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MANAGEMENT OF BUSINESS

FOR CAPE ® EXAMINATIONS

JEROME PITTERSON

CAPE is a registered trade mark of the Caribbean Examinations Council (CXC®). MANAGEMENT OF BUSINESS for CAPE® EXAMINATIONS is an independent publication and has not been authorised, sponsored, or otherwise approved by CXC.

CAPE® EXAMINATIONS is an independent publication and has not been authorised, sponsored, or otherwise approved by

Macmillan Education 4 Crinan Street, London, N1 9XW

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ISBN 978-0-230-40043-6

ISBN 978-0-230-48319-4 AER

Text © Jerome Pitterson, 2014 Design and illustration © Macmillan Publishers Limited, 2014 The author has asserted his right to be identified as the author of this work in accordance with the Copyright, Designs and Patents Act 1988.

First published 2014

All rights reserved; no part of this publication may be reproduced, stored in a retrieval system, transmitted in any form, or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publishers.

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The author and publishers would like to thank Judy Sewsaran for her assistance in preparing this book.

Author’s acknowledgement: I want to thank God for the knowledge and strength he has bestowed on me to complete this text successfully. Sincere gratitude is also extended to my family, for their support and inspiration throughout this process, and to the students I have taught for their encouraging words and who are waiting to see this publication. Thanks to everyone who had a part to play in the completion of this book.

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The author and publishers are grateful for permission to reprint the following copyright material:

Extract from Functions of the bank by Caribbean Development Bank

© Caribbean Development Bank. Reprinted by permission of the Bank.

Extract from ‘Costing’ by T. Lucey © 2000, Cengage Learning EMEA

Ltd. Reproduced by permission of Cengage Learning EMEA Ltd. Extract from http://www.entrepreneur.com/encyclopedia/business-plan with permission of Entrepreneur Media, Inc. © 2014 by Entrepreneur Media, Inc. All rights reserved. Extract from ‘Innovation and Entrepreneurship’ by Peter F. Drucker

© Peter F. Drucker. First published in 2007 by Taylor & Francis Ltd.

Extract from ‘Organizational Behaviour’ by Stephen P. Robbins and Timothy A. Judge, 15th Edition, © 2013. Reprinted by permission of Pearson Education, Inc., Upper Saddle River, NJ. Extract from info@sbaj.org.jm © Small Business Association of Jamaica. Reprinted by permission of the organization.

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Contents

List of figures and tables

7

10

UNIT 1 MANAGEMENT PRINCIPLES AND PROCESSES

MODULE 1 BUSINESS AND ITS ENVIRONMENT 12

11

Introduction

1 Economic and Legal Structures

Types of economic activity Economic sectors and legal structures The private sector The public sector Privatisation Multiple Choice Questions Extended Essay Questions

2 Business Objectives

Nature, role and importance of objectives Business ethics and social responsibility Obligations of the firm to stakeholders Good corporate governance Importance of business ethics and integrity Code of ethics Government’s response to social irresponsibility Multiple Choice Questions Extended Essay Questions

3 Decision Making

Essential features of information Significance of qualitative versus quantitative decision making

The stages of decision making Factors affecting decision making Multiple Choice Questions Extended Essay Questions

4 Caribbean Business Environment

and Globalisation The nature and structure of Caribbean business organisations Caribbean business culture The growth of multinational corporations in the Caribbean The impact of trade liberalisation and globalisation

