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Ella Aiken

 The strategic role of human resource management

 What is human resources management?

It is the total relationship between an employee and employer in order to achieve the strategic goals of
the business.

 Objectives of HRM
- They see an employee as an asset, rather than a cost to the business
- Encourage open communication and goal orientation.
- Aims to reduce conflict through effective procedures and relationships

 Why is HRM one of the most important business functions?

Staff costs are often more than 60% of operational costs

 What have governments created in more recent years?

A more flexible legal framework for human resources management in order to assist businesses in becoming
more competitive.

 Distinguish between an employee and employer

 Employer:
- Exercises control over the employee
- Has the responsibility for the payment of wages
- Holds the power to dismiss employees

 Employee:
- Is a worker under an employer’s control
- Control may involve the location of the workplace, the way in which the work is performed or the
degree of supervision involved.

 Major challenges for human resources management are:

- Developing and retaining talented staff
- Improving leadership development
- Managing the ageing workforce
- Succession planning
 Most specialist HR managers are responsible for:
- Human resource planning and job design
- Acquisition: recruitment selection and placement
- Development: induction, training, career development and performance appraisal
- Maintenance of staff: wellbeing, legal responsibilities and communication
- Performance management and rewards
- Separation
- Managing diversity: EEO and affirmative action

 What are line managers

Are responsible for the management of staff contributing to the prime function of the business.

 How is HRM evolving from a support function to a core function?

HRM is assisting with the efficient management of staff and building a culture that is aligned with the
business’s goals. Likewise, specialist human resources managers are now more involved in negotiations
with unions, establishing and negotiating agreements and preparing for tribunals than they were in the
past. Specialist human resources functions are now increasingly being outsourced to consultants.

 In response to global competition and the desire for businesses to reduce costs and improve productivity,
new business structures are developing.

 Outsourcing business functions to reduce costs obtain specialist support and improve productivity is

 Many firms outsource specialist HR functions inclusive of payroll and recruitment

 There has been a rapid growth in independent contractors, such as labour hire companies.

 Businesses generally find that outsourcing is most effective internationally when the business functions
being outsources are suitable for teleworking.



- Virgin Blue experienced major delays from 26th September to 28th September 2010, when its check in
and reservations system, which is outsources, went down.
- Major delays were experienced with over 400 flights disrupted and 50,000 passengers stranded in
various countries.
- In response to this, Virgin Blue recognised the difficulties experienced by travellers and agree to incur
additional costs associated with:
 Offering a full cash refund or flight credit
 Offering a free flight to all Virgin Blue guests
 Offering overnight accommodation and airport transfers
- Virgin estimated the cost of disruption was around $20 million.



 Expand capacity/ flexibility  Less integrated organisation

 Improve quality  Quality may decline
 Save costs  Costs may increase (hidden costs)
 Allows business to focus on main activities  Loss of security and confidentiality of
 Improves legal compliance information

 Stakeholders in the HRM process

 Employers
- Handle HRM issues on a daily basis, focusing on improving business involvement through involvement in
developing programs
- SURVEY: more than 7600 people found ‘people management’ to be severely failing.
- In response to this, improving management training has become important in improving overall HRM.

 Employees
- Demand challenging interesting work, involvement in the decision making process and autonomy in the
- Extensive period of downsizing have increased ‘CHURNING’ – moving frequently from one job to another in
different organisations.
- Businesses hope to retain and motivate skilled staff by putting extra effort into developing staff career
opportunities and establishing training plans, rewards and opportunities for greater employee involvement.
- Maintaining a sustainable work – life balance, to spend more time with families
- Labour shortages are looming due to ageing population – extending working life to 67 years prevents
employees from accessing pension or superannuation.

 Employer associations
- Assist employers in formulating policies and logs of claim served on their members by unions
- Act on behalf of employers in collective bargaining sessions and before industrial tribunals, courts,
commissions and committees.
- They provide advice on awards, unfair dismissals and discrimination issues, make submissions to safety net
- Negotiate agreements and lobby on behalf of employer interests

 Trade unions
- Organisations formed by employees in an industry, trade or occupation to represent them in their efforts to
improve wages and the working conditions of their members
- Trade union membership in Australia has dramatically fallen (51% in 1976 to 10% in 2012)
- Major reasons for a decline in union membership include:
 Community attitudes often favour individual rather than collective approaches to problems
 Poor image given of unions in media
 Legislative changes have reduced their power
 Globalisation
 Collapse of centralised wage fixing system

Economic changes and changes in the workforce

o Privatisation of businesses
o Decline in workplace size
o Feminisation of the workforce
o Casualization of the workforce

 Governments and government organisations

Role as a:
- Legislator
- Employer
- Responsible economic manager
- Policy administrator and representative of Australia
 How have governments attempted to increase their power?
Through the use of External Affairs and Corporations powers given under the constitution

- Laws made by federal and state parliaments (laws relating to employment conditions)
- Provide framework for awards and agreements, resolution of disputes and require employers to:
 Meet OHS requirements
 Maintain workers’ compensation insurance
 Provide all employees with superannuation, annual leave and long service leave
 Ensure employment practices are free from discrimination

- Australia has shifted from a dual federal and state industrial relations system to a nation industrial
- This system is implemented under the Fair Work Act and gives both employers and employees the same
workplace rights.


- Under the Fair Work Act 2009, all employees of constitutional corporations are covered under
state awards and enterprise agreements. It also sets out the Ten National Employment
Standards, and emphasises collective bargaining.
- FWA play a role in ensuring that the bargaining process and any associated industrial associated
industrial action
- Primary functions include:
o Settling disputes through conciliation
o Supervising the making of agreements or awards and award simplification
o Hearing appeals
o Handling unfair dismissal cases

Collective bargaining is a process of negotiations between employers or a group of employees aimed at

reaching agreements that regulate working conditions.

Industrial Tribunals and Courts

- Exist at the federal and state level to enforce laws established by governments

Federal Court
- Have the judicial power to determine disputes about existing rights to make decisions about these matters
- Handles cases relating to industrial action and breaches of industrial law.
- Has the power to approve de amalgamation (splitting up) of unions, declare unauthorised action taken
during a dispute under the Corporations Act 2001

 Society
- Expectations regarding employment conditions
- Demands for safety and wellbeing at work have increases
- Relocating production offshore leads to dislocation and structural unemployment.

What has caused the ongoing battle between the need for businesses to reduce its biggest cost - labour?
Global competition – as pressure from global competition increases, so do the needs of employees, particularly
those with dependant families.
 Legal influences

 The employment contract

- An employment contract is a legally binding agreement between an employer and employee and outlines
features inclusive of:
 Duties
 Supervision
 Hours
 Location
 Leave
 Salary/Wages

Common law
- Developed by courts and tribunals
- Under common law, both parties – employers and employees – have basic obligations in any employment

Employer obligations Employee obligations

- Providing work - Obey lawful and reasonable commands

- Payment of income and expenses - Use care and skill in the performance of their
- Meeting requirements of industrial relations work activities
legislation - Act in good faith and in the interests of the
- Duty of care employer

Minimum employment standards

- Provide a greater safety net for employees, particularly those who are most vulnerable and low paid
employees in the workplace.
- Covers basic rates of pay and casual loading, maximum ordinary hours of work, annual leave, personal leave
and parental leave

Minimum wage rates

- Basic rate of pay has been determined by:
 The award or agreement covering the employee
 The national minimum wage (federal minimum wage is currently $15.96 per hour or $606.40 per 38
hour week)
- Fair Work Australia establishes and maintains a safety net for employees with regards to fair minimum

When setting the national minimum wage, what does FWA take into account?
 The performance and competitiveness of the national economy, including productivity, business
competitiveness and viability, inflation and employment growth
 Living standards and the needs of low income earners
 The principal of equal pay for work of equal or comparable value

- Legally binding documents containing minimum terms and conditions of employment
- May include:
 Minimum wages
 Penalty rates
 Types of employment
 Flexible working arrangements
 Hours of work

What is the aim of the process of simplifying awards?

Aims to reduce complexity and costs to a business involved with interpreting such agreements.

Where can award breaches be reported?

- Fair Work Australia
- Fair Work Ombudsmen
- Trade Union

Enterprise agreements
- Enterprise agreements are collective agreements made at a workplace between an employer and a group of
employees about the terms and conditions of employment.

Under the Fair Work Act, there are three different types of agreements:

 Single enterprise agreements

- Between a single employer and a group of employees

 Multi enterprise agreements

- Between two or more employers and groups of their employees.

 Greenfields agreements
- Single and multi enterprise agreements relating to a genuine new enterprise of the employer that are made
before any employees to be covered by the agreement are employed

Rates of

and annual Overtime
Key features
of enterprise

Hours Allowances

- Enterprise agreements must be approved by Fair Work Australia, who must ensure the agreement:

o Is genuine of those involved

o Passes the ‘better off overall test’

Other employment contracts

 Individual common law contracts

- Covers employees not on federal or state agreements – those earning over the limit of award wages
- Common in private sector
- May be written or verbal
- Offer less protection

 Independent contractors
- Consultants or freelancers
- Tend to have a specific project for their contract

 Contracts for casual work

- Casual employment has increased form 16% to 21% from 1990 to 2011.
- Casual employees have contracts with employers for short term, irregular or seasonal work
- Most employers prefer casuals as it reduces their costs for recruitment dismissals and other on-costs
(additional costs involved in hiring an employee, above the cost of their wages)
- Do not have access to employment entitlements

 Part time contracts

- Have a continuing employment contract and work less than 35 hours per week
- Have access to employment entitlements

 Occupational Health and Safety

- Safety Work Australia was established to conduct research and develop national standards, codes of practice
and common approaches to WHS/OHS legislation, which are endorsed by the state.
- Legislation on OHS covers employees, employers and the self employed
- Work Health and Safety Act 2011 – ensures the health, safety and welfare at work of all employees by
providing a safe system of work.

 Workers’ compensation
- State legislation covers employees for workers’ compensation.
- Administered by Work Cover – a statutory body responsible for achieving safe workplaces, effective return
to work and security for injured workers
- Provides a range of benefits to an employee suffering from an injury or disease related to their work.
- Also provided to families of injured employees when the injury/disease was caused by or related to their

o Common law redress

- Employees may take action out against an employer when the employer or another employee has breached
their duty of care or has been negligent.

 Anti-discrimination
- Discrimination occurs when a policy disadvantages a person or a group because of a personal characteristic
that is irrelevant to the performance of the work
- Anti discrimination legislation has been enforced to protect employees from direct or indirect discrimination

How can employers prevent discrimination?

- Complying with legislation
- Audit all policies and practices to ensure they do not discriminate

Strategies used to eliminate discrimination in the workplace include:

- Committing to a workplace free from discrimination
- Writing and communicating policies to prevent discrimination, include a code of conduct
- Training managers and staff in cultural diversity issues.

 Equal employment opportunity

- Refers to equitable policies and practices in recruitment, training, selection and promotion.
- Ensures that the best person for the job is chosen, the business gains the person with the skills appropriate
to its needs and a more positive working environment is promoted.
- Level of equity is reflected in the extent to which women and minority groups have access to different
occupations and positions within the business
- Employers with more than 100 employees are obliged to develop and affirmative action program –
measures taken to eliminate direct and indirect discrimination towards women
 Economic influences

 The economic cycle

- Demand for labour is determined by the demand for goods and services.
- If labour shortages develop during periods of economic growth, employers compete for employees by
offering higher wages
- During downturns in the economic cycle, the demand for goods and services falls, thus businesses have to
reduce the size of their workforce and limit the capacity to provide significant wage increases.
- Structural change – a change in the nature and pattern of production of goods and services within an
- Structural change occurring in the economy has led to a rapid employment growth in the services sector,
which accounts for 86% of total employment.
- Employment is growing in property, business, retailing and tourism.

 Globalisation
- Has increased the level of international competition
- Has increased training in the management of multicultural workforces, with differing approaches to power,
authority and the role of groups/ individuals.
- Increasing role for international organisations inclusive of the international Labour Organisation and trade
blocs, to promote trade between countries that adhere to social justice principles.

 Technological influences
- Major source of improvements in productivity, communication and competition between businesses.
- Causing the nature of production and services to change and new jobs to be created
- Businesses are re engineering and restructuring networks, often offshore and making increasing use of
‘virtual teams’ using video technology.
- Allowing firms to operate anywhere at anytime
- Increases the need for ongoing training programs and new protocols to ensure that work-life balance is
maintained in an environment in which society often expects people to be ‘always on call’.

 Social influences

 Changing work patterns

- Growth in part time
- Casualization of the workforce
- Rising female participation rate – 59% in 2011
- Demand for career flexibility and job mobility – 14 to 16% of workforce are considered job mobile
- Ageing of the workforce – shortage of skills
- Early retirement – Eligibility for superannuation

Why has there been a growth in part time and casual work?

- Growth in the finance, retail, hospitality and community services industries

- Most part time workers do not want to work additional hours
- Part time work offers flexibility in balancing work and personal lives

Work patterns are changing and this trend is referred to as ‘LABOUR FRAGMENTATION’

 Living standards
- Companies who seek to undercut conditions through excessive outsourcing and casualization of the
workforce will be challenged to avoid erosion of living standards
- Conflict between individuals’ desire for high living standards, achieved through work – life balance.
- Concerns of loss of weekends for families working flexible hours and shifts.
- Australians are keen to have ‘quality job’ that are safe, meaningful secure and productive; where they are
respected and consulted by the employer and earn enough for a decent standard of living.

