Student name/ ID
Principles of Management
A case-led introduction to the environment,
functional areas and interactions involved
in everyday business.
Professor Karin McDonald
Office: Room L513
https://piazza.com/dongguk/spring2014/dba200107/home
BED01 Professor K.McDonald
Contents
BED01 Professor K.McDonald
Contents
Table of Contents
Introduction i
Unit 1: Business Basics I 1
Unit 2: Business Basics II 11
Unit 3: The Operations Department 23
Unit 4: The Marketing Department 35
Unit 5: Supply Chain and Channel Management, Category Management, etc. 46
Unit 6: Reaching Global Markets 56
Unit 7: Corporate Organization and Planning 68
Unit 8: The Finance Department 80
Unit 9: The Accounting Team and Financial Statements 94
Unit 10: The Human Resources Department 112
i
Introduction
Welcome to POPCO
For the purpose of this class, you should now consider yourself an intern at the
fictional manufacturing company, POPCO. POPCO is a Korean-based toy company
that started in the 1980s. They make a variety of toys and traditional Korean
games. Their main products are soft toys (in English language, “stuffed animals”).
They have recently launched a product called Clucky Chicken®. Clucky Chicken is
an “artificially intelligent” chicken soft toy. It relies on basic computer
programming via a computer chip inside the stuffed toy to interact with
consumers. POPCO launched the Clucky Chicken toy to compete with the wildly
successful Zhu Zhu Pets™ line of toy hamsters.
Class discussion and exercises will focus on POPCO to describe theories and
principles. Your job as an intern is to participate in helping the company make
good decisions, considering the new theories and principles you have learned.
Later, you will spend a week or two learning about the way each different area of
POPCO’s business works, including the types of jobs in each department, and
their responsibilities and activities. We will discuss in class how these jobs,
responsibilities and activities might be different in different kinds of companies.
POPCO®
Worksheets
The purpose of worksheets is to help you check your understanding of the
concepts and skills in the reading, so that in class we can demonstrate and
practice applying that learning. Worksheet problems and questions are very
similar to those on the quizzes, although the quiz problems and questions are a
little bit harder.
Ethical questions
Included in this CP are questions that raise ethical issues. Ethics are a key
consideration of the global business environment and interactions within and
without a business. Ethics are more than just corporate social responsibility,
though. We will discuss ethical issues in business throughout the course as time
allows. Ethics-related questions are marked by a Dongguk lotus emblem:
Terminology
Like any field of study, business has its own jargon, and requires learning a lot of
vocabulary. To avoid confusion where the business meaning of a common English
term may be different from the definition you know, or where common usage of
a business term may lead to confusion, this CP includes common terminology
explanations marked with a speech bubble:
1
Unit 1
Business Basics I
Learning objectives of this unit
In this unit you will learn the following concepts:
What is the goal of a business? What are the resources it uses? (in class: resource diagram)
What is profit, and who receives it? (in class: profit calculation)
What is a competitive market, and how does supply and demand work? (in class: graphing supply and demand)
How do businesses interact with households and governments (in class: circular flow diagram)
with regards to resources?
What trends are common to competitive market economies? (in class: productivity calculation)
What are economies of scale, and how can a company get them? (in class: economies of scale diagram)
2
Unit 1 Vocabulary
Factors of production (생산요소): Things of economic value needed to produce
goods and services
제품이나 서비스의 생산에 필요한 자본이나 노동 등의 요소
Net Profit (순이익): The money a business earns when revenues are greater than
expenses
총 이익에서 원가를 차감한 뒤에 남는 이익
Revenues (수익): The money a business earns from activities like selling goods or
services
영업활동 과정에서 상품의 매출액과 서비스 제공을 통해 얻어지는
경제가치로서 자기자본을 증가시키는 이익
Expenses (비용): The economic costs that a business incurs through its
operations in order to earn revenues
기업이 수익을 창출하기 위해 운영을 통해 부과하는 경제적 대가(원가
Supply and demand (수요와 공급): Supply is how much quantity that sellers in
the market can offer of a specific good or service at each of various prices, and
demand is how much quantity of a good or service buyers are willing to buy at
each of various prices in that market.
수요: 경제재 또는 용역에 대한 인간의 욕망, 청구/ 공급: 어느 제조업자 또는
판매업자가 판매에 제공하는 경제재의 양, 소모품
Households (가구, 가족, 가정): The population of an economy that consumes
goods and services and also own and contribute other factors of production
가구는 개인으로 구성되며, 제품 및 서비스의 소비자일뿐만 아니라 생산 요소
일부의 소유자
Stockholder (주주): A person who owns stock in a corporation
주식회사의 주식을 한 주 이상 소유한 법적 소유자
Stakeholder (이해당사자): The different people who are affected by an
organization’s activities and decisions
기업의 활동이나 정책에 의해서 이익 또는 손실을 입게 되는 모든 사람들
Productivity (생산성): The amount of output produced by a given amount of
factors of production input; often measured in quantity per unit of time.
주어진 생산 요소를 투입하여 생산해낸 결과물의 양
Economies of Scale (규모의 경제): The cost advantage that arises with increased
output of a product. For many (but not all) firms the greater the quantity of a
good produced, the lower the per-unit fixed cost because these costs are shared
over a larger number of goods.
생산요소투입량의 증대에 따른 생산비 절약 또는 수익향상의 이익
Specialization (특화): A method of production where a business or area focuses
on the production of a limited scope of products or services in order to gain
greater degrees of productive efficiency.
최대한의 생산 효율을 얻기 위한 생산활동의 분업
Growth (Globalization) (성장 (세계화)): The tendency of investment funds and
businesses to move beyond domestic and national markets to other markets
around the globe, thereby increasing the interconnectedness of different markets.
다양한 시장이 상호 연결되어 투자 기금과 기업들이 세계의 다른 시장으로 움직이는
과정
3
What makes a “Business”
There are many ways to define business. One way is to combine the purpose of
business in a definition with the resources required by business activities, and the
goal of those activities. Below is a common definition of business.
Business is an organized effort to combine and manage resources in a
profitable way in order to produce products and services that satisfy the
needs of customers.
Purpose: The definition of the purpose of business has changed over the years
with changes in economic and business thought. However, most people today
define the purpose of business as satisfying the needs of customers by producing
and selling products (also called “goods”) and services.
Resources: No matter what type of country or political system you are working in,
business activity requires the organization and management of resources.
Generally, you can categorize resources as material, human, financial, or
information resources.
What are the specific resources a toy company requires to produce and sell toys?
In economics class, you probably learned to remember the categories of “land,
labor, and capital” resources, also called factors of production since they are
required to produce goods and services. Sometimes these are referred to as
factor inputs.
Historically, different theorists have emphasized different factors of production
when considering what makes a strong national economy. With increasing study
into the factors of production and political economy, academics today also
include the categories “knowledge / information” and “entrepreneurship” as
important factors of production.
More and more, technology is also an important factor of production. People still
measure the economic strength of a country according to the factors of
production it has and how the country’s political system manages those resources
to meet the needs of its own customers: society.
Goal: Most people consider that the goal of business is to make a profit. But
many businesses do not always make a profit every year. And some businesses
are started to make a profit for some owners this year, but do not have the
resources or management to be successful long-term, creating losses for often
different owners in future years.
The general term profit simply means that, in a given time period, a business’s
sales revenues are greater than its expenses. Sales revenues minus expenses
equals profit.
How would you calculate profit for your own activities?
People often use the general term “revenues” instead of sales revenues.
There are many words and phrases that mean the same as “profit”: earnings,
income, and “the bottom line” all mean profit (specifically net profit). But be
aware – the terms operating profit and gross profit represent different amounts.
We will learn more about these terms in the accounting unit.
Who gets the profit? Profit is often invested back into the business. It can also be
distributed to owners of the business. Most people think of business owners as
those who manage the business day-to-day. But this is not typically the case. Any
person or group that invests in a business is an owner of that business. Typically
they give money to the business in exchange for ownership, or perform some
other valuable service. For publicly traded companies, these people are referred
to as stockholders. Don’t confuse this term with the very similar term
stakeholders. A stakeholder is anyone who is affected by a business’s activities.
Who are all the stakeholders in Dongguk’s business?
4
Notice that the kinds of needs customers might have are very different, and
there is not a distinction between a “need” and a “want”, or between a true need
versus an impulse. Is the need to survive from starvation the same as the need to
have a fashionable handbag? In its definition and response to “needs”, business
treats both the same: an opportunity for activity and profit. Are there needs that
products, services and business activities do not satisfy well? Is profit the best
motive for all of society’s needs?
The simplest business interaction: a market
With the definition of what a business is, we can review how a business interacts
with the world outside. The typical way for this to happen is in a market. A market
is a medium that allows those that supply products and services (also called
“producers”) to find and transact with those who demand them (“buyers” or
“customers”). Supply and demand in a competitive market is the fundamental
theory of modern economics.
In economic terms, supply and demand refer to quantities: the supply of a
product or service is the quantity that suppliers are willing to sell at each of
various prices, and the demand is the quantity that buyers are willing to purchase
at each of various prices. If, however, economists talk about “demand” alone they
are referring to the relationship of price and quantity demanded, not just
quantity.
Why do we say “at various prices”? Because in the economics of supply and
demand we speculate on how much producers and buyers would transact at not
just one but at many prices. For producers, they would sell more at a higher price
if they could, and fewer at a lower price. But for buyers, the opposite would likely
be true: the lower the price, the more buyers there would be demanding the
product or service, and lesser and lesser demand as the price increased.
This assumes that producers and buyers make rational decisions in their selling
and buying activities, which many behavioral economists now recognize is not
strictly true. But in principle, there is a theoretical selling / buying price mismatch
between producers and sellers at most quantities – imagine people walking away
from making deals. In fact, in a general supply and demand market, there is only
one price/quantity point that truly satisfies both producer and buyer at the same
time – the equilibrium, or market price. And according to economists, the forces
of supply and demand in a simple free market will guide the price and quantity to
that market equilibrium.
Too much quantity of a good will drive down prices, and not enough supply of
what buyers want will drive up prices that buyers are willing to pay. Note that no
matter whether there is a shift in supply, demand, or both supply and demand,
the market will adjust to an equilibrium price.
As this is an introductory course, we will not cover topics related to micro or
macroeconomics in depth. If you want to pursue any of these topics further or in
theoretical depth, you can review macro and microeconomics.
What happens when a business has too much (a surplus) of products to sell?
What happens when there is not enough (a shortage) of a product to buy?
The forces of supply and demand are credited in classical economics with driving
the quantities sold and prices paid in markets. In truth, many forces can impact
the prices charged (and paid) in markets, especially in mixed market economies
like Korea’s. But for markets to work effectively, buyers and producers must have
some freedom in making choices regarding their business activities, and they
must be able to compete with other producers or other buyers to make those
transactions.
Some theorists believe that developed societies are now too dominated by
the concept of “the market.” Thinkers like Harvard’s Michael Sandel believe that
5
“markets” should be a tool of society for responding to specific needs or
problems. Not the purpose of societies. What do you think?
People often use the phrase “the market” to describe the stock market, rather
than product or factor markets. Stocks represent quantifiable ownership of
businesses. They can be bought and sold like other goods and services for publicly
traded companies.
Markets, buyers and sellers:
the Circular Flow
A simple way to understand the role of business around you is to look at the flow
of economic value that is transacted in markets to and from the main consumers
(buyers – “demand”) and producers (sellers – “suppliers”) of the factors of
production, products and services. Using very general terms, the primary
consumers and producers include businesses (also called “firms”), governments,
and households. People refer to these as the main sectors in an economy.
In a society who are the “buyers” and who are the “sellers”?
One way of categorizing markets is by what they sell and for what purpose:
factor or resource markets are primarily for the buying and selling of the factors
of production. This kind of market transacts the inputs for creating other products
and services. It’s not only for things like raw materials, though; it also includes
things like labor wages, the cost of finance, and other factors of production from
the previous section. Another kind of market is primarily for the buying and
selling of finished goods and services. These product markets deal in the outputs
of economic activity.
For example, individuals in a household provide their working time in exchange
for wages in a factor market. They then use their wages to buy finished goods and
services to satisfy their needs from product markets.
Students often overlook the role of government in economies. Governments are
often the biggest consumers in factors markets and in product markets, but they
also are producers in both markets as well.
Furthermore, remember that the flow of transactions and economic value is
ongoing and interdependent. In other words, one sector of the economy will
affect the other sectors if it experiences change. Besides competition for scarce
resources, the primary cause of change affecting the sectors of an economy and
the markets through which economic value flows is the business environment.
Governments are supposed to voice the needs of society as a whole. As a
“customer” of firms in product and factor markets, do governments do a good job
representing the needs of societies? Would individuals do better representing
their own interests directly?
Three trends of competitive markets
Three key trends of competitive market economies that shape business are
productivity, specialization, and growth (which these days means globalization).
Supply and demand market forces, the changing external environment (see next
unit), and the interdependence of the government-household-business flow
require that businesses constantly adapt. To adapt most effectively, businesses
follow one or more of these trends.
Productivity is simply the goal to be most efficient at producing and delivering
products and services. It is typically measured in the product or service output of
a business, workforce, or worker per unit of input (sometimes called factor
inputs), usually time. Businesses can increase efficiency by lowering costs of
resources (called factor inputs), or increasing the amount of output given the
same level of factor input.
6
There are many ways to increase productivity or the rate of output. For example,
you could improve the way tasks are completed, or automate tasks using
machinery. Rapid productivity increases can often lead to layoffs and increased
unemployment unless demand also increases at the same time.
Another key way to increase productivity is to reduce the cost of factor inputs.
Often businesses achieve input cost savings by negotiating with multiple suppliers
for the best value.
In terms of increasing productivity through reducing the cost of inputs, not all
input costs are the same. Some input costs rise and fall with the amount of goods
or services produced, while some costs are required no matter how much output
is produced. Costs that rise and fall with the level of output are variable costs
(they vary with production), and those that do not change no matter the level of
output are fixed costs. Note that these are general terms and not related to
accounting expense categories.
As a company produces and sells output (products and services) in the market,
the fixed costs are spread over the number of products or services sold: the more
output sold, the less the fixed cost represents as a percentage of the total unit
cost of each product or service. In other words, the more a company sells, the
more profit they can make per unit of output sold. This is referred to as
economies of scale (economies refers to cost savings, and scale refers to the large
amount of output), and is one main contributing factor towards the drive towards
productivity and growth in competitive markets.
http://www.investopedia.com/video/play/what-is-economies-of-scale/
Note that at a certain point, theoretically companies also experience
diseconomies of scale, in other words when producing additional units actually
increases the cost per unit of production.
Specialization is the trend towards producing a limited scope of products or
services to achieve greater production efficiency. Specialization can refer to labor
specialization of a job or task, or of a company’s output, or a nation’s output. The
drive to specialize is a result of comparative advantage, where the opportunity
cost for one group to produce one item is lower than to produce another item,
when compared to the opportunity costs of another producer. By each group
specializing, the whole system is more productive.
Companies that specialize increase their knowledge and experience, which
increases their productivity and negotiating power. However, companies that
specialize without continuing to look at the business environment and
competitive forces can quickly become insular (inward-looking) and
uncompetitive. Larger companies may combine many different specializations
under one corporation or group of companies (called a conglomerate) so that
they can earn profits from one business area while another business area is
adapting and may be less profitable or competitive. Conglomerates can use many
different resources from all of their companies to balance their resources.
Growth is the result of the trend toward productivity (including economies of
scale) and specialization (including the trend towards creating large
conglomerates). Growth enhances a company’s ability to gain economies of scale,
increases their negotiating power, and gives the corporation or conglomerate
more ways to balance revenues and losses across companies and business areas
among other advantages.
These days, with improved communications and logistical infrastructure for things
like shipping and cargo, growth usually means globalization. Globalization simply
refers to a business operating in global resource and/or factor markets.
Theoretically, a company that can operate globally is likely to be much more
competitive than a company that is limited to local resources and markets. Small
and medium sized companies must find ways to specialize to meet local demands,
or find assistance in reaching global factor and product markets.
7
What are the negative aspects of globalization in your mind? Is it possible for
a company to not globalize and remain competitive? How?
Summary: Business Basics I
In this unit you have learned about:
The goal of business and the resources it uses
The definition of profit, stakeholder, and stockholder
The equilibrium price nature of competitive markets
The interdependent flow of value in society between businesses,
governments, and households
The market economy trend towards productivity, specialization, and
growth
If you are unfamiliar with microeconomics (including the basics of supply,
demand, market equilibrium, comparative advantage, specialization, etc.), I
strongly encourage you to view the videos at the link below (Korean
subtitled!)
https://www.khanacademy.org/economics-finance-domain/microeconomics
8
blank page for your notes
9
Worksheet 1 (front)
Matching: Match the POPCO resource with the resource category that applies.
You can choose more than one kind of categorization.
a) Land b) Labor c) Capital d) Knowledge/Information e) Entrepreneurship
f) Information g) Material h) Financial i) Human
1)___ Fuzzy yellow material to make Clucky Chickens®
2)___ The minimum wage in Korea
3)___ Market price survey of artificially intelligent toys for next Christmas
4)___ Interest rates
5)___ The availability of factory real estate plots in Korea
6)___ Our factory buildings
7)___ Initiative by our marketing team to crowdsource toy ideas
True or False
8)___ Profit is the same as Gross Profit
9)___ Sales revenues minus the bottom line equals earnings
Fill in the blank
10) Another name for an owner of a publicly traded business (ownership through
investment or providing another valuable service) is a ___________________.
Circle the best answer
11) If the quantity supplied of toys stays the same and the quantity demanded
increases, prices will go: up / down
12) If the quantity demanded for board games decreases the equilibrium price will
eventually go: up / down
13) Name one reason why toy demand quantity might go down:
______________________
Multiple choice. Circle the one best answer
14) Productivity is generally measured as:
(a) output / input
(b) hours per product
(c) costs / revenues
(d) cost / worker
15) Economies of scale are achieved by:
(a) Reducing the per unit productivity
(b) Reducing the variable costs to produce each product
(c) Spreading the fixed costs of production over many units
(d) Spreading the variable costs of production over many units
True or False
16) ____Specialization benefits larger companies because more specialized areas
make them more profitable.
17) ____One way a medium size company like POPCO can compete against giant
globalized toy conglomerates is to specialize in high quality stuffed animals or
get support to sell overseas from the Korean government.
18) On the next page, map all of the stakeholders in POPCO’s business you can think
of, and the resources we transact with them (buy and sell). Assume we sell our
toys in the EU, North America, and Korea, and that our main factory is in Korea.
10
Worksheet 1 (back)
Map all of the stakeholders you can think of for the POPCO business. Do we
transact (buy or sell) with all our stakeholders? _______ (yes or no)
Note the resources we transact with stakeholders we do buy and sell with.
11
Unit 2
Business Basics II
Learning objectives of this unit
In this unit you will learn the following concepts:
What are the environmental forces that affect business? (in class: forces discussion)
What is Gross Domestic Product (GDP)? (in class: example using flow image and formula)
What is the business cycle, and what happens during different phases? (in class: GDP x time graph, body analogy)
How do governments and financial institutions respond to change? (in class: fiscal and monetary policy problem)
What is the social responsibility of business in a competitive global market? (in class: review of flow model versus time, GDP & standard of living, goals)
12
Unit 2 Vocabulary
GDP(국내총생산): The monetary value of all the finished goods and services produced within a country's borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments, and exports, less imports that occur within a defined territory.
한나라의 국경 안에서 일정한 기간(보통 1 년)에 걸쳐 생산한 재화와 용역의
부가가치 또는 가계,대중 소비, 정부 경비, 투자와 수입비용을 뺀 수출 등을
화페단위로 합산한 것을 말한다.
The Business Cycle (경기변동): The recurring and fluctuating levels of economic activity that an economy experiences over a long period of time. The five stages of the business cycle are growth (expansion), peak, recession (contraction), trough and recovery.
경제 활동의 반복적인 변화. 확장, 절정, 침체, 골, 그리고 회복으로 구분되어 있다
(Price) Inflation (인플레이션): The rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling.
화폐가치가 하락하여 물가가 전반적, 지속적으로 상승하는 경제현상
http://www.investopedia.com/video/play/what-is-inflation/
Deflation (디플레이션): A general decline in prices, often caused by a reduction in the supply of money or credit. Deflation can be caused also by a decrease in government, personal or investment spending.
경기가 하강하면서 물가도 하락하는 경제현상. 정부,개인 또는 투자 소비에 의해
유발되어 진다
Monetary Policy (화폐 정책): The actions of a central bank, currency board or other regulatory committee that determine the size and rate of growth of the money supply, which in turn affects interest rates. Monetary policy is maintained through actions such as manipulating the interest rate, buying or selling government securities, or changing the amount of money banks need to keep in the vault (bank reserves or deposit ratios).
중앙은행이 이자율에 영향을 끼치는 통화 공급량의 크기와 성장률을 결정하는 정책.
이자율 증가 또는 은행 지급 준비금을 통하여 유지된다
Fiscal Policy (재정 정책): Government spending policies that influence tax rates, interest rates and government spending, in an effort to control the economy.
경제를 조정하기 위해 세율, 이자율과 정부 지출에 영향을 미치는 정책
Standard of living (생활수준): The level of wealth, comfort, material goods and necessities available to a certain socioeconomic class in a certain geographic area,
often measured in GDP per capita 사람들이 자신이 보유한 돈을 가지고 살 수
있는 제품과 서비스의 양
Quality of life (삶의 질): In addition to material well-being it includes such intangible things as the quality of the environment, national security, personal safety, and political and economic freedoms
물질적인 요소 뿐만 아니라 무형적인 환경, 국가적 안보, 개인의 안전 그리고
정치, 경제의 자유의 행복수준
Social responsibility (사회적 책임): The recognition that business activities have an impact on society and the consideration of that impact in business decision making
기업의 활동이 사회에 영향을 끼친다는 사실을 인지하고 이를 의사 결정에
반영
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The business environment: force for change
The business environment – the external forces affecting business markets,
activities and performance – is a multi-layered, always changing setting in which
business must adapt in order to compete. Particularly in a global business
environment, environmental forces may change significantly and often. These
forces greatly affect the markets and circular flow of value in economies.
Types of environmental forces affecting business include: demographic trends like
birthrates and living locations; social customs and cultural norms; laws and
regulations; global economic conditions like financial conditions and currency
rates; security and law enforcement conditions; the political situation;
technological innovations and availability; ecological environmental conditions;
public opinion; and ethical considerations.
You will often be asked to analyze “environmental trends” or “the environmental
forces” affecting a business, because they can so quickly and significantly affect
the markets and activities of business. This is often referred to as PEST analysis,
an acronym for Political, Economic, Social, and Technological forces. There are
several environmental forces beyond those four. Some people remember them
with STEEPLE – including “Ethical”, “Legal” and “Ecological” forces.
What are some specific environmental forces that affect POPCO as a toy business?
People often use the phrase “the environment” to describe the external
context of the activities they are talking about, rather than the more common
meaning about the ecological context. In our class, when we discuss “the
environment” we will usually be talking about the external context in which
business operates, unless mentioned otherwise.
GDP
When looking at a circular flow of value for, say, a country, how do you measure
that value in economic terms? Economists and business people use the term
Gross Domestic Product, or GDP, to measure that value. GDP measures the total
market value of all finished goods and services produced within a country’s
borders in a given period of time, usually a year. GDP places a value on a
country’s economic output and is often compared historically to previous years’,
a base year, and to other countries’ GDPs.
Notice that the market value is the tradable value, rather than the cost of goods.
And these are finished goods – because the value of intermediate goods is
captured in the value of the finished good within one country’s borders. Also
notice that it is produced within one country – not managed by one country. The
production is accounted for in the location where it is produced, not where it is
owned or managed.
GDP tends to increase gradually over time due to increases in productivity.
Increases in productivity are typically due to technology innovations, to discovery
or increase in the value of held resources, or because of new processes.
The business cycle
The interdependence of different sectors (the circular flow) of the economy,
coupled with the anticipation of supply and demand by looking at the past, tend
to create repeating cycles of expansion and contraction in economic activity. This
is the business cycle. The business cycle can be pictured as the fluctuations in
GDP over time.
The business cycle reflects periods of economic growth and contraction in
business production, wages, incomes and employment, spending, borrowing and
investment. While governments, businesses and households would all prefer
14
stable prices, growth, and full employment, the business cycle adapts according
to market forces. Yet, “market forces” really refer to supply and demand, and
those are greatly affected by people’s emotional attitudes about what has
happened in the past, and what they expect to happen in the future.
What part of the business cycle is Korea in now?
Typically, investors, governments, businesses and consumers will react and adapt
in reaction to what has recently just happened in anticipation of the direction of
change of the business cycle, and so often act with too much optimism or
pessimism.
Price inflation
One of the biggest triggers to affect households, businesses, and governments in
their every day economic decision-making is the price of things. The general
increase in prices over time is called price inflation. Inflation measures the rate at
which the general level of prices for goods and services is rising, and,
subsequently, purchasing power is falling. So as prices go up, the money you have
today is worth less tomorrow. Often you see inflation at the peak of business
cycle growth.
When you see headlines that talk about inflation, they are usually talking
about price inflation.
In general, prices will rise steadily and slowly over time. Economists disagree
about the causes of this, but generally agree that in the long run price inflation is
related to monetary inflation, or the increase in the money supply in the
economy. (In the short run, it could be due to a sudden loss of supply of a key
good like oil, because of more overall demand in the economy as it grows and the
three sectors spend more, or because the vicious cycle of workers trying to keep
their wages above price levels, which in turn leads to an increase in goods prices.)
Inflation is measured by the Consumer Price Index (CPI), which measures the
relative increase in cost of an averaged “basket of finished goods” over time.
There is a related Producer Price Index (PPI), which measures the same but for
factor inputs.
What goods have you noticed that have increased in price in your lifetime?
Deflation is a general decline in prices, often caused by a reduction in the supply
of money or credit. Deflation can be caused also by a decrease in government,
personal or investment spending. The opposite of inflation, deflation leads to
increased unemployment since there is a lower level of demand in the economy,
which can lead to a downward spiral and economic depression.
Countries will try and control excess inflation and deflation through monetary and
fiscal policy.
Controlling the economy: monetary policy
Governments and financial institutions respond to cyclical economic changes
through two different kinds of policies: monetary policy and fiscal policy. While
economists and politicians may debate how much of a role governments should
play in responding to markets and the business cycle, most agree that
government should play some role in preventing extremes of the business cycle.
Monetary policy is the policy of controlling the money supply in an economy. This
affects interest rates, and eventually, demand. Monetary policy is not set by the
representative government, but by central banks and their boards. Some central
banks are controlled fully by their respective governments, some are partially
controlled by the government and partially by private interests, usually the
boards of other banks. People set and administer monetary policy, not markets.
The stated purpose of most central banks is to stabilize prices (control inflation)
and in some cases, target full employment. Central banks control the money
15
supply by using three tools: 1) controlling the money supply and interest rates by
buying or selling government securities (typically short-term treasury securities
like treasury bills and bonds) from its member banks through open market
operations; 2) controlling banking risk and the impact of open market operations
on the money supply by setting the amount of money a bank must keep in
reserve and not lend, called the reserve requirement; and 3) controlling money
demand by manipulating the interest banks for banks that must borrow from the
bank of last resort, the central bank (called the discount rate);
“Open market operations” (and how it effects interest rates) is the most popular
tool employed by central banks. For example, when the central bank wants to
stimulate an economy, it will typically buy short term government securities from
the market via its member banks, and pay for these by adding a credit to the
seller’s bank account for the amount purchased. This deposit goes towards that
bank’s reserves. The bank has to keep a certain percentage of these new funds in
reserve, but can lend the excess money to another bank in the overnight lending
market between banks. In the example above, the bank has a credit to its
reserves, which means it can lend more money. The money banks can lend to
each other overnight is called the federal funds market in the US.
Why would banks want to lend money to each other overnight? It has to do with
the reserve requirement. Banks’ reserves of money – the money the bank must
keep and not lend, called the reserve requirement – is kept at their local central
bank office or in cash in the member bank’s vault. The bank must keep in reserve
a certain percentage in order to pay for its daily operations. For the bank, it
means it cannot easily make a profit on this “reserved” money because it cannot
be lent. Reserve requirements must be met by the close of the day.