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15

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48

49

50

Protectionism

54

Other barriers to trade

55

Multiple Choice Questions

56

Extended Essay Questions

57

MODULE 2 THE MANAGEMENT OF PEOPLE

58

5

The Functions and Theories of Management

58

The need for and nature of organisations

58

The major management theories

58

The functions of management

64

The roles of management

65

Multiple Choice Questions

67

Extended Essay Questions

67

6

The Organisation and its Structure

68

Classification of organisations

68

Factors influencing the classification of organisations

72

Characteristics of the formal organisational structure

73

Centralisation and decentralisation

75

Multiple Choice Questions

76

Extended Essay Questions

76

7

The Theory and Application of Motivation

77

Factors that stimulate and influence motivation

77

Theories of motivation

78

Financial and non-financial motivational strategies

80

Implications for managers

85

Multiple Choice Questions

87

Extended Essay Questions

87

8

Leadership

88

Leadership theories

88

Theory X and Theory Y

88

The Trait Theory

89

Leadership skills

90

Leadership styles

92

Factors influencing the choice of leadership style

94

Leadership roles

95

Informal leadership

95

Multiple Choice Questions

96

Extended Essay Questions

97

9

Team Management and Conflict

98

The nature of teams

98

4

CONTENTS

Stages of team development

99

Types of formal group

99

Characteristics of effective teams

99

Team or group cohesiveness

100

Evaluation of team work

101

Benefits of team management to the organisation

101

Conflict management

101

Multiple Choice Questions

106

Extended Essay Questions

106

10

Management of Change

107

Factors that may cause change in the organisation

107

Differences between leading and managing change

108

Resistance to change

108

Strategies for managing change

110

The importance of communication in the management process

111

Multiple Choice Questions

112

Extended Essay Questions

112

11

Communication in Business

113

Types of communication

113

The communication process

113

Channels of communication

114

Factors influencing the choice of channel used

116

Lines of communication

117

Barriers to effective communication

119

Reducing barriers to communication

120

Multiple Choice Questions

122

Extended Essay Questions

123

12

Human Resource Management

124

The role and importance of human resource management

124

The functions of human resource management

124

Labour–management relations

131

Laws affecting health and safety in the workplace

134

Multiple Choice Questions

135

Extended Essay Questions

136

MODULE 3 BUSINESS FINANCE AND ACCOUNTING

137

13

The Need for Capital and Sources of Finance

137

The need for capital

137

Sources of finance

140

Criteria for seeking finance

140

How to choose from these sources of funds?

143

Money and capital markets and international financial institutions

143

The money and capital markets

145

Multiple Choice Questions

147

Extended Essay Questions

147

14 Accounting Information and

Financial Statements

148

Why do we need accounting records?

148

Internal users of accounting information

148

External users of accounting information

149

Getting started with accounting

149

Components of financial statements

152

Multiple Choice Questions

158

15

Financial Statements Analysis

159

Financial analysis

159

Importance of financial analysis

159

Ratio analysis

159

Types of ratio

160

Multiple Choice Questions

166

Extended Essay Questions

166

16

Budgetary Accounting

167

Projections

167

The budgeting process

167

Categorisations of budgets

168

Operational budgets

168

Types of budget

168

Budgetary control

170

Multiple Choice Questions

172

17

Investment Appraisal

173

Investment

173

Investment appraisal

173

Analytical methods of appraisal

173

Limitations of investment appraisal

178

Comparison of methods of appraisal

178

Multiple Choice Questions

179

END OF UNIT ASSESSMENT

180

UNIT 2 APPLICATIONS IN MANAGEMENT

184

MODULE 1 PRODUCTION AND OPERATIONS MANAGEMENT

185

18

The Nature of Production

185

The production process

185

Factors of production

185

What to produce?

186

Production methods

186

Factors that influence the method of production used

190

When to produce?

191

Location of production

191

Multiple Choice Questions

195

Extended Essay Questions

195

19

Forecasting Techniques

196

Forecasting techniques

196

Qualitative forecasting techniques Quantitative forecasting techniques Multiple Choice Questions Extended Essay Question

20 Production Design Strategies and

Capacity Planning Product design planning Product design strategies Capacity planning Capacity utilisation Options available to increase capacity Economies and diseconomies of scale Diseconomies of scale Business layout Multiple Choice Questions Extended Essay Questions

21 Costing

Direct costs Indirect costs Fixed costs Variable costs Fixed costs per unit Semi-variable cost Approaches to costing Including stock Application of marginal costing ’Make or buy’ decisions Multiple Choice Questions Extended Essay Question

22 Inventory Management

Importance of inventory Importance of inventory control Inventory control management Multiple Choice Questions Extended Essay Question

23 Lean Production and Quality Management

Importance of quality Dimensions of quality Techniques for improving quality Multiple Choice Questions Extended Essay Questions

24 Productivity

Factors that affect productivity Methods of measuring productivity Methods of improving productivity Multiple Choice Questions Extended Essay Questions

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CONTENTS

5

25

Project Management

247

Critical Path Analysis (CPA)

247

Decision trees

250

Multiple Choice Questions

253

MODULE 2 FUNDAMENTALS OF MARKETING

254

26

The Concept of Marketing

254

The core marketing concepts

254

Multiple Choice Questions

260

Extended Essay Question

260

27

The Marketing Environment

261

The micro-environment

261

The macro-environment

262

Multiple Choice Questions

265

Extended Essay Questions

265

28

Marketing Research

266

Importance of conducting marketing research

266

Importance of developing a research plan

266

Stages of marketing research

266

Limitations of market research

272

Multiple Choice Questions

274

Extended Essay Questions

275

29

Principles of Segmentation

276

Market segmentation

276

Criteria for effective segmentation

278

Bases of segmentation

278

Consumer buying behaviour

281

The consumer decision-making process (the buying process)