 Ethics and corporate responsibility

What are ethical business practices?

Are those practices that are socially responsible, morally right, honourable and fair

Ethical and legal issues in the workplace:

- Discrimination
- Harassment
- Accidents
- Stress
- Unlawful dismissal

Benefits of ethical and legal practices

- Pleasant working environment and good working conditions
- Workplace free from discrimination
- Staff motivated and valued
- Improved business performance
- EEO and legal compliance
- Positive image of business > marketing opportunities

Distinguish between a code of conduct and code of ethics

- A code of conduct is a statement of acceptable and unacceptable behaviour in a business
- A code of ethics is a statement of a firm’s values and principles

 Working conditions

An ethical employer can be expected to achieve safe and fair working conditions that improve the welfare of
employees. This is achieved through:
- Compliance with social justice and industrial legislation (OHS, EEO and Anti Discrimination)
- Providing a safe and healthy working environment, safe work practices and equipment, appropriate
supervision and training.
- Creating challenging, interesting and meaningful work to stimulate intrinsic rewards

Working conditions have come under focus over the last two decades as businesses have increasingly responded
to global competition and sought to develop practices that improve efficiency and save labour on costs which
are generally around 60% of total costs.

Many businesses are realising the benefits of a more committed workforce and good public reputation achieved
through embracing the ethical principals of corporate social responsibility.

o HUMAN RESOURCES MANAGEMENT is focused on acquiring, developing, maintaining and managing staff
productively to achieve the business’s goals

What are the two major HR aspects that need to be planned in all businesses?
- The short term and long term human resource needs for the business, through a human resource inventory
- The strategy needed to meet these needs (i.e downsizing or outsourcing)

 Acquisition

- Acquiring the right staff is a critical process in managing HRM processes.

- Acquisition involves analysing:

 The internal environment – business’s goals and culture

 The external environment – economic conditions, competition and technology

Recruitment, selection and placement

- Recruitment is the process of locating and attracting the right quantity and quality of staff to apply
for employment vacancies or anticipated vacancies at the right cost.
- Employee selection involves gathering information about each applicant and using that information
to choose the most appropriate applicant.

Effective recruitment and employee selection involves:

 Evaluating and hiring job applicants who are motivated and have values and goals aligned with the business
and its culture
 A fair, non discriminatory and legally compliant selection policy
 Giving applicants a realistic understanding of their job description
 Using tools to identify gaps in skills and recruiting strategically to fill these gaps.

 Development
- Effective development programs ensure that experienced and talented staff is retained.
- These programs enhance employees’ motivation and commitment to the business through
promotion opportunities over the longer term.
- Research shows that employees who feel competent performing their jobs and are recognised for
their achievement are more motivated and satisfied at work and thus achieve higher levels of

- An effective induction program is carefully planned to introduce a new employee to the job, their
co-workers, the business and its culture.
- A well prepared induction program:
 Gives employees a positive attitude to the job and business
 Builds an employees’ confidence in the job
 Stresses the major safety policies
 Helps establish good working relationships with co-workers and supervisors.
Considers the
internal and

Determines the Key features

process - that is Determine the
the content of the of an objectives of the
program, learning effective traiing program
principals, location induction for employees,
and participants job and business
involved program

Assess the needs

of the individual,
the job and the


- Today, organisational structures are less hierarchical and more flatter in structure
- Flatter structures have improved autonomy and efficiency, yet led to reduced promotional
- Therefore, HR managers use strategies to help motivate and retain talented staff

Strategies can include:

 Job enlargement – increasing the breadth of tasks in a job
 Job rotation (multiskilling) – moving staff from on task to another over a period of time
 Job enrichment – increasing the responsibilities of a staff member
 Job sharing – where two people share the same job
 Self-managing teams and coaching – teams in which roles and decisions are determined by their members
 Mentoring and coaching

Distinguish between mentoring and coaching

Mentoring Coaching

Focus Individual life development Performance enhancement by

Preparation for future roles building skills and capabilities and
overcoming weaknesses

Role  Facilitator, guide – based on  Specific to employees’ work

sharing advice and function
 Assists employee in setting
 Personal relationship – more goals and finding solutions
like a friend

Function Provide advice that may assist in Share skills, knowledge, styles and
improving the way someone techniques that are relevant to the
manages issues and situations employees’ needs

Time Frame No time frame Specific time frame

Structure Unstructured Structured

Benefits  Individual through personal  Business, through improved

growth may have the potential team work is likely to improve
to improve performance overall performance and
 Enhances morale  May enhance morale


 A systematic process of analysing and evaluation employee performance for strengths, weaknesses and
opportunities for development
 Used to assess an employee’s suitability for promotion and their potential value to the business’s success.

Performance appraisal involves four main objectives:

1. To provide feedback from management to employees regarding work performance
2. To act as a measurement against which promotion and pay rises can be determined
3. To help the business monitor its employee selection
4. To identify employees’ training and development needs.

 What should a business do if most employees continually perform below expectations?

Change or modify its recruitment and selection process

 Why does care need to be taken when conducting appraisals?

They need to take care and ensure the criteria are job related, the appraising staff have been trained and that there
is no discrimination in the process.
 What are the benefits of a constructive evaluation?
It will help employees improve their future performance and it will be a more useful and worthwhile experience.

Performance appraisal tools

 Interview – formal discussion between supervisor and employee

 Can be flexible and detailed and allows for questions and discussion
 As supervisor has reward and promotion over employee, employee may struggle to be open for

 Performance ranking method – employees ranked from best to worst

 Simple
 Not a fair consideration against similar criteria and is open to bias

 360-degree feedback method – employee receives feedback anonymously from peers or managers
 Honest feedback
 Open to personal conflicts and rivalry, may not be constructive and could be time consuming

 Maintenance

 Focuses on the processes needed to retain staff and manage their wellbeing at work.

Involves looking after:

 Staff wellbeing – maximised by encouraging staff to partake in decision making process and
giving them some control over their work lives
 Safety and health
 Managing communications effectively – Supports employees in decision making
 Complying with industrial relations legislation and legal responsibilities


- Effective workplace relationships depend heavily on the strength of a business’s communications

- Poor communication is often reflected in workplace conflict and high turnover rates

Common methods of communication include:

o Regular team meetings
o Staff bulletins / newsletters
o Staff seminars
o Social functions
o Suggestion boxes
o Staff surveys
o Email – often criticised however for being a source of misunderstandings and tension.

- Recognition of staff achievements is critical in building a positive workplace culture


- Increasing use of email and increased opportunities for employee participation

- Firms encourage employee participation to improve communication, empower employees and
develop their commitment to improving quality and efficiency.

Employee participation strategies:

1. Participation through membership of the board of directors
- Allows an employee to represent staff on the board.

2. Participation through ownership

- Employees buy shared in their company, which may result in increased commitment


- Often a litmus test of the workplace culture as they are available to all staff
- May be monetary or non monetary
- Businesses carefully consider the value of these benefits in terms of retention of staff and workplace
culture, as they are expensive and some attract an employer-paid
Fringe benefits tax (FBT)

Typical benefits include:

 Flexible working arrangements
– Allows businesses to work more efficiently or allows employees to balance work and family responsibilities
– May include flexible remuneration options, flexible working hours, job sharing, work from home
arrangements or family leave

 Paid training
 Travel allowances
 Health insurance
 Subsidised gym membership
 Housing
 Company car

Costs for a workplace that is ‘family unfriendly’

 Lower morale through increased stress

 Absenteeism
 High turnover costs
 Loss of return on training costs
 Potential for court action (EEO)


An important role of the human resource manager is ensuring the policies comply with legislation, OHS, taxation,
social justice legislation and industrial relations legislation and agreements
 Separation

- May be involuntary or voluntary

- Voluntary separation may take place in the form of resignation, relocation, voluntary redundancy or
- Involuntary separation may take the form of contract expiry, retrenchment or dismissal

Why might staff be dismissed?

- For engaging in gross or serious misconduct (theft)
- Poor performance
- Redundancy due to organisational restructuring

Why must employers take great care in following all legal processes involved?
- To avoid costly claims of unfair dismissal

 UNFAIR DISMISSAL occurs what an employee makes an unfair dismissal remedy application and FWA finds
- The employee was dismissed
- The dismissal was harsh and unjust
- The dismissal was not a case of genuine redundancy

16.2 - Leadership styles

 Classical authoritative, autocratic (directive) approaches focus on planning, organising and

controlling. Focuses on controlling, established defined lines of command and is rigid and

 Behavioural, participative approach, which sees management as leading, motivation and

communication. Where the leader and the employees are encouraged to work together in the
decision making process so as to make informed decisions.

 Contingency approach emphasises the need to modify human resource management

approaches according to certain conditions. During a period of economic downturn where
immediacy is of prime concern the autocratic approach will be implemented.

16.3 - Job Design

Job design is the process of describing and defining the general or specific tasks that need to be performed by an

The job design:

- Usually takes place before employees are recruited
- Specifies the requirements needed to carry out the job

What does job design involve?

1. Analysing the existing work situation using observation, feedback and organisational data
2. Identify technical, managerial and administrative tasks to be performed
3. Identify needs and aspirations of employees for new positions
4. Decide how the job will fit in with the work group
5. Consult with key stakeholders and modify as required
6. Implement changes slowly & provide training.
7. Assess and review progress.

Methods of job design:

1. Job rotation – employees move from one job to another.
 Allows for the multiskilling of staff and creates more challenge and flexibility.
 Experienced employees may not want to be learning new types of work

2. Job enrichment – Employees are given more challenging tasks, responsibility, autonomy and decision
making power
 Employee satisfaction – higher retention rates
 May over extend employee and lead to burn out or work intensification

3. Job enlargement – Employees are given additional tasks to increase the variety and challenge involved in a
 Increased motivation and participation in decision making
 Problems could occur if they are not trained properly

 When selecting employees businesses consider three factors.

1. They want employees to perform the tasks that are set out in the job design.
2. They want to retain their employees in the business
3. They want their employees to display initiative and leadership that exceeds their roles.
 Specialised job design

Involves jobs being broken down into specialist skills areas in order to:

1. Improve knowledge and skills

2. To increase output
3. To reduce errors and labour costs
4. To control quality

However it leads to…

- No challenges and thus reduces employee motivation/satisfaction
- Repetitious and boring work
- Less social interaction or sharing of ideas
- Often no identifiable end product
- A reduction in the ability to absorb knowledge
- Limited knowledge sharing
- Management assuming greater control and power.

16.4 Recruitment

 Internal recruitment

 There is a lower cost because recruitment is from within the business
 It may improve the moral of existing staff
 It provides recognition of, and reward for good performance.
 The business is aware of skills and abilities of the person selected.

 It can reinforce existing negative attitudes within a business
 It runs the risk of ‘group think’ – the person selected will think how he or she has conditioned to
think by the culture of the business
 Those that are not promoted may be discontented.
 It may encourage ‘in-fighting’ for promotions among staff.

 External Recruitment

 It avoids the jealousy that could arise from an internal promotion
 The person brings fresh ideas and approaches to the business
 It can lead to a change in the culture of the business

 The person selected may clash with the culture of the business
 A long period of orientation and induction maybe needed
 Internal applicants may face a slump in morale.
 The selection process may take longer than for an internal appointment.
16.5 – Training and development

 Businesses undertake training and development of current or future skills for their employees.

Training develops skills, knowledge and attitudes that lead to superior work performance.

- Training is critical in Australia, due to significant labour market problems – shortage of skilled labour;
mismatch between what skills are available and what skills are needed.
- These problems can act as a brake on investment, but can be overcome by business commitment on
ongoing training

Development enhances the skills of the employee to upgrade their skills in line with the changing and future needs
of the business.

- It encourages employees to take advantage of opportunities to develop a career with the business.
- The business benefits by retaining the employee’s experience and knowledge of the business and by
helping it maintain competitiveness

Businesses may consider:

- Investing in further in house training and development
- Recruit staff for specific skills
- Share staff with other firms (insourcing)
- Outsource functions to specialist firms

16.6 - Performance management

 Performance management is the systematic process of evaluating and managing employee performance
in order to achieve the best outcomes for a business

Two main objectives of performance management are:

1. Evaluating an individual’s performance
2. Using that information to develop the individual.

Value of performance management

 Identifies opportunities for productivity improvement
 Provides feedback and recognition
 Identifies training and development needs

These procedures include:

 Linking the objectives of employees with the objectives and mission statement of the business so that
employees understand clearly how they contribute to achieving the goals of the business
 Establishing clear performance objectives for employees
 Establishing clear development plans for employees and supervisors
 Having regular discussions between employees and supervisors, involving coaching mentoring, feedback and
 Developmental performance management is focused on using data to develop the individual’s skills and
abilities, so they improve their effectiveness in their roles, overcome weaknesses and are prepared for

 Administrative performance management is focused on collecting data to manage the HRM function

For a business For the individual

 Assists with HR planning  Identifies strengths and weaknesses, creating

opportunities for training and development as
 Can plan to overcome gaps or weaknesses found well as coaching and mentoring
in performance
 Helps assess rewards and benefits linked to
 Shows the effectiveness of current selection performance
processes and whether staff recruited match,
the cultural fit and skills required for the  Compares the contribution to the organisation
organisation. against the agreed standards.