But banks do lend more to their customers than their reserves allow them to in
order to make more profit. To do this without breaking the law and risking
penalties, the bank will borrow funds from another bank overnight to meet the
reserve requirement (or lend to another bank that is not meeting its reserve
requirement – which also gives them a profit). The funds they borrow or lend
each night are called Fed funds in the US, and the interest rate charged on these
funds between banks overnight is called the Fed funds rate in the US (in Korea,
previously the overnight call rate and now the base rate).
The central bank targets a specific lending rate or funds rate they feel is right for
the economy, and then uses open market operations to affect this rate. The rate
itself “floats.” How does the increase or decrease in banks’ funds using open
market operations affect the funds lending rate? Think of it in terms of supply and
demand. The price of the money available to borrow from other banks is the
interest rate. Banks can earn money on money they lend, so there is stable
demand. With increased supply in money available to lend, the price (interest
rate on the fed funds) goes down. When this rate falls (or rises), the price of other
kinds of borrowing and lending changes too, causing interest rates on things like
credit cards, business loans, and mortgages to also fall (or rise).
People often use the general term “interest rates” when talking about
monetary policy, when actually they mean the central bank’s overnight lending
rate, which in the US is called the Federal Reserve rate. Yet the Federal Reserve
rate, which is only available to the largest and most creditworthy lending
institutions like large banks, is used to lend to other banks over night to keep
their balances and reserves square. This interest rate is not available to
households or other businesses. The interest rate that banks charge their most
creditworthy customers, usually large corporations, is the prime interest rate, or
prime rate. The prime rate is set according to the federal funds rate. Retail banks
base the interest rates they charge to small businesses and individuals for
personal loans and mortgages on the prime rate. In this way, the Federal Reserve
rate as set by a central bank has a domino effect on lending and the money
supply in an economy.
The central bank can also change the reserve requirement. If the percentage of
deposits banks are required to keep in reserve, as set by the central bank,
16
increase or decrease, you can see how this would affect the money available to
borrow and lend in the economy as every deposit can be then used to lend which
can then be used to lend, which can then be used to lend, etc. (minus the reserve
requirement). This is known as the multiplier effect. The money multiplier of
deposits to reserves is simply the amount of total deposits divided by the reserve
requirement percentage. So if banks have a reserve requirement of 20% and total
deposits are $100, then the actual money that could be circulating in this tiny
economy is $500.
Finally, central banks may use the discount rate to control the money supply.
Occasionally, banks may exceed their reserve requirements, but find that no
other banks will lend to them overnight. In this case the banks must turn to the
central bank itself to lend them money. The rate the central bank charges to
banks for such lending is called the discount rate. The discount rate is higher than
the funds rate charged between banks, making the central bank the bank of last
resort for borrowing.
Typically, central banks effectively decrease the money supply by effectively
raising interest rates via selling government securities like Treasury bonds or
through repo agreements (securities with an agreement to repurchase). This will
filter through the economy as an increase in the interest rate for lending. Raising
interest rates discourages borrowers and lenders, and selling government bonds
removes money from circulation (puts the bond in circulation, and takes the
money out).
In situations where inflation is low but economic activity is slow and growth is flat,
central banks may increase the money supply in order to stimulate demand. They
do this via the opposite path of the above, by buying government bonds or other
low risk securities from banks or dealers. This has the effect of lowering short-
term interest rates, which in turn acts as a signal to businesses and institutions to
consider borrowing and investing.
http://education-portal.com/academy/topic/central-bank-and-the-money-
supply.html
But what about if the interest rate is already near zero? In that case the central
bank may instead buy particular kinds of securities that may not be as low risk, or
target specific assets and parts of the economy where credit isn’t flowing
smoothly. This does not directly affect the funds rate charged between banks.
This puts more money into circulation with banks, encouraging them to lend. It
raises the risk of inflation, however, as more money is directed into the economy
with the same short-term demand for goods. And banks may choose to keep the
new money in reserve rather than lend it. This overall strategy is called
Quantitative easing. Quantitative easing is a controversial strategy for many
economists and investors.
https://www.khanacademy.org/economics-finance-domain/core-finance/money-
and-banking/federal-reserve/v/
Fiscal policy is where the government uses its power as both producer and buyer
in factor, product and service markets to impact economic outcomes. Fiscal policy
is also known as “tax and spend” policy: the government redistributes income it
collects in taxes by buying products and services, paying wages, and selling or
leasing resources. In this way the government influences supply and demand in
markets. Politicians disagree on whether increasing taxes and then increasing
government spending in the economy, or reducing taxes and hoping for firms and
households to spend that available income in the economy is better at
stimulating economic activity.
Fiscal policy is typically set through the representative body of government with
the approval of the central government authority. Governments can also raise
money to spend by selling debt in the form of Treasury bills and bonds (borrowing
from investors) when tax revenues are not sufficient or there is a budget deficit.
What are the current monetary and fiscal policies of Korea? Of other countries?
17
What is the goal of an economy?
Most governments and their central banks want their economies to grow and be
healthy. They want their societies to improve, and do their best using fiscal and
monetary policies to make that happen. Common measurements that allow
governments to assess the health and improvement experienced by their citizens
are socio economic indices.
Indices is the plural of index.
Socioeconomic indices are by nature subjective in design, and do not generally
reflect cultural values. Two commonly cited socioeconomic indices are standard
of living and quality of life.
Standard of living is a measure of the level of wealth, comfort, material goods
and necessities available to a certain socioeconomic class in a certain geographic
area. It emphasizes the material choices available for consumption, and people’s
economic ability to consume. Some simply calculate the GDP per capita (per
person) for standard of living. But in reality, it includes variables such as: average
incomes, employment availability, poverty rates, quality and affordability of
housing, life expectancy, literacy rates, cost of goods and services, affordability
and access to healthcare, availability of infrastructure like energy and
transportation, etc. Standard of living measures are typically easy to quantify. By
participating in trade and economic activity, the standard of living within an
economy typically improves.
Quality of life measures aspects of society such as: quality of the environment,
freedom from corruption, sense of security, religious and political freedom, equal
protection under the law, equal pay for equal work, freedom from torture,
freedom of movement, right to be treated equally without discrimination, right to
privacy and freedom of expression, right to leisure, right to education, etc.
Quality of life is less easy to quantify, and very difficult to compare between
cultures with different norms of social behavior and different kinds of
expectations.
The question of social responsibility
One of the purposes of government is to ensure the health of the society it
governs. And households have a responsibility as citizens to uphold society by
abiding by laws and respecting the rights and freedoms of other citizenry. So
what is the responsibility of business to society?
There are two general views on what the social responsibility of business is. On
one side, there is a purely economic view of business’s social responsibility:
business exists to make profit, and by making economic profit, paying taxes, and
participating in markets, business contributes wages and income to those in a
market economy, which in turn contributes to the standard of living of those who
participate in that economy. In this view, the social responsibility of business is to
do what it does best – earn profit – and to not intervene in other, non-profitable
ways in society. Every social issue is a business opportunity waiting for someone
to combine the factors of production effectively and make a profit from that
social demand. Paying taxes and returning profit to stockholders is the primary
job of business.
There are merits to this view, particularly in a global context. It is difficult to argue
that market economies have not increased the standard of living of those in
developing economies, for instance. Despite the seeming unfairness in the
difference between incomes and standards experienced by those in developed
and developing nations, participation in a global marketplace provides more
opportunities for people to raise their standard of living.
However, standard of living measures traditionally do not include measures of
sustainability, nor do they measure the more subjective quality of life variables
that many feel are essential to a healthy life. Sustainability is an extremely
18
important measure, because market economies in any context encourage
consumption, and some factor resources – like natural resources, for instance,
are finite (limited).
Those who hold an economic view of business’s social responsibility claim that
entrepreneurship and technology will step in to fix social problems due to
unsustainable practices as soon as it is profitable to do so. They do not feel that
businesses should operate in a socially responsible manner until it makes business
sense to do so.
The socio-economic view is different. In this view, businesses are actually a
contributing member of society and should thus work for the long-term benefit of
society, not just for their own profit. Businesses have a responsibility not just to
stockholders, but to all stakeholders because business benefits directly from
social and government contributions such as infrastructure, political freedoms,
security, an educated and healthy workforce, and other social conditions that
they do not necessarily directly pay for.
The socio-economic view also sees sustainability as a necessary objective of all
sectors of the economy to avoid tipping-point scenarios, where the social
problems created by economies are too big for even technology to fix. Those who
hold the socio-economic view point out issues that business and economic
markets have failed to address effectively with a profit motive, like global
warming, poverty, income disparity, under education, and lack of affordable
healthcare. They view these issues as significant barriers to society’s well being.
They claim that only businesses working together with government, targeting
sustainability and social well being, will have the resources needed to solve some
of these grave problems.
Business ethics
Many people believe that ethical problems in business arise from individuals
breaking the law. This is only one standard of ethical behavior – there are several
more. But many ethical challenges in business arise with the tension between the
needs and stockholders versus the needs of business stakeholders. A business
decision that clearly benefits stockholders may harm stakeholders, and the
opposite in many cases may be true.
Risk management is the business practice of weighing the possibility of bad
outcomes against the potential benefits. Often the possibility of bad outcomes is
at the expense of stakeholders, while the beneficiaries of potential benefits are
typically stockholders.
Unfortunately comparison of possible outcomes depends very much on your
point of view, and whether you prioritize stockholders or stakeholders. This leads
to ethical dilemmas for the people actually making the risk assessments: do they
act for the company, or as a stakeholder in society? One person’s acceptable risk
is far beyond what another person might consider acceptable. Because
businesses have low incentive to account for risks as viewed by all stakeholders,
they do not often prioritize or even consider non-owner stakeholder concerns in
their risk calculations, despite the slogans or vision statements in the company
annual report.
For this reason, society demands and governments often implement regulation of
industries. The purpose of regulation is not to harm business, but to ensure that
businesses and industries meet the needs of stakeholders and not just
stockholders.
In many cases, industries will regulate themselves. While some view this as
positive social responsibility, others believe that businesses pursue self-regulation
in order to avoid more strict regulatory standards. Those from the economic view
19
of social responsibility (and free-market supporters) claim that regulation is not
necessary because buyers and producers will make their demands known through
their actions as consumers and purchasing agents. However, this point of view
over estimates the power and motives of uninformed, misinformed, and
independent agents in markets.
What ethical issues exist in the toy industry, where the profit motive of
stockholders might compete with the interests of stakeholders? What regulations
are in place to manage these issues?
Summary: Business Basics II
In this unit you have learned about:
The environmental forces that affect business
GDP and the business cycle
Monetary and fiscal policy
Considerations about social responsibility and business ethics
If you are unfamiliar with microeconomics (including the basics of supply,
demand, market equilibrium, comparative advantage, specialization, etc.), I
strongly encourage you to view the videos at the link below (Korean
subtitled!)
https://www.khanacademy.org/economics-finance-
domain/macroeconomics/gdp-topic/circular-econ-gdp-tutorial/v/parsing-gross-
domestic-product
https://www.khanacademy.org/economics-finance-
domain/macroeconomics/aggregate-supply-demand-topic/monetary-fiscal-
policy/v/monetary-and-fiscal-policy
20
21
Worksheet 2 (front)
Fill in the blank.
1) The global financial crisis of 2009 was a/an __________ environmental force
that affected most global corporations.
2) Relaxing import regulations on toys imported into the EU is a/an
___________ environmental force that may affect POPCO’s overseas sales.
Select the one best answer.
3) One possible cause of high inflation is:
a. High unemployment
b. Low investment
c. Too easy credit
d. Low GDP
Identify the following as related to fiscal or monetary policy.
4) _____President’s budget proposal
5) _____Central bank’s open market operations
6) _____Tax increase
7) _____Government subsidies
8) _____Quantitative easing
9) ____Interest rates
Circle the correct answer about monetary and fiscal policy.
10) If a central bank uses open market operations to sell treasury bills or bonds, it
is trying to stimulate / slow down an economy.
11) If a central bank lowers the reserve requirement for banks, it is attempting to
stimulate / slow down an economy.
12) The primary way a government raises money is through taxes / lending
money.
True or False.
13) _____The socio-economic view of social responsibility believes that
businesses should prioritize the needs of all stockholders in their operations.
14) _____The economic view of social responsibility believes that technology plus
entrepreneurship will eventually solve all the issues and needs of society, and
so sustainability should only be pursued if it’s profitable.
15) _____The interest rate banks can charge each other overnight for meeting
their reserve requirements is called the prime rate.
16) _____The interest rate the central bank charges to banks that it lends to is
called the Fed Funds Rate in the US.
17) _____The reason a bank will borrow from another bank overnight is so they
can lend that money to their customers the next day.
Headline explanation.
18) On the following page, explain in your own words what is meant in the
following business headline. Explain why it is happening, and what the terms
mean. Is this monetary or fiscal policy? Where is the money for the fiscal
package coming from? Who are the investors, borrowers, and lenders? What
is the purpose of the money?
22
Worksheet 2 (back)
Explain the headline from Bloomberg news according to what you have learned in
this unit.
23
Unit 3
The Operations Department
Learning objectives of this unit
In this unit you will learn the following concepts:
What are the different roles and functions within an operations department? (in class: diagram)
What is productivity, and what is capacity? (in class: calculating)
What processes are involved in production management? (in class: POPCO exercise)
24
Unit 3 Vocabulary
Cycle time (사이클 타임): the time required to complete one cycle of an operation, or to complete a task, job, or function start to finish
어떤 한 공정에서 하나의 제품이 나오는 데 경과되는 시간을 말한다.
Lead time (선행기간): the time required to complete all cycles for an order plus any waiting time between tasks, cycles, etc.
상품의 주문일시와 인도일시 사이에 경과된 시간을 말한다.
Capacity (수용력): the amount of products or services that a plant or enterprise can produce in a given time using current resources
공장이나 기업이 주어진 시간 동안 갖고 있는 resource 를 이용하여 만들 수
있는 제품이나 서비스의 양
Productivity (생산성): an economic measure of output per unit of input, where output may be revenues, goods or services, and inputs are labor and capital
인풋당 아웃풋의 경제척도. 아웃풋은 수익, 제품 또는 서비스, 인풋은 노동
또는 자본이 될 수도 있다.
Labor-intensive (노동집약형): a process where people must do most of the work to generate output
사람들이 아웃풋을 만들어내기 위해 대부분의 일을 하는 과정.
Capital intensive (자본집약적): a process where output is generated mostly from plant and equipment
공장이나 장비를 통해 대부분의 생산량을 만들어내는 과정
Specification (설명서 ): a written statement of an item's required characteristics and design. A specification is documented in a manner that allows purchasing to find appropriate suppliers, and production to make and test the item's quality.
어떤 물품에 대해 요구되는 특징이나 디자인에 관한 진술서. 설명서는 적당한
공급자를 찾고 물품의 품질을 확인하고 실험할 수 있는 구매 방식을
용납하게끔 문서화 되어있다.
Purchasing (구매): all the activities involved in identifying suppliers, negotiating price, and obtaining required materials, supplies, components and parts from other firms based on a specification
설명서에 근거하여 공급자 식별, 가격 협상, 그리고 다른 회사로 부터 필요한
자재, 저장품 그리고 부품을 얻는 것과 관련된 모든 활동.
Inventory (재고): the raw materials, work-in-process goods and completely finished goods that are considered to be the portion of a business's assets that are ready or will be ready for sale.
판매를 위해 준비 되었거나 준비될 회사의 자산의 일부분으로 여겨지는
원자재, 재공품 그리고 완제품
Inventory management (재고관리): the process of managing inventories to minimize costs, including holding and stock-out costs
가격을 최소화 시키기 위한 재고관리 과정으로써 보유 비용 또는
재고부족보충을 위한 조달비용도 포함되있다.
Stock out (재고부족): A situation in which the demand or requirement for an item cannot be fulfilled from the current inventory
현재의 재고로부터 아이템의 수요나 필요사항이 충족될 수 없는 상황
Just in time (적기공급생산): An inventory strategy companies employ to increase efficiency and decrease waste by receiving goods only as they are needed in the production process, thereby reducing inventory costs.
생산과정에 필요한 제품만 받아서 효율성을 높이거나 낭비를 줄이기 위해
회사들이 이용하는 재고전략, 결과적으로 재고 비용을 줄인다
Quality control (품질관리): The process of ensuring that goods and services are produced according to specifications.
설명서에 따라서 제품이나 서비스가 생산되었는지를 보장하는 과정
25
What functions does a business require?
Imagine you were the founder of POPCO when it first began as a company. When
thinking about the tasks you needed to accomplish, and the people you would
need to accomplish them, how would you know the best way to organize in order
to be most efficient? We know from common sense and theory that specialization
helps businesses to be more productive, and that division of labor is one of the
most basic kinds of specialization. But what about POPCO’s business?
Thinking about a toy company like POPCO, you would need people to produce the
toys like factory workers, people to buy the materials and get them to the factory,
and people to manage that process. You would need people to sell the toys, and
promote them as well as to research what people want, and what they are willing
to pay. Finally, you would need people to manage the money coming in and out
of the business.
Figure 3.1 Core functional areas of a typical manufacturing business
These tasks are very different in their nature, and require special skills to
complete. You would not expect a factory worker to be able to develop a
promotion campaign necessarily, nor would you expect an accountant to make a
good sales person. Logically, an effective way to organize your new business
would be by grouping people into departments according to the similar activities
or functions they perform. And that’s what most businesses do. So we will first
look at the Operations department of POPCO.
The main responsibilities of the operations
department
The operations department is responsible for all the activities required to
transform resources such as raw materials, technology, and labor into goods and
services that meet customers’ needs. To fulfill that responsibility, the operations
department undertakes many specific tasks. They work with marketing to design
new products and services. They work with suppliers to negotiate and purchase
resources such as materials, technology, and labor needed for production, and
cost and schedule production.
Figure 3.2: Typical roles in the operations department
They design, develop, and organize production processes to make production as
efficient as possible, and supervise production. They maintain the company’s
plant, property, and equipment to ensure it is operational. They organize and
control the firm’s inventory, and inspect all inventories for defects and suitability
to ensure quality standards.
Operations Director
Purchasing Production Manager
Crew supervisor
Scheduling
Inspection
Materials Mgmnt & Stock
Control
Facilities & Maintenance
Logistics Support
Transportation
Warehousing
Production (Operations)
Sales and Marketing
Finance and Accounting
26
They work with marketing and sales as well as channel partners to ensure smooth
holding and transportation of goods with the help of logistics specialists and
systems. In manufacturing in particular, the operations department is a broad
department with many sub specialties.
When talking about operations, many people use the word stock when
discussing inventories. In this sense, stock is another word for inventory. In this
context, the word does not mean shares as is used in a financing or investment
context.
The basics of operations management: cost,
time, quality
Operations management requires balancing the three main variables of
production: cost, time, and quality. Often the decisions an operations manager
makes will impact one or more of these dimensions. It requires great skill to
understand the pros and cons of different decisions and be able to make them
quickly under constant pressure and changing requirements in the operating
environment. Operations is under constant pressure to increase operational
efficiency while at the same time provide greater and greater flexibility and
responsiveness. These are competing objectives in most firms.
In general, the operations department must consider the constraints of the
operating environment set by the company’s existing plant, property, and
equipment: operating capacity. They will understand the capacity of the firm’s
own production facilities in order to determine how much output the firm is
capable of producing in a given time period, and for particular regions. They will
also understand the productivity possible given the inputs of resources (including
labor) available, and consider the impact of changes in the type of product or
service specified for production on productivity, processes, and quality.
Much of the study in operations management is the quantification of the
efficiency of processes and systems. Variables that affect the efficiency of a
system include such things as whether products are made for inventory or made
to order, how much automation can be used, what materials can be used and
from which suppliers, the skill and availability of labor, the scheduling method
and prioritization of jobs, the variability and complexity of production tasks, and
the information management available to inform the production process.
Because operations efficiency can make such a significant contribution to
company performance, companies are extremely interested in analyzing their
operations systems for improvements. Often they hire process improvement or
operations analysts for this task.
Calculating productivity
Productivity as you recall is a measure of output – units produced – per unit of
input. Operating inputs include such things as labor, capital, energy, materials,
and management. Productivity can therefore be measured using any of the three
operating dimensions: product output per dollar of input (cost), product output
per labor hour (time), product output per certain number of defects (quality).
Often, a company will target a certain level of productivity increases over a year
or several years, depending on how many new products are in production.
Thinking about capacity
Capacity is the amount of products or services that a plant can produce (output),
hold, store, and receive in a given period of time using current resources.
Calculating capacity involves an understanding of operating limitations, also
called constraints. Systems like companies and factories have a theoretical
capacity (called design capacity) that the system can achieve under ideal
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conditions. However, because production is complex and involves so many
variables, this theoretical capacity is rarely, if ever, reached.
Companies talk in terms of effective capacity or throughput instead of design
capacity. Effective capacity is the output the firm expects to achieve given the
expected and anticipated operating efficiency of the equipment and constraints
of the system (constraints such as asset maintenance, labor time for completing
standard tasks, shut down time, lunch breaks, etc., which are usually arrived at by
looking at historical data). It is a measure in units or time that it is expected to
move an order from receipt to delivery in a “realistic” calculation. The efficiency
of a company or system is calculated as the actual output / effective capacity x
100%. Actual output will always be less than effective capacity because of
unanticipated issues such as machine breakdowns, inventory management issues,
and quality problems. However, firms should strive for 100% efficiency of
operations. This does not always mean cutting costs, as investments can increase
output at a greater rate than the required increase in costs.
The extent that a company such as POPCO or an industry as a whole actually uses
its available capacity at any given time is called utilization. The utilization of a
factory is measured as a percentage of its theoretical design capacity, actual
output / design capacity x 100%. Utilization will naturally be less than 100%
because every system requires upkeep and cannot run 100% of the time.
Occasionally economists will look at utilization to analyze the state of demand
and inflation.
For POPCO, a meaningful measure of capacity of our factory might be the number
of Clucky Chickens produced per labor hours, or per sewing machine operating
hours. Constraints determining our effective capacity might be the standard
operating efficiency of our sewing machines in a 60 hour work week, the stock of
materials readily available, and the experience of workers doing the tasks.
Constraints that might reduce our operating efficiency below 100% might include
strikes by workers, unreliable electricity supply to the factory, unexpected sewing
machine breakdowns, errors in the production process, etc.
Effective capacity for POPCO
Consider the different processes involved in producing Clucky Chickens (called
“sub tasks”): cutting fabric, sewing fabric, assembling plastic parts and inserting
computer chip components, stuffing and gluing, labeling, testing. Each of these
processes is unique, and varies in the types of materials involved, the standard
operating efficiency of the equipment, the amount and skill of labor required, the
time it takes for task completion, and the productivity of the sub-task in terms of
units output per labor hour. Each sub task has its own effective capacity.
For each sub task, the time required to produce one unit of output per operator
or workstation is called its cycle time. The lower the cycle time the higher the sub
task’s effective capacity. For some tasks, adding additional operators can increase
the output per subtask and therefore its capacity. But not for all.
The total time of all the cycle times in this process is called its processing time.
There may be waiting time between sub tasks that affect the overall output of the
whole toy assembly process. The waiting time plus the processing time is called
the lead time. Often this is the order processing time.
The interaction of these different processes will have an impact on the overall
output of our factory, and its effective capacity, even though none of these
variables is unexpected or a problem. The limitations of necessary sub process
capacities limit the effective capacity. For instance, if one fabric cutting machine
worked by one factory worker can cut 15,000 Clucky Chickens’ worth of fabric
pieces per day as its standard operating efficiency (a cycle time of 2.4
seconds/unit for a 10-hour workday), it does not necessarily mean our effective
capacity is 15,000 Clucky Chickens per day. Our team of five gluing workers might
only be able to glue and complete 5,000 Clucky Chickens per day in total working
at maximum speed for minimum defective products. That does not mean our
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gluing workers are slow, it means that that process has a lower capacity than the
fabric cutting process, and so is an effective constraint on overall output. Gluing
may be our bottleneck task in our toy assembly process.
Capacity, productivity and inventory
management
Considering the fabric-cutting example, what would happen if POPCO worked in
that manner for a week? In one week we would have an enormous build-up of
inventory of cut fabric. Short-term materials management would help ensure that
this material was used effectively over time, but the operations manager might
want to consider how to balance the activities of fabric cutting with the other
activities of Clucky Chicken production to avoid the costs of excessive materials
management and inventory holding costs. Both of these cost money, and that
cash resource might be better spent elsewhere.
Marketing and operations will work together to identify the capacity required by
estimated or actual sales orders. Operations will then determine whether the
current plant and facilities’ available capacity is sufficient to meet the demand
even at peak periods, or if additional capacity is required.
In the short-term, scheduling and allocation of equipment and resources can help
use more of existing capacity. In the medium-term, it may be necessary to
increase capacity by adding labor or shifts, improving assets, or outsourcing.
Better management of materials and inventory can improve the utilization of
increased capacity. In the long-term, the firm must consider adding facilities and
equipment in order to increase capacity. All of these changes to utilize and
increase capacity can have an impact on productivity, and it is not always positive.
Adding workers can slow down efficient production teams, as new workers must
be trained. Outsourced activities may have quality control issues. Adding shifts
may destabilize work relations. Using more capacity might threaten capacity
availability during peak periods, slowing down throughput overall. Operations
managers must consider the best use of capacity given all the demands on the
system.
Labor intensive or capital intensive
For manufacturers especially, a key consideration of operating efficiency and
efficiency improvement will depend on whether the firm’s operations are labor-
intensive or capital-intensive processes. Labor-intensive processes require
manual labor to complete, while capital-intensive processes are usually heavily
automated. POPCO’s production is extremely labor-intensive, although we do use
machinery. Most operations requiring sewing and mixed-materials assembly are
labor-intensive. Capital and labor-intensive processes have different costs and
risks associated with them. Capital-intensive processes have high initial costs
compared to labor-intensive processes, but their running costs and operating
risks are lower over time.
The operations process
Consider the following situation: POPCO’s Clucky Chicken toys are selling very
well, so POPCO plans to extend its artificial intelligence toy product line by adding
a new toy: Rolly Rabbits. As marketing establishes requirements for the product,
the operations process begins. The following outlines the basic processes of
operations:
1. Develop specification
2. Purchase materials, organize resources, design processes
3. Schedule production, manage and control materials
4. Oversee production and move inventories
5. Store and transport goods
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Specification
The specification defines the exact design, capabilities, and materials required of
a product or service. While the specification must be exact, it is based on
requirements from the marketing department that may be descriptive in nature.
Descriptions can be subjective. For that reason, the operations team (or
sometimes a product development team) will quickly design and produce a
limited amount of the product based on the requirements. These one-off
products are called prototypes, and are usually created with the help of computer
aided design technology. Prototypes allow operations and marketing to test,
evaluate, and clarify the best design, capabilities, and materials for the market’s
needs and firm’s unit cost limitations.
Once a completed specification is available, the firm can fully engage in the
operations process. One risk is that marketing requirements will change once the
operations process has begun. Changes to requirements usually demand changes
to the specification and therefore changes to purchases, design, materials, etc.
These changes can be extremely costly. To manage such risks, companies try to
develop fast prototyping capabilities, more reliable market data and testing
techniques, and more flexible operations processes.
Purchasing and resource organization
Next, companies will purchase required materials and organize all materials,
inventories, equipment, and labor for production. While labor is acquired with
the help of the human resources department and equipment and machinery
required is managed through facilities, purchasing is an often-overlooked key
aspect of operational efficiency. The purchasing team will identify multiple
suppliers based on their cost, reliability, and reputation for quality. Then they will
negotiate amongst suppliers for the best deal. Often cost is not the most
important factor.
To avoid losing advantage in such negotiations because of time pressure, the
purchasing team will often evaluate categories of suppliers long before
specifications are available, and evaluate them in a very thorough process known
as vetting. Successfully vetted suppliers are then added to an approved suppliers
list, and can receive requests for supply quotations at any time. This long-term
relationship building can benefit both supplier and buyer in terms of reliability.
On the downside, it makes it difficult for new suppliers to build businesses, and
can hurt certain vetted suppliers if they do not receive a steady stream of work.
Process design is the design of how production proceeds. It can involve the
planning of materials movements, the layout and use of production lines and
facilities, the standardization of tasks, and the method for incentivizing labor
productivity. These processes are communicated in manuals, through training,
and on-the-job.
Over time what are the risks of long-term supplier relationships where the
suppliers are in developing countries with lower standards of regulatory (legal)
enforcement? What can companies do to manage these risks?