281

Factors influencing buying behaviour

283

Multiple Choice Questions

284

Extended Essay Questions

284

30

Product Management

285

The concept of product

285

Dimensions of the product mix

286

Product line and extension

286

The Boston Matrix

286

New product development process

289

The product lifecycle

290

Branding and packaging

292

Characteristics of services

293

Multiple Choice Questions

296

Extended Essay Questions

297

31

Pricing Decision

298

Introduction to pricing

298

Factors influencing pricing decisions

299

Pricing strategies

302

6

CONTENTS

Multiple Choice Questions

305

Extended Essay Questions

306

32

Distribution Management

307

The role of distribution in the organisation

307

Factors influencing distribution decisions

307

Types of distribution channel

308

Introduction to logistics strategy

309

Types of distribution strategy

310

Multiple Choice Questions

311

Extended Essay Questions

311

33

Promotion Strategy

312

The concept and objectives of promotion

312

Tools of promotion

312

Multiple Choice Questions

318

Extended Essay Questions

319

34

Internet Marketing

320

Development of internet marketing

320

Opportunities created by internet marketing

321

Challenges associated with internet marketing

322

The importance of e-commerce to business organisations

322

Challenges created by e-commerce

323

Multiple Choice Questions

325

Extended Essay Question

325

MODULE 3 SMALL BUSINESS MANAGEMENT

326

35

The Nature and Characteristics

of Entrepreneurship

326

Corporate entrepreneurship (‘intrapreneurship’)

326

Social entrepreneurship

326

Characteristics of successful entrepreneurs

327

Benefits of entrepreneurship

328

Drawbacks of entrepreneurship

329

Multiple Choice Questions

330

Extended Essay Question

330

36

Economic Systems and Business Growth

331

The economy problem

331

Types of economic system

331

Criteria for measuring size and growth of businesses

334

A comparison of small firms and large firms

335

Strategies for growth

338

Multiple Choice Questions

343

Extended Essay Questions

343

37

Major Challenges and Opportunities Faced

by Small Businesses

344

Identifying successful business opportunities

344

Sourcing capital (finance)

344

Selection of business types

345

Determining a location

345

Globalisation and trade liberalisation

345

E-commerce

345

Intellectual property

346

Multiple Choice Questions

347

Extended Essay Question

348

38

Types and Nature of Assistance Available

to Small Firms

349

Government agencies

349

Non-government agencies

350

Financial institutions

350

Types of assistance offered to small businesses

351

Extended Essay Question

352

39

Preparation of a Business Plan for

a Small Business

353

Feasibility study

353

The business plan

353

Elements of a business plan

354

Multiple Choice Questions

359

Extended Essay Question

359

END OF UNIT ASSESSMENT

360

40

Internal Assessment

364

Choosing an appropriate topic or title for

your research

364

Introduction

365

Literature review

366

Writing your methodology

367

Presentation of data

368

Analysis of data

369

Interpretation of results

370

Conclusion and recommendation

370

References and citations

370

Appendices

370

Note to teachers

370

Glossary

372

Answers to Multiple Choice Questions

384

 