Effective performance management is fostered when businesses:

- Have clear job descriptions so people know what tasks or roles they need to perform
- Match people with the right skills to the role and culture of the business
- Provide induction, training and development so staff are competent and are able to experience
personal growth.

16.7 - Rewards Management

 Rewards for work may be:

 Monetary – such as wages/salary, bonuses and fringe benefits
 Non-monetary – such as flexible working hours, job satisfaction and recognition.

Intrinsic rewards are those that the individual derives from the task or job itself (sense of achievement)

Extrinsic rewards are those given or provided outside the job itself. It may be monetary (incentive payments) or non
monetary (flexible work schedules)

 Issues to consider when designing a reward system in terms of the business

- Business strategy
- Economic conditions (supply and demand)
- Organisational objectives of rewards
- Rewards and benefits of competitors

 Issues to consider when designing a reward system in terms of the individual

- Performance related (incentive plans; bonuses)
- Job related (role and level of responsibility, scope of supervision)
GOOGLE – Best place to work

- Famous for its laid back culture and customised rewards and benefits
- One of its popular benefits is ‘20% time’ – gives employees 20% of their time on a personal idea
for a product or service.

Other benefits:
- Tuition reimbursement
- Flexible working arrangement
- Back-up childcare
- On site doctor
- Financial planning classes
- Car wash
- Gym
- Massage therapy
- Hair stylist

 Performance pay can reward employees with individually or collectively for work towards achieving certain
goals. Individual rewards include payment by results, bonuses, commissions or straight/wage salary
increases. Group rewards can include payment by result, team bonuses or profit sharing.

16.8 – Global strategies: costs, skills and supply

Globalisation of business as well as technological developments in the Internet, HR applications and

telecommunications, has significantly increased the competition faced by any business > this has increased the
complexity of managing HR.

What pushes businesses to operate globally?

1. High cost of skilled labour in Australia
2. Short supply of skilled labour

Offshore skilled labour is available but not always available as required in the desired locations or quantities. This is
due to high levels of demand for lower cost labour in lower wage nations.

 Global considerations in human resources management over recent decades are as follows.
 Costs – between 1975 and 2007 labour costs in the United States increased fourfold and those in the UK
increased tenfold.
 Skills – India has become a preferred source of global labour because of good literacy levels in English
and other technical skills. The South Korean workforce has developed technical skills but there is not a
proficiency in English
 Supply – current world population is 6.5 billion people. The labour force is declining in advanced
industrial areas such as Japan and Europe, but expanding in Asia, Africa, Latin America and North
A business planning to expand overseas needs to consider whether it wishes to use a polycentric, geocentric or
ethnocentric approach

 Polycentric
Uses host country staffing with parent country staff in corporate management at its headquarters

 Accesses good market knowledge

 Cost efficient
 Brings employment opportunities
 Limits management experience for host country

 Geocentric
Uses the staff with the most appropriate skillset for a particular role and location, and

 Builds a pool of managers with global experience.

 Complex and expensive policies

 Ethnocentric
Uses parent country staff in its business

 Limits its ability to interact with customers and learn from overseas markets

Compliance with overseas labour market regulations is critical to avoid difficulties with local governments and
disruption to business. Likewise, cultural awareness and language training for all staff need to be implemented to
foster effective communication and positive relationships between employees.

16.9 – Workplace disputes

An industrial dispute is a disagreement over an issue or a group of issues between an employer and its employees,
which results in employees ceasing work.

A strike is a situation where workers withdraw their labour due issues usually residing around pay or working

A lockout can occur when employers close the entrance to a workplace and refuse admission to the workers.

- Conflict between stakeholders is inevitable in the workplace as they always have conflicting interests,
particularly over the degree to which employees should share in the profits.

- Disputes may be informal, formal, overt or covert and can be very costly to businesses at the time of the dispute,
but also to its reputation and to its employees.

- Employers and HR managers need to be aware of and respond to workplace conflicts as they can escalate to a
level where legal action is necessary

Workplace conflicts can also lead to

 Higher levels of absenteeism
 Lower productivity
 Legal claims
 Higher staff turnover
wages; allowances;

Health and safety Employment

workers compensation; Major causes of conditions
protective disputes (ABS) working hours; leave;
clothing/equipment benefits

Job security issues

retrenchment of
employees; downsizing;
 Dispute Resolution

Key stakeholders involved:

- Employees
- Employers
- Governments
- Trade unions
- Employer associations
- Courts
- Industrial tribunals

 Dispute resolution in Australia has been heavily influenced by politics.

 Liberal Party policies are traditionally more supportive of free market principles and business, while Labour Party
policies are more representative of their political base – trade unions.

 Focus on the resolution of disputes within the workplace has continues through collective and enterprise

 Before either party may take protected industrial action, there must be proof that both parties have attempted
to bargain in good faith (with a willingness to reach an agreement)

Forms of grievance procedures

 Negotiation

- Is a method of resolving disputes through discussions between the parties to result in a compromise
and a formal/informal agreement

 This benefits the parties involved by increasing their knowledge of company policy, business objectives and
issues involved in implementing change.

 Mediation

- Is the confidential discussion of issues in a non-threatening environment, in the presence of a

neutral, objective third party.
- Third party may be independent or a representative from a business, tribunal or govt. agency (FWA)

 Allows parties to become empowered by resolving their own disputes

 Reduces the risk of disputes escalating and leading to expensive legal costs or industrial action.

 Conciliation

- A process where a third party is involved in helping two other parties reach an agreement
- Conciliation member calls a conference and attempts to help both sides reach an agreement.

 Reduces the ambit of the dispute

 Develops strategies to resolve the dispute

 Arbitration

- A process where a third party hears both sides of a dispute and makes a legally binding decision to
resolve the dispute
- Court-like setting
- An order is handed down based on the merits of the evidence

 Final method of dispute resolution

 Decision is finalised.

What are grievance procedures?

Are formal procedures, generally written into an award or agreement that state, agreed processes to resolve
disputes in the workplace.

 Reduce the risk of an issues rapidly becoming a serious dispute


- Open to any party involved in or affected by industrial action.

- Parties may make direct claims for damages caused by the parties taking action, or for the breach of
contract resulting from such action.
- An employer may ask a court for an injunction or stop order to prevent unlawful interference with
the employer’s trade or business. (For example: where a nuisance is created by or during a picket
- It is costly and usually a last resort


Types of Benefits Costs


Financial  Increases empowerment of all parties who  Lost production and sales adversely affect a
‘own’ an agreement firm’s income and levels of debt and
 This leads to increased productivity, fewer reputation may be damaged.
disputes and reduced absenteeism and labour  Some firms may choose to relocate.
turnover.  Legal representation and fines imposed can
 Cost cutting measures can lead to conflict but be a financial burden on firms.
ensure a firm’s survival and competitiveness in
the long term.

Personal  Helps workers to gain management’s  Stress can be created through intensification
attention on major issues that may have of work and changes due to restructuring of
caused dissatisfaction and stress for a long workplace.
time.  Rumours/ threats of downsizing cause fear
 Better work relationships may result from a and insecurity.
clearer understanding of work problems  Absenteeism, accidents and defect rates can
 Greater employee involvement and increase
motivation > resulting from negotiated
changed and improved training.

Social  Jobs can be saved in some cases. Employee  Community bitterness can be directed at
and community welfare can be enhanced by unions, employees or employers in
changed work practices industries where disputes affect the general
 Introduction of multiskilling, new training public
opportunities and career paths benefit  Verbal and physical abuse may occur
individuals and society  Demonstrations can disrupt communities,
 OH&S problems may be reduced and violence and injuries may occur in
extreme cases

Political  Governments can change their policies in  Frequent and disruptive conflict has an
response to workplace conflict impact on government or opposition policies,
 Disputes draw attention to need to protect particularly at election times
worker entitlements  Bitterness between unions and governments
 Particular industries may be restructured to can lead to personal conflict and large-scale
improve the economy civil unrest.
 Loss of national income in extended disputes
can affect economic growth.

International  Changes to work practices following conflict  Loss of export income and markets can
can improve a business’s international occur after periods of disruption
competitiveness. This may present  The nation’s reputation for stability can be
opportunities for international expansion lost and overseas customers or investors
may turn elsewhere.

17.1 – Introduction

The role of the HR manager, working with the management team, is to decide how the employment relationship will
be best managed so that it is cost effective, achieves the goals of the business and contributes to the bottom-line
(net earnings).

The role of HRM is to effectively link individual performance with corporate strategy. Then the business can modify
processes and strategies, if they are not effective, through performance management.

For individuals, a range of strategies may be used to foster the development of skills and behaviours required for
organisational effectiveness (performance management), including performance appraisal, development and


Commitment to
ongoing training
rewards system
and development

Flexible family Performance

working management
conditions systems
Key elements
of effective

Culture based on
trust Common
- promotes purpose,
collaboration including a focus
- promotes on customer
participation service and
- values worth of
employees equally

Legal compliance
- EEO Commitment to
- OH&S change
- IR legislation
17.2 – Indicators

Many businesses use a range of indicators – performance measures that are used to evaluate organisation or
individual effectiveness – to reflect on the effectiveness of HRM.

Benchmarking - is process used to compare business performance between internal sections of a business of
between businesses, to determine strengths and weaknesses.

Indicators are gathered and collated in human resource audits – a diagnostic tool used to evaluate HR policies and
practices in order to identify problems and develop solutions in attempt to rectify problems.

Functional area Indicators

Human resources planning Number of staff/budgeted staff

Recruitment and selection Applicant rejections

Acceptance rates for job offers
Recruitment costs
Vacancies filled within target time

Training and development Training days/hours per employee

Training time
Cost of training
Test outcomes – changes in skills, quality, accidents, output, and productivity.
Succession planning rate
Promotion rate

Employee rewards and Cost of rewards and benefits

benefits Labour turnover rates
Absence rates/ total hours worked
Comparison with other businesses

Industrial relations Grievance records

Industrial disputes/ work stoppages
Time lost through disputes

OH&S Accident rates

Lost time injury rates
Workers compensation costs/ payroll

Performance appraisal Appraisals undertaken

Goals achieved or not achieved
Improvements in quality and productivity (turnover rate)

Separation/ termination Separation rate

Dismissal rate
Resignation rate
Avg. retirement rate
Unfair dismissal claims

General HRM effectiveness Labour costs/ sales and gross profit per employee
Growth in market share
The most commonly used performance indicators are:

- Financial indicators for each member of staff, including sales per employee
- Contribution to production (output per employee)
- Changes in staff turnover
- Absenteeism
- Accidents
- Level of disputation
- Workers satisfaction

The role of the HR manager in using these indicators is focused on fostering continuous improvement by:

- Communicating and educating employees about company vision, strategy and expectations at an
operational level
- Planning and setting goals for employees and ensuring that they know how to achieve them
- Developing employees effectively to improve performance
- Evaluating performance – providing feedback
- Linking rewards to performance measures
- Providing organisational feedback

 Corporate culture

A corporate (business/workplace) culture refers to the values, ideas, expectations and beliefs shared by
members of the business

The indicators that reveal a workplace has a poor corporate culture include:

- High staff turnover

- Poor customer service
- High levels of absenteeism
- Accidents
- Disputes and internal conflict

Features of a positive corporate culture and how to build a great workplace culture:

- Pay more than basic rights and some share options

- Fun atmosphere
- Collaboration across all levels and involvement in decision making
- High quality personal relationships
- Flexible family friendly practices
- High levels of training and mentoring
- Culture of trust – equality
 Benchmarking key variables

Purpose of benchmarking is to compare a business’s performance in specific areas against other similar businesses
or divisions, or against ‘best practice’ businesses. The aim is then to initiate or foster improvement.

 Informal benchmarking
Includes any strategies such as networking through informal discussions with colleagues in other businesses,
undertaking visits to other businesses, researching best practice online and attending conferences

 Performance benchmarking
Involves comparing the performance levels of a process/activity with other businesses

 Best practice benchmarking

Involves comparing performance levels with those of another best practice business in specific areas using a
structured process to gain skills and knowledge and to modify organisational processes.

 Balanced scorecard benchmarking

It benchmarks key performance variables with targets aligned with the strategic plan.

Why does care need to be taken when performing benchmarking?

- Care needs to be taken as focus can sometimes be excessively on costs rather than what is actually
being achieved or may be achieved.
- Equal focus should be put on qualitative and quantitative variables


Used systematically to analyse and evaluate human resource activities and their effectiveness.

This can be performed by:

1. Comparing the performance of one business division with that of another division, to determine areas of
weakness and improvement
2. Comparing key performance variables
3. Through a management by objectives (MBO) approach, to determine areas of poo performance against
targets established.


Demonstrate the actual effect of indicators in economic terms – in terms of costs and profits

Key variables include:

1. Variances in labour budget

- Increases in labour budget represent a major increase in the costs of business and are likely due to
poor planning of staffing needs, higher unscheduled absenteeism or increases in wages.

2. Time lost/cost due to injuries or sickness

- Rising costs are a clear indicator that health and safety requirements are being breached, perhaps
due to poor or lack of training. Such costs also create high insurance premiums and risks of fines and
claims in the long term.

3. Levels of labour turnover

- Higher levels indicate workplace problems, ranging from poor workplace culture and working
relationships to lack of clear job descriptions and opportunities for promotion.

Involves detailed feedback and research on key issues, which allows judgements to be made about changes in
behaviour or quality of service provided.

Benchmarking major variables is essential in planning for continuous improvement.