Scheduling and materials management
Scheduling involves identifying the most efficient use of labor and equipment
considering all of the production happening in a particular firm at a given time. It
is the timing of operations. The firm’s overall operations will have a planned
capacity including its total facility and equipment resources available that is
usually planned yearly. The firm might make monthly plans of total output based
on total forecasted demand or orders for its products and services. They will then
construct an “aggregate plan” over a long period such as 6-18 months of all the
resources and capacity needed. Aggregate planning of considers the facilities
available, the inventories in stock, current labor and contract resources to
calculate the total output of product or services possible in a given time period,
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typically a month. This allows them to find efficiencies and save on the cost of
operations.
When people use the term scheduling, they typically are not referring to overall
capacity or aggregate planning. Scheduling refers to the production timing for
specific products or product lines for each week. Scheduling breaks down capacity
and aggregate planning measures into job sequences and specific assignments of
personnel, materials, and machinery. The objective of scheduling is to allocate
and prioritize demand from forecasts or orders to available facilities.
For POPCO, scheduling might be based on demand forecasts (a push system) to
avoid shortages of finished goods for sale (called stockouts), or might be based
on actual orders (a pull system) to avoid holding excess work in progress
inventory. Order-dependent production requires efficient order processing from
marketing, and is an important area of marketing-operations interaction. Just in
time (JIT) manufacturing is based on a pull system, in other words where a unit
and the production system is organized starting from the pull of a specifically
required output like an actual order. Most likely, our scheduling would be based
on a combination of methods: push anticipating peak times, and pull for off peak
periods.
Materials management is the management of the material resources used by the
production processes in the production schedule. Materials management is
essential for ensuring the exact materials required by production are in the
correct place at the exact time needed. Inefficient materials management
compounds inefficiencies of production and capacity utilization because once a
production process is stopped it cannot instantaneously start again – there are
set up and startup time lags and costs. There are also costs associated with the
purchasing process itself.
Production oversight and inventory management
Production oversight is necessary to ensure that production targets are met and
quality standards upheld. But production oversight is also critical for managing
inventory. Inventories for manufacturing firms like POPCO are generally classified
in the following three broad categories. Raw materials and components are
inventories that have been purchased but have not yet entered the production
process. Work-in-progress inventory is inventory that is partially processed
through the production process, but is not yet finished goods inventory. Finished
goods inventory is inventory awaiting shipment or storage. Inventory
management is the process of managing inventories to avoid holding costs and
stockouts.
Production management’s goal is to manage production of exactly the output
required by established plans. A production line or crew manager should
constantly be aware of the productivity of the line compared to targets, as well as
unexpected outcomes that will reduce operating efficiency. A production
manager’s awareness and ability to respond to changes is a major source of a
company’s competitive advantage.
In general, holding too much inventory of any type for too long is extremely costly
for businesses, as every minute inventory is held is a minute that the firm incurs
costs such as warehousing, materials handling, labor, and even potentially
financing costs, with no revenue to match it. These are called holding costs. So
production oversight is not about producing the maximum output possible at all
times, but producing the required output for a specific job at the quality standard
set by the company.
Quality
These days quality is a focus of the operations process. Ensuring quality helps
improve the overall efficiency of an operation by eliminating defects and the cost
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of returns (which require reworking or destroying finished goods, called scrapping)
and related legal liability. Increased quality reduces the costs of warranties. (A
warranty is a written guarantee issued to the purchaser promising to repair or
replace it; in Korea, the A/S contract). Quality reliability enhances a company’s
reputation, which in turn can increase sales. Quality standards may be required
by industry or international regulations.
Similar to how the marketing orientation has moved away from product selling
towards customer satisfaction, the operations orientation has moved away from
output maximization to quality prioritization. For an operations manager, quality
tends to be manufacturing and product-based, conforming to standards, product
characteristic or performance criteria, and making the product right the first time.
The quality inspection process usually involves two dimensions: testing for
whether a good is defective or not according to its intended design (called
attribute inspection), and testing for its acceptance according to a specification of
acceptable values for things like weight, speed, height, strength, etc. (called
variable inspection). A Rolly Rabbit might have ears that are 1mm shorter than
the design, but still work fine. The company defines the acceptable variation
range for variable quality inspection purposes.
Companies should determine when and where they intend to inspect inventories.
Quality inspections are needed for supplies as well as inventories at each step of
the operations process, and can even take place for finished goods at the
customers’ locations.
Storage and transportation of goods
The final stage of the operations process is the transportation or storage of
finished goods inventory. Often storage and transportation are negotiated
between the producer and intermediaries in the supply chain. But several
considerations are important: who is the rightful owner of the goods at what
stage in storage or delivery? Who is responsible for insuring the goods during
storage or transportation? Who is responsible for the timeliness and cost of
delivery and the security of storage? These are important considerations, and it is
essential for operations to be clear by working closely with the trade marketing
team and their customers.
While we mentioned the costs to hold inventories previously, the costs of
transporting goods vary by method. Transporting by air is fast but expensive, by
sea is slow but more cost effective. Additional methods include railroads, trucking,
and smaller waterways, and for specific products, pipelines. The volume being
transported also has an impact on unit transportation costs.
Transportation efficiency especially using container shipping revolutionized
international trade and supply chains. It so drastically reduced the cost of global
shipping that now most companies rely in some part of their supply chain on
global container shipping. Companies now have access to suppliers and markets
around the world.
For most companies, containerized transportation is very standardized and, aside
from recessionary times when ships might stay in port, predictable. But there is
significant responsibility for managing all the local and regional aspects of moving
and storing all the materials and inventories of a company’s supply chain. It is an
extremely complex effort, beyond the capabilities of most firms. Therefore
companies often outsource to specialists the management of how their resources
are obtained, stored, and moved to the locations where they are required along
the supply chain. This specialized management is called logistics.
Logistics is an increasingly important part of global business, as it is required to
maintain operating efficiency. Distribution of goods to and from a firm’s facilities
can account for 25% of the cost of a product! Logistics experts balance timeliness
with methods of shipping and storage to arrive at efficiencies. Logistics is
becoming more and more efficient every day with the help of technologies, from
radio tagging of inventory items to security technologies for stock in transit.
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What do you think is the impact of logistics outsourcing on the environment,
and corporate responsibility for the environment?
Summary: The Operations department
In this unit you have learned about:
The different roles and functions within an operations department
Productivity and capacity
Production processes and management considerations
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Worksheet 3 (front)
True or False.
1) ___ Capacity is limited by the operating efficiency of machinery.
2) ___ In the short term, firms should consider managing capacity by adding
facilities and buying new equipment.
3) ___ POPCO’s business is considered both labor and capital-intensive.
4) ___ The specification of a product is a general description of the market
requirements for how a product should look and feel.
5) ___ Purchasing selects suppliers based on who is the cheapest.
6) ___ Scheduling for firms is usually done yearly for product lines based on
estimated market demand.
7) ___ POPCO most likely uses pull processes during peak times because this will
ensure safe levels of inventory for unexpected orders.
8) ___ A stockout may result from poorly managed inventory.
9) ___ Holding excess inventory is cost effective because it will cause a rise in price.
10) ___ Quality standards are absolute and an inspected product is either OK or
defective.
11) ___ Because transportation methods are mostly standardized, logistics is a
simple job and a very small part of the cost of production.
(12-15) Calculate the productivity increase of POPCO in their Clucky Chicken
production line between 2011 and 2012.
2011 2012
Units produced 200,000 210,000
Labor (hours) 10,000 9,000
Materials ($) 400,000 405,000
Capital invested ($) 15,000 5,000
Energy (KWH) 60,000 70,000
Labor wage = $2 per hour, Energy cost = $0.07 per KWH
Productivity = Units produced / Input used
12) 2011 Clucky Chickens per $ input, to 5 decimal places: _________
13) 2012 Clucky Chickens per $ input, to 5 decimal places: _________
14) Productivity increase to the nearest whole % = _______ %
15) List 5 operations management actions that could likely have resulted in the
above productivity increase. Look closely at what information you have, and
what changed between 2011 and 2012.
16) On the back of this worksheet, draw a picture of part of the operations you
can observe at any business on the Dongguk campus (for instance, Vonie
coffee, the cafeteria, copyshop, etc.). Note the subtasks involved, the stations
and equipment, the workers per station, and the output for production of one
product or service. Note the cycle times and overall process cycle time, lead
time, capacities per workstation or machine, for one hour.
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Worksheet 3 (back)
Where are the bottlenecks? What would you recommend to improve
productivity?
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Unit 4
The Marketing Department
Learning objectives of this unit
In this unit you will learn the following concepts:
What are the different roles and functions within a marketing department? (in class: diagram)
What are the “4Ps” of marketing? (in class: discussion)
How is consumer behavior understood, and how does it impact the various aspects of marketing? (in class: POPCO example)
What is margin, markup, and breakeven? (in class: problems)
What are different pricing strategies? (in class: pricing exercise)
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Unit 4 Vocabulary
Trade marketing (트레이드 마케팅): marketing that relates to increasing the demand at wholesaler, retailer, or distributor level rather than at the consumer level
소비자보다는 도매업자, 소매업자 또는 유통업자의 수요를 증가시키는 것과
관련있는 마케팅
Market share (시장점유율): a percentage of total sales volume in a market captured by a brand, product, or company.
브랜드, 제품 또는 회사가 확보한 시장에서의 전체 판매량 비율
Markup (가격할증): the amount a seller adds to the cost of a product to determine its basic selling price
기본 판매 가격을 결정하기 위해 판매자가 제품의 가격에 더하는 금액
Margin (마진): the amount of revenue that is retained as profit (gross, operating, or net income)
이익으로써 보유하고 있는 수입금액(매출총이익, 영업이익 또는 순이익)
Breakeven quantity (손익분기 수량): the number of units that must be sold for the total revenue from all units sold to equal the total cost of all units sold. Every unit sold after the breakeven quantity contributes to profitability.
판매되는 모든 유닛의 비용과 총수익이 같게 되기위하여 모든 유닛은 판매
되어야한다. 손익분기점 이후 모든 수량은 수익성 발생에 기여한다.
Profit maximization (이윤극대화): The process where a firm considers the best output and price to create the greatest amount of profit
이윤을 극대화 시키기 위해 기업이 최고의 아웃풋과 가격을 생각하는 과정
New product pricing (신제품 가격 결정): consists of either penetration pricing (charging a very low price to get maximum market share) or price skimming (charging a high price ) to maximize profits while the product or service is unique in the market
독특한 상품이나 서비스의 이익을 극대화 하기 위한 시장침투가격전략(시장
진입 시기에 가격을 낮게 책정하여 시장에 침투하기 쉽도록 하는 것) 또는
초기고가전략(출시 당시 고가전략을 고사하는 것)이다.
Differential pricing (차등가격): charging different prices to customers for the same product and quantity of product
생산물을 등급화하여 등급별로 차등된 가격을 받는 것.
Psychological pricing (심리적가격): encourage purchases based on emotional responses rather than economically rational responses
경제적으로 합리적인 반응보다는 감정적인 반응에 근거하여 구매를
격려하는 것
Promotional pricing (프로모셔널 가격): pricing products in coordination with promotional activities in order to increase sales volume, drive foot traffic into a store, or to move slow-selling inventory
판매량, 매장으로의 상시인파 또는 느리게 팔리는 재고를 이동시키기 위해
판촉활동과 합동으로 제품 가격을 책정하는 것
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The main responsibilities of the marketing
department
The main responsibilities of the marketing department are to create value for
customers and build customer relationships so that the company can capture
value from customers in return. Several activities help achieve this goal.
The marketing department engages in research activities (called customer insight)
to understand the marketplace, including who the target customers are, and their
needs and wants. They translate this information and what it means for the
company into a strategic marketing plan, which outlines the target customers,
what they want, how to acquire them and keep them as customers, and how to
encourage their loyalty.
They then engage with the rest of the organization as well as outside experts in
order to deliver a marketing program that achieves the goal of the marketing plan.
The program will likely include several aspects: developing new products or
refining existing products that customers want, strategies for targeting specific
customer segments, pricing products, deciding the distribution strategy to
intermediaries, and the sales and promotion activities needed to ensure the
company captures the maximum value from customers. In addition, the
marketing department manages the customer relationship of existing customers
to try and develop their valuable loyalty.
Figure 4.1: Typical roles in the marketing department
The marketing department is typically separated into two main areas: trade (sales)
and brand marketing. The trade marketing team is responsible for working with
intermediaries and customer points of contact in the trade to sell the company’s
products and services, and encourage others to promote them. Typically they
work with points of contact in intermediaries like wholesalers, retailers, or agents
and brokers. They often manage intermediary-specific promotions and activities
to encourage a profitable relationship between the company and the
intermediaries responsible for reaching the customer. They spend a lot of time
developing close relationships with intermediaries.
Brand marketing, in contrast, manages the development of the company’s overall
approach to targeting customers, as well as defining the products and services
that will satisfy them. They establish base prices and pricing strategies to reach
the financial goals in the marketing plan, as well as deciding the channels to
market and promotions that will deliver promised revenues.
Trade marketing is supported by marketing staff. These trade marketing staff
work quickly to ensure intermediaries get their products on time and receive
promotional incentives to encourage them to sell the company’s products and
services. These staff members also work to inform intermediary customers about
Marketing Director
Trade marketing (sales)
Trade support Customer
support
Brand marketing
Customer insight
New product development
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how the features, benefits, and promotional support of products will affect the
intermediary’s bottom line.
In contrast, brand marketing is supported by a customer insight team. The
customer insight team determines the needs and wants of the market as well as
existing customers using research techniques. Brand marketing is also often
supported by a new product development (NPD) team. The NPD team designs
product changes or new products to answer the customer needs and wants
revealed by the insight team. (In some companies product development is a
separate division, in others it falls withing engineering or operations.)
So what of customer relationship management? In other words, which area
supports existing customers who are not satisfied, and encourages happy
customers to tell others about their experiences? In most companies, customer
support was originally a function of sales, a role that listened to customer
complaints via the intermediary, not directly. In the era of call centers (A/S), often
this responsibility was outsourced, and sometimes moved to an operations
function. These days, though, companies are much more directly aware of
customer complaints thanks to the Internet. Some feel that customer relationship
management should be a strategic part of the brand marketing function, while
others insist that it is rightfully managed and fixed in operations, because they
have the knowledge, resources and financial authority to devote to eliminating
defects that cause dissatisfaction. For many companies, the idea of a unified
approach to customer relationship management is still not well supported
organizationally.
The 4Ps
As mentioned in the overview, the general categories of marketing activities were
traditionally group into the “4Ps” of marketing. These days, however, this
categorization is not as popular because it does not highlight the aspect of
customer relationship management that is important for developing long-term,
profitable customers. Also it does not emphasize the external relationships and
cooperation needed to satisfy and support target customers.
For the moment, though, the “4Ps” is a good memory device for you to recall all
the different areas marketing is involved in. The 4Ps include: Price, Place, Product,
and Promotion. (The order does not matter.) Due to time constraints this course
will focus on Price, Place, and Product. Before considering each area of the 4Ps in
the following sections, we should start with the customer universe.
Understanding the market and customer
An essential role found within the marketing department is that of customer
insight, often called the market research department. This team is responsible for
identifying trends in consumer behavior, needs and wants. They also recommend
how environmental changes might create opportunities for targeting new
customers, creating new products, or new strategies for pricing, distribution, and
promotion.
As customer insight managers identify new groups of consumers that have
different needs and wants, they try to group them according to one or more
common characteristics so that the brand marketing team can develop the
appropriate pricing, distribution and promotion strategies for them. These groups
are called market segments, and the groups that are of interest to the company
are called target market segments or target customer segments.
Identifying target market segments
Target market segments often have one or more characteristics in common. The
typical characteristics that the insight team studies and uses for segmenting
purposes usually includes some aspects of demographics like age, gender, income,
education, social class, technology use, family size, occupation, etc.. It also may
include psychographic characteristics such as personality, lifestyle, and motives,
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geographic characteristics such as urban or rural, city size, climate, country, etc.,
and behavioral characteristics such as amount of product or service used,
frequency of purchase, brand loyalty, price sensitivity, and purpose for how they
use the product or service.
Table 4.1 Characteristics used for segmenting markets
Demographic Psychographic Geographic Behavioral
Age
Gender
Income
Education level
Social class
Technology use
Family size
Occupation
Personality
Lifestyle
Motives
Attitudes
Country
Region
Type of dwelling
City size
Climate
Volume of use
End use
Benefit
expectations
Brand loyalty
Price sensitivity
For example, a POPCO target segment might be “urban dwelling, technologically-
active Korean housewives with motherhood anxiety”. Our marketing insight team
would use a combination of quantitative and qualitative market research to
identify how many of these women there are, what messages and product
benefits are likely to appeal to them, where they shop, what they feel about our
brands and our intermediaries’ brands, and their sensitivities in terms of product
pricing.
Consumer behavior
The last piece of the insight puzzle is about understanding consumer behavior
with respect to the company and our products and services. Consumer behavior
is involved in every aspect of the end customer’s interaction with POPCO and our
products. So we must understand their behaviors in order to sell to them and
ensure their satisfaction and loyalty.
Aspects of consumer behavior include how much time, effort, and interest the
end customer spends in selecting a product. Generally, a customer will recognize
or act on a need or want by first searching for information, evaluating alternatives,
making a purchase, then evaluating their expectations compared to the actual
experience after purchase.
There are several influences on this process.
Figure 4.2 Types of consumer behavior influences on decision-making
Situational influences are very specific to the immediate purchase occasion:
physical surroundings, social surroundings, time of day, purchase reason, and
buyer’s mood and condition.
Psychological influences are very often within the buyer’s individual mind,
whether consciously or subconsciously, before they approach the purchase
decision. They involve the consumer’s perceptions, motives, learning, attitudes,
personality, and lifestyle.
Decision influences
Situational: immediate
Psychology: individual
Social: community
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Finally, social influences are about the buyer’s family influences, role in their
social circle, peer groups, social class, and the culture and subcultures to which
the buyer belongs. Often these social rules, obligations, and norms will have a
great influence on buyers’ purchases. However, the level of influence varies
greatly in nature between cultures.
The customer insight team will use mostly qualitative research to understand the
relevant consumer behaviors and their impact on the decision process for a
company’s particular product or service.
Once the insight team has delivered a clear picture of the market trends and
opportunities, defined customer segments, and identified the key consumer
behaviors that will affect the target market’s purchase behavior, the marketing
team is ready to go to work on the 4Ps, product, pricing, place (distribution), and
promotion.
While in reality the marketing team would first likely consider product design and
development next, we will look at products in Unit 12. Instead, we will first
consider the basics of pricing.
Pricing
It is the responsibility of the marketing team to deliver revenues to the business
(in other words, to generate sales opportunities and convert them to actual sales).
A key measurement of their effectiveness is net sales. So a key consideration for
the marketing department is to establish a target selling or retail price and
projected volume of sales for the products or services the company sells. This
target price may change as the company applies different pricing strategies to
maximize revenues, encourage purchase and turnover inventory. (This is
especially true if actual sales volumes appear to be different than those
projected.) However, at the start, the company works with base price
assumptions in order to ensure they meet the company’s revenue objectives.
There are three ways to set this base price: according to the costs of production,
according to the demand for products, or according to the prices charged by
competitors in the market.
Cost-based pricing
Setting the base price according to the cost of production is also known as cost-
based pricing. Cost-based pricing is the simplest form of setting a base price. You
simply establish the target profit on a unit basis, then add this to all the costs
related to producing the product (including all direct and indirect expenses). The
difference between the cost of production and the final price is called the markup.
The markup is set to ensure that you cover the costs to produce each product,
plus the additional amount in profit you want to make. Expressed as a percentage,
the markup is the difference in between the final selling price and the unit cost,
divided by the unit cost. (Compare this to the margin, which is the different
between the final selling price and the unit cost, divided by the unit price).
In order to guide setting target sales quantities with cost-based pricing,
operations and marketing teams often together conduct a breakeven analysis.
Breakeven analysis
Breakeven analysis establishes how many units of a product or service must be
produced and sold in order to cover all the costs involved in production of that
product or service. The same technique can also be used to determine how many
units of a product or service must be produced and sold to reach a set target such
as profitability.
The costs are viewed as a combination of fixed costs and variable costs. In order
to calculate the breakeven for a particular product, for instance, you identify the
quantity where the total costs attributable to producing a product are equal to
the total revenues earned by selling the product.
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TC = TR
Total costs are a sum of the variable and fixed costs attributable to a product.
Variable costs may change with the number of units sold, but fixed costs must be
paid no matter how many units are sold. In other words,
TC = VC* Q + TFC
Where VC is the variable costs per unit, Q is the quantity of products and TFC is
the total fixed costs
Total revenues are simply the target selling price for the product times the
quantity sold. The target selling price is set by establishing a target profit margin
and then using cost-based pricing.
TR = P * Q
Where P is the target selling price of the product set according to a target profit
margin, and Q is the quantity of products
Solving for Q, we have
Q = TFC / (P – VC)
So when examining breakeven, companies must first establish the cost
contribution of production. It is easy to establish the direct costs of
manufacturing in terms of materials costs, and it is not too difficult to estimate
the direct labor contribution costs based on the productivity of a particular
product manufacturing line, but testing a small run of production.
Similarly, some fixed costs are easy to attribute to a particular product: campaign
and marketing costs for that particular product, for instance. But what about the
operations management time for a particular product, when it is just one product
being produced in a large factory? What about the inventory costs for one
product in a warehouse full of inventory being constantly moved and managed?
You can see that the process of establishing breakeven is a process of estimations
and guessing in many ways based on information that is known.
However, the basic steps to calculating breakeven are to establish which costs are
fixed and which are variable, and then to calculate the total variable costs based
on the same units (per single unit).
While cost-based pricing seems simple, it can often cause problems. For one thing,
the markup can only be established after all production costs and indirect
expenses are effectively calculated. If additional production costs or indirect
expenses are later incurred, there is no way to recoup these except by eroding
the profit margin on each product.
Secondly, cost-based pricing is not reactive to market forces. A markup may make
the final retail price too high for the price sensitivities of customers, which will
therefore reduce sales volumes, which will in turn erode overall revenues. Cost-
base pricing therefore often creates the need for promotional pricing strategies
to adjust to the market. Cost-base pricing is popular with retailers and
wholesalers, and you can see that these intermediaries rely heavily on additional
pricing strategies like promotions and sales to clear inventory that may have too
high a markup.
Demand-based pricing
One issue with cost-based pricing is that it does not respond to market demand.
For example, cost-based pricing would not capture the possible profit when
demand was high, and might be sensitive to falls in revenues when demand is low.
Demand-based pricing is a different method for setting the base price of a
product or service according to demand. The marketer estimates the quantity of
products that will sell at many prices, the selects the price that will generate the
maximum total revenues. This method requires the marketer to be able to
accurately forecast demand and price sensitivity for products.
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Demand-based pricing can be used to capture the maximum possible revenues
from different customer segments, different purchasing occasions, or through
different purchasing channels. Price is still set according to demand, but this gives
the company more ability to capture more possible revenues than just using one
price for every customer regardless of occasion, segment, or channel
considerations. This is a form of price differentiation.
Competition-based pricing
In competition-based pricing, the company bases its price on consideration of
competitors’ prices. They may set the price the same, above, or below
competitors’ prices to meet revenue and profitability objectives. Clearly, though,
this pricing is qualified by other conditions such as the costs to avoid making a
loss. In such a case, the company would likely exit the product or service market
to avoid making losses.
Beyond base pricing: pricing strategies
Pricing strategies are used to respond to the market in such a way as to ensure
that the company’s overall revenue, market share, or profitability objectives are
met. These overall objectives may not be able to be achieved using stable base
prices alone, mostly due to the lifecycle of the product and other market and
environmental forces.
Types of pricing strategies include: new-product pricing, differential pricing,
psychological pricing, product-line pricing, and promotional pricing.
New product pricing strategies are used specifically to capture value as new
products enter the market. They include price skimming, where the company
charges the highest possible price for the product as it is introduced to the
market and demand is high for its uniqueness or other desirable benefit. New
technology products often use price skimming as they enter the market. The
other type of new product pricing is called penetration pricing. The purpose of
penetration pricing is to penetrate the market as quickly as possible, acquiring as
many customers and quick sales as possible. Penetration pricing does this by
setting the product or service price low. In a way, this is opposite to price
skimming. Penetration pricing’s key objective is market share, while pricing
skimming’s key objective is profitability and exclusivity.
Differential pricing strategies are used to allow a company to maximize revenues
and respond to varying demand and price sensitivities by charging different prices
to different customers for the same quality and quantity of product. Examples of
differential pricing are negotiated pricing, where buyers and sellers negotiate the
final price; secondary market pricing, where different target segments are given a
different price as in early-bird dinner specials, online-only deals, and different
country pricing.
Psychological pricing is where companies encourage purchase based on
emotional rather than economic responses such as in charging odd numbers
rather than whole numbers for items, called odd-number pricing, or giving a bulk
price for many units, called multiple unit pricing. Psychological pricing also
includes bundle pricing, where a company bundles together many products or
products and services together to give the impression of value, as well as
everyday low prices, where a company tries to save intermittent marketing and
promotion costs by developing a brand promise of consistently low prices,
thereby paying for the price discounts.
Product-line pricing is a strategy where companies consider how customers view
product prices in relation to other products in the same line, like printers and
toner cartridges, called captive pricing, or premium items versus everyday
versions, called premium pricing. Another method of product-line pricing is
setting product prices in a product line at predetermined levels: 29,999, 49,999
and 69,999 for instance. This is called price lining.
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Promotional pricing strategies are where companies coordinate pricing with
specific promotional activities to encourage sales (special-event pricing), set
prices extremely low to encourage footfall (price leaders), or promote prices by
showing them compared to a previous price or competitors’ prices (comparison
discounting).
What are the ethical implications of different pricing strategies? When is a
pricing strategy unethical if there are buyers willing to pay the price? How does
the availability of information affect the ethics of pricing, and the rationality of
consumer behaviour in purchase decisions?
Summary: The Marketing Department
In this unit you have learned about:
The different roles and functions within a marketing department, including
the 4Ps
Ways of understanding customer market segments and consumer
behaviors that affect purchase decisions
The different ways to determine pricing
How to calculate margin, markup, and breakeven, and the impact on sales
quantities needed for breakeven and for a target margin %
Different pricing strategies
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Worksheet 4 (front)
Match the general type of pricing strategy with its use.
a) New product b) Differential c) Psychological d) Product-line e) Promotional
1) ___ Papa Johns pizza charges $27.99 for a large pepperoni delivered, $19.99 for
the same pizza take away
2) ___ Apple sells the iPhone 6 in 2014 at $899
3) ___ Daiso charges 1,000 won, 2,000 won, or 5,000 won for all its products
4) ___ Lotte Mart has a Chuseok holiday sale on gift boxes of fruits
5) ___ Burger King offer a “student set” meal including drink, fries and sandwich
for 7,000won
Problem modeling. POPCO is launching a new product this Christmas season to
complement Clucky Chickens: the Clucky Chicken Coop. Based on the strategic
goals of the company and the artificial intelligence toy division’s targets, POPCO
needs the Coop product to contribute 30% operating profit margin. The
Operations team needs you to tell them how many units to target for
production, and the Sales team need you to give them pre-sales targets.
6) If you were the marketing manager, how would you approach this problem
(hint: review what you have learned in this Unit)? List the steps below.
a. Step 1:
b. Step 2:
c. Step 3:
d. Step 4:
e. Step 5:
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Worksheet 4 (back)
19) In the space below, describe 3 different pricing strategies for pricing Clucky
Coops at $5, $10, and $25 respectively. Describe why you might choose each
strategy. Clucky Chickens® retail for $10 each.
20) In the space below, calculate the minimum quantity for production/presales
needed for one of your pricing choices from question 7, given the following
information from operations and your team:
Clucky Chicken Coop related costs
Plastic mold for coop $25,000
Design services $8,000
Materials costs per unit $1.30
Production line labor per unit: assembly, packing $1.00
Inventory management cost per 1,000 units $200
Additional direct overheads: per 1,000 units $50
Promotion campaign $250,000
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Unit 5
Supply Chain and Channel Management,
Category Management, R&D and NPD
Learning objectives of this unit
In this unit you will learn the following concepts:
Supply chain management for a manufacturing firm (in class: diagram)
The kinds and roles of intermediaries in the purchasing and selling of goods and services (in class: discussion)
Different possible distribution strategies (in class: discussion)
Product mix, product line, product family, product line extension (in class: map of POPCO family exercise)
New product development process (in class: exercise)
Category management? (in class: discussion)
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Unit 5 Vocabulary
Order processing (주문처리): receiving and filling customers’ purchase orders
고객들의 구매 주문을 받고 채우는 것
Materials handling (자재운반관리): the physical handling of resources in warehouses as well as during transportation
창고나 운송 중 상품의 물리적인 처리
Inventory management (재고관리): the process of managing inventories in such a way as to minimize inventory costs, including holding costs and potential stock-out costs
재고유지비와 부족재고비를 포함한 재고비용을 최소화하기 위한 재고관리
과정
Warehousing (창고저장): receiving and storing goods and preparing them for shipment
물품을 받고 저장시키고 수송을 위해 준비시키는 것
Logistics (로지스틱스): The overall management of the way resources are obtained, stored, and moved to the locations where they are required along the supply chain.
resource 가 얻어지고 저장되고 공급망이 요구되는 위치에 따라 이동되는
방법에 대한 전체적인 관리
Intermediary (중개인): Individual / firm (e.g., agent, distributor, wholesaler, retailer) that links producers to other intermediaries or the ultimate buyer.