Index

386

7

List of figures and tables

Figures

Figure 1.1

An example of industry in the

primary sector

12

Figure 1.2

An example of industry in the

secondary sector

13

Figure 1.3

An example of industry in the

tertiary sector

14

Figure 1.4

Private-sector organisations

15

Figure 1.5

A sole-trader business

16

Figure 1.6

A public limited company

19

Figure 1.7

A cooperative business

20

Figure 1.8

A franchise

21

Figure 1.9

Public-sector organisations

24

Figure 2.1

The hierarchy of objectives

31

Figure 2.2

Scotiabank

33

Figure 3.1

The stages of decision making

38

Figure 4.1

Business culture factors

48

Figure 4.2

Digicel headquarters, Kingston

51

Figure 5.1

A basic system

62

Figure 5.2

The three levels of management

64

Figure 6.1

Functional organisational structure

68

Figure 6.2

Product organisational structure

69

Figure 6.3

Geographical organisational structure

69

Figure 6.4

Matrix organisational structure

70

Figure 6.5

Team organisational structure

71

Figure 6.6

Network organisational structure

71

Figure 6.7

Virtual organisational structure

71

Figure 6.8

Narrow span of control

73

Figure 6.9

Wide span of control

74

Figure 7.1

Maslow’s Hierarchy of Needs

78

Figure 10.1 Managing change

110

Figure 11.1 The communication process

113

Figure 11.2 The flow of communication

118

Figure 12.1 The recruitment plan

125

Figure 14.1 The double entry system

150

Figure 16.1 The budgetary process

168

Figure 17.1

NPV graph

178

Figure 18.1

The production process

185

Figure 18.2

An example of job production

186

Figure 18.3

An example of batch production

187

Figure 18.4

An example of flow production

189

Figure 19.1

Examples of common trends

199

Figure 19.2

A scatter diagram

201

Figure 20.1

Diseconomies of scale

210

Figure 20.2

Process layout

211

Figure 20.3

Product layout

212

Figure 20.4

Fixed-position layout

213

Figure 20.5

Cellular layout

214

Figure 21.1

Fixed costs

217

Figure 21.2

Variable costs

217

Figure 21.3

Fixed costs per unit

217

Figure 21.4

Semi-variable costs

217

Figure 21.5

A breakeven chart

221

Figure 22.1

Stock control levels

225

Figure 22.2

Simpson Lumber Yard stock control

graph

226

Figure 22.3

A typical economic order quantity graph 227

Figure 22.4

Economic order quantity graph for Questions 6–8

228

Figure 25.1

The sections of a node

247

Figure 25.2

Lines representing activity

247

Figure 25.3

Network diagram

248

Figure 25.4

New network diagram

248

Figure 25.5

Three possible situations in CPA

249

Figure 25.6

New diagram, using dummy activity

249

Figure 25.7

Network diagram

249

Figure 25.8

A decision tree

250

Figure 25.9

The revised decision tree

251

Figure 25.10

A more complex decision tree

252

Figure 25.11 Network diagram for Questions 1–3

253

Figure 26.1

Core marketing concepts

254

Figure 28.1

Stages in developing a research plan

267

Figure 29.1

Market coverage strategies

277

Figure 29.2

The consumer decision-making process

282

8 LIST OF FIGURES AND TABLES

Figure 30.1 The Four Ps

285

Figure 30.2 Attributes of the product

285

Figure 30.3 Dimensions of the product mix

286

Figure 30.4 The Boston Matrix

287

Figure 30.5 New product development process

289

Figure 30.6 The four-stage product lifecycle

290

Figure 30.7 The five-stage product lifecycle

291

Figure 30.8 Extending the product lifecycle

291

Figure 30.9 Secondary packaging

293

Figure 31.1 Price ceiling

301

Figure 31.2 Price flooring

301

Figure 31.3 Penetration pricing and price skimming compared

304

Figure 32.1 Types of distribution channel

308

Figure 32.2 One-channel intermediary

309

Figure 32.3 Two-channel intermediary

309

Figure 36.1 Market share illustrated in a pie chart

335

Figure 36.2 Diseconomies of scale

337

Figure 36.3 An example of conglomerate integration

339

Figure 40.1 Examples of statistical tools

369

Tables

Table 1.1

Benefits and problems associated with a change in legal structure

23

Table 2.1

The firm’s social responsibilities to stakeholders

34

Table 3.1

The decision-making process

39

Table 3.2

Possible impact of factors on a firm’s

decision making

44

Table 5.1

Contributions of classical theories to

modern organisations

61

Table 5.2

Contributions of modern theories

to modern organisations

63

Table 5.3

Mintzberg’s ten roles for top management

65

Table 8.1

An evaluation of different leadership styles

93

Table 9.1

An evaluation of conflict management strategies

Table 11.1 An evaluation of communication methods

104

117

Table 11.2 Methods of overcoming barriers to communication

121

Table 13.1 Advantages and disadvantages of sources of capital

141

Table 14.1 Transactions illustrating the double entry system

151

Table 14.2

Cash inflows and outflows

156

Table 15.1

Net profit figures for analysis

159

Table 15.2 Data for calculating investment or shareholders’ ratios

162

Table 15.3 Data for calculating efficiency and activity ratios

163

Table 17.1 KEP Industry initial capital outlays and annual cash inflows

174

Table 17.2 initial capital outlays and annual cash inflows for three projects

174

Table 17.3 Initial capital outlays and annual cash inflows for two projects

175

Table 17.4

Forecasted data for Projects A and B

175

Table 17.5

An extract of discount factors for $1

176

