed in relation to output – in other words, Fixed Costs do not change according to Output (for example: rent).

How to increase Capacity Utilisation How to decrease Capacity Utilisation

Cut Selling Prices Make redundancies

Increase demand Sell machinery

Create a Unique Selling Point Downgrade factory size

Change the Target Market

- Matching Production to DemandIt is very important that a business matches its production to its demand. If production is below demand the business will miss out on sales and therefore profits. Customers will also be disappointed and it may affect future sales as the reputation of the business will suffer.

However, if production is higher than demand then the costs of storing finished goods plus the cash ‘tied up’ in the products will also decrease profits.

What causes demand to fluctuate?

- The economy- Trends and fashions- Seasonal demand- Special occasions (for example: flowers on Mother’s Day)

Some of these are unpredictable though! Sales Forecasting will help production planning, however the fundamental issue is how to organise operations so that they can cope with these varying levels of demand. Here are some of the following methods businesses can use to achieve this…

Method Limitations

OvertimeThis increases output as staff are available for more hours, using resources which are already available

Staff are paid a higher hourly-wage, thus increasing Unit Costs. Workers may also purposely slow down

production so that overtime is offered.

Temporary ContractsPeople are employed to cope with higher demand

Recruitment and training costs money, and they may lack loyalty and commitment.

Part-Time StaffThese are called in to work at peak-times They may lack loyalty and commitment.

Sub-ContractingThe supplier will provide some of the goods that the

contracting business needs – usually temporary

It may be more expensive than producing the goods yourself. Quality Assurance also becomes harder to

monitor, so standards have to be agreed.

Managing Stocks EfficientlyStocks of both materials and finished goods may be

held back – this can act as a buffer

Holding stocks is expensive and carries an Opportunity Cost. Goods may become out of

date/out of fashion and will be perishable.

RationalisationThis is often concerned with the cutting-back of

production capacity in order to match lower demand-levels. This is likely to reduce Fixed/Variable

Costs and may include…

- Selling a factory, or part of it- Leasing out factory space- Selling second-hand machinery- Leasing machinery- Creating redundancies

Redundancies may reduce motivation/job security. Also, if capacity is cut permanently and then increases

in the future, capacity shortages will re-occur.

Organisations may find themselves with excess capacity if demand for their products slows down. If this is a short-term problem then this will hopefully resolve itself without any cause for concern. However, if the problem is long-term the organisation will seek to find ways to reduce its Maximum Capacity.

Long-Term Solutions Short-Term Solutions

Selling a factory or part of it Leasing out factory space

Making redundancies Leasing out machinery

Selling off second-hand machinery

Non-standard Orders – These are special, one-off orders which are usually different from their regular selling-price. Businesses should consider how to organise staff and machinery to cope with these.

Effective Marketing

Effective Marketing is when firms achieve sales and profit targets by convincing customers to return and buy products over and over again. Marketing is a business function that aims to…

- Identify customers’ wantsThe key ability here is to respond to customers’ tastes. It is usually developed from identifying an opportunity, listening to existing customers, or by formal Market Research.

- Satisfying customer’s wantsBy designing products and services which the customer wants.

- Produce a Marketing MixThis will hopefully satisfy customers’ wants whilst also creating profits for the business. This means not only getting the product right, but also its price, its distribution, and also making the customer aware that the product is in the right market (promotions!)

1. Identifying the Target Market

To really succeed, a business must know and understand the customers in the target market. What do they really want from the product? What is the satisfaction of having the product? Showing it off to their friends?

The business also needs to know the interests, lifestyles, ages, sexes and personalities of their potential customers (Market Segmentation).Having a clear idea of who is in the target market should mean that the market research can be much more focused. Quota Sampling can be used for this to great effect, whilst also saving money.Advertisement, promotions and sponsorship can be focused and this should save a great deal of money in the long-run.

2. Market-Orientated Marketing

This type of marketing is market-led rather than product-led, with the customer held at the heart of the decision-making process. Some businesses are still product-led (doing what is best for the production manager) and then try to sell the resulting product (often called the ‘hard sell’).

However, most businesses specialise in a certain field and then respond to customers in that particular field. Cadbury’s are strong in chocolate but still respond to their customer’s tastes in taste and the size of bars, etc.

3. A Coherent Brand Image

Firms that market their products well use an integrated Marketing Mix that creates an attractive brand image. Some businesses have developed brands that have been around for years, however it is important not to destroy the longevity of the brand by making too many changes.

To achieve this, products should be…

- Good products in the first place- Properly priced- Distributed well- Promoted in a way which attracts the Target Market

A strong brand means that customers are loyal to the product and therefore pricing can be pushed higher, as customers should pay for it.

Effective marketing should be a long-term philosophy, not a short-term way to boost profits. Exploiting customers’ price elasticity in order to higher prices is not a good idea!