생산자를 다른 중간상 또는 최종 구매자와 연결 시키는 개인 또는
기업(대리인, 유통업자, 도매업자, 소매업자 등)
Retailer (소매상): an intermediary that buys from other intermediaries or producers and sells to end consumers
다른 중간상이나 생산자에게 구매를 하고 최종 소비자에게 판매하는 중간상
Wholesaler (도매상): an intermediary that sells to other firms, particularly retailers
특히 소매상과 같은 다른 조직에게 판매하는 중간상
Agent (대리인): an intermediary that helps exchanges and transactions, usually hired on commission
교환과 거래들을 도와주는 중간상. 보통 수수료로 고용된다
Intensive distribution (개방적 유통): the use of all available outlets for a product
가능한 한 많은 소매 아울렛에 제품을 두는 유통
Selective distribution (선택적 유통): the use of only a portion of the available outlets for a product in each geographic area
각 지리적 지역에서 소규모의 가능한 소매상 집단에만 제품을 보내는 유통
Exclusive distribution (독점적 유통): the use of only a single retail outlet for a product in a large geographic area
큰 지리적 지역에서 단 하나의 소매 아울렛에만 제품을 보내는 유통
Product mix (제품믹스): all the products the firm offers for sale, often described in terms of width and depth. Width is the number of product lines, while depth is the average number of products within each product line. A wide or broad product mix means a company has many product lines, a narrow or limited product mix means there are few product lines and likely few products in each line.
판매를 위해 기업이 제공하는 모든 제품. 보통 너비와 깊이로 설명되어진다.
너비는 제품라인의 개수이며 깊이는 각 제품라인 안에 있는 제품의 평균
개수이다. 넓은 제품믹스는 기업이 제품라인을 많이 갖고 있다는 것을
의미하며 좁거나 제한된 제품믹스는 제품라인이 적다는 것을 의미하고 각
라인에 제품이 적을 것이라 예상된다
Product line (제품라인(계열)): a group of similar products that differ in only minor characteristics, and use the same production processes.
같은 생산 라인을 이용하며 생산되는 비슷한 제품들 중 특징이 조금만 다른
제품.
Product line extension (제품라인확장): the development of a product closely related to one or more products in the existing product line, but designed to meet slightly different customer needs.
존재하는 제품라인과 밀접한 관계를 가지고 있는 상품을 고객들의 요구에
맞춰 살짝 다르게 디자인 하는 제품 개발
Category management (카테고리 관리): Retail strategy in which a full line of products (instead of the individual products or brands) is managed as a group in
48
order to increase sales, using the category manager's knowledge about consumer buying patterns and market trends for that specific product category.
구체적인 제품 카테고리에 대한 소비자의 구매행동과 시장 트랜드에 대한
카테고리 매니저의 지식을 이용하여 판매를 증가시키기 위해 모든 계열의
제품을(개인 제품 또는 브랜드 대신에) 그룹으로 관리하는 소매 전략
49
Supply chain management defined
You have learned about operations management and some of the overlap
between marketing and operations in the satisfying of customer needs and wants.
You can see that some of these tasks and processes would benefit from being
considered together, with improved communication and coordination throughout
the whole process, instead of being thought of as separate, unconnected
functions.
The concept of supply chain management arose from the recognition that
coordination and cooperation between different company departments as well as
between different companies along the path from product idea all the way
through to satisfied end customer could have benefits to all parties involved.
Supply chain management attempts to apply a total system approach to the flow
of resources (information, material, human, financial) through processes in the
transformation of a customer need into customer satisfaction.
Figure 5.1 Sample supply chain
Figure 5.2 Sample information input informing supply chain
Key aspects of the supply chain include product design, purchasing, materials
management, inventory management, quality acceptance testing, storage and
warehousing with the help of logistics, distribution to intermediaries following a
distribution strategy, and then return logistics for items that are unsold, defective,
or otherwise unsatisfactory, which may then need to be scrapped, reworked, or
redesigned.
With the trend toward more informed and demanding consumers, companies
must be more agile (quick and flexible) in satisfying customer needs. This often
requires a higher level of coordination between departments and between
companies than in the past. Notice that purchasing, order processing, quality
testing, storage or distribution, and return logistics require coordination with
outside companies. Supply chain management is therefore often facilitated using
enterprise resource planning (ERP) systems. ERP systems bring together
quantitative, real-time data for all the resources in the supply chain so that
managers can make better decisions.
ERP systems also help record and retain information in the supply chain, which
otherwise might be lost between departments and organizations. This
Design Order
processing Purchasing
Materials management
Production Inventory
management Quality testing
Storage or Distribution
Return logistics
Scrap rework or redesign
Consumer feedback
Customer forecasting
Supplier relationships and discounts
Inbound logistics
Scheduling and customer
prioritization Stock levels
Customer inspection
Logistics integration
Customer feedback
Market feedback
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organizational learning can be an important source of market information and
therefore competitive advantage.
Distribution channels and strategies
One aspect of the supply chain that is critical to a company’s success is the
development of distribution channels and channel strategies. This is one area
where operations and marketing overlap, although many would consider it a
marketing function (P “place”). In fact, distribution channel and marketing
channel are used interchangeably. Marketing is solely responsible for determining
who are the intermediaries in the channel of distribution between finished
production and the end customer. Operations is responsible for fulfilling the
orders and managing the outflow of goods to the channel.
The word channel in business refers to the means used to deliver goods or
services to consumers. Often people talk in terms of “indirect” – through many
intermediaries – or “direct” channels – straight to the consumer. The term has
been adapted to other process contexts, though, and can be applied to sales,
such as “we are moving most of our sales to the online channel”, or promotions,
as in “the outdoor promotions channel was very successful”. In these contexts
channel does not simply refer to distribution only, it refers to the medium
between customer and product or service provider.
Distribution and marketing channels
In the distribution of goods, most companies work with intermediaries who add
value to the product or service in the channel of distributing or marketing
products. Intermediaries are, literally, the people “in the middle” between the
producer and the consumer of goods and services. Often several interdependent
intermediaries form a chain in the successful marketing of goods and services.
These interdependent intermediaries are known as a company’s channel to
market. For instance, POPCO’s channel to market in the USA might include a
North American sales agent, who sells to regional wholesalers who then sell on to
small toyshops. We might also sell and distribute directly to a national toy retail
chain, coordinating with their logistics company to distribute our toys to large
regional distribution centers, which ship on to the various regional super stores.
There is great variety in the kinds of marketing channels we may use.
It is important that intermediaries in the marketing channel add value to the
product or service proposition. Ways intermediaries add value include providing
information back to the producing company about the market and customer,
through promoting the product or service, by finding and locating prospective
buyers, through negotiating price and selling terms, through financing the
distribution of goods, and of course for the distribution itself. For some industries,
channels to market are very standardized, like in the automotive industry. In
others, like ours, there is considerable variety. Most every marketing channel in
every industry has been affected by the development of online technologies and
advanced information systems.
In what ways could the Internet have affected our marketing channel? How might
it affect the automotive channel in the future, and who benefits?
No matter what the product or service, intermediaries in the channel require
motivation from the producing company to market the good or service.
Intermediaries may be working with a producer’s competitors at any given time.
Therefore it is important to build strong relationships with channel intermediaries.
There are two basic categories of intermediaries: wholesalers and retailers.
Wholesalers conduct all the activities to sell products or services to retailers or
other intermediaries in the channel, and to end business customers. While many
wholesalers these days sell to both consumer and intermediary customers, those
that sell primarily to business end customers and other intermediaries are termed
wholesalers. Another term for wholesalers is merchant wholesalers.
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In addition to transportation and warehousing, wholesalers add value by selling
and promoting on the behalf of producers, by buying in bulk and then selling in
smaller bulk units (bulk breaking), by building in-demand assortment of products
that may complement a producer’s product lines and ranges, by financing
through extending credit to their customers and buy placing advance orders to
producer companies and paying on time. They also are excellent sources of
market demand information for producers.
A special category of wholesalers is agents and brokers. They different from
merchant wholesalers in two important ways: they do not take title (ownership)
of the goods, and they do not provide many of the value-added functions of
merchant wholesalers. Why are agents and brokers helpful? They are specialists
in types of products or types of customers, and are very often exceptional at
managing the paperwork required in global trade. Very often agents and brokers
will specialize in inbound or outbound trade for a particular region, product
category, or specific manufacturer. This requires expertise in regulations and
customs amongst other skills. Brokers match buyers and sellers and assist in
negotiations, while agents are typically longer-term representatives of producer
companies. They often perform the role of sales staff or sometimes purchasing
staff that is done in-house in larger companies.
Retailers conduct all the activities to sell products or services directly to end
customers (in this case consumers) for their own use. While many intermediaries
do retailing, in other words, showcase and sell products and services, retailers
derive their primary revenues from retailing. Retailing can be conducted in a retail
environment like a store, or in a non-retail environment like through personal
selling door to door or in a home, through kiosks or vending machines, or through
direct channels like direct mail, home shopping, and of course the Internet. Non-
store retailing is growing rapidly as people choose the convenience and
information setting of the personal environment to make purchase decisions.
There are a wide variety of types of retailers, including specialty stores with
limited types of products, super stores with many kinds of products, discount
stores and off-price retailers (such as factory outlets), department stores,
supermarkets, and convenience stores. As non-store retailing grows, retailers
must seek new ways to entice consumers to their locations, and offer additional
value beyond the mere distribution and display of goods and services.
Marketers must consider the number and quality of intermediaries in their
channels to market, and support and evaluate channel partners. In this way they
manage channels to market.
Marketers may have different distribution strategies, depending on the types of
goods or services that they sell and the customers to whom they sell them.
Intensive distribution means selling in every available outlet, and will require
many different channels to market. Examples include low price consumables like
chewing gum or other convenience store items. Selective distribution means
selling via select outlets, perhaps based on product category, location, or other
considerations. POPCO would likely use selective distribution to ensure our
products are sold in relevant outlets like toy stores, department stores, but not
convenience stores. Exclusive distribution means selling your goods through only
a few, handpicked or controlled outlets in a region. Apple attempts to maintain
the desirability of its products by trying to ensure exclusive distribution in Apple
stores or select partner dealers.
The product mix
The final “P” of marketing is product. We have discussed how marketers conduct
research and segmentation to understand different customer needs and wants
and their buying behaviors. This helps marketers develop new product
requirements. Truthfully the process of new product development varies
considerably from industry to industry, company to company. But how do
marketers manage existing products, and the relationship of customers and
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consumers to all of the products or services a company has to offer? This is called
managing the product mix.
The product mix is a signal to intermediaries about the strengths and knowledge
of a company in particular areas of customer needs and wants. A company with a
wide product mix is involved in satisfying a wide variety of customer needs and
wants, with many product lines. A product line is a group of products produced
using primarily the same production process, with minor differences that respond
to different customer needs. A company with a narrow product mix might only
focus on a particular category of needs. A deep product mix means that the
company offers many products in each product line to customers, hoping to
capture more customers overall.
Larger companies with deep product lines will try to “own” the customer through
all of the purchasing required in that particular experience of needs and wants
fulfillment. They develop product families that are product lines related to the
same customer experience. Developing a product family can help use the loyalty
of a customer for one product or product line in order to sell them more products
in different but related lines. Product families often also provide consumers
opportunities to share their product experience and encourage purchase with
new customers who have different needs.
Managing multiple, deep product lines or product families requires sophisticated
knowledge of the consumer, as well as proactive management of products
through their lifecycle. A successful product or product line may demand the
addition of new products to meet slightly different customer targets or new
customer demands, in order to renew buying opportunities. The addition of such
products to a line is called product line extension. On the other hand, the
company may need to quickly replace or delete a product from a product line to
adjust to changing customer needs and wants.
A single product or service unit has a unique identity within the set of products
a company sells, that allows it to be tracked in the supply chain and especially for
inventory purposes. This is called a stock keeping unit or SKU.
New product development
New product development to extend product lines or establish new product lines
is a critical aspect of company development. The process of new product
development varies from company to company, but includes stages of market or
product research, concept testing and financial assessment, prototyping, market
testing, further development, product launch, and evaluation.
These days with the pressure to bring products to market more quickly, many
companies are shortening their market and product research time and instead
doing in-house or observational research to correct or establish the requirements
for new products. Consumer products companies have developed the expertise
(or the suppliers with expertise) to rapidly prototype and then launch products
into the market, knowing that there may be a chance of problems, dissatisfaction,
or even failure. However, with the volume of products launching so quickly, the
cost of this failure may be acceptable compared to the relative cost of time-
consuming an expensive research as was conducted in the 20th century for each
new product.
Such a “just good enough” product development strategy relies on live feedback
from the market to make incremental improvements. You can see this kind of
development cycle for products in industries that rely on software (which can be
more easily updated and improved compared to incentivizing a new hardware
purchase), or where the standard product development cycle is very short, as in
fast moving consumer goods industries (“FMCG”). For products that demand
more spend and consideration from the consumer such as automobiles and white
goods, new product development is still a rigorous process involving extensive
testing and market research.
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Companies are always looking for ways to launch products that look and feel
“new and improved” to the customer, but without the operations or research
cost and risk required of breakthrough innovation. Managing the risks involved in
new product development is much easier for larger conglomerates than smaller
companies. However, any new product development risk can harm a company’s
reputation.
Category management
In addition to developing the channel to market for a company’s products and
services, it is important that a company who sells ultimately through retail
understand the concept of category management. Understanding category
management is essential so that a company can best support and control the
availability and desirability of its products against competitors’.
In the retail sector, category management is the key principle for organizing and
evaluating businesses. Products and services are managed along category lines,
groups of products related to one another in the customer’s mind. A category
manager will take decisions on which products are represented in each category,
and which products are given priority within categories in the display and
promotion of category items.
Category managers are responsible for the inventory turnover and profitability of
their whole category (which includes every product within it), even though the
product producers themselves are likely to be competitors. They will have a deep
understanding of the role of the category with respect to other categories in the
retailer, and try to maximize their category’s profitability by setting category-
appropriate targets, retail strategies, and sales tactics. Product producers often
play a very important part in these sales tactics and retail strategies.
Decisions that affect which products category managers choose to stock include
price, sell through rate, reputation, popularity, promotion support, and discounts
or sales support for the retailer. Category managers are experts in the changing
needs of consumers for their particular category items, and are up-to-date with
new technologies and other environmental forces impacting product
development. For this reason, they are an extremely valuable source of
competitive market information for a producer’s sales team and for sales agents
In what ways can channel cooperation help address social responsibility
issues?
Summary: Supply chain, channel, and
category management
In this unit you have learned about:
The definition of supply chain management
The difference between different intermediaries
Distribution strategies
Product definition and the meaning of SKU
The definition of a product mix, a product line, product families, and
product line extensions
Channel management
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Worksheet 5 (front)
Fill in the blank with the appropriate term.
1) ______ is a system technology to help provide real time supply chain data.
2) A retail ___________ is groups of products related to each other in the
consumer’s mind.
3) The number and type of intermediaries defines a company’s marketing or
distribution ___________ strategy.
4) Smaller companies without a sales force often use ____________ to fulfill this
role.
5) The addition of Rolly the Rabbit adds to our __________________ of artificial
intelligence toys.
6) Our distribution strategy would unlikely be ____________ because we would
like to have more than one retailer in any given region, and our price point is
relatively low.
7) All of the toys POPCO sells, including traditional toys, board games, artificial
intelligence toys and accessories, are known as our _________________.
8) These days it is difficult to tell apart retailers from ______________ because
many sell directly to the public in addition to business customers and
intermediaries.
9) Catalog, Internet, and vending machines are all examples of ___________
retailing.
10) The process of managing the return of items because of defects or other
problems is called __________________.
11) New product development cycles are faster these days, involving rapid
________________ of new products for testing (building working samples).
Multiple choice. Select the one best answer. 12) If POPCO executives decided that we must be more efficient in our supply
chain, what solution would we likely not pursue?
a. Move to intensive distribution
b. Outsource logistics
c. Consolidate intermediaries
d. Open direct sales via an online shop
13) If POPCO executives determined that there is unsatisfied demand for
artificially intellgient toys, but they do not want to invest heavily in new
equipment or staff, we should recommend the following:
a. Adding a new product familiy
b. Widening our product mix
c. Deleting the Clucky Chicken® product line
d. Extending our Clucky Chicken® product line
14) Which category should we negotiate our artifically intelligent Farm Friends®
family of toys to be placed next to with our supermarket customers?
a. Baby food
b. Gardening and pets
c. Outdoor equipment
d. Children’s art supplies
15) Visit a store that sells Zhu Zhu Pets® or many stuffed animals. On the back,
draw an overview layout of the store, including the product categories. Why
do you think the stuffed animals are located where they are? Explain on the
diagram.
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Worksheet 5 (back)
Draw your diagram and include category names here, plus your explanation.
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Unit 6
Reaching Global Markets
Learning objectives of this unit
In this unit you will learn the following concepts:
Two international organizations that facilitate international trade (in class: examples)
The different ways firms grow and expand internationally (in class: exercise)
The different tools for restricting trade and when are they utilized (in class: exercise)
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Unit 6 Vocabulary
IMF and the World Bank (국제통화기금 & 세계은행): Two international organizations that help the globalization and development of nations.
세계화와 각국의 발전을 돕는 국제적인 기구
Balance of Payments (국제수지): A record of all transactions made between one particular country and all other countries during a specified period of time. BOP compares the dollar difference of the amount of exports and imports, including all financial exports and imports. A negative balance of payments means that more money is flowing out of the country than coming in, and vice versa.
특정 기간 내에 다른 나라와의 거래를 기록한 것. 국제수지는 수입과 수출의
차이를 비교하며 국제수지적자는 들어오는 돈보다 나가는 돈이 더 많다는
것을 뜻한다.
Licensing (라이센싱): A contractual agreement in which one firm permits another to produce and market its product or resources and use its brand name in return for some consideration, typically in the form of a royalty payment or other compensation.
상표 등록된 재산권을 가지고 있는 개인 또는 단체가 타인에게 대가를 받고
그 재산권을 사용할 수 있도록 상업적 권리를 부여하는 계약.
Intellectual property (지적재산): The set of intangibles owned and legally protected by a company from outside use or implementation without consent. Intellectual property can consist of patents, trade secrets, copyrights and trademarks, or simply ideas if executed in a tangible form.
외부에서 동의 없이 사용 또는 구현될 경우 법적으로 보호받을 수 있는 회사
소유의 무형의 집합체. 지적 재산은 특허, 영업비밀, 저작권과 상표 등이 될
수 있으며, 간단하게는 아이디어 등도 유형의 형태로 실행 될 경우 해당 될 수
있다.
Patent (특허): A government license that gives the holder exclusive rights to a process, design or new invention for a designated period of time.
지정된 기간 동안 과정부터 디자인, 신 발명품 등의 권리를 정부가
소유자에게 부여하는 일종의 라이선스(허가).
Trademark (상표): A brand name or brand mark with the same protection from the government patent office.
브랜드 이름이나 브랜드 마크(로고 등) 가 정부 특허청에서 받는 보호.
Franchise (체인점): A type of license that a party (franchisee) acquires to allow them to have access to a business's (the franchisor) proprietary knowledge, processes and trademarks in order to allow the party to sell a product or provide a service under the business's name. In exchange for gaining the franchise, the franchisee usually pays the franchisor initial start-up and annual licensing fees.
프렌차이조의 상표, 상호의 사용권이나 제품의 임대 또는 매매 권리 등을
프렌차이지에게 주고 그에 따른 적정의 수수료를 받는 계약이다.
Contract manufacturing (계약생산): Production of goods by one firm, under the label or brand of another firm. Also called outsourcing.
한 회사가 다른 회사의 라벨 또는 브랜드의 이름으로 제품을 생산하는 것.
아웃소싱이라고 불리기도 한다.
FDI (해외직접투자(외국인직접투자):): Also known as Foreign Direct Investment, an investment made by a company or entity based in one country, into a company or entity based in another country.
한 나라의 기업이 다른 나라에서 새로운 사업체를 설립하거나 기존 사업체의
인수를 통하여 이를 통제할 수 있는 투자지분을 획득하여 장기적인 관점에서
직접경영에 참여하는 것을 목적으로 하는 투자.
Joint venture/ strategic alliance (합작투자/전략적 제휴): A business arrangement in which two or more parties agree to pool their resources for the purpose of accomplishing a specific task.
둘 이상의 기업이 특정 목표를 달성하기 위해 경영자원을 공유하거나
협력하는 일정기간 동안의 지속적 협력관계를 말한다.
Horizontal merger (수평 합병): A merger occurring between companies in the same industry typically to gain economies of scale.
동일산업에 있는 기업간의 합병. 시장점유율을 확대하거나 제품생산에서의
규모의 경제를 달성하기 위해 경쟁기업을 매수하는 것이다.
Vertical merger (수직 합병): A merger between two companies producing different goods or services for one specific finished product.
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제품의 생산이나 원재료의 공급 등이 상이한 단계에 있는 기업간에 이뤄지는
합병을 말하며, 주로 대기업이 원료에서부터 완제품의 유통까지 모든 단계를
지배하려는 목적에서 기업의 상하 계열관계에 있는 회사를 매수하는 형태.
Conglomerate merger (혼합 합병): A merger between firms that are involved in totally unrelated business activities.
상호관련성이 없고 경쟁관계가 없는 이종업종의 기업들 간에 이뤄지는
합병을 말한다. 주로 재무적 측면에서 상승효과를 얻기 위한 합병이지만
일반관리기술의 이전 등 경영 측면에서의 효과도 있을 수 있다.
Trade Deficit (무역 적자): An economic measure of a negative balance of trade in which a country's imports exceeds its exports.
국가의 수입이 수출을 초과 했을 때 나타나는 무역수지 적자.
Tariff (관세): A tax imposed on imported goods and services.
수입에 부과되는 세금.
Dumping (덤핑 (투기/폐기)): In international trade, the export by a country or company of a product at a price that is lower in the foreign market than the price charged in the domestic market.
상품가격을 국내보다 수출국 현지에서 더 낮추어 판매하는 행위.
Import Quota (수입할당): A government-imposed trade restriction that limits the number, or in certain cases the value, of goods and services that can be imported during a particular time period.
한 국가가 수입하는 특정 범주의 상품 수를 제한하는 것.
Embargo (금수조치): A government order that restricts or forbids commerce or exchange with a specified country, organization, or individual.
특정 상품의 수입이나 수출에 대한 완전한 금지 또는 특정 국가와의 무역을
완전히 중단하는 행위.
Foreign Exchange Control (외환 통제): Types of controls that governments put in place to ban or restrict the amount of foreign currency or local currency that is allowed to be traded or purchased.
사고 팔 수 있는 외환의 금액을 제한 하는 것.
Currency Devaluation (통화 평가절하): A deliberate downward adjustment to a country's official exchange rate relative to other currencies.
한 나라의 통화의 대외가치가 하락하는 것.
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From local to global: financing growth
You have seen in Units 1 and 2 how competitive market economies encourage
firms to be more productive, specialized, and global. One of the key resources
needed to take advantage of these trends is money (also called capital). Private
companies can raise money to finance growth through several means, including
incorporating and selling stock, accepting private loans, or in the case of more
substantial companies by issuing bonds.
But if you are a small or struggling firm wanting to compete domestically or
internationally, how do you find the capital to enter these supplier and customer
markets? Some companies rely on subsidies; others on support or tax concessions
from their governments. Trade and industry organizations occasionally also
provide financial support (which is often redistributed funds from the
government).
Governments play a key role in this distribution of capital to fund and encourage
trade, and set their trade and economic policy accordingly.
So how does a country access the capital required to compete in global markets,
and how are these markets facilitated?
Facilitating trade: IMF and the World Bank
Two international organizations that facilitate international trade between
nations are the International Monetary Fund (IMF) and the World Bank. While
they share some of the same objectives in fostering global trade and
development, their purposes are quite different.
The IMF’s purpose is to promote monetary and exchange stability, facilitate the
expansion and growth of international trade, and help countries to manage
international transactions and balance of payments by lending funds. In this way,
it is like the central bank of the world.
The IMF monitors monetary policy and exchange rates around the world in order
to facilitate global market stability. The IMF’s economists and researchers
examine environmental trends on a country, region and global basis to alert its
member states to developments that might threaten trade.
They also provide a forum for countries to discuss policies that may restrict trade.
Globalization can impact countries dramatically with swift movement of capital
and comparative advantage, which can drive political responses that harm trade,
restrict capital and labor movement, and create unsustainable tax policy. The IMF
provides guidance and mediation to avoid such trade obstacles.
Often political or economic instability in one country can lead to economic
difficulties in another region or industry. The purpose of the IMF is to avoid such
domino effects on the world economy. They provide technical advice and
development support in the form of loans to developing nations.
They also provide short-term loans particularly foreign currency loans for
countries experiencing short-term challenges with their balances of payments.
These loans are often made at concessionary rates, that is, below the market rate.
The money available for loans is contributed regularly by IMF members on a
quota system that reflects the relative economic size of the country in the world
economy. The quota system is also the basis for member states’ voting power in
the IMF, much like the corporation model of voting rights for investors.
In the past the IMF has been accused of favouring wealthy large countries while
harming the development of low-income and developing economies in its
activities. This is a problem because developing and growing economies provide
the “engine” and dynamism for the global economy as a whole. This critique has
been the legacy of the quota system. In 2008 the IMF members voted to reform
the quota system to better reflect the contribution (but not size) of developing
and fast-growth economies.
The World Bank’s stated goal is to free the world of poverty. Its activities are also
to promote trade and development, but not for the purpose of stability, but to
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eliminate poverty. Towards that end, they offer financing, advice and research to
low-income countries to aid their economic development.
The World Bank is comprised of two institutions: the International Bank for
Reconstruction and Development (IBRD) and the International Development
Association (IDA). IBRD members are also required to be members of the IMF. All
members contribute funds to the bank, and their voting power reflects their
economic size (and contributions).
Leadership of the World Bank is controlled by the most wealthy and developed
nations (notably the U.S.) through their voting system. Many criticize the World
Bank for favouring wealthy countries and encouraging economic approaches that
are harmful to developing economies. A former World Bank Chief Economist,
Joseph Stiglitz, has repeatedly criticized the World Bank’s focus on GDP figures as
a measure of development and loan performance, rather than sustainable
measures of improved standard of living, industry health, employment figures
and equality standards.
Ways to grow and enter foreign markets
There are many ways to grow and enter foreign markets, other than simply
producing your products locally and exporting them overseas. Exporting can be
costly and requires knowledge of consumer tastes and behaviors, regional
regulations, tax laws, import regulations and trade restrictions. Often companies
will use agents, brokers, or wholesalers rather than sell directly in foreign
territories. We will explore these more in the marketing and operations units. But
to grow as a company, there are several different common ways, each with their
advantages and disadvantages.
Licensing
Licensing is one of the simplest forms of growing a company’s market. It requires
limited investment from the firm, and can result in hassle-free fees and royalty
income. A license is a contractual agreement in which one firm permits another
to produce and market its product or resources and use its brand name in return
for some consideration, typically in the form of a royalty payment (a fee granting
the permission) or other compensation. The license typically grants permission to
use intellectual property in the form of patents or trademarks by the licensing
firm for a specific period of time, in a specific region, and for a specific purpose.
Licenses are only of interest if the licensor company’s products, services, brand or
other intellectual property is in demand and difficult to imitate. The risk of
licensing is that a company loses control of its brand and therefore reputation in
territories not in its control. However, licensing is a fast way of raising low-effort
income.
Franchising
You are probably familiar with franchises, particularly in the fast food industry. A
franchise is a type of license that a person (franchisee) acquires to allow them to
have access to a business's (the franchisor) proprietary knowledge, processes and
trademarks in order to allow the person to sell a product or provide a service
under the business's name.