 High or increasing absenteeism and labour turnover rates are indicators of problems including boredom,
poor relationships and lack of training and opportunities to develop.

 Feedback from performance appraisals provides information useful for evaluating and planning training,
recruitment and selection, development, rewards and separation processes.

 Changes in staff turnover

Staff turnover refers to the separation of employees from an employer, both voluntary and involuntary, through
dismissal or retrenchment. It is often shown as a percentage of total staff numbers.

- Staff turnover over in Australia averages 12 – 15% per year

- In assessing the significant of turnover, it is important for businesses to benchmark their turnover
against that of other businesses in he industry and determine the types of staff that are leaving and
their reasons.
- Some staff may leave to seek new opportunities or promotion as a result of skills developed in a
particular industry; this may not be a negative reflection on the workplace they are leaving.
- Others may leave due to a ‘toxic’ workplace riddled with internal politics.

 Absenteeism

Absenteeism is measured as the average rate of employee absenteeism on an average day, without sick leave or
leave approved in advance.

- High levels of absenteeism or lateness indicate that workers are dissatisfied or that there is conflict
in the workplace.
- In order to reduce this, firms need to have higher staffing levels to cope
- High absenteeism contributes to a reduction in revenue, due to the disruption of work and can lead
to lower productivity and high labour costs.

 Accidents

- About 5.3% of Australia’s 12 million employees experience a work related injury or illness each year
- According to Safe Work Australia, in 201o there were 132,000 workers’ compensation claims for
serious work related injuries.
- Overall the total cost of work related injuries and deaths in Australia is more than $60 billion per
year in indirect and direct costs
- In order to reduce the occurrence of accidents, businesses need to adopt a systematic, legally
compliant approach to managing OH&S.

OH&S indicators are:

 Lost Time Frequency Rates – lost time due to injuries per million hours
 Safe Work Australia rates – workers compensation claims
Best practice businesses:

- Have regular safety audits and comprehensive safety programs

- Build a culture of safety using policy statements, safety signs and reminders
- Provide careful induction and ongoing training to ensure staff are aware of safety rules

As a result businesses save on:

- Compensation claims
- Absenteeism
- Lost work time
- Replacement costs for damaged equipment
- Loss of morale

 Levels of disputation

Types of Industrial conflict

Overt Manifestations

By employees: By management:
 Pickets  Lockouts
 Strikes  Stand downs
 Work bans and boycotts  Dismissals, retrenchments

Covert Manifestations

By employees: By management:
 Absenteeism  Discrimination
 High labour turnover rates  Harassment
 Theft and sabotage  Lack of cooperation
 Higher defect rates  Exclusion from decision making
 Reduced productivity
 Lack of cooperation

Indicators of industrial disputation

 Work bans
A ban or boycott is a refusal to work overtime, handle a product, piece of equipment, process or even a refusal to
work with particular individuals.
A green ban refers to the refusal to carry out work that is considered to be harmful to the environment

 Work to rule
Occurs when employees refuse to perform any duties additional to the work they normally perform. Common in
community services.

 Go slow
Employee’s work at a slower rate than normal, causing customer complaints and an excessive backlog of work.

 Sabotage
Includes vandalism, cyber attacks and internal theft. Involve employees tacking action to harm or destroy the image
of a firm.
- Employers should be concerned if there are a number of grievances reported as they are an
indicator of poor quality relationships within a workplace and can be very damaging if they attract
media attention or move through the legal system.

- Ongoing grievances are likely to be reflected in high levels of staff turnover and industrial disputes

 Workers satisfaction

- Employee satisfaction is a key factor in employee commitment, job performance and staff turnover.

- Employees who have good relationships with co-workers enjoy their work activities, receive relevant
training that allows them to do their job well and gain opportunities to grow, are more likely to be
satisfied and stay with the business

- Employee satisfaction surveys are useful in helping employers measure and understand how their
staffs feel about their work, their management and the culture of the organisation.

- Effective leadership is one of the most important influences on employee satisfaction, particularly
when employees feel recognised and encouraged, where management is transparent, promotion is
merit based and communication is honest and respectful

- The quality of management is also a crucial factor in employee satisfaction and retention, especially
with a widespread view in Australia that management is ‘all talk and no action’.

- Employees value a family friendly culture, adequate breaks during the day, effective resourcing to do
their job, rewards for effort and performance, opportunities for sabbaticals or leave options and
workplace wellbeing strategies such as a gym.

How can employee satisfaction be improved overall?

Employee satisfaction is improved by matching the purpose of the business with the skills and cultural fit of the

9.1 Strategic role of financial management

- Businesses have specific goals they wish to achieve in relation to the investment in capital
(machinery and technology), training of staff, marketing and the expansion of operations
- The strategies that a business adopts work towards achieving its goals both in short and longer term.
- Developing a strategic plan as part of a business’s financial management will ensure that the
business survives and grows in a competitive world.

Business goals and objectives

Businesses exist for a number of purposes that are translated into goals. For example: a business’s goals may

- To increase the dividends to shareholders

- To maintain an environmentally friendly environment
- To be a market leader within five years.

These goals are translated, in turn, into business objectives that provide further detail about the business’s mission;
that is their purpose and function.
Business objectives break the business operations into achievable and manageable outcomes that can be
measured and evaluated. Objectives give a clear indication to management of where the business wants to be.

Goals are the longer-term outcomes of a business. The main purpose or goal for a business is usually to maximise
profits. A business can only maximise profits if it has a carefully determined process by which it will achieve its
goals. This process – its strategy – is the major tool that assists a business to achieve its goals.

EXAMPLE: To meet the goal of a business increasing the dividends to shareholders, a business will need to increase
its profits. Its strategies might include opening up new outlets or expanding its market division.

Strategic plans

- Encompass a long-term view of where the business is going, how it will get there and a monitoring
process to keep track of progress.

Managing financial resources Financial management is

Financial resources are the planning and
Financial management is crucial to achieve a those resources of a monitoring of a business’s
business’s financial goals. business that have a financial resources to
monetary value. enable the business to
Mismanagement of financial resources can lead to achieve its financial goals.
problems such as:
- Insufficient cash to pay suppliers
- Inadequate capital for expansion
- Too many assets that are non-productive

Strategies for monitoring the financial resources of a business must be incorporated into their strategic plan

Strategies include:
- Monitoring business’s cash flow
- Paying its debts
- Auditing of financial accounts
- In the year 2000, there was significant change in general taxation with the introduction of the GST.
This resulted in a shift in emphasis from direct to indirect taxation while, at the same time,
broadening the tax base.
- Business tax was also changed. The rate of company tax and capital gains tax was lowered, and
accelerated depreciation was decreased. These changes impacted on financial planning because
most business decisions are made with taxation in mind.

- The rapid developments in technological hardware and software over the last decade have enabled
financial managers to do more detailed and extensive analysis of the financial implications of

Financial innovation:
- There has been an explosion of new financial products over the last decade because of competition
between financial institutions.

9.2 Objectives of financial management

For a business to achieve its longer-term goals it must have a number of specific objectives.

The objectives of financial management are to maximise:

 Profitability
 Growth
 Efficiency
 Liquidity
 Solvency

The responsibility of financial management is to make decisions about the best way to achieve those objectives.

1. Profitability
- Profitability is the ability of a business to maximise its profits.
- Profits satisfy owners or shareholders in the short term but are also important for the longer-term
sustainability of a firm.
- To ensure a profit is maximised, a business must carefully monitor its revenue and pricing policies, coasts
and expenses, inventory levels and levels of assets.
- Assets are used to generate revenue and levels of assets must not be too low or too high.

2. Growth
- Nearly all-Australian businesses set objectives for the amount of growth they want the business to achieve.
- A growth strategy tries to increase the size or level of a business’s operations.
- Growth can be achieved in two ways:
1. By expanding the business
2. Merging with or acquiring other businesses.

- Growth of an organisation depends on its ability to develop and use its asset structure to increase sales,
profits and market share.
- Growth through direct expansion is achieved by using the business’s internal resources to increase the
business’s sales, production capacity or workforce. For example, McDonald’s growth strategy in Australia has
been through direct expansion, rather than acquiring other chains such as Burger King.
- Sometimes businesses grow by developing new businesses that are part of their supply chain. For example,
Coles Supermarkets used internal resources to set up their own piggeries to supply pork and bacon to their
- The most popular method to achieve growth, however, is through merging, or acquiring, other businesses.
Often this is with a competing business or a business providing complementary products
3. Efficiency
- Efficiency refers to the relationship between inputs and outputs. If a manager can get more output from a
given input, such as labour, the manager has increased efficiency. Another possibility is to get the same
output from less input.
- Minimizing resource costs has been one of the key features of business in the last 20 years and downsizing
the business’s workforce remains one of the current drivers for efficiency.
- Downsizing means reducing the size of the workforce by adopting better technologies so the output per
worker employed increases.

4. Liquidity
- Liquidity is a business’s ability to pay its bills as they fall due.
- An organisation must have sufficient cash flow to meet its financial obligations or be able to convert current
assets in cash quickly by selling inventory. If for any reason a business cannot pay its debts it is said to be
- This does not mean the business does not have sufficient assets to pay the bill. It means that assets, such as
inventory, could not be turned into cash quickly enough to pay the bill.

5. Solvency
- Solvency is the extent to which the business can meet its financial commitments in the longer term.
- The longer term refers to a time period greater than 12 months
- Solvency is particularly important to the owners, shareholders and creditors of a business because it is an
indication of the risks to their investment.
- Solvency indicates whether a business will be able to repay amounts that have been borrowed for
investments in capital.

Potential conflict between long term and short term objectives

 Short term financial objectives


- Are the tactical (one to two years) and operational plans of a business.
- These would be reviewed regularly to see if targets are being met and resources are being used to the best
advantage to achieve the other objectives.

EXAMPLE: If management has a goal to achieve a 15% increase in profit for the next 10 years, the tactical plans
might involve purchasing additional machinery or updating old equipment with new technologies.

 Long term financial objectives


- Are the strategic plans of a business.

- They are determined for a set period of time, generally more than 5 years.
- Tend to be broad goals such as increasing profit for market share, and each will require a series of SHORT
TERM GOALS to assist in its achievement.

sources of

Global External
market sources of
influences finance
Influences on

Influences of

10.2 Sources of finance – internal and external


Internal finance comes form either the business owners (equity or capital) or from outcome of the business
activities (retained profits)

 Owners’ equity

Equity capital can be raised by taking on another partner or seeking funds from an Owners Equity:
investor who then becomes an owner or shareholder, selling off unproductive Is the funds contributed
assets through the issuing of private shares. by the owners or
partners to establish
 Retained profits and build the business.

- The most source of internal finance

- Kept in the business as a cheap and accessible source of finance for future activities.
- In Australian businesses, approx. 50% of profits are retained to be reinvested


External finance refers to the funds provided by sources outside the business, including banks, other financial
institutions, government, suppliers or financial intermediaries.

Finance provided from external sources through creditors or lenders is known as debt finance. Using debt as a
source of finance means that the business relies on outside sources rather than the owners to finance the

There is an increase in risk for businesses using debt as the interest, and bank and government charges have to
be paid on top of the principal borrowed. However, Australia’s tax system has promoted debt financing for
businesses by providing tax deductions for interest payments.
 Debt: short term borrowing

- Used to finance temporary shortages in cash flow or finance for working capital.
- Generally repaid within one to two years

Provided though:

Bank overdrafts
- Allows a business to overdraw its account to an agreed limit
- Assists with short term liquidity problems
- Costs are minimal and interest rates are lower than on other forms of borrowing, as they are paid as an
outstanding balance on the account
- Are repayable on demand

Commercial bills Bill of Exchange

- Type of bill of exchange issued by institutions other than banks, and are A document ordering
given for larger amounts, usually over $100,000. the payment of a
- Issued by non-financial institutions, hence the word ‘commercial’. certain amount of
- Commercial bills play a significant role in Australia’s financial markets, with money at some fixed
bills of exchange forming an important segment of the short-term money future date.

- A short-term source of borrowing for a business.
Is the selling of accounts
- It enables a business to raise funds immediately by selling accounts
receivable for a
receivable at a discount to a firm that specialises in collecting accounts
discounted price to a
finance company.
- Important source of short term finance because the business will receive up
to 90% of the amount of receivables within 48 hours of submitting its
invoices to the factoring company. Accounts receivable is money
owed to a business by its
 Debt: long term borrowing clients (customers or debtors)
and shown on its balance
- Funds borrowed for period longer than 2 years. sheet as an asset.
- Can be secured or unsecured
- Interest rates are usually variable

- A loan secured by the property of the owner
- Property mortgaged cannot be sold or used as a security until the mortgage is repaid.
- Repaid through regular repayments over an agreed period such as 15 years.

- Issued by a company at a fixed rate or interest and fixed rate of time.
- Not secured
- The company repays the amount of the debenture by buying back the debenture.

Unsecured notes
- Is a loan for a set period of time but is not backed by any collateral or assets, and therefore presents the
most risk to the investors
- Companies sell unsecured notes to generate money for their initiatives, such as share repurchases and

- Long term source
- Involves the payment of money for the use of equipment that is owned by another party.
- Includes operating and financial leases.