Mass Marketing v Niche Marketing

Niche Marketing is tailoring a product to a particular type of customer (Segmentation) and promoting it to that precise Target Market. Mass Marketing is devising a product with mass appeal and promoting it to all types of customers.

- Mass MarketingThe benefit of a Mass Market product is the volume of sales that it can generate, therefore only a small Contribution Per Unit is needed in order to make it profitable.

However, the drawback is that there are likely to be lots of substitute products available, so mass market products can sometimes be relatively Price Elastic. However, it does not always mean cheap prices (for example: there are lots of Smart-Phones, but Apple’s aren’t cheap – maybe they used Product Differentiation?)The ultimate aim of Mass Marketing is the creation of a generic brand. For example: Coca-Cola meaning all Cola products, Hoover meaning all hoover products, etc.

- Niche MarketingThis is a small segment of a much larger market, where products are designed to appeal to a very specific target. These products are usually distinctive and sell in small volumes. They are also usually distributed in specialist retailers or via the internet. However, the niche product must be large enough to make profit!

Small Niche Operators usually lack the Economies of Scale, so this usually means they cannot compete on price. These products are less price-sensitive and can be charged at higher prices as the niche market is prepared to pay.

Are Niche Markets safe-havens for small businesses?In the past, large businesses stuck to Mass-Market products and ignored small gaps in the market. This was because it was not profitable to go for short, small production runs.However, technology is changing this, so large firms can build the sales volumes they need by producing a large variety of low-volume, Niche Market products. Therefore, small producers are coming under threat from larger companies that have begun to target their niches.

Fortunately, small firms are often quicker to respond to market changes than larger businesses. When Pepsi bought PJ Smoothies, Innocent moved quickly and kept the majority of its market share.

Business To Business Markets – These are usually not Mass Market products or services and are aimed at the business market, for example: Industrial Plant equipment and business banking.

Consumer Markets – These are Mass or Niche markets in goods and services bought by customers who consume the product or service.

Marketing Mix

A Marketing Mix is the balance between the four main elements needed to carry out a Marketing Strategy (the plan to achieve an objective). It consists of the four P’s…

- Product – The right product or service on offer to the Target Market- Price – The lowest price doesn’t always win the customers- Place – Distribution to customers must be perfect- Promotion – Advertising on TV, Radio, the Internet, etc.

Every business must use the 4 P’s in an integrated way which balances costs and effectiveness.

The Product is the key factor in most cases…No amount of Marketing will make a poor product succeed! When selling to the consumer, Market Branding is very important, so careful promotion in creating the brand and having it available at the right time and place is essential. With business-to-business products, reliability and quality may be much more important than glossy promotion. In other markets, price is very important.

Influences on the Marketing Mix – what the Mix depends upon…

Finance…The Budget given to the Marketing Department is dependent on what the business is hoping to achieve. However, this budget must be divided between the 4 P’s. In the development stage, money also needs to be invested into Product Development. Distribution and Promotion will take most of the budget when introducing a product to the Market Place.

Technology…Product Development must move with technology. As well as spending millions on TV advertising, businesses should also consider other media advertising such as Facebook, Google and YouTube. Placement decisions are also important here as more and more customers are beginning to shop online.

Market Research…If finance and technology are important to a successful Marketing Mix, then Market Research is vital! It is important that this is ongoing to enable feedback of the Marketing Mix.Product – Is the business still producing what the customer wants? What is customer feedback? What are competitors doing?

Price – Do different economic circumstances mean that prices need changing? What are competitors doing?Place – Are new Markets available to sell the product in? Where do competitors sell?Promotion – Is the money that the business is spending promotion actually reaching the Target Market?

Issues for analysis with the Marketing Mix…

- The Mix depends on the budget available, the competitive situation and the objectives- Although the product is likely to be the most important aspect of the Mix, every case is different. Coca

Cola often loses out to Pepsi on taste tests, yet they sell more than Pepsi does in nearly every country in the world

- This Mix must be integrated and matched to the Business Plan and also meet the Objectives

Marketing Mix – Product

A Product is an item or service that is bought and sold in a market. In order to be successful, products must not just satisfy customers but also delight them!

The major influences on the development of new products are…

- New Technology- Market Research- Product Extensions- Similar Products (“me too” products)

In order for the above points to be effective they have to be noticed, combined and acted upon. This is where the entrepreneurial skills of managers and owners come into play. In many cases it is vital for a business (except in a “me too” situation) to gain First Mover Advantage.Product Differentiation and a Unique Selling Point will also increase popularity of products. These are products which are seen to have unique features which similar products do not possess.

Issues for Analysis for the Marketing Mix – Product…

- Firms operating in competitive markets need to sell products that have a strong USP if they want to keep Market Share

- Product Differentiation reduces Price Sensitivity- Product Differentiation also boosts Added-Value as it can make Premium Prices possible- However, PD and USP are rarely permanent. Changes in customer tastes and technological advances

will wipe away the difference in products

Marketing Mix - Product Life Cycle

A Product Life Cycle is the theory that all products will follow a similar pattern over time – development, introduction, growth, maturity, (sometimes Market saturation) and finally decline.