In exchange for gaining the franchise, the franchisee usually pays the franchisor
initial start-up and annual licensing fees, and sometimes royalty fees as well.
Some franchisees also pay a share of their revenues back to the franchisor.
There are clear benefits of franchising for a firm wanting to grow: fast and
controlled growth; low capital investment and operating costs (these are paid and
arranged by the franchisee) which means more money for developing and
marketing the franchised brand, products and services; clear standards of
operation for the franchisee that can allow for standardization; and ongoing cash
income.
The disadvantages for the franchisor of franchising are the hassles of dealing with
franchises often run by inexperienced business people who are in competition
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with rivals and each other. This often leads to poorly run franchises or lawsuits
where the franchisee sues the franchisor. For this reason some franchisors invest
a great deal in developing their supply chains, set-up capital systems and
resources, real estate and financial expertise to eliminate the risk of under-
qualified franchisees damaging the company’s reputation and brand.
What has the growth of global franchises meant for local companies and
industry? Why have they been so successful, even when many people oppose
them?
Contract Manufacturing
Another way to grow is for a firm to contract with a different company in another
region to produce their products or services, under their own brand or label.
Another term for contract manufacturing is outsourcing. Contract manufacturing
is how most businesses access international markets in some part of their supply
chain. Difficulties arise with outsourcing when the terms of the contract are not
met, or the conditions of the contracted firm do not meet the standards of the
contracting firm.
Outsourcing is often pursued to reduce the impact of labor and material costs,
but puts pressure on low-income nations where standards for resource
protection, health and safety, equality and human rights may be low or
unenforced. Increasingly firms are examining how best to monitor and control
these aspects of the firms to whom they outsource production and services.
Foreign Direct Investment (FDI)
FDI is an investment made by a company or entity based in one country, into a
company or entity based in another country. It is similar to contract
manufacturing, but the relationship between the companies is more significant,
giving the investing firm some amount of control over the local firm. FDI is often
heavily subsidized by governments seeking inward investment.
The investing company may make its overseas investment in a number of ways -
either by setting up a subsidiary or associate company in the foreign country, by
acquiring shares of an overseas company, or through a merger or joint venture.
The accepted minimum ownership for a foreign direct investment relationship, as
defined by the OECD, is 10%. That is, the foreign investor must own at least 10%
or more of the voting stock or ordinary shares of the investee company. For this
reason, it often requires more investment and involves more investment risk than
contract manufacturing.
Open economies with good growth prospects tend to attract larger amounts of
foreign direct investment than closed, highly regulated economies. FDI is not only
used for accessing lower labor and material costs, but it can be an effective way
of opening up new markets particularly in the retail sector.
Joint ventures (JV) and strategic alliances
Joint ventures and strategic alliances are very similar in providing a path to
growth for companies. They are a business arrangement in which two or more
parties agree to pool their resources for the purpose of accomplishing a specific
task. This task can be a new project or any other business activity.
In a JV each of the participants is responsible for profits, losses and costs
associated with it. However, the venture is its own entity, separate and apart
from the participants' other business interests. The JV typically lasts only for the
duration of the project or until the goal is accomplished. Joint ventures tend to be
very structured with clearly quantified objectives. Joint ventures require a
significant amount of capital and management investment, however this
investment is much lower than it would be if any of the involved firms were to
attempt the project alone. In fact, in many cases the JV is used for projects where
no one firm could afford the required investment.
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A strategic alliance is less involved and often less quantifiable than a joint venture.
In a strategic alliance, each company maintains its autonomy while gaining a new
opportunity. The opportunity could be external or internal for the company. A
strategic alliance could help a company develop a more effective process, expand
into a new market, or develop an advantage over a competitor, among other
possibilities.
Mergers
For firms that have mutually beneficial resources and the potential to save money
by combining resources, a merger may be appropriate. A merger is where two or
more companies join operations and ownership to become one entity.
Unfortunately, mergers rarely create the synergies (cost savings and increased
revenues) anticipated, while they can increase share price volatility and also
destabilize the company’s workforce. In many cases, mergers destroy market
value in the long term rather than create value.
There are three main types of mergers:
Horizontal: A Horizontal merger is a business consolidation that occurs between
firms who operate in the same space, often as competitors offering the same
product or service. Horizontal mergers are common in industries with fewer firms,
as competition tends to be higher and the synergies and potential gains in market
share are much greater for merging firms in such an industry.
Vertical: A vertical merger occurs when two or more firms, operating at different
levels within an industry's supply chain, merge operations. Most often the logic
behind the merger is to increase synergies created by merging firms that would
be more efficient operating as one.
Conglomerate: A merger between firms that are involved in totally different
business activities prior to the merger. There are two types of conglomerate
mergers: pure and mixed. Pure conglomerate mergers involve firms with nothing
in common, while mixed conglomerate mergers involve firms that are looking for
product extensions or market extensions.
What way should POPCO use to access foreign markets? What paths to growth
are not appropriate for POPCO?
Why restrict trade?
As companies grow and enter global markets, they will encounter restrictions to
trade. Restrictions to trade are often discussed at the same time as trade
balances and trade deficits. Countries have a national interest in keeping a
healthy trade balance – the balance between the value of imports and exports –
with other countries. This helps stabilize their economies. A trade deficit
represents an outflow of domestic currency to foreign markets. Economic theory
dictates that a trade deficit is not necessarily a bad situation because it often
corrects itself over time. But long-term or significant trade deficits can drain a
country’s resources and political power eventually.
For this reason, trade restrictions (imposed through trade policy) are often used
to stabilize the balance of trade of a particular country. Often they are intended
to increase exports or reduce imports, or protect domestic production. In this
way global trade and international policy and politics are intertwined.
Trade restrictions can therefore limit access of growing companies to global
markets. It is important for firms to understand the different kinds of trade
restrictions, why they are used, and where they are likely to be encountered.
Types of trade restrictions
Tariff
Tariffs are the most common form of trade restriction, and one of several tools
available to governments to shape trade policy. Tariffs are simply taxes levied on
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imported products and services. Tariffs increase the price of imported goods and
services, making them more expensive to consumers. Governments may impose
tariffs to raise revenue or to protect domestic industries from foreign competition,
since consumers will generally purchase cheaper foreign produced goods.
The main benefit of tariffs is clear: tariffs raise revenue for the levying
government. However, tariffs can lead to less efficient domestic industries, and
can lead to trade wars as exporting countries reciprocate with their own tariffs on
imported goods. The World Trade Organization was set up to mediate between
countries in conflict due to trade disagreements, often caused by the use of too-
high or unfair tariffs.
People often use the word “levy” when discussing trade restrictions: to levy a
tariff for instance. Levy simply means to impose. It is often used with tariffs and
also fines: the government levied a tariff on sugar imports. The word “duty” is
often used in discussions of trade restrictions. It does not mean in this case a
moral obligation, but instead it means a tax, fine or other legally enforced
obligation.
Dumping
A different way of undermining foreign competition and manipulating markets is
through dumping. Dumping usually involves one country exporting massive
volumes of a particular product typically at below-market price, causing local
producers and manufacturers to go out of business. Dumping is regulated by the
WTO and countries can petition for restrictions or fines to be placed on nations
seen to be dumping.
Import quotas
An import quota can limit the number or value of particular goods imported to a
country, but do not have the benefit of raising revenue. Import quotas are mostly
used to restrict foreign competition and increase domestic production.
Unfortunately, because of the interdependency of companies from different
countries in every step of the supply chain, import quotas can often protect one
kind of producer or manufacturer while harming another in a particular industry.
Many foreign manufacturers and producers respond to import quotas by varying
the specification of their products, or launching joint ventures to produce the
product or service in the restricted area. In this way they circumvent the
restrictions. Import quotas can have the undesirable effects of increasing
corruption amongst administrative officials selecting approved importers, and
also of smuggling. Governments can also use the selection of importers to exert
political power abroad.
Embargo
An embargo is typically motivated by politics rather than economic rationale, and
is viewed as an extreme measure. Because an embargo restricts or more often
prohibits trade with a country, organization, or individual, it can be a potent
political tool. Critics claim that embargoes actually do the most harm to those
that are already victims of the unfavorable practices.
Foreign exchange (Forex) control
Governments use foreign exchange controls to stabilize their currencies and
currency inflows and outflows, as well as the influence of foreigners and their
capital on the local economy. Common exchange controls include banning the
use of foreign currency and restricting the amount of domestic currency that can
be exchanged within the country.
Developing economies or those with vulnerable economies often must rely on
foreign currency controls to prevent volatility in their markets, which can lead to
sharp increases in currency values against foreign currencies, which in turn drive
inflation. Because foreign currency controls can be used as a political weapon
rather than a beneficial economic policy tool, the International Monetary Fund
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regulates the use of foreign exchange controls amongst its members to those
with transitional economies only.
Foreign exchange controls often have the undesirable effect of encouraging black
markets to exchange local domestic currency for stronger international currencies.
Because the stronger currency is in more demand, black market exchange
effectively weakens the value of the domestic currency significantly, increasing
the exchange rate of the foreign currency to higher than that set by the
government.
Currency devaluation
Currency devaluation is the monetary policy of reducing the value of a currency
with respect to a foreign currency. In a fixed exchange rate regime, only a
decision by a country's central bank can alter the official value of the currency.
The bank does this either through the trading of foreign currency reserves which
alters the supply of its currency and thus the value, (and in the open market the
demand through anticipation of devaluation of the domestic currency), or
through exchange controls limiting the buying and selling of the domestic
currency.
Devaluation makes a country's exports relatively less expensive for foreigners,
encouraging foreign consumption. It also makes foreign products relatively more
expensive for domestic consumers, discouraging imports. . As a result, this may
help to reduce a country's trade deficit. However, other countries may complain
about this practice limiting international growth and fair competition.
Devaluation does not necessarily encourage domestic demand, however, and
perception that low cost domestic goods are inferior can create political issues
with domestic consumers wanting more choice
Regulations
While regulations are typically enforced not to restrict trade but to ensure fair
operating standards to protect stakeholders, they can also be used to effectively
restrict trade. Governments and industries wanting to limit competition can
employ regulations to restrict market entry to only a few competitors. In this way
regulations can favor large, established corporations over smaller, less developed
or more innovative ones.
What types of trade restrictions affect the toy industry?
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Summary: Reaching global markets
In this unit you have learned about:
The main international organizations that facilitate growth and trade
The different methods firms use to grow and enter international markets, and
the benefits and drawbacks of each method
The common restrictions to trade, their purpose and limitations
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Worksheet 6 (front)
True or False.
1) _____Both the IMF’s and the World Bank’s activities directly work to stabilize
currencies and interest rates.
2) _____The World Bank’s purpose is to end poverty in the world, so its members
have equal voting rights and power.
Match the growth strategy with its main benefits. Select the one best answer.
a) JV by sharing resources
b) Outsourcing s
c) FDI investment
d) Licensing that would otherwise be unaffordable for single firms
e) Vertical merger without profit and loss responsibility
3) ____Can improve efficiency in a single supply chain
4) ____A fast way of raising low-effort income for well-known brands or firms with
unique technologie
5) ____Helps to reduce labor costs without long-term
6) ____Helps make possible giant, expensive projects
7) ____Gives some foreign production control to a firm
Match the trade restriction with its main disadvantages. Select the one best
answer.
a) Tariff
b) Dumping
c) Regulations
d) Embargo for the company and country involved
e) Forex controls
8) ____Can protect large corporations unfairly and limit market entry of small firms
9) ____Politically-motivated prohibition that can harm political and economic
victims
10) ____Can encourage currency black markets and so destabilize local currencies
11) ____Can lead to intervention by the WTO and fines
12) ____Often leads to trade wars if seen as unfair
13) Explain and analyze the headline story on the reverse based on what you
have learned in this unit.
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Worksheet 6 (back)
Explain the headline from the Korea Times news according to what you have
learned in this unit. Describe why it might be unrealistic in terms of growth
strategies, their costs, requirements, and barriers.
Also, give you opinion: do you think Caffe Bene will succeed?
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Unit 7
Corporate Organization and Planning
Learning objectives of this unit
In this unit you will learn the following concepts:
How companies organized, and the principles of company organization (in class: walk through)
The tools that help companies to organize effectively (in class: organization chart exercise)
The general categories of jobs and job functions (in class: discussion)
Organizational design and how it is related to authority and hierarchy (in class: discussion)
How organizations plan (in class: organization exercise)
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Unit 7 Vocabulary
Departmentalization (부문화): the process of grouping activities into
departments. Division of labor creates specialists who need coordination. This
coordination is facilitated by grouping specialists together in departments.
분화된 여러 활동을 분류해 유사한 직무끼리 집단화 하는 것. 분업은
전문가들의 합동을 요구하며 이 합동력은 전문가들을 집단화 함으로 가능해
질 수 있다.
Organization chart (조직도): a graphic representation of the structure of an
organization, showing the relationships of the positions or jobs within it in a
hierarchy.
조직의 편성, 직위의 상호 관계나 책임과 권한의 분담 계열, 지휘,명령 계통
등을 한눈에 볼 수 있게 제작한 표.
Job Design (직무설계): the systematic and purposeful allocation of tasks to
individuals and groups within an organization. Job design originated with the
ideas of Taylorism, but has since evolved through a systems approach as well as
individual personality-driven model.
개인과 조직을 연결시켜 주는 가장 기본적인 단위인 직무의 내용과 방법 및
관계를 구체화하여 개인의 욕구와 조직의 목표를 통합시키는 것. 직무설계는
테일러리즘의 아이디어들에서 비롯되었다. 하지만 그 이후 체계론적
접근법과 개인의 성향 위주의 모델에 의해서 발전되었다.
Chain of command (지휘 계통): the order in which authority and power in an
organization is wielded and delegated from top management to every employee
at every level of the organization. Instructions flow downward along the chain of
command and accountability flows upward.
최고 경영층에서부터 조직의 모든 사람들에게 조직의 권위와 권한이
위임되는 순서. 지시는 지휘 계통의 아래로 흐르며 책임은 위로 흐른다.
Line management (계통 관리): the direct supervision and coordination of the
employees directly involved in producing the business’s products or services.
기업의 제품이나 서비스 생산에 직접적으로 관련된 직원을 직접 감독하고
조언하는 것.
Staff functions (직원직능): secondary business activity that supports the line
functions of a business (typically by advising them) to achieve the business’s
objectives. In business management, staff functions are usually defined as all
functions that are not line functions.
기업의 목표를 달성하기 위해 기업의 (주로 조언을 통하여) 라인 기능을
지원하는 보조 사업 활동. 경영에서 직원직능은 라인 기능을 제외한 모든
기능으로 정의 된다.
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Organizing a company
When companies start they tend to group people by the similar tasks that they
perform or skills they have. This is called functional departmentalization, and is
very common form of organization for small to medium-sized firms.
Functional departmentalization allows companies to refine and standardize the
processes of each department. Employees hone their skills and become familiar
with the tasks required. The coordination between department members
increases. This type of organization emphasizes efficiency and processes. The
internal focus of departments helps companies to document and standardize the
tasks they perform to make them most efficient within each department.
Functional departmentalization drawbacks
Functional departmentalization has many benefits, including inter-departmental
coordination and process-driven efficiency. But by nature it encourages
departments to look inward rather than outward, and decreases coordination
between departments if managed in a scientific way. (Scientific management,
sometimes called Taylorism, is the principle of evaluating the most efficient
method for doing a task regardless of labor or operator, then ensuring uniformity
and conformity in execution of that task. This is in contrast to “rules of thumb”,
intuition, or individual choice in how one conducts their job tasks.) In a modern
competitive context where firms are encouraged to not only be economically
efficient but also to compete and grow, an inward, departmental focus creates its
own inefficiencies. During early industrialization, the pace of change was
relatively slow by comparison, so departmentalization and scientific management
worked well. But competitive forces and the need for innovation increased
throughout the 20th century, seeing a decline in strict departmentalization and
scientific management. Much of the principles of scientific management have
been absorbed into operations process analysis.
In a modern competitive context with ever-changing environmental forces, a firm
requires extreme coordination between departments, as well as an outward focus
on competitors and especially the customer. Creativity and innovation are critical
to being competitive, and flexibility is essential to respond to fast-changing
environments. A company needs to manage the human relations within the firm
to best ensure employees are effective and innovative, not just efficient. And
companies need exceptional access to information to do their increasingly
complex jobs well and respond to changing environments.
Figure 7.1 Functional areas of a modern business
What other functions do you think POPCO should include as part of its essential
business? What functions do you think could or should be outsourced?
Modern departmentalization
These days, firms often develop a mixed form of departmentalization as they
grow: they may incorporate a focus on a product line or category of products, or a
particular geographic region, or according to a type of customer. Often these
different organizing methods are added on top of a foundation of functional
departmentalization, and organically change as the firm grows into new markets.
Production (Operations)
Marketing (Including
Sales)
Finance and Accounting
Human Resources
Information Technology
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In order to clarify the organization of a company, firms typically diagram their
organization of different departments and people using an organization chart. An
organization chart not only describes the separation between different
departments, it also graphically shows the chain of command – who reports to
whom. It is important for employees to have clear lines of authority, and not
report to two different people who might instruct them to do competing tasks.
Figure 7.2 POPCO’s original organization chart before launching Clucky Chickens™
In this early organization chart, POPCO designed jobs and allocated tasks
according to function. This is how POPCO’s head office was organized until last
year. Before launching Clucky Chickens, POPCO produced a wide variety of very
simple kinds of toys. At that time, they marketed their toys directly in the Korean
market, and through distributors in America and Europe. POPCO was a small
company by toy company standards. But with the launch of Clucky Chicken™ last
year, POPCO wanted to organize so they could grow rapidly.
Clucky Chickens were a new kind of toy for POPCO, and required a new
production setup. How could they best re-organize to focus on expansion and
efficient Clucky production, without threatening their existing operations?
As stated before, they had many choices: they could reorganize according to
product, by geography, or by type of customer. Following are some examples of
what that new organization might have looked like.
Figure 7.3 Product-led departmentalization
CEO
Chief Operating Officer
Production
HR
IT
Director of Marketing
Brand Development
Sales
New Product Development
Chief Financial Officer
Accounts
Payroll
Corporate Secretary
CEO
Clucky toys
Operations Marketing
Asia
North America
EMEA
Traditional toys
Operations
Marketing
Non-toy business
Company Secretary
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Figure 7.4 Geographic-led departmentalization
Figure 7.5 Customer-led departmentalization
What are the drawbacks to each of these kinds of organizations illustrated in
Figures 7.3, 7.4, 7.5? What are the benefits?
Determining the right kind of organization at the right time is a critical step in
managing a growing business. After reviewing the options, POPCO management
was concerned that a product-based organization would create internal
competition between product groups, and draw all of the marketing focus away
from their current production. They felt that this kind of organization would be
reasonable if they had many different established toy product lines, however
their traditional toys are not market leaders.
A regional departmentalization was possible, however there would seem to be a
lot of duplication as the production facilities were, last year, centralized in Korea.
Confusing the chain of command between the operations for different regions
might become a problem.
So, like many organizations, POPCO decided on a combined form for their new
organization.
CEO
Asia Pacific
Ai Toys
Marketing
Operations
Traditional & non-toys
Maketing
Operations
North America
Sales
EMEA
Sales
Company Secretary
CEO
Tween toys
Operations Marketing
Korea Sales
Global Sales
Infant and baby
Operations
Marketing
Heritage toys
Operations
Marketing
Company Secretary
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Figure 7.6 POPCO’s new organization at the launch of Clucky Chickens™
Line versus staff management
There are different kinds of responsibilities within a business, and different levels
of authority. A chain of command describes who reports to whom in an
organization, and typically is reflected in a detailed organization chart. The term
originated in the military and helped identify exactly who should direct whom,
from the lowest soldier in the field to the highest general. This line from solder to
general was termed the line of authority.
In the company context, this vocabulary persists. Line management refers to the
supervision and coordination of the company’s core business activities, typically
the production and sales of goods and services. These core line activities typically
include production and sales, marketing, and sometimes finance. If the
competitive market is the company’s battlefield, then line management describes
who coordinates and supervises whom from factory worker to CEO in the
execution of the company’s battle plans – from strategy down to tactical plans.
People often use the term “line” with other terms to indicate how close the
responsibility is to the actual production or selling of the good or service. It also
can mean the directness of supervision of authority, or the practical nature of the
position. “Line responsibility” is synonymous for direct responsibility, as in “she
has line responsibility of 30 employees”, while “line management” suggest that
the job involved actual production or selling responsibility, rather than research
or advisory responsibility.
There are other roles in a business that require expertise and help the business
run smoothly, but that aren’t directly involved in the chain of command in the
production and selling of goods and services. These areas are sometimes called
“non-core” functions or staff functions, although they may be extremely
important. People in these functional areas generally provide advice to
management on how best to run the business, or on how to interact with the
environment.
Typical staff functions are Accounting, Research, Human Resources, Corporate
Communications, Public Relations, and Legal Services. They generally do not have
direct supervisory authority over anyone in the chain of command.
It is a challenge for staff managers to effectively influence line managers, and this
interaction often causes conflict within organizations. One way of minimizing such
conflicts is to establish rules or guidelines from the expertise of staff managers for
the implementation by line managers. Consider HR policies, or instructions for
CEO
Operations
Ai Toys
Traditional Toys
Marketing
Brands and NPD
Sales
Asia Pacific
North America
EMEA
Finance and Administration
Accounting
HR and Payroll
IT
Company Secretary
Legal & PR
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legal compliance, or even Internet and email policies from the IT department!
Such policies and guidelines are often needed in order for the expertise of staff
managers to be embedded within the organization. But you can imagine how line
managers might feel about such guidelines and focus on activities and processes
other than those of their line responsibility: intrusive, bureaucratic, and a threat
to their authority.
Management authority and delegation
Different departments require management no matter what their basis of
organization. And different levels of the company organization require different
levels of management authority. In general, people refer to different
management levels as executive management, middle management, and first-line
management. First-line managers are directly responsible for employees and the
tasks closest to actual production and actual sales, and are one level above non-
managerial employees. Middle management generally manages groups or
departments below that are run by first-line managers, and report to executive
managers.
Figure 7.7 Distribution of management authority and levels
People often confuse the general concept of “line management” with first-line
management. First-line managers do not manage any other managers, only non-
managerial employees, while general line management includes first-line
managers, but can include second, third or further management responsibility up
the chain of command.
By definition, first-line managers do not report to other first-line managers. There
may be many of them, but they are spread thinly across an organization’s core
activities. Middle management, however, typically includes many management
layers, of groups reporting to other middle management layers. Executive
management often includes at least two layers of management, including vice
presidents and senior executives, but rarely many more.
Review the organization chart adopted by POPCO last year. How many executives,
middle managers, and first-line managers do you think it has now?
Delegation of authority means assigning responsibility of management to another,
giving that person the authority to fulfill that responsibility, and also defining
their accountability for fulfillment of that responsibility. Executives delegate
responsibility to middle managers, who delegate to other middle managers, and
so on down the chain until first-line managers delegate responsibility of core
tasks to first-line workers. This hierarchy of delegation can be reflected in formal
organization, like in our organization chart, or it can also be more informal, and
not reflected in the formal organization.
Organizational centralization and height
The amount of layers of delegation, the kinds of tasks and responsibilities
delegated, and the number of people delegated to define the spread of authority
within an organization. In centralized organizations, authority is concentrated at
in the upper levels of the organization. In decentralized organizations, authority is
spread out to other layers. It is very difficult to establish purely from an
Executives
Middle management
First-line management
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organization chart whether an organization is centralized or decentralized: you
must know the kinds of authority that have been delegated to know.
One thing you can tell by a detailed organization chart is how many general layers
of management that exist in the company, and how many people each manager
directly manages. The number of people a single manager manages is known as
the span of control. A narrow span of management control is characteristic of a
tall organizational height or hierarchical organization. With a narrow span of
control and tall hierarchy there are many organizational layers, while a wide span
of management control suggests a flat organization.
Critics contend that hierarchical organizations struggle with too many layers of
administration and paperwork, and with distorted communications between
bottom and top layers of management. They also contend that hierarchical
organizations are slow to make decisions and adjust to change. This contention is
controversial, as there are plenty of examples where hierarchical companies and
organizations are extremely decisive and effective. The particular data sampled,
the organizational culture, the context culture, and indeed the types of
departments being analyzed often heavily influence such theories.
Flat organizations with wide spans of control are thought to increase the
empowerment of employees, as well as encourage more employee participation,
improved communications, and quick decision-making. However no conclusive
research evidence shows that this is true either. The most clear distinction
between these two types is that the path to promotion goes through more steps
in a tall organization than in a flat hierarchy, but even this assertion can be
misleading: in a flat hierarchy, promotion may never occur at all or require such a
long time that it effectively requires the same time as in a many-layered
organization.
Korean corporations typically are extremely hierarchical, yet also can be
characterized as decisive, for example Samsung is known for its decisive
management style. What aspects of Korean culture do you think contribute to
this paradox?
Planning
Planning is related to organizational design in that there are different kinds and
levels of planning that take places within organizations. Generally, executive
management executes strategic planning. It includes setting corporate strategy
and long-term goals, and sometimes short-term but strategically important
objectives. Strategic plans typically attempt to fulfil a corporate vision or mission.
For instance, POPCO’s vision could be, “to be the most admired brand in
innovative toy entertainment around the world.” Notice that this vision is quite
different from being “the most recognized toy brand in the world.” Defining the
corporate vision is a key task for executives.
Strategic plans often focus on a two-to-five year planning horizon, based on
market projections. Strategic planning became popular in firms in the 1960s and
is still the engine that drives corporate action in many companies today. Recently
theorists have criticized the idea of the strategic planning process as being
uncreative, too formalized and execution-driven particularly in light of the fast
pace of environmental change. In other words, theorists today fear that the
rationality of the planning process lends itself to pursuing known or familiar goals,
projects and outcomes rather than innovation.
Based on the strategic plan, department executives or directors typically translate
the overall goals into tactical department plans for their particular groups or
departments. These plans may be very strategic in nature, but they typically cover
a year period and for that reason do not include step-by-step detail. They do,
however, include concrete, quantifiable objectives for the department or group,
and the manager is accountable for the department fulfilling these objectives
according to the plan. Examples might include the company’s marketing plan,
operations or financial plan. Typically, budget is allocated to each department
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based on these plans. Sometimes, departments are given fixed budgets, and
asked to meet certain objectives within those budgets.
Based on these department or group-level plans, middle managers usually create
operational plans with the input of first-line managers. These plans are typically
project-based, with quantifiable and concrete steps for execution and
accountability. These plans typically cover periods less than one year.
But consider how organizations cope with change: how can they adapt their plans?
Figure 7.8 Traditional planning process
Because of the changeable nature of competitive markets, it is important to have
alternative plans in case circumstances change or plans fail. Alternative plans are
also called contingency plans. Most contingency planning is done at the
department or group level, rather than at the executive or first-line level. For
executives, routinely changing strategies will cause investors to become nervous,
which will in turn hurt earnings and market valuation. On the other extreme,
operational plans are very specific by nature, and so often there is no time or
budget to develop detailed alternatives. For this reason, contingency planning
tends to happen at the level of planning objectives with department plans.
In American English, people often refer to contingency plans as backup plans,
or “Plan B”. You will often hear managers ask, “what’s our Plan B if this fails?”
In summary, strategic plans are by nature long-term, simple, and include broad
goals for two to five year horizon. Department plans include objectives for the
department in fulfilling the strategic goals of the company, cover typically a one-
year planning period, and are more detailed. Operational plans are the most
detailed plans, and are typically organized around project that can be
accomplished within one year. Contingency plans are alternative plans, and they
typically are created as alternatives to department-level plans.
The planning process is by nature a rational, top-down process. What are the
implications of such a process on human values? Do you think the planning
process itself could contribute to unethical behaviour? How?
Control in the corporate form
In the hierarchy of a company and the chain of command it should be clear who
reports to whom. But what about at the very top? Who hires and manages the
CEO, and to whom does the CEO report? Who other than the senior executives is
involved in the strategic planning for a company?
In the corporate form, there is an important relationship between the
performance of the firm, the CEO and corporate officers, and the owners of the
firm. This relationship is mediated through the board of directors. The board of
directors is the top governing body of a company, and can be chosen from inside
or outside the corporation. In theory board members are chosen based on their
knowledge and experience with respect to the company’s activities or needs, but
often they are chosen because of relationships with the company founders or
other board members, or prestige in the field. Board members are elected by
stockholders of the company, and are compensated by the company for their
involvement.