Advantages of debt finance Disadvantages of debt finance

 Interest payments are tax deductible business  Debt can be expensive

expenses  Repayments begin immediately and must be met
 If bankruptcy or insolvency occurs debt providers regardless of the business cash flow
have priority before equity providers  Collateral is often needed to secure a loan
 Can be relatively simple  It is up to the owner of the business to clearly
 Will not decrease your ownership in the business establish the value of the business and their
and the owner can maintain their own control of the ability to repay the loan.
business.  You may require a good credit history for
 Implications for liquidity and cash flow because debt borrowing
requires regular repayments that cannot be delayed
if circumstances change.

 Equity

- Refers to the finance raised by the company by issuing shares to the public for purchase through the ASX
- Alternative debt funding

- Ordinary shares
- Private equity

Ordinary shares
- Most commonly traded shares
- Value is determined by a country’s current or future performance.

The following terms refer to variations in the type or issue of ordinary shares:

 New issues – a security that has been issued and sold for the first time on a public market
 Rights issue – the privilege granted to shareholders to buy new shares in the same company.
 Placements – allotment of shares, debentures and so on, made directly from the company to investors.
 Share purchase plan – an offer to existing shareholders in a listed company the opportunity to purchase
more shares in that company without brokerage fees.

Private equity
- Money invested in a private company, not listed on the ASX. The aim of the private company is to raise
capital to finance future expansion or investment of the business.

Advantages of equity finance Disadvantages of equity finance

 Does not have to be paid back  You are exchanging ownership of your business
 No repayments, therefore the firm has more cash flow  A proportion of profits go to the additional new
 Cash flow generated can be used for further expansion owners
and investment.  Does not provide a tax deduction for the business
 Does not incur interest charges  New investors often expect improved growth and
 High degree of stability and control over the business. performance for the business and therefore a better
 Low gearing (use of resources of the owner and not return on their investment.
external sources of finance  Limits the growth of a business because a focus on
 Risk is low because dividends do not have to be paid if equity limits the finance available for growth
circumstances change  Profits have to be shared with the additional owners
 Has no financial cost and this reduces profitability for existing owners.

10.3 Financial Institutions

The main financial institutions are:

 Banks
 Investment banks
 Finance and life insurance companies
 Unit trusts

- Banks are the main operations in financial markets and are the most important source of funds for business

- Investment banks are one of the fastest growing sectors of the financial market and provide a specialised
advice and services for the business’ financial needs.

- Finance and life insurance companies are non – bank financial institutions and act as financial

- Superannuation funds are able to invest the contributions of members into a range of short and long-term
investments with the aim of maximising a return. The business sector increasingly uses superannuation for
long-term investment in growth and development.

- The Australian Securities Exchange, formerly the Australian Stock Exchange, was created in 2006, and acts as
both a primary and secondary market for the sale of shares to the public.

10.4 Influence of the government

The government influences the financial management of business through the implementation of economic policies
(fiscal and monetary), and through the implementation of current and changing legislation.

Two governmental influences on financial management for businesses include:

 Australian Securities and Investment Commission

- ASIC enforces and administer the Corporations Act

- Protect consumers in areas of investment, life and general insurance, superannuation and banking in
- Aim to reduce fraud and unfair practices in financial markets and financial products.
- Ensures companies adhere to the law

 Company taxation

- Companies and corporations in Australia pay company tax in profits

- This tax is levied at a flat rate of 30%; unlike personal income taxes, which uses a progressive scale.
- Company tax is paid before profits and are distributed to shareholders as dividends.
- Australian government has undertaken a process of reform of the federal tax system that will improve
Australia’s international competitiveness and make Australia an even more attractive place to invest,
thereby driving long-term economic growth.
10.5 Global market influences

Globalisation has created more independence between economies and their business (and finance) sectors, which
relies on trade for expansion and increased profits.

Global market influences increasingly affect business final decisions; this is evident in the availability of funds for
loans and the interest rates charged for these loans.

 Economic outlook
- Refers to changes in economic growth rates of individual economies around the world

A positive outlook will create:

- Increasing demand for products and services. For a country such as Australia, this would mean businesses
(LIKE WESFARMERS) would need to increase production to meet demand and therefore require funds to
purchase equipment, employ or train staff, or expand the business.

- Decrease the interest rates on funds borrowed internationally from the financial money market. This results
in mainly a decrease in the level of risk associated with repayments. As business sales increase, so too do

 Availability of funds
- Refers to the ease with which a business can access funds for borrowing, on the international financial

There are various conditions and rates that apply and these will primarily based on:
 Risk
 Demand and supply
 Domestic economic conditions.

The GFC in 2008-09 had a major impact on the availability of funds for all companies and institutions
(WESFARMERS). It caused a sharp increase in interest rates that was a reflection of the high level of risk in lending.

 Interest rates

- The cost of borrowing money.

- The higher the level of risk involved in a business, the higher the level of interest rates.
- Businesses could be tempted to borrow the necessary finance offshore to gain an advantage of lower
interest rates, however, the real risk here is exchange rate movements.
- Any adverse currency fluctuations could be seeing the advantage of cheaper overseas interest rates quickly
eliminated. In the long term, the ‘cheap’ interest rates may end up costing more.
The Planning Process

present Determinin
Establishing financial g financial
financial position needs

Maintaining Developing
record budgets

11.1 – Planning and Implementing

- Financial planning is essential if a business is to achieve its goals, hence financial planning determines how
they will be achieved.

- The financial process begins with long term and strategic plans. Long-term plans include a business’s
planned capital expenditure or planned investment. Capital expenditure is what is spent on a business’s
non-current or fixed assets. It is used to generate revenue and ultimately returns to owners and

- Planning processes involve the setting of goals and objectives, determining the strategies to achieve those
goals and objectives, identifying and evaluating alternative courses of action and choosing the best
alternative for the business.

Financial Needs

To determine where a business is headed and how it will get there, it is important to know what its needs are.

The financial needs of a business are determined by:

 The size of the business
 The current phase of the business cycle
 Future plans for growth and development
 Capacity to source finance – debt and or equity
 Management skills for assessing financial needs and planning

A business plan might be used when seeking finance or support for a project from a bank or financial institution or
other potential investors. These institutions need a guarantee that their financial commitment to the business will
be successful. A business plan sets out finance required, the proposed sources of finance and a range of financial
statements. Financial information is needed to show that the business can generate an acceptable return for the
investment being sought and should; therefore, include an analysis of financial performance, income state, cash flow
statement, balance sheet and financial ratio reports.
Developing Budgets

Budgets provide information in quantitative terms about requirements to achieve a particular purpose.
Budgets can be drawn up to show:

Budgets are importance financial management tools. They enable managers to plan for the future, monitor past and
present performance and coordinate the plans made by different sections of the business

- Cash required for planned outlays in a particular period

- The cost of capital expenditure and associated expenses against earning capacity.
- Estimated use and cost of raw materials or inventory
- Number and cost of labour hours required for production.

Budgets reflect the strategic planning decisions about how resources are to be used. They provide financial
information for a business’s specific goals and are used in strategic, tactical and operational planning.

Budgets enable constant monitoring of financial objectives and provide a basis for administrative control, direction
of sales effort, production planning, control of stock, price setting, financial requirements, control of expenses and of
production cost.

Operating budgets relate to the main activities of a business and may include budgets relating to sales, production,
raw materials, direct labour, expenses and cost of goods sold.

Project budgets relate to capital expenditure, and research and development. Capital expenditure budgets in a
business’s strategic plan include information about the purpose of the asset purchase, life span of the asset and the
revenue that would be generated from the purchase.

Financial budgets relate to financial data of the business. The predictions of the operating and project budgets are
included in the budgeted financial statements. Financial budgets include the budgeted income statement, balance
sheet and cash flow statement. The income statement and balance sheet reflect the results of operating activities
whilst the cash flow statement show the liquidity of the business.

Record Systems

Record systems are mechanisms employed by a business to ensure that data are recorded and the information
provided by that data is efficiency, accurate, reliable and accessible.
Financial Ricks

A financial risk is the risk to a business of being unable to cover its financial obligations. If the business is financed
from borrowings there is a HIGH RISK. The higher the risk, the greater expectation of profits or dividends.

How to minimise financial risk?

To minimise financial risk, businesses must consider the amount of profit that will be generated, hence the profit
must be sufficient enough to cover the cost of debt as well as increasing profits to justify the amount of risk taken by
the owners and shareholders.
Consideration must also be given to the liquidity of a business’s assets. If a business has short-term debt, it must
have liquid assets so that debt including interest payments and the repayment of principal on loans can be covered.

Financial controls

Financial problems and losses prevent a business from achieving its goals. The most common causes of financial
problems and losses are:

- Theft
- Fraud
- Damage or loss of assets
- Errors in record system

Financial controls ensure that the plans that have been determined will lead to the achievement of the business’s
goals in the most efficient way.

Control is particularly important in assets such as accounts receivable, inventory and cash.

Some common policies and procedures that promote control include:

- Clear authorisation and responsibility for tasks

- Separation for duties
- Rotation of duties
- Protection of assets – i.e. buildings is kept locked, a registry of assets is maintained, regular checks of
inventory are carried out and security surveillance cameras are installed.

Recommendations for saving money

1. Good processes – Have a system that for the business by touching each piece of paper once and use
electronic interactions with banks, suppliers, customers so that man handling of documents isn’t required.

2. Fire fast – Don’t procrastinate about removing poor quality staff. ‘Free up their future’ and save a heap of

3. Always behave like a start up – When establishing a business you juggle money and find alternative ways
around spending all the time, as your budget is so small.

4. Sign your own cheques – don’t delegate cheque signing and electronic payments. Fraud is prevalent and
losses can be significant.
11.2 Debt and equity financing

Debt finance Debt finance – relates to the

short term and long-term
Debt can be attractive to businesses because funds are relatively available and borrowing from external sources
interest payments are tax deductible therefore reducing the cost of debt by a business. It is a liability as it
financing. is money owed to external
If a business uses a high level of debt finance it takes a greater risk than if it
uses equity finance. The amount of risk is affected by how much the business has borrowed, when loans have to be
repaid and the required level of current assets.

The higher risk of investment, the higher return of an investment, the higher the return to the business. Thus it can
be said that risk and return are interrelated and determine what makes up the share prices of corporations.

Advantages of debt Disadvantages of debt

 Funds are readily available  Increased risk if debt comes from financial
institutions because the interest, bank charges,
government charges and the principal must be

 Increased funds should lead to increased  Security is required by the business

earnings and profits

 Tax deduction for interest payments  Regular repayments have to be repaid

 Lenders have first claim on any money if the

business ends in bankruptcy.

Equity finance – relates to the

Equity finance internal sources of finance in
the business
Most important source of funds for companies because it remains in the
business for an indefinite time, because funds do not have to be repaid at a set
date, as with debt financing.

Equity is generally safer than debt, but equity requires sufficient profits to me made so that the business can
continue to operate.

Equity funds provide confidence to creditors and lenders, who are more willing to lend if there are equity funds.
They act as a safety net for unexpected downturns or changes in business activities.
Advantages of equity Disadvantages of equity

 Does not have to be repaid unless the owner  Lower profits and lower returns for the owner
leaves the business

 Cheaper than other sources of finance as there  The expectation that the owner will have about
are no interest payments the return on investment

 The owners who have contributed the equity

retain control over how the finance is used

 Low gearing (use of resources of the owner and

not external sources of finance)

 Less risk for the business and the owner

Comparison of debt and equity finance

Debt Equity

 Lenders have prior claim in the event of  Shareholders have a residual claim on assets
 Equity has not maturity date
 Debt must be repaid by periodic repayments
 Dividends are not tax deductible
 Interest payments are tax deductible
 Shareholders require a high rate of return due to
 Lenders usually require a low rate of return higher risk

 Interest payments are fixed  Dividend payments are not fixed and may be
reduced through lack of funds
 Debt providers have not voting rights
 Equity holders have voting rights
11.3 - Matching the terms of finance to the business purpose

When a business identifies and plans to meet its financial objectives, it is necessary to match the terms of finance
with its purpose.

This requires a business to consider:

 The term, flexibility and availability of finance

- Must be suitable for the structure of the business and the purpose for which the funds are required.
- Short-term finance should be matched to short-term purposes of the business, such as managing a
temporary cash flow short fall.
- Long-term finance should be matched with long-term purposes, such as an expansion of the business
- Flexibility is also important, as businesses often require funds to be variable so that is firms have excess
funds, borrowing can be paid off more quickly.
- The availability of finance is also important hence, too heavy dependence on a small number of investors can
increase risk if an investor pulls out or commitments cannot be met. Likewise, if a business has a low credit
rating, it may need to look to alternative sources of funding.

 The cost of each source of finance

- The cost of each source of funding, whether it is debt (borrowings) or equity capital (retained earnings and
share issues), must be determined.
- Set up costs and interests rates are also other subsidiary costs that must be measured for each of the
available source of funds, as costs fluctuate depending on economic and market conditions.
- The required rate of return is also taken into consideration and balanced against the costs of each source.

 The structure of the business

- Small businesses have fewer opportunities for equity capital than larger businesses
- Equity for unincorporated businesses has to be raised from private sources or by taking on another partner.
- It is common for business to use reserves of retained earnings when they wish to expand.
11.4 – Monitoring and controlling

Monitoring and controlling is essential for maintaining business viability and thus requires management to
monitor internal and external factors that will impact financially on the business’ operations. This may include
changes to economic outlook, internal production methods and changes to workplace laws.