Table 17.6 Investment information for DGF Company Ltd

177

Table 17.7 Information for NPV/DCF analysis

177

Table 17.8 Comparison of methods of appraisal

178

Table 19.1 Data for calculating simple moving averages

200

Table 19.2 Data for Future Sales Ltd sales forecasts

200

Table 19.3 Data for least squares regression calculation

201

Table 19.4

Data for Questions 5 and 6

203

Table 21.1 Calculating operating profit under marginal costing

218

Table 21.2 Calculating operating profit under absorption costing

218

Table 21.3 Production costs for Great Juices Ltd

222

Table 25.1

Getting ready for school

248

Table 25.2 Getting ready for school (revised timings)

248

Table 25.3 Information for critical path exercise

249

Table 25.4 Information for critical path example

249

Table 25.5

Activities by A Fisher Ltd

250

Table 25.6

Expected values

251

Table 25.7 Data from James Duncan’s market research

252

Table 26.1

Overview of business concepts

259

Table 28.1 An evaluation of marketing research techniques

272

Table 30.1 Possible responses from marketers to characteristics of services

295

Table 31.1 Information for calculating price elasticity of demand

299

Table 31.2

Degrees of elasticity

300

Table 33.1 Overview of types of advertising media

314

Table 36.1 The impact of economic systems on business decision making

333

Table 40.1 Module content related to SBA topics

365

LIST OF FIGURES AND TABLES

9

10

Introduction

This textbook is geared towards students studying CAPE ® Management of Business Units 1 and 2, including private candidates. The text is divided into two units and gives comprehensive coverage of the CAPE ® Management of Business syllabus, providing students with a wide knowledge base of business concepts. Students will be furnished with the information needed to do well in their CAPE ® examinations and the book forms a basis for higher studies. The text also incorporates some ‘hard to find and explain’ concepts and so it is also an excellent resource for teachers.

The text breaks down accounting information so that students without accounting knowledge from CSEC ® level will be able to understand the concepts of Module 3, Unit 1. However, it also offers challenging exercises for those with a strong accounting background.

The book gives a number of definitions, examples from different territories and practice exercises to assess students’ understanding of the concepts. Each chapter is summarised at the end and also incorporates multiple choice questions, case studies which help students to think critically, and extended essay-type questions.

The text also contains photographs, artwork and diagrams to cater for visual learners, as well as worked examples of accounting questions and tables to break down information for ease of understanding, studying and remembering.

11

Unit 1

MANAGEMENT PRINCIPLES AND PROCESSES

12

1

Module 1 Business and its Environment

Economic and Legal Structures

LEARNING OBJECTIVES:

At the end of this chapter students should be able to:

Identify the different types of business activityAt the end of this chapter students should be able to: Distinguish among the different types

Distinguish among the different types of business activityable to: Identify the different types of business activity Distinguish between the private and public sectors

Distinguish between the private and public sectorsDistinguish among the different types of business activity Describe the different private- and public-sector businesses

Describe the different private- and public-sector businessesactivity Distinguish between the private and public sectors Outline how each of the businesses is formed

Outline how each of the businesses is formedDescribe the different private- and public-sector businesses Discuss the benefits and drawbacks of each type of

Discuss the benefits and drawbacks of each type of businessbusinesses Outline how each of the businesses is formed Identify examples of each type of business

Identify examples of each type of businessDiscuss the benefits and drawbacks of each type of business Types of economic activity T he

Types of economic activity

T he Caribbean business environment can be divided into three types of economic or business activity. These are discussed below.

Primary sector

The primary sector incorporates all the extractive industries, including mining (for example, bauxite), fishing, forestry and farming. In most cases, the products of the primary sector are the raw materials that are used for secondary production. For example, bauxite is used for manufacturing aluminium and lumber is used in the building of furniture and houses. The primary sector also includes the fishing and agricultural industries. Some Caribbean countries are heavily dependent on the primary level of activity in order to earn foreign exchange. Currently, some countries export large amounts of our raw materials in their natural state instead of exploring the products that could be produced by using those same resources. This means that the secondary level of activity is perhaps not explored as much as it could be. Dependence on the primary sector presents the country with the following advantages and disadvantages:

the country with the following advantages and disadvantages: Figure 1.1: An example of industry in the

Figure 1.1: An example of industry in the primary sector