Strategic plan
Department plans+ Contingency plans
Project or operational plans
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Board members appoint the CEO and other corporate officers like the chairperson,
executive vice presidents and chief officers (e.g. CFO, COO), the company
secretary, and treasurer. The board of directors helps executives to form the
company’s vision and strategic plans. Corporate officers routinely meet with the
Board of Directors to get advice and approval on a variety of things including
operating budgets and capital expenditures, and the capital budgeting process
(see the next unit for an explanation of these).
Figure 7.9 Control in the corporate form
What governance issues might arise from the corporate form of control?
Summary: Corporate Organization and
Planning
In this unit you have learned about:
The different approaches to corporate organization
The concept of job design and departmentalization
The difference between line management and staff functions
The different layers of management, and their typical distribution
The idea of span of control and organizational height
The basics of business planning and the weaknesses in the strategic planning
process
The basic form of control in corporate form
Stockholders Elect Board of directors
Appoint Corporate
officers Hire Employees
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Worksheet 7 (front)
True or False
1)___ As companies grow, they must move towards functional departmentalization
to be efficient.
2)___ Firms never mix types of departmentalization in their organizational structure
because it confuses workers
Match the organizational term with the best description.
a) Organization chart b) Job design c) Staff function d) Chain of command e) Line
management
3)___ Management of Clucky Chickens production and sales
4)___ Human resources and public relations
5)___ Manager of Korean sales for POPCO
6)___ Describes the chain of command
7)___ Describes the allocation of tasks to groups and individuals
8)___ Who is responsible to whom in POPCO from factory worker to CEO
True or False
9)___ An organization with a wide span of control is centralized in authority
10)___ A hierarchical organization makes slow decisions
11)___ A narrow span of control suggests a tall hierarchy in an organization
12) Review the organization chart in 7.6. Now assume that, in addition to expanding our production facilities to a factory in Brazil, POPCO has also made two acquisitions: a small animation production company called Sunnyside, and a web design company called Studio 103. On the reverse, draw a new organization chart for POPCO, bringing in the animation production, graphic effects production, and web design functions into the company in an effective way. How has this changed the company?
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Worksheet 7 (back)
Draw your new organization chart here, and explain how this will change the company.
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Unit 8
The Finance Department
Learning objectives of this unit
In this unit you will learn the following concepts:
The main responsibilities of the finance department (in class: diagram)
The different roles and functions within a finance department (in class: diagram)
The different kinds of budgets (in class: diagram)
Different ways to raise money (in class: exercise)
Some of the ways the finance department uses to compare different financing options (in class: financing exercise)
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Unit 8 Vocabulary
Cash flow (현금 유동성): the total amount of money flowing into and out of a business, directly affecting a company's liquidity.
기업활동을 통해 나타나는 현금의 유입과 유출. 기업의 자산 유동성에
직접적인 영향을 끼친다.
Operating budget (영업 예산): A detailed projection of all estimated income and expenses based on forecasted sales revenue during a given period (usually one year). It generally consists of several sub-budgets, the most important one being the sales projection, which is prepared first. Since an operating budget is a short-term budget, capital outlays are excluded because they are long-term costs.
주어진 시간 (주로 1 년)동안의 예상 매출액을 기본으로 모든 예상 수입과 지
출의 상세히 예상 하는 것. 일반적으로 여러 개의 소규모 예산들로 이루어져
있으며 가장 먼저 준비되는 판매 전망이 가장 중요하다. 운영 예산은 단기 예
산이기 때문에장기 비용인 자본 지출은 제외 된다.
Sales projection (판매 전망): an estimate of a business’s sales revenues for a future period, typically based on the actual sales of similar products and services from the same period in the previous year.
전년도와 같은 기간의 제품과 서비스의 실제 매출액을 기준으로 사업의 미래
영업 수익을 추정하는 것.
Operating expense (운영 예산): a category of expenditure that a business incurs as a result of performing its normal business operations regardless of the level of sales or production.
“opex”라고도 불리며 판매 또는 생산의 수준과 관계없이 정상적인 업무를 수
행하는 과정에서 발생하는 지출의 카테고리.
Capital budget (자본 예산): also called a capital expenditure budget, or “capex” budget for short, a plan for raising large and long-term finance for investment in plant and machinery or other fixed assets, over a period greater than the period considered under an operating budget.
공장설비 및 기계 투자를 위한 대규모 장기 금융에 대한 자세한 예산 계획.
http://www.investopedia.com/video/play/what-is-capex/
Capital budgeting (자본 예산): the process in which a business determines whether projects such as building a new plant or investing in a long-term venture are worth pursuing. Oftentimes, a prospective project's lifetime cash inflows and outflows are assessed in order to determine whether the returns generated meet a sufficient target benchmark.
장기적 벤처 투자나 신규 공장 건설등의 프로젝트가 추구 가치가 있는지의 여
부를 결정하는 과정. 때때로 유망한 프로젝트의 현금 유입과 유출 수명을 평
가하여 수익이 충분한 기준점을 충족하였는지 확인한다.
Cash budget (현금수지예산): a simple short-term budget typically prepared monthly or quarterly, used to quantify an immediate, short-term (i.e. less than one year) cash flow such as cash on hand, cash receipts, credit receipts and short-term payments to suppliers, creditors, and investors
수중에 있는 현금, 현금 영수중과 공급자, 채권자 그리고 투자자들의 단기
납입금과 같은 단기 (1 년이 안된) 현금 흐름을 수량화 하기 위해 매달 혹은
분기별로 만들어 진 단기 예산.
Liquidity (유동성): the possession of sufficient cash or cash equivalent assets to pay for current liabilities.
유동부채를 지불하기 위해 자산을 현금으로 전환 할 수 있는 능력.
Liability (부채): an obligation of an entity arising from past transactions or events, i.e. something owed by a company.
제삼자에게 지고 있는 금전상의 의무.
Operating leverage (영업 레버리지): a measurement of the degree to which a firm or project incurs a combination of fixed and variable costs.
기업의 프로젝트가 얼마만큼의 고정비와 변동비를 발생하는 지 측정하는
정도
Security (담보): any marketable asset used as collateral against a loan obligation, which the lender may seize if the borrower does not meet their loan obligations.
채무자의 채무불이행에 대비하여 채권자에게 채권의 확보를 위하여
제공되는 모든 유가 자산.
Debt capital (부채 자본): capital raised by taking out a loan, with related future principle and interest payment associated liabilities.
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미래의 원리 및 이자와 관련된 부채를 감안하고 대출하여 모은 자금.
Financial leverage (재무 레버리지): The amount of debt used to finance a firm's assets.
기업의 자산을 융자하기 위해 사용 된 부채
Bond (채권): a debt investment in which an investor loans money to company or government that borrows the funds for a defined period of time at a fixed interest rate.
정부 또는 기업이 일반인으로부터 자금을 조달하기 위해 정해진 기간 동안
고정 이율로 발행하는 차용 증서.
http://www.investopedia.com/video/play/understanding-bonds/
Equity capital (자기 자본): capital received for an interest in the ownership of a business, which is capital free from any debt obligations.
기업의 자본 중에서 출자의 원천에 따라 출자자 (주식회사의 경우는 주주)에
귀속되는 자본 부분. 총자본에서 부채를 한다.
Retained Earnings (유보이익): the portion of net income which is retained by the corporation rather than distributed to its owners as dividends.
주주에게 배당금으로 지급되지 않고 기업에 남는 당기 순이익의 일부분.
http://www.investopedia.com/video/play/retained-earnings/
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The main responsibilities of the finance
department
The main responsibilities of the finance department vary, and have a short term
and a long term focus. The finance department conducts budgeting for the
operations and capital investments of the company; it budgets and manages cash
flow; raises the required short and long term financing for the company; controls
incoming revenues and payments of production costs, operating expenses, and
capital expenses; negotiates with suppliers for purchases; and audits the use of
funds of the various departments.
The finance department also helps the company improve operations through
budgeting and forecasting the company’s short and long term financial needs and
performance. Finally, the finance department advises senior management on
strategic decisions with respect to productivity, specialization, and growth using
financial analysis and modeling.
Figure 8.1: Typical roles in the finance department
Forecasting and planning: The operating
and capital budgets
The financial planning and forecasting for a business for a year is reflected in the
operating budget of the company. The operating budget includes all estimates
for revenues and income for the business, as well as all expenses and costs
associated with both production and the day to day running of the business not
directly involved in production.
The operating budget typically begins with an estimation of revenues. The finance
department typically works with the marketing department’s sales team to
estimate future revenues in a sales projection (also called sales forecast), and
works with the operations department’s purchasing team and the company’s
general administrative team to estimate the costs and expenses related to
production and day to day running of the business, respectively. The operating
budget includes payments that are due in the future, as well as anticipated
revenues not yet received.
Do not confuse the operating budget with operating expenses. Operating
expenses are the day to day expenses of running a business not related to the
costs of producing goods or services. An operating budget, in contrast, includes
all of the costs associated with running the business including those related to
production. We will explain more about operating expenses in the accounting
unit.
The finance department also works with the various departments and executives
to determine more strategic investments for the company, and the long-term
finance required for these types of acquisitions. This type of estimation is focused
on the purchase of assets for the company that will create income in the future,
such as a new factory, machinery, or repairs of existing fixed assets. A major focus
of long-term planning therefore is capital expenditures, included in the capital
Finance Director
Accounting
Financial reporting
Tax and investment
Auditing
Payroll
Financial Administration
Controller
Billings and collections
Purchasing
Financial Analysis and Planning
Planning and forecasts
Corp. finance
Financial analysis
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budget (also called the capital expense budget, or “capex” budget). Capital
expenditures are accounted for differently than everyday expenses, because their
value is not consumed in one year but over time. They typically require long-term
financing, too.
The operating budget is the counterpart to the capital budget. Very often, each
department will create their own operating and capital budgets. These
department budgets will then be combined into a master budget for the company.
Managing cash flow: the cash budget
The finance department is responsible for day-to-day transactional accounting of
the business, including keeping track of all transactions as well as any reporting to
the government of transactions. The finance department also manages the cash
flow of the business, to ensure there are enough funds to pay for the company’s
day to day financial needs. This requires issuing clear purchasing policies for
suppliers, as well as credit terms for customers for billing. It also involves active
collection of balances due to the company so that the company is paid on time. A
financial controller usually manages the company cash flow.
To estimate the cash flow of a business, the finance department creates a cash
budget to estimate short-term cash needs. The forecast of these day-to-day sales
and collections minus purchases and expenses is done on a very short-term basis,
typically quarterly, monthly or even weekly.
Often the company may forecast periods when there is insufficient cash to cover
the day-to-day needs for a particular month or quarter. This is particularly true for
companies with seasonal sales cycles, or long lead times for production. Consider
POPCO: the peak toy-buying season is during December-January Christmas sales
season, yet production for this period (and the expenses associated with
production) begins the previous spring. Long before POPCO receives revenues for
toy sales, they must pay suppliers for the costs of producing inventory. This is
referred to as speculative production, because there is a time lag between
production and revenue generation. If POPCO toys are not selling well in
December, they might invest in short-term promotions with retailers to boost
sales.
How are the cash budget and the operating budget related? The cash budget
simply reflects the cash on hand of the business at the beginning and end of each
period. In other words, if your cash budget shows extra cash for a period, then
the operating budget should show how that extra cash will be spent, like paying
debts, investing in longer-term activities, or issuing dividends to shareholders. If
the cash budget shows a shortfall in the future, the operating budget will show
where money will be retained to cover the shortfall, or reflect the short-term
financing activities planned to cover it.
Access to cash or failure to provide for enough cash or cash equivalents is very
often the root of small and new business failure. For this reason investors are
interested in a company’s liquidity, which is its ability to pay for what it owes
within one year (called current liabilities) with the cash or cash equivalents it will
have in that same period.
Strategic financial forecasting and analysis:
capital budgeting
The finance department is responsible for evaluating and advising the company
on how best to be productive, specialize, and grow. For instance, productivity
improvements might include improving equipment or facilities. Specialization
might include developing a new product or launching a division with new
expertise. Growth might involve expanding facilities, well as investments in
market entry strategies like new licenses, mergers and acquisitions, joint ventures,
and FDI. It may even involve market investment strategies for the company’s
liquid assets. Managing long-term financing effectively can be very complex and
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demanding as the business environment changes, so requires detailed projections,
modeling, and analysis to evaluate.
This process is known as capital budgeting. Capital budgeting is much more than
simply forecasting the amount of money something costs, however. It involves
analyzing the comparative cost and return of the different possible investment
projects available to the company. Imagine that POPCO wanted to know the best
way to increase production capacity: it could expand its current facilities, acquire
another company, invest in a factor overseas, or contract with a company to
manufacture on its behalf. Which is the most efficient course of action, and the
most effective for the organization? The finance department is responsible for
evaluating the alternatives and modeling each option’s costs and benefits. Its job
is to determine which expenditures and projects are worth the investment of the
company’s capital structure, which is just a term for POPCO’s financing options
(debt, equity, or retained earnings).
An important consideration in evaluating alternatives is the operating leverage of
each project. Operating leverage measures the degree to which a company or
project incurs fixed versus variable costs in the production of revenues and profit.
A project that has a high proportion of fixed costs compared to variable costs uses
a lot of operating leverage. It may be considered riskier, requiring lots of money
up front, but with higher potential returns in the future. A business that has very
few sales, but with very high gross profit margins, is also considered highly
leveraged.
Do you think the expansion into Clucky Chicken™ production overseas increases
or decreases our operating leverage, or does it stay about the same? Why?
Raising finance: sources of funds
Another responsibility of the finance department is to raise finance for the
company. Financial needs can be related to short-term (within one year needs),
or can be more strategic, requiring long-term financial consideration.
Short term needs are typically revealed through the cash and operating budget
process, and include: monthly expenses and inventory needs, speculative
production, short-term promotions, cash flow problems, and emergencies. Long
term financing needs are identified through the capital expense budget and the
capital budgeting process, and can include those for capital improvements,
expansion, mergers and acquisitions, and new product development.
Once the financial needs of the business are identified, the finance department
will evaluate the different sources of funds for the finance required. The sources
of funds are quite different, and so are the risks and costs associated with each
method. The four main sources of funds are sales revenues from the current
planning period; equity capital in the form of stock; debt capital meaning
borrowed funds; and sale of the company’s assets. Each source of funds has pros
and cons of its use. They are not specifically related to short or long term needs,
and some can be used for either.
Figure 8.2: Sources of funds to pay for financial needs
Sources of funds
Sales revenues
Debt capital
Equity capital
Sale of assets
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Sales revenues
Most of the financing for a company’s needs, especially short-term requirements,
come from sales revenues for the current period: in the budgeting process, this is
reflected in the costs and expenses deducted from sales projections. Even
uncollected revenues and inventories are fairly liquid (meaning easily transferable
to cash) in nature, and can be used as security for borrowing money (debt capital).
Debt capital – short term
Debt capital is simply borrowed money. Money can be borrowed for short or long
term use, but can take many more forms that just a simple bank loan.
Retailers can often get effective debt capital from manufacturers through trade
credit, where they have a month or more to pay for merchandise. Trade credit is
free from interest, and is an exceptional way for a retailer or wholesaler to “buy
time”. On the other side, manufacturers may issue promissory notes to suppliers,
which are literally an “I owe you”. Promissory notes usually carry some amount of
interest on them, however. Outside of trade credit and promissory notes,
businesses usually turn to banks for short-term debt capital.
A line of credit is a kind of loan that is approved by a bank even before the money
is needed, with agreed, short-term repayment terms. Banks also offer short-term
unsecured loans to businesses, depending on their credit rating and relationship
with the bank.
Each of these – trade credit, promissory note, line of credit, and unsecured bank
loan – is an example of unsecured short-term debt capital. Usually the amounts
are small, and if the company has a good relationship with the lender, the interest
levied can be small as well.
If the company requires more financing, or more financing on better interest
terms, they may turn to secured short term financing. Companies can use assets
like inventory, accounts receivable, or even equipment to secure loans and other
financing. For instance, a company can pledge its inventory as security for a loan,
in which case the lender might require that the inventory is stored in a public
warehouse. The borrower would then only receive the inventory back once the
lender was paid in full, plus interest. The borrower would also need to pay for the
storage and insurance of the inventory, rather than be able to sell it.
A better option might be secure a loan against payments due to the company
(accounts receivables). Particularly when a company issues trade credit, they may
be owed a lot of money by their customers, but not have access to this cash. A
lender would evaluate the credit worthiness of the company’s customers before
entering such an agreement, but might agree to lend up to 80% of the value of
accounts receivables.
Debt capital – long term
Long term debt capital primarily consists of long term loans and issuance of bonds.
In a few occasions in industries where capital investments in machinery are high
but standardized, suppliers might extend long-term credit to their customers
rather than forego a sale. Term loans are long term loans whereby the borrower
agrees to repay both the money borrowed (the principle) and the interest due on
the loan in period installments agreed with the lender. Term loans are typically
from three to seven years long. The lender has a lot of discretion on setting the
interest and repayment terms for such loans, and often includes additional
conditions for lending such as maintaining a certain amount of working capital in
the company. Long term loans are almost always secured.
Large corporations with excellent credit as well as governments may issue bonds,
another form of debt capital. A bond is an agreement to repay a specified amount
of money (called the face value, or ‘par’ value) with interest by the maturity date,
when the repayment is due. Until the maturity date, the corporation repays the
interest (called the coupon) due to the lenders at regular intervals, usually every
six months. Bonds vary in face value, maturity date, and coupon. The higher a
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bond’s interest rate (coupon), the higher the risk of the bond. Bonds are
traditionally sold in units of $1,000.
Bonds are not first issued directly by the borrower to members of the public;
instead they are issued to the market through an intermediary (also called an
underwriter), typically one or more investment banks. The investment banks
marry bond sellers with bond buyers (typically large institutional investors like
pension funds, insurance companies, banks, bond mutual funds, and other
corporations).
Bond holders can sell their bonds before the maturity date in the secondary
marketplace through dealers. Pricing of bonds may vary from dealer to dealer,
because each dealer charges a fee or commission on the transaction.
Using a lot of debt to finance assets is not necessarily a bad thing, so long as the
company uses the borrowings for something that provides a greater return than
the expense of the capital borrowed. In other words, so long as they can repay
those debts and remain competitive, borrowing may be smart financial
management in the push to be more productive, specialize, and grow. The
amount of debt a firm uses to finance its assets, including revenues as well as
other kinds of assets, is referred to as financial leverage. Different industries may
have a range of acceptable financial leverage, and different ways of calculating
financial leverage. We will look at the ratios used to calculate operating leverage,
financial leverage, and total leverage in unit 7.
What kinds of companies can you imagine typically operate
The general term leverage is used in business to describe any method to
multiply gains (or losses). It can be used as a verb or adjective. Examples are, “We
leveraged our house through a mortgage,” and “Microsoft has become highly
leveraged by borrowing at the same time they have excess cash.” While leverage
is not in itself a bad thing, and many companies these days with high credit
ratings are increasing their borrowings because of extremely low interest rates,
analysts look for those companies to use their leverage wisely: by creating new
profit-generating profit lines, diversification, and expansion. But with the
increasing movement of capital into financial instruments and markets (termed
financial engineering), instead we have seen companies put this money into
things like securities, hedge funds, and other financial instruments. Analysts
complain that such investments do not build the core asset base of the company,
and can be risky (remember leverage multiplies gains and losses because of the
interest and credit rating costs of debt). But companies avoid criticism by paying
out high cash dividends to shareholders. This is just one example of what is being
called the financialization of modern economies. According to one writer, “Like
their middle-class customers, corporations have made up in the past decade for a
lack of core profit generating ability through leverage.”
Equity capital
Equity capital is a source of funds used almost exclusively for long-term financial
needs. Very small companies usually raise equity capital from the money invested
directly by the business owners into the business – no stock is issued. But in the
case of corporations, the two primary forms of equity capital are retained
earnings and stock issuance.
Retained earnings are simply the earnings left from the previous period’s
operations that are not repaid to owners in the form of dividends. They are
considered equity financing because they are effectively undistributed profits.
Many companies large and small do not pay dividends and instead reinvest profits
into the business. Retained earnings can provide the finance department with the
means to become more productive, specialize, and grow.
Stock issuance is the granting of a percentage ownership in the company in
exchange for capital. The first time a company issues stock is called an Initial
Public Offering, or IPO. IPOs are most often managed by intermediaries like
investment banks. The immediate cost of an IPO is extremely high due to the
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legal fees paid to consultants in order to comply with filing regulations, as well as
the fees and commissions charged by investment banks. However, the ongoing
costs of issuing stock after the initial offering (also called floatation) are small.
Companies are under no obligation to issue dividends, although shareholders may
demand dividends if they feel the retained earnings are not adding value to the
stock.
Stockholders can of course sell their stock in the stock market. The supply and
demand of a given stock in the stock market can cause the value of the company
to go up or down, and hence the value of the stock ownership stake can rise or
fall. The market capitalization of a company is reflected in the market value of all
its outstanding shares. Market capitalization not only shows the size of the firm,
but can suggest the relative risk of investment in the firm.
In special cases companies may pursue alternative equity financing: venture
capital or private placement. Venture capitalists are private investors or
investment companies that seek out high-return opportunities. In return for
investing, the venture capitalists receive an equity stake in the firm plus a share of
the firm’s profits. Venture capital not only targets start-up businesses, but also
highly profitable ventures by established companies.
A private placement is a stock issuance sold directly to large institutional investors,
not the general public. The costs of private placements are generally lower and
the legal filing requirements are fewer than in public stock filing. Specific terms
are negotiated between the buyer and seller in private placements.
Sale of assets
A company may sell its assets to raise short or long-term capital. In a mature firm,
management of assets is handled dynamically, constantly evaluated against other
alternatives. A buy or lease decision may depend on the cost for capital
expenditure, the value of repairing old assets versus buying or leasing new assets,
and the operating leverage position of the company. For this reason, sale of
assets may not be a sign of desperation, but sound financial management.
The finance department at work: comparing
the return of different financing strategies
If you were to try and understand how well a company was doing, you might look
at their net income (i.e. bottom line profit). But, does that mean that a big
company is always doing better than a small company, because their absolute net
income is likely to be greater? Of course not. In order to best evaluate the
effectiveness of companies in turning resources into profit, you need to instead
look at ratios of their performance. Ratios help to avoid making evaluation errors
due to absolute numbers. People like company and financial analysts use financial
ratios to compare one company to another in the same industry and of the same
size to see how the company is doing. They also use financial ratios to examine
the performance of a company over time.
You will see in the next section how financial ratios help analysts, investors, and
researchers calculate and compare the performance of firms. How does the
finance department compare and analyze the benefits of raising finance in one
way versus another? In capital budgeting, typically they compare the internal rate
of return, discounted cash flow, and the net present value of one project versus
another. You may learn more about these analysis techniques in an advanced
financial management course. We will not discuss those measures, but instead
we will use a basic financial ratio to show how simply financial leverage works.
Two ratios that help measure how effectively a company uses its financial
resources are Return on Equity (ROE) and Return on Assets (ROA). Return on
equity measures a corporation's profitability by revealing how much profit a
company generates with the money shareholders have invested. In other words,
it measures how much of each $ raised through issuing common stock is returned
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in net income (i.e. bottom line profit). For example, a company that generated
£100 worth of profit for the year for £1000 of equity has a ROE of 10%. ROE is
expressed as a percentage:
ROE = Net Income / Shareholder’s Equity
“Equity” is another word for the value of ownership, or shares outstanding.
By contrast, Return on Assets measures how effectively a company manages all of
its assets to return a profit. In other words, it measures how much profit is
generated by each $ of assets. The job of managers is to make the most of the
assets of a company, with only as much borrowings or investment as is necessary.
Assets are valued at the cost of borrowing plus the amount invested by
shareholders, or in other words, assets = liabilities + owner’s equity (debt and
equity). Companies use both debt and equity to finance their assets. For example,
if one company has a net income of $1 million and total assets of $5 million, its
ROA is 20%; however, if another company earns the same amount but has total
assets of $10 million, it has an ROA of 10%. Based on this example, the first
company is better at converting its assets into profit.
ROA = Net Income / Total Assets
Let’s compare some financing options for POPCO. If POPCO wants to raise
$100,000 for new machinery, which is the better way: borrowing from the bank
or issuing shares?
Let’s say that POPCO’s options for raising this cash were limited to issuing stock or
borrowing from a commercial bank.
Suppose that the bank loan rate is 9% interest
Suppose POPCO already had received $500,000 in investment from
shareholders (so has outstanding shares of $500,000 value total)
Suppose that POPCO’s finance team estimates that their operating profit
in the year the finance is raised at $95,000.
Here’s a very simple comparison of these financing methods, using Return on
Equity (ROE), or what % of each $ of shareholder investment is expected to be
returned as net profit.
Figure 8.3: Comparing the impact of different financing methods on ROE
Finance through debt capital Finance through equity capital
Owner’s equity $ 500,000 Owner’s equity $ 500,000
No additional equity $ 0 Plus additional equity $ 100,000
Total equity $ 500,000 Total equity $ 600,000
Plus debt capital $ 100,000 No debt capital $ 0
Total capital $ 600,000 Total capital $ 600,000
Expected Return on Owner’s Equity (ROE) at Year End
Finance through debt capital Finance through equity capital
Operating income (Operating profit)
$ 95,000 Operating income (Operating profit
$ 95,000
Less “other expense” (loan interest)
$ 9,000 No “other expense” (loan interest)
$ 0
Net income (ignoring tax)
$ 86,000 Net income (ignoring tax)
$ 95,000
ROE = $86,000 / $500,000
17.2% ROE = $95,000 / $600,000
15.8%
The increasing use of corporate leverage to invest in non-core activities such
as financial instruments is a natural result of globalization, but what are the
downsides to this “financialization” of market value?
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Summary: the Finance Department
In this unit you have learned about:
The main responsibilities of the finance department
The different roles and functions within a finance department
The difference kinds of budgets
The concept of operating leverage
The different ways to raise money
The concept of financial leverage
How finance teams might compare different finance methods
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Blank page for your notes
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Worksheet 8 (front)
Match the budget type with the forecasted item.
a) Operating budget b) Capital budget c) Cash budget
1)___ Estimated purchase cost of all new computers
2)___ Reinvestment of extra cash expected 3rd quarter
3)___ Overall inventory needed to support projected sales for the year
4)___ Forecast of quarterly sales revenues
5)___ Cash gain or loss estimated for a month
6)___ The money spent to purchase a new company van
True or False
7)___ Equity capital in the form of an IPO is a great source of funds for companies
with limited cash flow.
8)___ Issuing bonds is a short-term form of debt capital available to all companies.
9)___ A cheap form of debt capital is trade credit.
10)___ Operating leverage measures how well a company turns assets into equity.
Multiple choice. Consider what would happen in the example in Figure 6.3 under
the following conditions, and select the best answer. Include your calculations on
the reverse.
11) If the interest rate fell to 3%, then if all other conditions remained the same as
in Figure 8.3,
a) The firm should use equity financing according to ROE
b) The return on equity would decrease for both financing methods
c) The return on equity would increase for debt financing only
d) There would be less operating income
13) If the amount of capital needing to be raised rose from $100,000 to $500,000,
interest rates were 2.5%, but other conditions were the same as in Figure 8.3, then
a) The firm should use equity financing according to ROE
b) The rate of return on equity would increase for both financing methods compared to 8.3
c) The rate of return on equity would decrease for both financing methods compared to 8.3
d) There would be less operating income
12) What do you think would be the immediate impact on ROA of the best option
for ROE in 12 above? Why?
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Worksheet 8 (back)
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Unit 9
The Accounting Team and
Financial Statements
Learning objectives of this unit
In this unit you will learn the following concepts:
How accountants view business activity, and the different forms of accounting (in class: diagram)
The basic principles behind financial accounting (in class: formula)
The process of financial accounting (the accounting cycle) (in class: discussion and exercises)
The main financial statements (in class: statements exercises)
The balance sheet and how is it used (in class: statements exercises)
The income statement and how is it used (in class: statements exercises)
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Unit 9 Vocabulary
An Account (계정): A separate and specific record of financial transactions that occur in each of the main financial transaction categories: assets, liabilities, shareholders’ equity, revenues, and expenses. For example, in the main financial transaction category “assets”, a company will have an account each for the following asset subcategories: cash, accounts receivable, supplies, building, and machinery. It will also have separate, individual accounts within liabilities, shareholders’ equity, revenues, and expenses. Transactions are shown as either debits (abbreviated Dr) or credits (Cr).