The main financial controls used for monitoring include:

- Cash flow statements
- Balance sheets
- Income statements

Cash flow statements

- The cash flow statement provides a link between the income statement and the balance sheet

- It provides information about a firm’s ability to pay its debt on time.

- Creditors, lenders, owners and shareholders all use a cash flow statement to assess the ability of the
business to manage its cash and identify trends in cash flow over time.

Cash flows show whether a firm can:

 Generate a favourable cash flow

A cash flow statement is a
 Pays its financial commitments as they fall due
financial statement that
 Have sufficient funds for future expansion
indicates the movement of
 Obtain finance from external sources, if needed.
cash receipts and cash
 Pay drawings to owners or dividends to shareholders.
payments resulting from
transactions overtime.
Cash flow statements are split into three categories:

1. Operating activities

- Are the cash inflows and outflows, relating to the main activity of the business – that is the provision of
goods and services
- Income from sales cash and credit) make up the main operating inflow, whilst dividends and interest
received make up the outflow.
- Outflows consist of payments to employees and suppliers

2. Investing activities

- Cash inflows and cash outflows relating to the purchase and sale of non current assets and investments.
- These assets and investments are used to generate income for the business
- Examples: selling of a motor vehicle; purchasing new equipment or property

3. Financing activities

- Cash inflows and outflows relating to the borrowing activities of the business
- Borrowing inflows can relate to equity (capital contribution by owner) or debt (loans from financial
- Cash outflows relate to the repayment of debt and cash drawings of the owner or the payment of the
dividends to shareholders
Income statements (statement of financial performance)
An income statement shows
- The income statement shows the operating efficiency – that is, the the operating results for a
income earned and expenses incurred over the accounting period with period of time. It shows the
the resultant profit or loss. revenue earned and
expenses incurred over the
It shows: accounting period with the
resultant profit or loss
 Operating income earned from the main function of the business, such as
sales of inventories.
 Operating expenses, such as purchase of inventories

Analysis of the income statement can indicate whether expenses are increasing, decreasing or remaining constant
and why profits have increased or decreased.
Balance sheet (statement of financial position) A balance sheet represents
a business’s assets and
- Balance sheet shows the financial stability of the business liabilities at a particular
point in time, expressed in
- It shows the level of current and non-current assets, current and non- money terms, and
current liabilities, including investment and owners equity. represents the net worth of
the business.
Analysis of the balance sheet can indicate whether:
- The business has enough assets to cover its debts
- The interest and money borrowed can be paid
- The assets of the business are being used to maximise profits
- The owners are making a good ROI

Shows the ROI, sources and extent of borrowing, level of inventories

Figures show whether the business has sufficient assets to continue to make profits in the longer term, how much of
the assets are financed from outside borrowings, whether the business can expect to meet its financial obligations in
the short and longer term, and how the year’s figures compare to the previous.

- Three main components include: assets; liabilities; owner equity

Assets are items of value Liabilities are claims by people other than Owners’ equity represents
owned by the business. the owner against the assets (items of the owners’ financial interest
Current assets can be turned debt), and represent what is owed by the in the business or net worth of
into cash within 12 months, business. Current liabilities must be repaid the business. Also referred to
whereas non current assets within 12 months where as non-current as ‘capital’.
cannot be turned into cash liabilities must be met sometime after
within 12 months that period.

Balance sheet – the accounting

equation and relationships

The accounting equation, which forms

the basis of the accounting process,
shows the relationship between
assets, liabilities and owners equity.

Assets = Liabilities +
Owners Equity
Owners’ equity = Assets –
Assets are what are owned by the
business; = Assets
liabilities – equity
and owners
is what is owed by the business.
Owners Equity
PROFIT = Revenue - Expenses
Analysis involves working the
11.5 – Financial Ratios financial information into
significant and acceptable forms
The financial statements of a business must be analysed to gain thorough that make it meaningful, and
highlighting relationships between
understanding of the activities of a business.
different aspects of the business

The main types of analysis include: vertical (within one year), horizontal (between different years) and trend (over
3-5 years)

The analysis of financial statements is aimed at the areas of financial stability Interpretation involves making
judgements and decisions using
(liquidity and gearing), profitability and efficiency.
data gathered from the analysis

Ratio Formula Measures Analysis Example Interpretation of ratio results

Return on Net Profitab Shows how effective the For every $1 The higher the ratio or
Equity Ratio Profit ility funds contributed by the in total percentage, the better the
Total owner have been in equity they return for the owner
Equity generating profit and so are making
the return on investment $0.40 in
net profit

Expense Ratio Total Efficienc Each of the categories of For every $1 Higher expense ratios
Expenses y expenses is compared to in sales indicate poor management
Sales sales. This ratio gives an there is
indication of the amount $0.35 in
of sales that are allocated administratio
to individual expenses such n expenses
as selling, administrating,
COGS and financial

Gross Profit Gross Profitab Shows he changes from Gross Profit The higher the ratio the
Ratio profit ility one accounting period to Ratio = 45% better.
Sales another and indicates the
effectiveness of accounting For every $1 If the ratio is low,
policies concerning pricing, in sales alternative suppliers may
sales, discounts, the Company need to sourced and
valuation of stock XYZ is competitors investigated.

Net Profit Net Profitab Shows the percentage of Net Profit A firm will be aiming for a
Ratio Profit ility Net Profit on sales. Can Ratio = 25% high net profit ratio.
Sales be altered by changing
gross profit or decreasing For every $1 A low net profit ratio
expenses. in sales, indicated that expenses
Company should be examined to look
XYZ is for the possibility of
making reductions
$0.25 in
Net Profit

Accounts Sales x Efficienc Measures the effectiveness High Higher turnover ratios
Receivable 365 y of a firm’s credit policy turnover indicate the business has
Ratio Accounts and how efficiently it ratios efficient debt collection
receivable collects its debt indicate the
business has

Debt to Gearing Shows the extent to Ratio 2:1 The higher the ratio, the
Equity Ratio Total (Solven which the firm is relying For every $1 less solvent the firm (the
liabilities cy) on debt or outside sources in owners higher the business risk)
Owners to finance the business. equity there
Equity is $2 in

Current Ratio Current Liquidit Shows the short term Ratio 2:1 It is generally accepted that
Assets y financial stability of a For every $1 a ratio of 2:1 indicates a
Current business (It’s ability to in liabilities, sound financial position (a
Liabilities meet its short term there is $2 firm should have double the
financial commitments) in assets amount of assets to cover
its liabilities.

11.6 – Limitations of financial reports

- There are limitations to financial reports. They can be misinterpreted and can be misleading, thus impacting
the decision making of management and potentially putting the business at risk.

- Limitations can include the influences on information when recorded, such as those that are ‘one offs’, that
will distort the true earnings of a company.

The limitations of financial reports are:

This is the process of removing one time or unusual influences from the balance
Normalised earnings sheet to show the true earnings of a company. An example of this would be the
removal of a land sale, which would achieve a large capital gain
Capitalising expenses Process of adding a capital expense to the balance sheet that is regarded as an
asset, rather than an expense.
Examples include: research and development

Valuing assets Process of estimating the market value of assets or liabilities.

Two main methods of valuing assets include:

- Discounted cash flow method – estimates the value of an asset based on
its expected cash flows.
- Guideline company method – values is determined by observing the
prices of similar companies that sold in the market

Timing assets Financial reports cover activities over a period of time, usually one year.
Therefore, the business’s financial position may not be a true representation if the
business has experienced seasonal fluctuations.

Debt repayments Financial reports do not have the capacity to disclose information about debt
repayments, and therefore are limiting.

The recording of debt repayments on financial reports can be used to distort the
‘reality’ of the business’s status and this may be undertaken to provide a more
favourable overview of the business.

Notes to the financial Notes to financial statements report the details and information that are left out
statement of the main reporting documents, such as the balance sheet and income

These notes contain important information such as accounting methodologies

used for recording and reporting transactions that can affect the bottom line
return expected from an investment in a company.

11.7 – Ethical issues related to financial reports

Businesses have an ethical and legal responsibility to provide accurate financial records.

Financial decisions must reflect the objectives of the business and the interests of the owners and shareholders.

Ethical considerations are important in the valuing of assets, including inventory and accounts receivable. Such
valuations influence the working capital and hence the short term stability of the business. If overvalued, working
capital will be high and indicate an untrue working capital figure of the business.

Likewise, is debt finance is used extensively to finance activities in a business, although debt funds may be used to
increase profit, there is added risk to shareholders, and this in itself is an ethical issue that must be considered.

Laws relating to corporations regulate the conduct of directors and the requirement for disclosure of all information
to be accurate. This is very important to lenders and shareholders of companies who make decisions about
investment based on the information provided by the business
Audited accounts

Audits are an important part of the control function and are generally used to
An audit is an independent
examine financial affairs of a business.
check of the accuracy of all
financial records and
There are three types of audits: accounting procedures

1. Internal audits

Employees to check accounting procedures and accuracy of financial records

conduct theses internally

2. Management audits
Requirement of
These are conducted to review the firm’s strategic plan and to determine if the Corporations
changes should be made. The factors affecting the strategic plan may include Act 2001 (Cwlth)
human resources, production processes and finance.

3. External audits

Conducted by specialised independent audit accountants

Record keeping

- All accounting processes depend on how accurately and honestly data is recorded.
- The ATO regularly monitors business operators, and those found to be
evading their taxation responsibilities can receive fines far in excess of the What is a business activity
amount they may believe they have saved in tax. statement?

Goods and services tax obligations Records a business’s claim for

input tax credits and for GST
- One of the purposes for the introduction of GST was to make it more payable
difficult for businesses and individuals operating in the ‘cash economy’, to
avoid tax
- Consequently, all businesses have an ethical and legal obligation to comply with the GST reporting
- All businesses have an obligation to complete a BAS quarterly, to pay any GST collected and claim input tax
12.1 – Cash flow management

- Cash flow is the movement of cash in and out of a business over a period of time.
- A cash flow statement provides important information regarding a firm’s ability to pay its debts on time.
- Cash flow statements are vital for the business to assess whether money inflows can match money outflows.
The term ‘liquidity’ is used to describe whether a business has an adequate cash flow.
- A cash flow statement can assist in identifying period of potential shortfalls or surpluses.

Some examples of a business’s inflows and outflows of cash

Inflows Outflows
Sales Payments to suppliers — raw materials/finished goods, etc.

Accounts receivable Interest on loans

Commissions Operating expenses — wages/salaries, raw materials/finished goods

Sales of assets Drawings

Rents Purchase of assets

Interest (investments/loans, etc.) Loan repayments


Management strategies Why is financial flexibility important?

1. Distribution of payments Because a business must be able to adapt its

finances to cover planned and unplanned
- An important strategy involves distributing payments changes.
throughout the month, year or other period so that cash In time of downturn and reduced
shortfalls do not occur. confidence, businesses are usually more
- A cash flow projection can assist in identifying periods of concerned with its ability to pay its debts
shortfall and surplus. and remain solvent, rather than
2. Discounts for early payment Economic climate is a factor determining
whether a business focuses on cash flow
- Another cash flow management strategy involves offering rather than profitability.
creditors a discount for early payments.
- This is most effective when targeted at those creditors who owe the largest amounts over the financial year
- This is beneficial for creditors who save their money and improve their cash flow and to the business as it
positively affects their cash flow status.

3. Factoring

- Factoring can be beneficial to a business as the business can save on costs Factoring is the selling of
involved in following up on unpaid accounts and debt collection. accounts receivable for a
- Factoring is growing in popularity as a strategy to improve working capital. discounted price to a finance
- Companies facing a cash flow squeeze and slow-paying customers often or specialist factoring
sell their invoices or accounts receivable to specialized companies called company.
factors. Therefore it can be said that in predicting a shortfall, a company
can engage in factoring to provide better cash flow control.

12.2 – Working capital (liquidity) management

Working capital is the term used in businesses to describe the funds available for the short-term financial
commitments of a business.

Net working capital = current assets – current liabilities

Current (working capital) ratio = current assets

Current liabilities

Net working capital represents those funds that are needed for the day-to-day
operations of a business to produce profits and provide cash for short-term liquidity. Working capital
Net working is the funds
Working for
capital funds that
The working capital cycle for businesses demonstrates that current assets are financial commitments
are needed foristhe
management of a
constantly changing as inventories are sold, cash is paid out and payments are business.
day best
the operations
mix of of a business
received. to produce
assets profits and
and current liabilities
provide to
needed cash for short-term
achieve the
liquidity. of the business.
Working capital is often the major asset of a business and current asset approximately make up 40% of business

Insufficient working capital means there are cash shortages or liquidity problems and the situation forces businesses
to increase their debt and find new sources of finance or sell off non current assets.

On the other hand, an excess of working capital means that assets are earning less than the cost to finance them.

Working capital management involves determining the best mix of current assets and current liabilities needed to
achieve the objectives of the business.

Management must achieve a balance between using funds to create profits and holding sufficient funds to cover
payments. The more efficient a business is in organising and using its working capital, the more effective and
profitable it will be.

 The current (working capital) ratio

- Shows if the current assets can cover liabilities.

- Helps determine whether a business is managing cash flows so that it can pay its immediate debts.
- The ratio indicates the amount of risk taken by a business in relation to profitability and liquidity, and can
help determine whether the business’s financial structure is acceptable.
- A 2:1 ratio is generally acceptable
- Careful monitoring of the working capital is important for the survival of the business.
- Ratios vary depending on the type of the business, the efficiency of the business in being able to convert
current assets into cash, and the relations with creditors and banks that are sources of cash.