It is important to realise that a Product Life Cycle can be drawn for a brand or for a generic product, for example: Chocolate is generic whilst Cadbury’s is a brand. It is important for managers to bear both in mind before making any decisions.

Many products are rejected at the Development stage – for example Dragons Den turn down hundreds of ideas. Of the ones that are launched, many fail to reach their targets and are withdrawn before hitting the Growth stage.

What is the Product Life Cycle?It helps managers plan Marketing Activities as the Marketing Mix will have to be adjusted at different stages of the cycle. Unfortunately managers know that the length of each stage of a Product’s Life Cycle cannot easily be predicted. For example: clothes, films and music often go in and out of fashion!

The Product Life Cycle and Capacity – An Operational Management Issue…When planning the launch of new products, managers must bear in mind the capacity of the business – will existing products be affected by the new product’s demand? If they cannot cope with Capacity, potential sales may be lost and the Marketing work will have been a waste.

The Product Life Cycle and Cash Flow – A Financial Issue…In the Development stage Cash Flow will most probably be negative – especially in smaller businesses. The firm will be relying on cash from other products or banks in order to support the Research and Development of the new product.

Introduction Stage – Cash will start to come in, but very slowly. Outgoings will be spent on heavy promotion and production, so Cash Flow will probably remain negative.

Growth Stage – A Breakeven Point should hopefully have been achieved by this point, and Cash Flow should be positive. It is important that Cash Flow is managed carefully!

Extension Strategies…Once a product is in the Growth stage, managers will encounter new problems. How long will the product’s Life Cycle be? When will it reach the Maturity, Saturation and Decline stages? Because of this, they will need to think about extension strategies…

- Modifying the Product slightlyNew flavour? New shape? This could help increase the product’s Life Cycle

- Targeting a new segment of the MarketOverseas? Teenagers? Aiming the product at a different Target Market should also extend the Cycle

- New uses for the product

Is a Sales Decline inevitable?While this may be true for the advancement of some technology-based products, for others it may be down to poor marketing. Effective Extension Strategies can keep products going for longer. Companies like Monopoly and Kit Kat keep on releasing new versions of their product to increase longevity.

It is also important to realise that it is extremely difficult to predict when these changes to the Life Cycle are going to happen. Managers should try to influence the future to shape the Life Cycle of all the products that the business produces.

Marketing Mix – Product Portfolio Analysis

A Product Portfolio Analysis examines the existing position of all of a business’s products. It allows the firm to consider its existing position and plan what to do next. The best known way of considering the portfolio of products is through the Boston Matrix.The Boston Matrix shows the Market Share of each product and the growths of the markets in which they operate. By highlighting the position of each product in terms of market share and market growth, a business

can analyse the existing situation and decide where the marketing effort (and cash) can go.

Cash Cows – These are products or businesses that hold high shares of slowly growing markets

Question Marks/Problem Child – These are low shares of rapidly growing markets

Stars – These are high shares of growing markets

Dogs – These are high shares of stable or declining markets

The Cash Cow…The blue circle has a high share of a low-growth market. The size of the circle depends on the turnover of the product. This type of product generates high profits and cash for the business as sales are high while promotional costs per units are low.

Question Mark/Problem Child…The orange and red circles have a low market share in a high-growth market. The market is growing fast and the product could provide high returns if it can gain greater market share. It may grow into a Star product or fall into a Dog product.

Star…The yellow circle has a high market share in a fast-growing market. This product is the firms “star” product. It is doing very well and must be protected from “me too” products.

Dog…The green circle has a large market share in a low-growth market. Although the market is small, the product holds some appeal to the firm. Dogs come from Question Marks/Problem Child’s that have run their course.

The purpose of Product Portfolio Analysis…Marketing managers can examine the firms existing products and then plan what to do next.

- Building the productBusinesses can invest in promotion and distribution to support the product (Question Marks and Stars)

- Holding the productBusinesses can maintain promotion and distribution to keep their position (Stars and possibly Cash Cows)

- Milking the productBusinesses can take the profits from Cash Cows to support other products

- Divesting the productThis is when businesses get rid of products (Dogs and Question Marks/Problem Child’s)

Obviously the decisions above depend on the analysis of the products in the first place. If the majority of firms are Cash Cows, Research and Development spending needs to be a major part of the decision, as they will eventually turn into Dogs.

However, if the majority are Question Marks, this is when difficult and risky decisions have to be made. Product Life Cycles usually follow the pattern of Question Marks -> Stars -> Cash Cows -> Dogs. Bear in mind though that these models do not tell the marketing manager what to do. They must be interpreted and acted upon, and do not guarantee success.

Also, remember that Life Cycles are becoming shorter and shorter due to technology and the levels of competition in most markets.