계정은 자산, 부채, 자본, 수익, 비용같은 주요 금융 거래들을 기록하는
분리되고 구체적인 금융거래 기록이다. 예를 들면 주요 금융거래 범주인
“자산”에는 각자의 계정이 있는데 자산의 하위 범주에는 현금, 매출채권,
저장품, 건물 그리고 기계들이 있다. 부채, 자본, 수익 그리고 비용도 각자의
분리된 계정이있다. 위의 금융거래들은 기업의 재무제표
(대차대조표,손익계산서) 에 보고된다. 거래들은 차변(debits 줄여서 Dr) 또는
대변(Credits 줄여서 Cr)에 보여진다.
Debit (차변): Indicates the left hand side of an accounting entry. It DOES NOT mean ‘decrease’. The act of recording an amount on the left side of an account is called ‘debiting’. Refer to the debits and credits table to review how debit transactions affect each category of accounts (increase or decrease).
차변은 회계분개에서 좌변을 나타낸다. 하지만 왼쪽에 있다고 감소를
나타내지는 않는다. 좌변에 액수를 기록하는 것은‘debiting’이라 불린다.
아래에 차변 대변 표를 보고 차변 매매거래의 거래범주가 어떤 영향을 받는지
보십시오(증가 또는 감소).
Credit (대변): Indicates the right hand side of an accounting entry. It DOES NOT mean ‘increase’. The act of recording an amount on the right side of an account is called ‘crediting’. Refer to the debits and credits table to review how credit transactions affect each category of accounts (increase or decrease).
대변은 회계분개에서 우변을 나타낸다. 하지만 증가를 나타내지는 않는다.
대변에 액수를 기록하는 것은‘crediting’이라 불린다. 차변 대변표를 보고 대변
매매거래의 거래범주가 어떤 영향을 받는지 보십시오(증가 또는 감소).
Assets (자산): A resource with economic value that a corporation owns with the expectation that it will provide future benefit. On the balance sheet, an asset represents what a firm owns. In the context of accounting, assets are classified as current, fixed (non-current), or intangible. Current means that the asset will be consumed within one year. Generally, this includes things like cash, accounts receivable and inventory. Fixed assets are those that are expected to keep providing benefit for more than one year, such as equipment, buildings and real estate. Intangible assets are not physical in nature. Corporate intellectual property (items such as patents, trademarks, copyrights, business methodologies), goodwill and brand recognition are all common intangible assets.
개인이나 법인이 소유하고 있는 유형과 무형의 유가치물 (有價値物).
재무상태표에서 자산은 기업이 소유하고 있는 것을 나타낸다. 회계에서
자산은 유동자산, 고정(비유동)자산 또는 무형자산으로 분류된다.
유동자산은 일년이내에 소비되는 자산을 일컫는다. 일반적으로 현금,
미수금(외상매출금) 그리고 재고가 유동자산에 속한다. 고정자산은 일년
이상 이익을 주는것을 말한다. 장비, 건물, 부동산이 예시이다. 무형자산은 말
그대로 형체가 없는 자산이다. 기업의 지적자산(특허권, 상표권, 저작권, 사업
방법론 등), 영업권, 브랜드 인지도 등이 보통 무형자산으로 분류된다.
자산=자본+부채
Liquidity (유동성): The ability to convert an asset to cash quickly. Assets that can be easily bought or sold are known as liquid assets.
기업이 갖고 있는 자산을 현금으로 바꿀 수 있는 능력을 말한다. 쉽게 말해
현금으로 바꿔 쓸만한 재산을 얼마나 갖고 있는가를 나타내는 말이다.
Owners’ equity (자본): Assets minus liabilities, or equivalently share capital plus retained earnings minus treasury shares (stock that may is from a repurchase or buyback from shareholders, or stock that was never issued to the public). Shareholders' equity represents the amount by which a company is financed through common and preferred shares. Also called Shareholders’ equity.
Owners’ equity comes from two main sources. The first is the money that was originally invested in the company, along with any additional investments made thereafter, including investments made through stock issues. The second comes from retained earnings that the company accumulates over time through its operations. In most cases, the retained earnings portion is the largest component.
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자산-자본=부채 또는 주식자본+이익잉여금-자사주처분(주주들에게 다시
사거나 재구매한 주식 또는 외부에 발행하지 않은 주주). 자본은 보통주와
우선주를 통하여 기업의 자금 조달양을 보여준다.
자본은 두가지의 주요 출처에서 온다. 첫째는 회사에 원래 투자된 돈 또는
후에 추가로 투자된 돈이다. 더하여 주식발행으로 인해 벌어들인 돈도
포함된다. 둘째로는 영업활동하면서 모아진 이익잉여금이다. 대부분의 경우
이익잉여금이 주로 구성되있다.
Retained earnings (이익잉여금): The percentage of net earnings not paid out as dividends, but retained by the company to be reinvested in its core business or to pay debt. It is recorded under shareholders' equity on the balance sheet.
이익잉여금은 기업의 영업활동, 고정자산의 처분, 그 밖의 자산의 처분 및
기타 임시적인 손익거래에서 생긴 결과로서 주주에게 배당금으로
지급하거나 자본으로 대체되지 않고 남아있는 부분을 말한다. 이것은
재무상태표에서 주주지본 아래에 기록된다.
Operating expenses (운영비용): In business terms, some refer to operating expenses as only those expenses for the day to day running of the company that are NOT involved in production costs (COGS). However in accounting terms, the expenses not involved in COGS are referred to by their expense account names: Sales, General and Administrative expenses. In the accountant’s view, ALL costs to do with operating activities (as opposed to investing or financing activities) are referred to as “Operating expenses”.
비지니스 용어에서 운영비용은 가끔 나날이 회사가 운영되면서 드는 비용만
언급하기도 한다. 하지만 회계 용어에서는매출원가에 포함되있지 않는
비용은 비용회계용어로 불린다: Sales, General and Administrative
expenses.회계사의 입장에서는 운영비용(투자활동이나 재무활동과는
대조적으로) 과 관련된 모든 비용은 운영비용으로 언급된다. 운영비용:
기업이 단위기간 동안 윤영하면서 거기에서 조수입을 올리기 위하여 필요한
모든 비용이다.
Cost of Goods Sold – COGS (매출원가): The direct costs attributable to the production of the goods sold by a company. This amount includes the cost of the materials used in creating the good along with the direct labor costs used to produce the good. It excludes indirect expenses such as distribution costs and sales force costs. COGS appears on the income statement and can be deducted
from revenue to calculate a company's gross margin. Also referred to as "cost of sales."
회사가 판매하는 제품을 생산할 때 드는 직접적인 비용이다. 이 총액은
제품을 만들 때 드는 재료나 생산할 때 드는 직접적인 노동비용이 포함된다.
이것은 유통비용이나 판매인력비용은 제외한다. 매출원가는 손익계산서에
나타나며 회사의 매출총이익을 구하기 위해 수익에서 빼서 계산되기도 한다.
"cost of sales" 이라 불리기도 한다. 판매된 상품의 생산원가 혹은 구입원가를
말한다. 기초재고액 + 당기순매입액 – 기말재고액 = 매출원가로 계산된다.
Accrual basis (발생주의): The standard of corporate accounting, where revenue is recognized when earned (i.e. when the goods or services have been provided) regardless of when cash is received, and expenses are recognized when incurred (i.e. when the benefit is received) regardless of when cash is paid. Accrual basis creates a much more accurate picture of the position and performance of the business than the alternative, cash basis.
발생주의는 기업 회계의 표준이다. 발생주의란 수익이 발생했을 때 현금의
수입이 언제 얻어졌는지와 관계없이 그리고 비용은 현금의 지출이 언제
사용되었는지랑 관계없이 발생했을 때를 기준으로 인식한다는 원칙이다.
발생주의는 현금주의 보다는 조금 더 정확하게 기업의 실적이나 위치를
보여준다.
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An accountant’s view of business
Before talking about what accounts do, it is helpful to see business through the
eyes of an accountant. In the eyes of an accountant, businesses are very simple.
Businesses are involved in three kinds of activities only:
a) Financing activities: raising external funds in order to run the business; these
funds contribute to the company’s resources.
b) Investing activities: purchasing or enhancing resources the company needs in
order in order to run the business, using the funds raised in financing activities.
c) Operating activities: actually running the business (including all aspects of
running the business from marketing, operations, finance to HR, IT, etc.), using
the resources obtained through investing activities; running the business
contributes resources in the form or revenues and equity to financing activities.
Thinking back to the finance section, you can see that investing activities will
likely involve capital expenditures as well as sale (disposal) of assets, like a
reverse investment. Financing activities include all the activities involved in raising
funds through debt or equity capital, as well as their reverse, such as distributing
dividends. Finally, operating includes all the transaction activities related to
operating the company, which most often involve the flow of cash in the form of
paying bills and recording revenues. This simple framework for understanding
business influences all of accounting practice.
Figure 9.1 Accountant’s framework for viewing business
Different accounting specialties
Accountants have many responsibilities, all to do with recording, processing, and
projecting information regarding business transactions and financial events.
Depending on the company’s size and form, a company may use a bookkeeper to
do its internal accounting, or hire an accredited accountant like a CPA. Many
medium-sized and most large firms have their own in-house accounting teams to
do their accounting, because qualified accountants provide information to make
decisions as well as report on past activities. There are different specialty areas of
accounting, summarized below.
Investing activity
Operating activity
Financing activity
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Managerial accounting
Managerial accounting practice provides economic and financial information for
managers and other internal users. They help managers determine budgets, and
guide decisions by providing analysis of actual results versus planned objectives
and standard costs. Managerial accounting practitioners relate to managers the
relationship among activity levels, costs, and profits. As managerial accounting is
a very sophisticated form of accounting we will not focus on it in this course.
Other accounting areas of specialization
There are many other branches of accounting, the most popular being tax
accounting and auditing services. Accounting practice has moved swiftly into
nearly all staff areas of company management, particularly those that are liable to
be outsourced, including human resource and legal advice, forensics (often
involving IT), and even management consulting. However, in addition to
managerial accounting, the most essential kind of accounting handled within a
firm is financial accounting. We will introduce financial accounting in this course.
Financial accounting
Within the basic framework of Financing, Investing, and Operating a business,
financial accounting considers five basic financial elements: Assets, Liabilities,
Owner’s Equity, Revenues, and Expenses.
When a financial accountant creates an account (the basic “container” for
accounting data) in which to record financial data, the account will involve at
least one of these elements.
Table 9.1 The five basic financial elements
Financial element Description
Assets A resource with economic value that a corporation
owns because of past transactions or events, with the
expectation that it will provide future economic
benefit
Liabilities A present obligation of an entity arising from past
transactions or events. Settling these obligations is
expected to result in an outflow of resources from the
business.
Owners’ Equity The remaining value of the assets of a business after
deducting all its liabilities. Also called 'net assets'.
Revenues (Income) An increase in economic benefits during the
accounting period, other than those relating to
contributions from owners, in the form of inflows or
enhancements of assets or decrease in liabilities,
which will result in increase in equity
Expense A decrease in economic benefits during the
accounting period, other than those relating to
distributions to owners, in the form of outflow or use
of assets or increase of liabilities that result in a
decrease in equity
Financial accountants analyze and record financial transaction data in order to
report to company stakeholders the financial position (orange entries in the table)
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and financial performance (green entries in the table) of the company, as well as
the flow of cash into and out of the company, and status of ownership.
Stakeholders might include shareholders, managers and employees, suppliers and
customers, creditors, and the government.
Financial accountants’ records ultimately are recorded in four key financial
statements:
1) The Balance Sheet: shows the financial position of the company at a given
point in time, which is the balance of assets, and liabilities and owner’s
(sometimes referred to as shareholders’) equity. Assets always are equal to
liabilities plus owner’s equity.
2) The Income Statement: shows the financial performance of the company for
a period of time as net income, which is simply the difference between
revenues and expenses. Note that finance that is raised through non-revenue
means (such as by issuing shares, issuing bonds, and incurring debts) are NOT
reflected in the income statement, but are reflected in the Balance Sheet as
an increase in cash and either liabilities for debt or owner’s equity for equity
issue.
3) The Statement of Cash Flows: shows the cash receipts, cash payments, and
net change in cash resulting from the company’s operating, investing, and
financing activities.
4) The Statement of Changes in Owner’s Equity reflects changes in owners’
equity like share capital.
We will focus primarily on the financial position and financial performance
statements, also known as the Balance Sheet and Income Statement respectively.
Before discussing these two financial statements, we will look at how accounting
is done and several aspects of modern accounting: the double entry concept, the
fundamental accounting equation, accrual basis, and the matching principle.
Double entry accounting explained
Every transaction has two effects. For example, if someone purchases a Clucky
Chicken from a toyshop, she pays cash to the shopkeeper and in return, she gets
a Clucky Chicken. These are two financial effects: a decrease in her personal cash
by the cost of the Clucky Chicken, and at the same time an increase in her
personal assets of one Clucky Chicken. Conversely, the toyshop’s cash increases
by the purchase price of one Clucky, while their revenues also increase by the
selling price of one Clucky Chicken.
Accountants record both effects of a financial transaction in their financial
records, which eventually will be categorized, totaled, and summarized on the
financial statements. Remember, these two effects must be recorded in one or
more of the following five elemental categories of accounting: Assets, Liabilities,
Owner’s Equity, Revenues, and Expenses.
Credits and debits
Traditionally, the two effects of a financial transaction recorded in accounting
entries are known as Debit (Dr) and Credit (Cr). In accounting, a debit DOES NOT
refer to a decrease, and a credit DOES NOT refer to an increase. They are simply
accounting conventional terms that signify “entered on the left” for debits, and
“entered on the right” for credits, respectively.
In the original Latin for Debit and Credit (Debere = ‘to owe’ and Credre = ‘to
entrust’), the terms recorded the duality of financial transactions. The ‘Debits and
Credits’ method records the flow of financial resources from a source (Credit) to a
destination (Debit). Every accounting transaction in a business involves this flow
of financial resources.
The uniqueness of the ‘Debit and Credit’ classification method is found in the fact
that while various individual account values may change with each new
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transaction, the accounting equation that underpins the accounting system
(Assets = Liabilities + Equity) always remain in balance.
This is the application of the double entry concept. Without applying the double
entry concept, accounting records would only reflect a partial view of the
company's affairs.
How to handle Debits and Credits
Debit and credit records can reflect an increase or a decrease in a financial
amount depending on which of the five accounting categories the transaction
falls under. Table 9.2 summarizes the conventional effects of Debit (Dr) and Credit
(Cr) transactions in each of the five main categories. Accounting students typically
memorize these effects.
Table 9.2 How debits and credits impact the five financial elements
Assets Liabilities
Dr = Increase Cr = Decrease Dr = Decrease Cr = Increase
Equity
Dr = Decrease Cr = Increase
Expenses Revenues
Dr = Increase Cr = Decrease Dr = Decrease Cr = Increase
The fundamental accounting equation
From an accounting point of view, when owners initially form a new business, the
new business has zero assets. The only way a new business can have assets is if
others provide the assets. ‘Others’ in this case may be external funders like banks
who lend money to the business (debt capital in the form of Liabilities) or internal
funders like owners who invest money in the business (share capital in the form
of Owners’ Equity).
Because all the assets of a business have been supplied by ‘others’ (Liabilities and
Owners’ Equity), then these ‘others’ have an economic claim over the business
that is the equivalent of the value of the total assets that the business controls.
Or,
Assets = Liabilities + Shareholders’ Equity
Owners’ equity is the sum of the original investment made in a company, plus any
further investment including funds raised through issuing stock (together known
as paid-in capital), less treasury stock (which is stock that was issued, but bought
back by the company.
The process of financial accounting
In order to record and make sense of these double-entry (credits and debits)
financial transaction effects in an orderly manner, over time, so that they can
eventually be reported in financial statements (and accounting books finished and
closed so that the next accounting period can begin), accounting practice has
developed a concise, multi-step process.
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Figure 9.3 The accounting process
Creating accounts, making journal entries and posting to accounts
If you wanted to keep track of the finances of a business, how would you do it?
You would probably categorize your spending by the type of goods you purchased,
and you might choose to record the money coming in by type of transaction. You
would also want to record when the transaction was made. The accounting
process is exactly this intuitive process, but including the double entry system for
accuracy. The accounting process also includes making a trial balances that is then
adjusted with additional entries.
What are “additional entries?” In accounting, it is important that, for financial
statements to be accurate, they include accurate revenues and expenses that are
incurred (earned or owed) in the period in question. But many expenses and
revenues might cover a longer period or bridge one period and the next.
Generally, adjusting entries are needed when nothing has been entered in the
accounting records for certain expenses or revenues, but those expenses and/or
revenues did occur and must be included in the current period's financial
statements; or something has already been entered in the accounting records,
but the amount needs to be divided up between two or more accounting periods.
For example the use of supplies or inventory stored at the company. The
categories of both purchases and receipts of money are recorded in accounts.
And accounts are consolidated into super-categories in order to prepare financial
statements of financial activities.
Financial statements are very easy to understand and remember if you are clear
about how they are made. You are likely familiar with receipts already. Businesses,
however, do not often pay in cash or with credit cards, and are not always paid
immediately. They rely on payment terms and trade credit, which separates the
time the goods are transaction from the time that the money changes hands. This
can make accounting difficult.
In order to keep track of these kinds of transactions, businesses use different
kinds of receipts to record transactions of goods and services that are not yet paid
or that are paid in advance, and accountants keep separate accounts of these
things too. The receipt a business uses to record an ordered good or service with
payment due in the future is called a Purchase order. When a company wishes to
record the contracted moneys due for products or services that have been or will
be transacted, they issue a Sales Invoice demanding payment, including the terms
of conditions of the contract. A purchase order secures the budget for purchasing
goods and services, and receipt and analysis/recording of an invoice starts the
recording of payment due in the accounting cycle.
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The accounting team keeps track of invoices and other regular bills that are due
but not yet paid in an account called Accounts Payable (A/P for short). Conversely,
the accounting team will keep track of invoices they have issued for due moneys
in their Accounts Receivable (A/R for short). In addition to actual cash and credit
receipts and payments, these are the type of records identified and analyzed in
step one. The other most often used account is the account Cash. Ultimately most
transactions are recorded via Cash and A/R or A/P in the accounting life of a
transaction.
The information taken from business receipts and sales invoices is the date of the
transaction, the kind of accounts involved, and the amount transacted.
At first, these records are simply kept chronologically in an accounting journal,
including the appropriate credit and debit information, the accounts involved,
and the date transacted. Then the journal entries are “deconstructed”, pulling the
separate account entries together into account ledgers for each account.
Acccounts can be more or less specific depending on the company’s requirements:
examples include Cash, A/R, A/P, Sales revenues, Loan interest, Equipment,
Supplies, etc.
Normal balances
Notice that each accounting category (Assets, Liabilities, Equity, Expenses, and
Revenues) has its own ledger accounts associated with it. After each account is
credited and debited appropriately in an accounting period, a trial balance for the
ledger account is created. Most companies keep a single (these days
computerized) record of all the accounts and their various credits and debits in
one super-record, called a general ledger.
Typically, the accounts in the 5 major accounting categories have balances in one
or the other column once netted in performing trial balances. For instance, Assets
should have a total Debit balance for a going concern, likewise Expenses also will
likely be Debit balanced. On the other hand, Liabilities, Equity, and Revenues all
have normal Credit balances. Retained earnings is an Equity account. These are
the accounting categories’ normal balances.
Note: some accounts within these common accounts do not have the normal
balances, and so are known as “contra” accounts (contra means “against”). For
instance, Dividends, Treasury Stock, and drawings by owners are all contra
accounts within the Equity account. They have debit balances. Other examples
include Sales Returns and Allowances, and Sales Discounts (Debit balances rather
than the normal Credit balance for Revenues accounts) and Accumulated
Depreciation (Credit balance rather than the normal Debit balance for Asset
accounts).
Examples of Steps One, Two and Three of the accounting process follow, showing
separate accounts.
Example 1:
Document to be analyzed: A receipt submitted to POPCO’s accounts department
for purchase of $100 using cash of furry yellow material on May 2.
Step One: Accounts involved: Cash, Materials; Date: 05/02; Amount: $100
Analysis: flow from Cash (an asset account, credited) to Materials (also an
asset account, debited)
Step Two: Record the financial transaction in the chronological journal
May 2 Dr Material $100
Cr Cash $100
Step Three: Post into different accounts.
(If there is not an appropriate account, create it.)
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Materials (new account) Cash (existing account)
05/02 100 05/02 100
Notice that these are both assets accounts in the five basic financial elements!
Also, notice that you do not put a minus sign for the credit to cash. That will be
reflected when all of the credits and debits in Cash are netted before reporting in
the trial balance of the Cash account.
Example 2: The accounts department receives an invoice from a sewing machine
company, showing that POPCO purchased a group of sewing machines on account
(meaning, it will be paid for in the future), for $1,000 on June 10.
Step One: Accounts involved: Accounts Payable, Equipment; Date: 06/10;
Amount: $1,000
Analysis: flow from Accounts Payable (credited) to Equipment (debited)
Step Two: Record the financial transaction in the chronological journal
June 10 Dr Equipment $1000
Cr Accounts Payable $1000
Step Three: Post into different accounts.
Equipment (existing account) A/P (existing account)
06/10 1000 06/10 1000
Example 3: The accounts department records from bank records the automatic
payment of monthly rent from POPCO to our property owner on June 30 for $450.
Step One: Accounts involved: Cash, Rent Expense; Date: 06/30; Amount: $450
Analysis: flow from Cash (credited) to Rent Expense (debited)
Step Two: Record the financial transaction in the chronological journal
June 30 Dr Rent Expense $450
Cr Cash $450
Step Three: Post into different accounts.
Rent Expense (existing account) Cash (existing account)
06/30 450 05/02 100
06/30 450
Just using these three transaction examples, you can see that five different
accounts are involved, and think about the five financial element categories that
they are in:
Cash (an Asset account),
Rent Expense (an Expense account),
Accounts Payable (a Liabilities account),
Equipment (an Asset account), and
Materials (an Asset account)
Let’s try three more examples.
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Example 4: POPCO receives payment by check on September 7 from a wholesaler
who was invoiced in August for $15,000 in Clucky Chickens that were delivered in
August.
Step One: Accounts involved: Accounts Receivable, Cash; Date: 09/07;
Amount: $15,000
Analysis: flow from Accounts Receivable (credited) to Cash (debited)
Step Two: Record the financial transaction in the chronological journal
Sept 7 Dr Cash $15000
Cr Accounts Receivables $15000
Step Three: Post into different accounts.
A/R (existing account) Cash (existing account)
09/07 15000 09/07 15000 05/02 100
06/30 450
NOTE: the reason why Revenues is not involved in this September record, is
because a credit of Revenues would have been recorded in August, along with a
debit to Accounts Receivables.
Example 5: On September 25 POPCO paid $300 to various creditors through bank
transfer.
Step One: Accounts involved: Cash, Accounts Payable; Date: 09/25; Amount:
$300
Analysis: flow from Cash (credited) to Accounts Payable (debited)
Step Two: Record the financial transaction in the chronological journal
Sept 25 Dr Accounts Payable $300
Cr Cash $300
Step Three: Post into different accounts.
A/P (existing account) Cash (existing account)
09/25 300 09/07 15000 05/02 100
06/30 450
09/25 300
Example 6: POPCO completes production of a $50,000 order for a large company
and delivers toys on November 4 that are paid on account (in other words, we
issue trade credit to the company, they have not yet paid us).
Step One: Accounts involved: Revenues, Accounts Receivable; Date: 11/04;
Amount: $50,000
Analysis: flow from Revenues (credited) to Accounts Receivable (debited)
Step Two: Record the financial transaction in the chronological journal
Nov 4 Dr Accounts Receivable $50000
Cr Revenues $50000
Step Three: Post into different accounts.
A/R (existing account) Revenues (existing account)
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11/04 50000 09/07 15000 11/04 50000
Creating a trial balance
Typically, a company will have many separate accounts showing transactions, all
recorded in an organized way in the general ledger (and they typically give each
account a unique number that shows which of the five financial elements it is, as
well as the order it appears on financial statements). At the close of an
accounting period, each account is netted, meaning the total balance is calculated
subtracting credits from debits (or debits from credits, depending on the normal
balance of the account). The account balance is recorded into the trial balance in
either the credit or debit column (whichever is greater). A trial balance showing
the credits and debits of all the accounts is created, to ensure that credits and
debits balance, no matter which accounts net more or less.
For an accounting period including all our examples (and including the result of
the Check It! Example), the trial balance would look like this:
Figure 9.2 Example trial balance
POPCO Trial Balance December 31
Debits Credits
Cash 514,150
Accounts Receivable (A/R) 35,000
Materials 100
Equipment (sewing machines) 1,000
Accounts Payable (A/P) 700
Share Capital 500,000
Sales Revenues 50,000
Rent Expense 450
TOTALS 550,700 550,700
Notice the order of items on the trial balance: Assets listed first, then Liabilities,
then Owners’ Equity, then Revenues, and finally Expenses.
From recording to reporting
With complete records of the net credits and debits for each account, listed in the
trial balance in order of the elements (Assets, Liabilities, Owners’ Equity,
Revenues, Expenses), we now can use the trial balance to prepare the statement
of POPCO’s financial position (the Balance Sheet) at the point in time that, in this
case, will be the end of the year, as well as POPCO’s financial performance during
the course of the year.
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In truth, between the preparation of a trial balance and the preparation and final
reporting of statements, we would make adjusting entries for items with no
financial records attached to them, that we might need to count at the end of the
accounting period. Examples include accounting for changes in supplies and,
importantly, inventory. For this explanation, though, we will move onto preparing
financial statements.
Using the trial balance of very simple transactions in Figure 7.2 we can now state
POPCO’s performance through the period (Income Statement) as well as the
financial position (Balance Sheet) on December 31. The performance statement
looks at revenues and expenses, while the position statement looks at assets,
liabilities and owners’ equity. Note that we calculate the income statement first
to identify net income.
Figure 9.3 Sample POPCO Income Statement
POPCO Income Statement for the Year ended December 31
Revenues 50,000
Less Expenses
Rent expense 450
Total Expenses 450
Net Income $49,550
Next, we can consider the financial position of POPCO at the end of this period
using the information from the trial balance, as well as the results from the
Income Statement. Assuming we do not pay dividends on the net income realized
in this period, net income would be reflected as retained earnings. Therefore, the
following is a statement of the current position of POPCO at the end of the period.
Figure 9.4 Sample Statement of Position for POPCO
POPCO Statement of position (Balance Sheet)
for the Year ended December 31
Assets
Current Assets
Cash 514,150
Accounts Receivable (A/R) 35,000
Materials 100
Total current assets $549,250
Non-current Assets
Equipment (sewing machines) 1,000
Total non-current assets 1,000
TOTAL ASSETS $550,250
Liabilities and Owners’ Equity
Current Liabilities
Accounts Payable (A/P) $700
Owners’ Equity
Share Capital 500,000
Retained Earnings 49,550
Total Owners’ Equity 549,550
$550,250
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As you can see, our example calculations are accurate and support the
fundamental accounting equation. One difficulty with this stepped accounting
process is that misreporting can still lead to an accurate-looking trial balance.
What ethical issues can you anticipate arising from the accounting process?
The Income Statement in more detail
To explain more about these two financial statements, the Income Statement
shows the revenues and expenses during the period. In addition to the net
income, someone reviewing this statement might want to know:
What percentage of revenues are returned in net income
What contribution to operating expenses make towards net income
What are the values compared to past years
What are the ratios of net income, revenues and expenses compared to
others in the industry
What is the company’s ability to generate income from revenues and
expenses
However what is not shown on this simplified example is the division between
types of expenses. As mentioned before, a stakeholder reviewing the statements
would want to see clearly the division between expenses related to the
production of goods or provision of services sold by the company, and other day
to day kinds of expenses to keep the company going.
For manufacturing companies, these are divided into Cost of Goods Sold (known
as COGS), and day-to-day expenses categorized into Sales, General and
Administrative expenses. So, materials to produce Clucky Chickens are part of the
cost of goods sold (in actuality, the cost to produce inventory). Salaries of our
marketing team are sales expenses.
More about COGS
One challenge in measuring the cost of producing goods sold is the aspect of
inventory. During a given accounting period, you may be purchasing materials,
using some of those materials and not others, completing production of some
goods and leaving some partially completed. You also will likely use some
inventory you already have on hand for sale, for production, or both. For this
reason, COGS needs to account for the state of inventory of the company at the
beginning of the accounting period and at the end, as well as changes to
inventory during the period.