High ratio
- A high current ratio may indicate the business has invested too much in current assets that bring in a small
- Profitability may be reduced as the business has chosen to reduce its risk of not being able to pay its debts
by having a higher current ratio.

Low ratio
- May mean the business is more profitable if it is investing its resources in longer-term assets and generating
more profits.
- However there is a risk that the business may not be able to pay its current liabilities

 Control of current assets

- Management of current assets is important for monitoring working capital.

- Excess inventories and lack of control over accounts receivable lead to an increased level of unused assets,
leading in turn to increased liquidity problems.
- On the other hand, insufficient inventory and tight control policies may also lead to problems.
- Working capital must be sufficient to maintain liquidity and access to credit (overdraft) to meet unexpected
or unforseen circumstances.


- Cash is critical for business success, and careful consideration must be given to the levels of cash receivables
and inventories that are held by a business.

Cash ensures that a business:

- Can pay its debts
- Repay loans
- Pay accounts in the short term
- Survives in the long term
- Can take advantage of investment opportunities (short term money market)

Cash shortages can occur due to unforseen expenses, and they are a cost to the business.
Businesses try to keep their cash balances at a minimum and hold marketable securities as reserves of liquidity.
Reserves of cash or marketable securities guard against sudden shortages or disruptions to cash flow.
Internal management procedures must be in place to ensure that cash is not lost through theft.


- The collection of receivables is important in the management of working

capital. Receivables are sums of
- Consequently, a business must monitor its accounts receivable and ensure money due to a business
that their timing allows the business to maintain adequate cash resources. from customers to whom it
- The faster the debtors pay, the better the firm’s cash position. has supplied goods or
services. They are recorded
Procedures for managing accounts receivable include: as accounts receivable.
 Checking the credit rating of prospective customers
 Sending customers’ statements monthly and at the same time each month so that debtors know when to
expect accounts.
 Following up accounts that are not paid by the due date.
 Stipulating a reasonable period
 Putting policies in place for collecting bad debts

What is the disadvantage of implementing a tight credit policy?

It increases the possibility that customers might choose to buy from other firms. Therefore, the costs and benefits
must be weighed up carefully.


- Inventories make up a significant amount of current assets and their levels must be monitored so that excess
or insufficient levels of stock do not occur.
- Too much inventory or slow moving inventory will lead to cash shortages.
- Insufficient inventory of quick selling items will also lead to a loss of customers and hence lost sales.
- Inventory is a cost to a business if it is unsold: the holding of stock means unnecessary expenses (storage and
insurance costs)
- Businesses must ensure that inventory turnover is sufficient to generate cash to pay for purchases and pay
suppliers on time so that they will be willing to give credit in the future.
- ‘Just in time’ is one method used to ensure that inventory is not lying idle. An arrangement is made with a
supplier that orders will be supplied immediately. The firm carries little or no inventory and relies on the
supplier to fulfil orders as soon as required

 Control of current liabilities

Minimising the costs related to a firm’s current liabilities is an important part of managing working capital. This
involves being able to convert current assets into cash to ensure that the business’s creditors (accounts payable,
bank loans or overdrafts) are paid.

Payables (accounts payable)

- A business must monitor its payables and ensure that their timing allows the business to maintain adequate
cash resources.
- The holding back of accounts payable until their due date can be a cheap Payables are sums of money
means to improve a firm’s liquidity position, as some suppliers allow a owed by the business to other
period of interest free trade credit before requiring payment for goods businesses from whom it has
purchased. purchased goods and services.
- It may also be able to take advantage of discount offered by creditors. Payables are recorded as
This reduces cost and assists with cash flow. accounts payable.
- Accounts, must however, be paid by their due dates to avoid any extra
charges imposed for late payment and ensure that trade credit will be
extended to the business in the future.

In summary, control of accounts payable involves periodic reviews of suppliers and the credit facilities they provide,
for example:

 Discounts
 Interest free credit periods
 Extended terms for payments

Alternative finance plans include:

- A floor plan - Often used by motor vehicle dealers who have slow stock turnover
- Consignment finance – goods are supplied for a particular period of time and payment is generally not
required until goods are sold.
Trade credit (Cost free finance) - An agreement where a customer can purchase goods on account (without paying
cash), paying the supplier at a later date.


- Businesses may need to borrow funds in the short term for a Bridging finance can be provided by
number of purposes. banks to cover times when funds from
- Funds may be required to cover the sale and purchase of the settlement of asset sales such as
property, unforseen circumstances, and import and export property, have not been received but
commitments. payment for another property is
- Short-term loans and bridging finance are important sources required. However, the cost in interest
of short term funding for businesses. rates and charges associated with
bridging finance are high.
Why is management of loans important?

This is important because as costs for establishment, interest rates and ongoing charges must be investigated and
monitored to minimise costs.

- Short-term loans are generally an expensive form of borrowing for a business and their use should be
- Control of loans involves investigating alternative source of funds from different banks and financial
- Positive, ongoing relationships with financial institutions ensure that the most appropriate short-term loan is
used to meet the short-term financial commitments of the business.


- Convenient and relatively cheap as a source of short-term borrowing.

- Enable businesses to overcome temporary cash shortages.
- Feature of the overdraft differ between banks, but generally involve an arrangement with the bank that the
business’s account can be overdrawn to a certain amount.
- Banks require regular repayments to be made on overdrafts and may charge account keeping fees,
establishment fees and interest.
- Bank charges do, however, need to be carefully monitored, as charges vary depending on the type of
overdraft established.
- Businesses should have a policy for using and managing bank overdrafts and monitor budgets on a daily or
weekly basis so that cash supplies can be controlled.

 Strategies for managing working capital


- Leasing is the hiring of an asset from another person or company who has purchased the asset and retains
ownership of it.

What is an advantage of leasing?

Leasing ‘frees up’ cash that can be used elsewhere in a business, so the level of working capital is improved.
It is also attractive to some businesses as it is an expense and therefore is tax deductible. Firms can also increase
their numbers of assets through leasing and this means that revenue and therefore profits, can be increased. While
most loans require a deposit so that a firm can only borrow 90 – 95% of the purchase price of the asset, leasing
allows 100% financing.
Sale and lease back is the selling
Sale and leaseback of an owned asset to a lessor and
leasing the asset back through
- Sale and lease-back increases a business’s liquidity because the cash fixed payments for a specified
that is obtained form the sale is then used as working capital. number of years.
- Financial markets needs to be dynamic and relevant to both the
internal and external factors that will affect the overall success of a business.
12.3 Profitability Management

 Cost controls Profitability management involves

the controlling of both the business’s
1. Fixed and variable costs costs and revenue

Fixed costs – not dependent on the level of operating activity in a business; do not change when the level of
activity changes; must be paid regardless of what happens to the business.
EXAMPLES: Salaries, insurance, lease

Variable costs – those that change proportionately with the level of operating activity in a business.
EXAMPLES: Materials, labour used, wages

Monitoring both fixed and variable costs is important in a business, as changes in the volume of activity, need to be
managed in terms of the associated changes in costs.

How can one minimise these costs?

- Budgets
- Industry standards

By minimising costs, one’s PROFIT is maximised

2. Cost centres

- Cost centres have direct and indirect costs

Direct – those that can be allocated to a particular product
Cost centres are particular areas,
(variable costs)
departments or sections of a business
Indirect – those that can be allocated to more than one product
to which costs can be directly
3. Expense minimisation

Profits can be weakened if the expenses of a business are high as they consume valuable resources within a
business. Guidelines and policies should be established to encourage staff to minimise expenses where possible.
Savings can be substantial is people take control and eliminate unnecessary spending.

 Revenue Controls

1. Marketing objectives

Sales objectives
Sales objectives must be pitched at a level of sales that will cover costs, both fixed and variable, and result in a profit.
A cost-profit-volume analysis can be used to determine the level of revenue sufficient for a business to cover fixed
and variable costs to break and to predict the effect on profit of changes in the level of activity, prices or costs.

Sales mix
Changes to the sales mix can affect revenue. Businesses should control this by maintaining a clear focus on the
important customer base on which most of the revenue depends on, before diversifying or extending product ranges
or ceasing production on particular lines. Research should be carried out to identify the potential effect of sales-mix
changes before decisions are made.

Pricing policy
Affects revenue and working capital and therefore should be closely monitored and controlled.
Overpricing could fail to attract buyers, while underpricing may bring higher sales but result in cash shortfalls and
low profits.

12.4 Global financial management

Global business brings extra concern for financial managers – in particular currency fluctuations, interest rates,
methods of international payment, hedging and derivatives.

Largely uncontrollable financial risks include currency fluctuations, interest rates and overseas borrowing. This is
because they are part of the external environment.

1. Currency fluctuations/ exchange rates

Countries have their own currency, which they use for domestic purposes. This means that when transactions are
conducted on a global scale, one currency must be converted to another. This transaction is performed through the
foreign exchange market – which determines the price of one currency relative to another.

The foreign exchange rate is the ratio of one currency to another; it tells how much a unit of one currency is worth
in terms of another.
Effects of currency fluctuations

- Make imports cheaper
- Increased consumer purchasing power
- Make exports more expensive
- Reduces international competitiveness of exporters

- Make exports cheaper
- Increasing export competitiveness
- Make imports more expensive
- Reduced consumer purchasing power

Interest rates

Low interest rates:

- Reduce savings and encourage borrowing
- Boosts stock market
- Boosts wealth for individuals
- Boosts confidence

High interest rates:

- Discourage borrowing and increase savings
- Increased cost of borrowing
- Reduced confidence
- Upward pressure on exchange rates

Methods of international payment

Payment in advance – exporter receives payment and then arranges for the goods to be sent
- No risk for exporter
- Often used when the credit worthiness of the buyer is uncertain

Letter of credit – a commitment by the importer’s bank, which promises to pay the exporter once documents
proving shipment has been presented.
- Popular with exporters because it relies on the overseas bank, rather than the importer.

Clean payment – when the payment is sent to, but not received
- Easiest and quickest method
Bills of exchange – A document drawn up by the exporter demanding payment from the importer at a specified time.
- Allows the exporter to maintain control over goods until payment is either made or guaranteed.

1. Document (bill) against payment.

- Importer collects goods after paying for them

2. Document (bill) against acceptance

- Importer collects goods after paying for them.

Hedging is the process of
- Helps reduce the uncertainty involved with international financial minimising the risk of
transactions currency fluctuations

1. Natural hedging
- The adopting of strategies to eliminate or minimise risk

Such strategies may include:

- Establishing offshore subsidiaries
The spot exchange rate is the
- Arranging for import payments and export receipts to be
value of one currency in
denominated in foreign currency. Therefore any losses from a
another currency on a
movement in the exchange rate will be offset by gains from the
particular day.

2. Financial instrument hedging

- Financial products such as derivatives can also be used to minimise or spread the risk of currency


A derivative is a simple financial instrument that may be used to lessen the exporting risks associated with currency

1. Forward exchange contract

- A contract to exchange one currency for another currency at an agreed exchange rate on a future date,
usually for 30, 90 or 180 days.
- Bank guarantees the exporter, within the set time, a fixed rate of exchange for the money generated from
the sale of the exported goods.

2. Options contract
- An option gives the buyer the right, but not the obligation, to buy or sell foreign currency at some time in
the future.

3. Swap contract
- A currency swap is an agreement to exchange currency in the spot market with an agreement to reverse the
transaction in the future.
- It is a mutual exchange
- Allows a business to alter its exposure to exchange fluctuations without discarding the original transaction.


5.3 Strategic role of marketing Marketing is the process of
planning and executing the
Marketing is perhaps the most important activity in a business because it conception, pricing, promotion and
has a direct effect on profitability and sales. distribution of ideas, goods and
services to create exchanges that
The strategic goal of marketing is to translate profit maximization into a satisfy individual and organisational
reality. objectives
(American Marketing Association).
In doing so, firms develop a marketing plan that sets out strategies to
increase sales and achieve the greater objectives of a business (i.e.
financial objectives – increase profitability by 5% over the next 12 months. Profit maximisation occurs
when there is a maximum
The role of marketing today is to view the business through the customers’ difference between the total
eyes. The business needs to see itself as a customer-satisfying process. revenue coming into the
business and total costs paid
Marketing plan out.

The plan should focus on short term and long term planning for three Marketing plan is a document that
reasons: lists activities aimed at achieving
particular marketing outcomes in
1. The plan outlines the strategies to be used to bring the buyer and relation to goods or services. The
seller together. plan provides a template for future
The business needs to identify: action aimed at reaching business
- Where the market is goals (such as profit maximisation)
- Who will buy the product
- Why they will buy the product
- How often they will buy the product

2. The core of marketing is satisfying customers wants which should lead to repeat sales
3. Marketing is the revenue generating activity of any business. Nothing is achieved until a sale is made.