At the end of a period, a company may have many goods available for sale, but
not all of them will be sold. Therefore, we must consider the ending inventory in
at the close of the period.
During the period, a company will use the inventory it already had at the
beginning of the period plus new purchases like materials to produce all of the
goods available for sale.
Thinking about inventory in these ways, you can consider it this way:
Beginning Inventory + Net Purchases = Cost of Goods Available for Sale
But after we count the entire inventory left at the end of the period, we will likely
have inventory left of one sort or another (like materials, partially finished goods,
or even fully produced goods). So actually, the Cost of the Goods Available for
Sale is really the Cost of Goods Sold, plus the Ending Inventory we have.
In summary, we arrive at this conclusion:
Beginning Inventory + Net Purchases = Cost of Goods Sold + Ending Inventory
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And therefore,
Cost of Goods Sold = Beginning Inventory + Net Purchases – Ending Inventory
What does ‘Net Purchases’ mean? Purchases typically are for materials and for
delivery of materials to the place of production (but not distribution of finished
goods to their destination, which is considered a sales expense). But occasionally
we may receive discounts on the purchases we make, or return such items if they
are faulty. These are subtracted from Purchases. Net Purchases is simply the total
purchases less the Returns, Allowances, and Discounts between us and our
suppliers.
Sales, General and Administrative
The day-to-day expenses of running the company are categorized in sales, general
and administrative expenses. Clearly, in analyzing an income statement you
would want to see any increases in sales (including marketing expenses) to be
reflected in increased revenues, and you would want a company to minimize
general and administrative costs as much as possible while still effectively
supporting production and marketing. Generally, a company may call these
expenses simply Operating Expenses, although generally accountants consider all
costs incurred by a company for its operations as Operating costs (as opposed to
Investing and Financing).
The Balance Sheet in more detail
The statement of financial position, or balance sheet, shows what kind of
resources the business has and what kind of obligations it owes. In addition to the
raw totals, someone reviewing the statement might want to know:
What are the values compared to income
What are the values compared to the values in past years
What are the ratios of assets and liabilities compared to others in the industry
What is the company’s ability to pay its liabilities quickly, if necessary
The last point drives the organization of the balance sheet items: assets are listed
by liquidity, or the ability to transfer them into cash to pay for liabilities. Liabilities,
on the other hand, are listed according to when they are payable (due).
Accrual accounting
Now that you have an idea of the construction and purpose of these two key
financial statements, it is helpful to review how time impacts the accounting
process. Notice that the Balance Sheet reflects the net value of the company at a
specific point in time, while the Income Statement reflects the net income of the
company during a specified period. Time, it appears, is very important in financial
accounting!
If you are an accountant, you could consider transactions actually occurring at
two different points in time: when the money (cash) actually passes from one
party to another, or when the value of the resource is recognized. In cash
accounting, transactions are recorded according to when cash is paid or received.
However, this is not an accurate reflection of operations for most firms where
payments and value transactions happen far apart.
In accrual accounting, which is the basis of good accounting practice for
corporations, transactions are accounted for when the value of the resource is
transacted, not when money is transacted. In other words, revenue is recognized
when it is earned (not when it is received in cash), and expenses are recorded
when they are incurred (not when they are paid in cash).
As an example, consider that POPCO purchases Clucky Chicken material in June,
but pays for it in August. In what month should the value of the material be
accounted for?
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According to accrual accounting, the expense of the material is recorded when
POPCO takes ownership of the material in June.
Similarly, if POPCO receives an order for Clucky Chickens in June and delivers the
products in August, POPCO recognizes the revenue from sale of the products
when the products actually change ownership, not when the contract is struck, or
the customer actually pays for them. This is true whether the customer pre-pays
for the merchandise, or buys on credit.
In case where payment is received before the event triggering recognition of
revenue happens, the debit goes to cash and credit to unearned revenue. In case
the event triggering revenue recognition occurs before payment is received, the
debit goes to accounts receivable and credit to revenue. The latter is the most
common occurrence for most firms.
Often in production you buy materials and create additional inventory to sell, but
at the end of the financial period (the end of the year, for instance) you have
extra inventory left. How is this inventory accounted for? This brings us to the
matching principle and adjusting entries.
Lastly, the matching principle
The matching principle in accrual accounting is where accountants try to match
recognition of revenues with the expenses incurred in their generation in the
same period. So, if we sell $2,000,000 worth of Clucky Chickens in one month, our
accounting team will want to account for all the expenses incurred to generate
that $2,000,000 in revenue in the same financial period, not earlier or later. If we
started with no inventory, incurred $1,200,000 in expenses in that period, but at
the end of the period have $200,000 in inventory left, then our profit should not
include the expense of that $200,000 in inventory. The most accurate reporting of
the amount of expenses required to generate that much revenue is not
$1,200,000 but $1,000,000. And our income from that is $1,000,000. That’s the
matching principle.
Ideally, the matching is based on a cause and effect relationship: sales cause the
cost of goods sold expense and the sales expense. If no cause and effect
relationship exists, accountants will show an expense in the accounting period
when a cost is used up or has expired. Lastly, if a cost cannot be linked to
revenues or to an accounting period, the expense will be recorded immediately.
An example of this is advertising expense and research and development expense.
http://www.investopedia.com/video/play/accrual-accounting/
Summary: the Accounting Team and
Financial Statements
In this unit you have learned about:
How accountants view business activity, and the different forms of
accounting
The basics principles behind financial accounting
The process of financial accounting
The main financial statements, including the Statement of Income and
Statement of Financial Position (Balance Sheet)
A sample income statement and how its information might be used
A sample balance sheet and how its information might be used
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Worksheet 9 (front)
Section 1: Fill in the missing amounts for each activity
Assets Liabilities Equity
ⓐ $ 4,000 $ 2,500
ⓑ 12,800 5,700
ⓒ 2,800 3,900
Section 2: Show the Debits and Credits associated with the following transactions, put in
their correct general account categories (Assets, Liabilities, Equity, Expense, Revenues).
Activity Assets
Liabilities
Equity
Expense
Revenues
A) Purchased land on credit.
B) Made a cash sale.
C) Purchased delivery truck for cash.
D) Paid this month’s rent
E) Paid an invoice due.
F) Sold merchandise on account.
Section 3: For "T" accounts listed below, state which side represents an increase and
which represents a decrease
Section 4: For the accounts listed below, indicate if the normal balance of the account is a debit or credit.
Accounts Normal Balance Debit or Credit
a) Service Revenue
b) Rent Expense
c) Accounts Receivable
d) Accounts Payable
e) Share Capital
f) Office Supplies
g) Insurance Expense
h) Dividends
i) Office Building
j) Notes Payable
Section 5: For each transaction noted below, write in the appropriate column the names of the accounts to be debited and credited.
Transaction Debit Credit
1) Issued ordinary shares for cash
2) Paid salary expense
3) Purchased a truck on credit 4) Received cash
for goods sold
5) Paid accounts payable
6) Borrowed money from a bank issuing a note
(worksheet continues on the reverse)
Assets and Expense
Dr
Cr
Liabilities, Owners' Equity and Revenue
Dr
Cr
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Section 6: Journalize the following business transactions in general journal form. a) Shareholders invest $25,000 in cash in starting a business as a corporation: 13/11/03. b) Purchased $500 of office supplies on credit: 13/12/24 c) Purchased office equipment for $6,000, paying $3,500 in cash and wrote a 30-day, $2,500, note payable: 14/01/03 d) Product sales revenue billed to customers amounts to $40,000 (not received yet): 14/01/2 e) Paid $700 in cash for the current month’s rent14/02/01 _____Dr ___________ ____________
Cr _____________ __________
_____Dr ___________ ____________
Cr _____________ __________
_____Dr ___________ ____________
Cr _____________ __________
_____Dr ___________ ____________
Cr _____________ __________
_____Dr ___________ ____________
Cr _____________ __________
Section 7: Record the following transactions in the accounts listed below a) Received $25,000 from product sales b) Purchased equipment for $1,000, making a down payment of 30% c) Incurred utilities expense on account, $100 d) Paid $400 to creditors
Cash
Equipment
Utilities Expense
Service Revenue
Accounts payable
Section 8: Match the item with its appearance in its related financial statement.
a) Income Statement b) Statement of Financial Position (Balance Sheet)
1)___ Cash of $50,000
2)___ Accounts Payables of $10,000
3)___ Sales revenues of $25,000
4)___ Owners’ Equity of $500,000
5)___ Loan interest expense of $125 each month
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Unit 10
The Human Resources Department
Learning objectives of this unit
In this unit you will learn the following concepts:
The different roles and responsibilities within an HR department (in class: diagram)
The key steps in acquiring employees (in class: discussion)
The key steps in maintaining employees (in class: discussion)
The key steps to developing employees (in class: discussion)
The key trends affecting human resource management these days (in class: article exercise)
How human resource management varies by company, country, and culture (in class: discussion)
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Unit 10 Vocabulary
Job analysis (직무분석): a systematic procedure for studying jobs to determine their various elements and requirements
직무의 다양한 요소와 자격요건을 결정하기 위해 직무를 연구하는 조직적
절차
Paper-and-pencil tests(지필검사): tests designed by an organization that attempt to measure applicant skills and abilities, interests, and personality and match them with those desired by the company
회사가 원하는지원자의 기술과 능력, 관심과 성격을 match 하기 위해
조직에서 designed 한 시험
Orientation (오리엔테이션): the process of training new employees about the culture, goals, and vision of the company. Orientation may also include task-based training, usually of a general nature.
회사의 문화 목표 그리고 회사의 비전에 대한 신입 사원 교육.
오리엔테이션은 대체적으로 작업 중심 교육울 포함할 수도 있다.
Compensation (보상): the payment employees receive in exchange for their labor
직원들이 노동의 대가로 받는 보답
Salary (월급): a specific amount of money paid for an employee’s work during a set calendar period, regardless of the actual number of hours worked
직원이 실제로 일한 시간에 따른 것이 아닌, 지정된 날짜 사이(보통 1 달) 동안
특정한 금액의 돈을 지급하는 것
Commission-based pay (커미션(수수료)) : a payment based on a percentage of sales revenues
매출수입의 일정 비율을 지급하는 것
Incentive payment (장려금): payment in addition to wages, salary, or commissions
월급, 연봉, 커미션 이외에도 추가적으로 지급되는 것
Profit sharing (이익배분제): awarding shares to employees as incentive payments, often used instead of cash compensation
직원들에게 장려금으로써 주식을 주는것. 현금보상 대신 주는것으로 자주
이용된다.
Employee Benefits (사원특전): a reward in addition to regular compensation that is provided indirectly to employees, such as insurance coverage
일반적인 보상뿐만이 아닌 간접적으로 직원들에게 지급되는 보상. 예를 들면
보험
Performance appraisal (업적(근무)평가): the evaluation of an employees’ current performance and estimated potential contributions, in order to make human resource management decisions
인적자원관리 결정을 하기 위해 직원들의 현재 업적과 추정된 잠재적 기여에
대한 평가
Performance feedback (성과피드백): a process where employees are informed of their performance appraisal. In some cases the employees are allowed to also give feedback, or are asked for self appraisal.
직원들이 자신들의 업적평가에 대해 통보받는 과정. 어떤 경우에는 직원들도
피드백을 줄 수 있거나 자기평가를 하도록 하기도 한다.
Job rotation (직무순환): the systematic shifting of employees from one job or department to another
직원들을 하나의 직무나 부서에서 다른 직무나 부서로 순환시키는 체계적인
이동
Seniority based system (연공서열): System where pay levels, promotion and compensation or benefit increases are determined by the length of time on the job and not performance.
이 시스템은 성과에 따른 것이 아니라 근무한 기간에 따라 급여수준, 승진 및
보상 또는 특전이 오르는 것을 말한다.
Performance based system (성과에 따른 승진): System where pay levels, promotion and compensation or benefit increases are determined by appraised performance and not length of time on the job.
근무한 기간에 따라 보상을 받는 것이 아니라 성과에 따라 급여, 승진, 보상을
또는 특전을 받는 시스템이다.
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The main responsibilities of the human
resources department
The human resources department is a unique department in many ways. Unlike
other departments, the human resources department shares their responsibilities
with managers from other departments. The human resources department
guides managers in managing their human resources, and facilitates the
satisfaction of an organization’s internal customers: employees. For instance, line
managers will work with human resource specialists to conduct human resource
planning and job analysis, and to hire employees.
Figure 10.1 Typical roles in the human resources department
In the past, the human resource function was limited by a production-oriented
view of the firm. Starting with scientific management, managers viewed workers
as a resource to be controlled. More recently, management theorists and
managers themselves have come to realize the competitive value of satisfied,
motivated employees. The view of employees has changed from simply
perceiving their utility to embracing their emotions and motivations as human
beings. This change has caused an elevation of the human resources function
from simply an administrative role to a more strategic one. It has also increased
the demands on human resources managers to understand a broad spectrum of
human-based influencers such as culture, psychology, situation, group and power
dynamics. It has placed more focus on strategic aspects of human resource
management.
Despite this trend, many small companies do not have an official human resource
manager. In these small companies, managers, executives, and administrative
staff (i.e. an office manager) carry out the various human resource responsibilities.
Interestingly, many larger companies that recognize the importance of HRM
choose to outsource the specific areas of it to specialist firms like accountants,
headhunters, trainers, and consultants.
The primary responsibilities of the human resources department remain to
acquire, maintain, and develop an organization’s human resources.
Acquiring employees
Acquiring employees involves human resources planning, job analysis,
recruitment, selection, and orientation of new employees. It is often referred to
as staffing in the human resources department organization.
Planning
The purpose of human resource planning is to meet an organization’s human resource needs into the future. It is a very strategic activity, and is developed from the company’s vision and strategic plan. The human resource team must determine what skills and experience are needed by each of the various
Human Resource Director
Staffing
Employee Relations
Risk Management
Compensation Analysis
Benefits Administration
Training
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departments of the company (and sometimes for departments that do not yet exist), where those kinds of employees can be found, and how to attract them to the company. They must do all this in the most economical way possible.
Figure 10.2 Three areas of human resource management
An economical approach to fulfilling human resource requirements is to hire
employees that already work for the company. In order to plan for such situations
as new human resource requirements, or replacement of an employee who
resigns or retires, companies will routinely conduct a skills audit and maintain a
replacement chart. A skills audit evaluates all the skills current employees possess.
A replacement chart identifies potential candidates that could fulfill key positions
if need be. A replacement chart is a kind of contingency plan.
In some cases, a company actually has a greater supply of employees than it
requires. In this case, the human resources department consults with department
managers to identify ways of reducing employee numbers. Typical means of
reducing a workforce include: laying off employees due to not enough work,
asking employees to retire early, or firing employees.
The difference between laying off employees and firing them is that
employees are laid off for economic reasons unrelated to performance, while
being fired is due to poor performance of the employee.
Job analysis
As part of the planning process the human resources department with the help of
department managers conducts job analysis. Job analysis determines what tasks
and set of responsibilities are involved in a particular job. Job analysis usually
results in a job description and a job specification. A job description describes the
tasks and responsibilities of a particular job, including the job title. A job
specification lists the experience, skills and qualifications needed to perform the
job as described. Often, the human resourced department uses the job
description and job specification later when evaluating an employee’s
performance.
Once an organization has developed job descriptions and specifications for their
needed hires, they can proceed with recruiting, selection, and orientation of
employees.
Recruitment
Companies try to recruit to the most qualified employees, because the cost of
acquiring employees is high. Estimates range from several thousand dollars to an
entire year’s salary in some industries for just the cost of acquiring a new
employee. Human resources teams look for candidates that will meet their
current and future needs, and consider candidates inside and outside the
company. Recruitment is essentially a targeted promotional activity: promoting
employment of the firm to the best candidates, cost-effectively. Recruitment
usually includes instructions for applicants about the selection process.
Typical recruitment strategies include:
• Planning
• Job analysis
• Recruiting, selecting, orienting
Acquire
• Compensation
• Benefits
• Employee relations
Maintain • Appraisal
• Training
• Management development
Develop
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Job fairs
Job postings in company or industry media
Classified advertising in online and offline media
Headhunting using specialist recruitment firms, usually for very specific or
high-ranking positions
Selection
The selection process involves coordinating activities that inform the company
about job applicants. Activities that provide information can include: receiving
emailed application forms and resumes, employment applications, employment
tests (usually for new candidates) and assessment centers (usually for existing
employees), interviews, and references. In Korea, for instance, many large
conglomerates require all applicants to take a general, standardized skills and
knowledge test, before selecting top scoring applicants for interviews. These
kinds of tests are called paper and pencil tests. In the US, large firms more
typically use automated resume screening software to identify candidates that
match their required job description and specification, rather than paper and
pencil tests. Both countries use interviews as a last step in the selection process.
However in Korea, panel interviews (interviewing many applicants at once by
multiple interviewers) are common, whereas in the US, individual interviews are
the norm.
The word recruitment is often used to refer to all the activities in the
acquisition stage of human resources, except orientation. In addition, the word
job description and job specification may be used interchangeably to refer to the
contents of both.
Upon selection, if the candidate decides to accept the job offer, an employment
contract is agreed. In Korea, such contracts are typically very brief, and
standardized for all employees. In other countries, these contracts may be very
long, detailed, and individualized depending on the company and industry.
Orientation
Once hired, new employees participate in orientation. Orientation activities and
focus vary from country to country, company to company. In most large Korean
conglomerates, orientation includes induction into the company culture, history,
and principles along with team building activities. It often lasts for several weeks
or even months. In western countries, orientation is generally for a shorter
duration, and is more focused on training staff-related job skills like using
company IT systems, administrative forms, and the reporting structure. It may
also include career-path information.
What do you think is the relationship of Korean employees to their
employers? Do you think it is different in Korea than in other cultures? Why?
Maintaining employees
In order to maintain good employees, it is important to offer them fair
compensation and appropriate and valuable benefits in exchange for their labor.
Furthermore, it is essential to develop employee relations that allow the
organization to understand the changing needs of the workforce and their level of
satisfaction with the firm and managers.
Compensation
Compensation is the monetary (money) payment – called the wage – employees
receive in exchange for their labor. Negotiating compensation is a key issue for
management, as compensation is often a significant percentage of operating
costs. Typically companies develop a compensation system to determine a logical
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and fair distribution of wages according to job position, department, and
responsibilities. This is called a wage structure. A company’s wage level is how
much it pays employees relative to other firms in its industry. Government
ministries and trade associations conduct industry surveys of wage levels. Human
resource managers consult these surveys for guidance in setting wage levels.
Quite often labor unions, work councils, and other management-employee bodies
disagree over one or more aspects of the compensation system. The sum of
regular compensation a company pays to employees is called the payroll.
Three typical types of compensation include:
Hourly wage: a specific amount of money paid each hour in exchange
for labor
Weekly or monthly salary: a payment made for a specific calendar
period, regardless of the actual number of hours worked
Commission: pay determined as a percentage of revenue (sales)
Base plus performance pay: a combination of weekly or monthly
“base” salary, plus some additional payment made according to
commission, lump sum (one fixed amount), or other agreed
performance-determined amount
Compensation types are not necessarily associated with compensation levels. For
instance, lawyers are typically paid an hourly wage, as are low-skilled workers.
Within a company, the difference in pay between positions, departments, and
jobs is created using job evaluation techniques. Job evaluations compare the
relative worth of one job versus another within a company. Unfortunately, many
areas of the workforce and types of jobs are undervalued in the process of job
evaluation and wage setting. Social prejudice, tradition, labor market structural
issues, or simple supply and demand can lead to undervaluing particular kinds of
jobs. The idea of comparable worth attempts to counteract undervaluing
employees. Comparable worth is the principle that jobs requiring the same level
of education, skills, and training should receive equal pay. Comparable worth
seeks to intervene in the supply and demand of the labor market to set wage
price levels.
In addition to basic compensation, many companies add incentives as part of
compensation. Incentives are rarely fixed. They are most often determined by
overall company performance. Therefore, employees are motivated (i.e.
incentivized) to help the company perform well.
Typical incentives include:
Annual bonuses: an additional payment typically awarded to all employees
once a year, depending on the company’s performance
Merit pay: a bonus or reward for outstanding work or a specific achievement
usually awarded to individual employees
Lump-sum salary increase: where an employee due a percentage salary
increase is given the equivalent of one year of that increase in a single
payment
Profit sharing: a distribution of a percentage of company profit to employees,
often in the form of marketable shares
Benefits
Benefits are rewards in addition to regular wage-style compensation given to
employees in exchange for labor. Compensation plus benefits is often referred to
as a compensation package. Benefits usually consist of pay for time not worked
such as vacation time, services like workers’ compensation and health insurance
paid for by the employer, and expenses reimbursed by the employer such as
college tuition for employees’ dependents.
Some benefits are universal and required by law, such as unemployment
insurance, workers’ compensation for job-related disability or injury, and in some
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countries health coverage. Other benefits are voluntary. Companies may create
benefits that suit their particular company culture or employee needs and wants.
Often, benefits may be influenced by the culture of the society in which the
employees reside. For instance, for many years Korean companies provided
university tuition reimbursement to all employees of a particular level or position.
This benefit was extremely important in a culture that attributes status and
importance to university education.
Table 10.1 Examples of benefits by category
Insurance benefits Services benefits Pay for time not worked
Workers’ compensation Company pension and
retirement
Vacation time
Health insurance Free meals Holidays
Dental insurance Tuition reimbursement Sick leave
Life insurance Vehicle Community service
Unemployment
insurance
Child care
Social security and
welfare
Stock options
Health club
Miscellaneous discounts
As companies become more global and feel increasing pressures to compete
internationally, it becomes more and more difficult to reward employees with
high-cost benefits. Some innovative companies offer quirky and unusual benefits
in the form of prize draws, gift-giving, and extra-curricular activities. It is unclear
whether such socially oriented benefits are linked to improved moral, loyalty, or
performance, and this is a new area of academic study. Some complain that such
benefits actually disguise a reduction in key valuable benefits that employees
need like health insurance and childcare.
In order to better meet the needs of employees, some companies are moving
towards flexible benefits plans, where employees are given credits that can be
used to purchase a individualized selection of benefits from a benefits menu. The
cost of flexible benefits plans is high, however for multinational corporations it
may better help them address benefits programs that span cultures and countries.
Employee relations
Employee relations cover two broad areas: general employee relations, and
industrial relations. Employee relations covers all activities that attempt to
understand and evaluate the employee relationship, while industrial relations is
typically used to describe the relationship between company management and
collective representation of workers, often in a union. The human resources
department manages employee relations, while experts, senior executives, and
labor representatives or works councils of representative employees and
managers usually manage industrial relations.
The goal of employee relations is to increase satisfaction of effective employees
and ensure their retention. Good employee relations are often measured in terms
of employee churn rate also called attrition rate or employee turnover. Employee
turnover can be due to employees deciding to resign or retire (called natural
attrition), or it can be through layoffs or firing. Human resources departments
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often manage payroll costs by using a “hiring freeze” – not hiring new employees
for a specific period, knowing that payroll decrease due to natural attrition.
High employee turnover is not ideal, as it costs companies money. In some
industries it is the norm, however. Acceptable employee turnover is most often
evaluated by industry and company size. Human resources departments routinely
measure employee turnover to understand whether the company’s human
resource system is working effectively or not.
The phrase churn rate often is used instead of employee turnover to describes
attrition of employees above what would be considered desirable. A company
that has “high employee churn” is not doing a good job in the area of human
resource management compared to competitors.
Developing employees
Developing employees involves improving their knowledge, skills, and expertise.
Development is achieved by first understanding their performance and
capabilities through performance appraisal, then delivering the appropriate
training to enhance their performance and capabilities.
Performance appraisal
Performance appraisals serve multiple purposes. They can be used to inform
employees how they can do better. They can be used to determine rewards or
identify employees for disciplinary action or layoffs. They can be used to
determine the effectiveness of the company’s human resource system, including
their methods for selecting, maintaining, and developing employees.
Performance appraisal processes vary by industry and by culture. For instance,
performance appraisals may take the form of a discussion between an employee
and their manager, giving the employee an opportunity to feed back on the
manager’s performance as well as their own. Or, performance appraisal may not
include the employee at all, and may be simply a report on all employees that
perform below a certain standard.
A performance appraisal may rely on the judgment of a superior, and there is
much scope there for subjective errors or prejudice. On the other hand, objective
appraisals that rely purely on quantifiable measure may not take into account
important conditions or circumstances that are not in the control of the employee.
Training
Training seeks to improve the skills and knowledge of existing employees.
Training can allow the firm to remain competitive in changing environments,
while keeping the same employees and thus lowering the costs of employee
acquisition. Companies first do training needs analysis before determining what
method of training is appropriate. Typical training methods may include:
On the job training where employees learn by doing the work, often with a
more experienced mentor
Simulations where the work is simulated in a controlled environment, often
in an assessment center
Classroom teaching and lectures
Seminars and conferences
Role playing where participants act out the roles of other employees,
managers, customers, suppliers
Often companies include a training allowance as part of compensation packages
for employees. Each employee is budgeted with a certain amount of training
allowance they can use each year. The employee and their manager work
together to determine what training opportunities best suit the company’s and
employee’s needs in order to spend that budget.
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Management development
Management development is a specific kind of employee training that seeks to
enhance the general management skills of selected employees that the company
wishes to develop into senior managers. Management development programs
often will first develop the knowledge of the manager in all aspects of the
business in addition to their own functional area of expertise. Next they will focus
on developing the employee’s management skills in things like negotiations,
dispute resolution, motivating employees, and controlling employee behavior.
The particular management skills and style a company trains is heavily influenced
by the culture of the organization, the behavior model established by the founder
and other significant company leaders, and the culture in which the company
operates.
In some companies, employees are evaluated on their management potential
through a process of job rotation. In other companies, high-performing new
employees are selected for fast advancement in special management
development programs to accelerate their rise to the top of the organization. This
is called fast tracking employees.
HR systems and culture
Overall, you can see that the hr strategies employed by a company may be
determined by their culture and history. A company with a history and culture
that values seniority will likely rely on a seniority-based HR system, including
seniority-based pay. Seniority-based system awards promotion and pay increases
according to the time served at a company, regardless of position or rank.
Seniority-based pay has long been the norm in Korean companies. Since the Asian
financial crisis, however, some companies that compete in global markets are
moving to performance-based systems in order to give themselves more payroll
and promotion flexibility. Many Chaebol-owned companies in Korea have moved
from seniority to performance-based systems. Seniority-based pay is favored by
labor unions.
They are unlikely to use shared feedback in appraisal, or fast tracking employees.
A company that operates in a more individualized culture might rely more on
performance-based system. A company working in a culture where social equality
and cooperation is valued may choose a different system still. Of any of the
functional areas you have studied, the human resources department is probably
the most influenced by the social culture in which the company operates.
Given the influence of culture on HR systems and policies, how should HR
departments in multinational or global companies decide what is the best HR
strategy?
Summary: The human resources
department
In this unit you have learned about:
The different roles and responsibilities within an HR department
The key steps in acquiring, maintaining, and developing employees
Key trends affecting human resource management, especially in Korea
The impact of culture, and country on human resources management
Now, go to eClass and apply what you have learned in this week’s Challenge
Question!
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Worksheet 10 (front)
Select true or false. 1) T F It is better economically to be paid a regular salary than an hourly wage. 2) T F Korean companies most likely use performance based pay because of Korean culture and history 3) T F POPCO determines the appropriate wage level for employees by evaluating the value of the their role and experiences to the company, as well as the industry averages for wage level. This is called appraisal. 4) T F General skills paper and pencil tests are a common selection technique in American companies. 5) T F Many kinds of insurance style benefits are required by law in most countries. Such legally required employer payments include workplace accident coverage and vehicle insurance. Match the aspect of HRM with the HRM group in POPCO that would handle it. a) Risk management b) Benefits administration c) Staffing d) Employee relations e) Compensation analysis f) Training 6) ____ Administering POPCO’s retirement program. 7) ____ Establishing health and safety rules to prevent fires 8) ____ Estimating comparable worth of our managers’ pay 9) ____ Conducting a survey on what charity POPCO should donate to. 10) ___ Learning and performing the company pledge and song 11) Review the graphic and story from the Korean Herald on the back, then to the right list the following: Identify 3 negative impacts this productivity phenomenon might have on Korean human resource management. List 5 HRM company policies that you think could solve the problems behind this productivity phenomenon.
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Worksheet 10 (back)
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