Business plan = road map

Marketing plan = signposts (showing the direction to take)

5.4 Interdependence with other key business functions

The marketing of a business needs to work closely with operations, research and development, finance and HR to
check that their plans are possible

- Operations will need to use sales forecasts produced by the marketing department to plan their production

- Sales forecast will also be an important part of the budgets produced by the finance department, as well as
the deployment of labour for HR

- A search and development department will need to work closely with the marketing department to
understand the needs of the customers and to test outputs of the R&D section

The marketing concept is a philosophy that states all sections of the business are involved in satisfying a customer’s
needs and wants, while achieving the business’s goals. The business should direct all policies, plans and operations
towards achieving customer satisfaction. Therefore the marketing plan needs to become integrated into all aspects
of the business.
5.5 Production, selling, marketing approaches

Production approach – 1820s to 1920s

- To develop marketing plan based on the marketing concept – that all sections of the business are involved in
satisfying a customer’s needs and wants while achieving business’s goals
- Focused businesses on the production of goods and services
- Industrial Revolution and WWI – burst of industrial output

Sales approach – 1920s to 1960s

- The clever selling techniques that are key to the success of a business
- Emphasised selling because of increased competition
- Still neglecting the needs of the customer, regardless of the process becoming more refined.

Market oriented approach – 1960s to 1980s (stage one) & 1980s to present (stage two)
- Means a business reacts to what customers want – through market research. The decisions are based
around information about customers’ needs and wants rather than what the business thinks is right for the
- Involves developing a relationship with the customer
- Most Australian families have a discretionary income – refers to disposal income that is available for
spending and saving after an individual has purchased the basic necessities of food, clothing and shelter.

Corporate social responsibility

With growing public concern over environmental pollution and resource depletion came a shift in the emphasis of
marketing plans.

One major change has been an increase in the demand for environmentally sustainable products.

Customer orientation

This is the process of collecting information from customers and basing market decisions and practices on
customers’ wants and interests.

For a business to adopt a customer orientation approach the customer Customer satisfaction measures
relationship does not end with the sale, it begins there. This is where the how goods and services supplied
business must strive to maintain customer satisfaction. by a business meet or exceed
customer expectation.
Relationship marketing

This is the development of long term and cost effective relationships with individual customers.

Places high priority on customer loyalty, customer retention and continual satisfaction

5.6 Types of markets

What is a market?

A group of individuals that:

- Need or want a product
- Have money to purchase the product
- Are willing to spend their money to obtain the product
- Are socially and legally authorised to purchase the product
Resource market Industrial market Intermediate market

- Those individuals or groups - Includes industries and business - Consists of wholesalers and
engaged in all forms of primary that purchase products to use in the retailers who purchase finished
production production of other products or in products and sell them again to
their daily operations make a profit
- Where raw materials are bought
and sold (Rio Tinto, BHP, mining) - Where goods that are used as - Subway, Glue, General Pants
supplies in the production process
are traded (Holden)

Consumer market Mass market Niche market

- Consists of individuals – members - The seller mass-produces, mass - When the mass market is divided
of a household who plan to use or distributes and mass promotes one into smaller markets consisting of
consume the products they buy product to all buyers. The business buyers who have specific needs and
does not target its products to a lifestyles
- Markets in which products and specific group of buyers
services are sold to the public - Differs from a market segment, as
- Products are aimed at all its customer base is much narrower
- Housing appliances consumers irrespective of their age,
gender - Micro market
- Harvey Norman, Coles, Woolworths
- Very few products today are - When you walk into a newsagency
marketed to mass markets (basic and you see an assortment of
food, water, electricity) magazines based on gender, age,
income and lifestyle
6.2 Factors influencing customer choice Customer choice refers to the decisions and
actions of customers when they search for,
 Psychological evaluate, select and purchase goods and
Internal forces within an individual that affect their buying

1. Perception: Perception is the process

Perception is viewed through everyone differently through which people select,
It is simply an opinion that customers have on particular products, which vary organise and interpret
depending on individuals’ gender, age, culture and religion. information to create meaning.

2. Motives: Motive is the reason that

A motive is the reason which individuals act upon; belief within them that they makes an individual do
need the product something.
(Comfort? Approval of others?)

3. Attitudes: Personality is the collection of

The overall feeling about an object or activity. all the behaviours and
The attitudes of customers heavily influence the success or failure of a business’s characteristics that make up
marketing strategy. that person

4. Personality: Self-image relates to how a

The collection of behaviours and characteristics that make up a person. person views himself or herself
The type of brand and product reflects a person’s personality.
Self-image is also a major determinant of what products we buy.

5. Learning Brand loyalty occurs when a

Learning refers to changes in an individual’s behaviour caused by information favourable attitude towards
and experiences. single brand results in repeat
Customers have direct experience of many new products. When they do, they sales over time.
are also learning. Consequently, much of customer behaviour is learned.
Therefore, successful marketing strategies may assist customer leaning that
encourages brand loyalty.

 Sociocultural

Socioeconomic influences are forces exerted by other people and groups that affect an individual’s buying

Social class

This refers to a person’s relative rank in society, based on his or her occupation, education and income.
This influences
Culture is the most basic cause of a person’s wants and behaviour. Growing up, children learn basic values,
perception and wants from the family.
Marketing is always trying to respond to “cultural shifts” which might point to new products that might be wanted
by customers or to increased demand.

Example: Cultural shift to wards greater concern for health and fitness has created opportunities servicing customers
who wish to buy:
- Low calorie foods
- Gym memberships
- Exercise equipment
The increased desire for “leisure time” has resulted in increased demand for convenient products and services such
as microwave ovens, ready meals and direct market service businesses such as telephone banking.

Each culture contains “sub culture” – groups of people with the same values. Sub cultures can include nationalities,
religions, racial groups or region groups. Sometimes a sub culture will create a substantial market segment of its

 Economic

Economic forces have an enormous impact on both businesses and customers. They influence a business’s capacity
to compete and a customer’s willingness and ability to spend. The economy is constantly fluctuating from boom to
recession. These two distinct phases influence the marketing environment – “dining at home and TV shows like My
Kitchen Rules were hailed as the reason behind Coles and Woolworths increasing their sales in the face of a major
slow down during 2008 & 2009.

 Government

Governments use a number of economic policy measures to influence the level of economic activity.
Depending on the economic condition, the government will put in place policies that expand or contract the level of
economic activity.
Policies directly or indirectly influence business activity and consumer spending habits, which will influence the
marketing plan.

Government regulations have direct and immediate impacts on the marketing plans of businesses. Laws and
regulations that are enforced by the government influence businesses behaviour and decisions as breaching these
laws could result in financial penalties.

The NSW Fair Trading Office – a state based body that administers the fair trading laws. Its role is to protect
consumers from unfair and illegal business practices and also to provide a forum for the resolution of disputes

6.3 Consumer laws

- Improve the protection and rights of consumers.

- Clarify the rights and responsibilities of businesses.
- They also ensure that a successful business is able to develop a motivated, positive workforce whilst
adopting ethical and legally correct practices through all operations of the organisation.

Australian Consumer Law

Introduced in 2011 to replace Trade Practices Act 1974

- Promotes fair and competitive behaviour in the market place

- Attempts to prevent deceptive and misleading behaviour towards consumers
- Mirrors ASIC’s role
- Enforced by ACCC
- Implemented by the Competition and Consumer Act 2010

 Competition and Consumer Act 2010

1. Protect consumers against undesirable practices (misleading advertising)
2. Regulate certain trade practices that restrict competition
6.4 Deceptive and misleading advertising

Examples: Bait and switch advertising

- Fine print (important conditions are written in small sized print and involves advertising a few
therefore are difficult to read) products at reduced and
therefore enticing prices to
- Before and after advertisements (Consumers may be misled by attract customers. When the
‘before and after’ advertisements where the comparison is distorted advertised products quickly run
so that “before” images are worsened and “after” images are out, customers are directed to
enhanced. higher priced items.

- Special offer (Advertisements may be misleading or deceptive if they

imply that a special offer is available for only a limited period, when Dishonest advertising is when an
in fact the offer is continuously available. advertisement uses words that
are deceptive or claims that a
6.5 Price Discrimination product has a specific quality
when it does not.
The setting of different prices for a product in separate markets.

The difference in prices is possible because:

- The markets are geographically separated (city vs. country)
- There is product differentiation within the one market (EXAMPLE: different electricity prices for domestic
and business users)

Prohibited under Competition and Consumer Act, if discrimination could substantially reduce competition

6.6 Implied conditions

The unspoken and unwritten terms of a contract

The most important implied condition refers to the products acceptable quality under the Trade Practices Act 1974,
which enforced that businesses must ensure their products are of a ‘merchantable quality’. This has been changed
under ACL to acceptable quality – that the product is fit for the purpose for which it is being sold, acceptable in
appearance and finish, free from defects, safe and durable.

6.7 Warranties

A promise by the business to repair or replace faulty products.

A warranty assures the customer that the business has confidence in the quality of their product and will repair or
replace any faulty items.

Can be used as an aggressive marketing tool if it includes superior options to those of a competitive product.


By law a business is required to offer a refund if:

- The product is faulty
- Do not match description or sample
- Fail to do the job they were supposed to do

There is no obligation to offer a refund if the customer has simply changed their mind, found a cheaper product, or
damage occurred after purchase was made.
Also important that signs regarding refunds and exchanges are displayed.
6.8 Ethical – truth, accuracy and good taste in advertising, products that may damage health, engaging in fair
competition, sugging

Ethics are moral guidelines, which govern good behaviour. So behaving ethically is doing what is morally right.
Behaving ethically in business is widely regarded as good business practice
An ethical decision is one that is both legal and meets the shared ethical standards of the community.

Harvey Norman were fined $250,000 for misleading advertising

Nutri Grain – promotes nutrition and health when it is in fact full of sugar (32 grams per 100 grams of Nutri Grain)
Coca Cola, Cadbury and Mars, which are signatories to the Responsible Children’s Marketing Initiative, set their
own nutritional standards, that make it difficult for consumers to understand.


The role of the Advertising Standards
Market Research: Bureau is to ensure that acceptable
- Invasion of privacy (obtaining research without advertising standards are followed. The ASB
permission) does thins by administering a national
- Stereotyping – drawing unfair or inappropriate conclusions system of advertising self-regulation – a
system by which a business or industry
Target customers and market: controls its own activities rather than being
- Targeting the vulnerable (children/ elderly) publicly regulated by an outside
- Excluding potential customers from the market organisation such as the government.
(discouraging demand from undesirable market sectors or
simply refusing to sell to certain customers)
Viral marketing is a method of
Pricing promotion that involves the
- Price fixing spreading of messages from person
- Price wars to person without the involvement
- Price collusion (agreeing with other competitors to set prices of the originator. This is commonly
in a market to the detriment of competition and consumers) achieved through the use of digital
word of mouth advertising.
Advertising and promotion
- Issues over truth and honesty
- Issues with violence, sex and profanity Consumer exploitation occurs when the
- Taste and controversy rights of the consumer are ignored. May
- Negative advertising result when businesses engage in unfair
marketing strategies due to increased
What is price fixing? competition in the workplace.
- Illegal, anticompetitive and unethical

So a business cannot: Puffery is the exaggerated praise

1. Agree prices with its competitors or flattery, especially when used
2. Share markets or limit production to raise prices for promotional purposes that no
3. Impose minimum prices on different distributors (such as shops) reasonable person would take as
4. Agree with competitors what purchase price it will offer factual
5. Cut prices below cost in order to force a smaller or weaker
competitor out of the market.

 Sugging
The ‘selling under the guise of a survey’ – a sales technique disguised as market research.
EXAMPLE: a survey is a sales technique disguised under market research – AAMI insurance policy holders, TESCO,
and NRL Referees.
This is NOT illegal, however it does raise ethical issues regarding to the invasion of one’s privacy and deception.
Article by The Economist 2011– TESCO
“Tesco routinely collects information from car holders of it Club loyalty card”
7.1 Introduction

A marketing plan gives a purpose and direction to all business activities. The marketing plan needs to mesh with the
business’s operational plan, financial plan and cash flow forecasts.

All marketing plans should be:

1. Realistic in light of the SWOT analysis
2. Achievable within the business’s resources and budgets

7.2 Situational analysis – SWOT analysis and product life cycle

A situational analysis investigates the marketing opportunities and potential problems. It is based on market
research, which gathers all of the available information about the market environment.

 Provides the firm with the opportunity to examine its current position
 It is important that the business has a clear understanding of its current position and where it is heading.

Four key elements of a situational analysis include:

1. SWOT analysis
2. Product life cycle analysis
3. Market analysis
4. Competitor analysis
1. SWOT analysis

Involves identifying and analysis the strengths and weaknesses of the business, the opportunities in, and threats
form, the external environment

Internal = Strengths and Weaknesses

 Strengths

Reviews the business’ current strengths such as a goods brand or strong sales performance. Virgin has used their
strong brand name to launch several products.

 Weaknesses

Reviews the business’ current weaknesses such as poor response times to requests for information or late
deliveries. A strategy adopted to address this may include implementing more resources into a better
warehousing system for the dispatch of goods.

External = Opportunities and Threats

 Opportunities

Reviews the business’ future opportunities (e.g. new technology making it easier to manufacture certain goods
or new markets abroad)

 Threats

Reviews the business’s future threats, mostly from increased competition from other firms or form changes in
the economic situation (e.g. setting lower prices or increasing promotion to attract demand)

SWOT analysis of the contribution of marketing to a business’ strategy

Strengths Weaknesses Opportunities Threats

- Specialist marketing - Lack of clear product - The use of technology to - Competitors introducing
expertise differentiation compared develop new products better products at lower
with competing products prices
- An innovative product or - Growing demand from
service - Weak distribution overseas markets (China/ - Changes in the economic
compared with India) environment encourages
- The location of the competitors customers to be less loyal
business may be - The use of social media to established brands
convenient to customers - Inadequate online (Facebook and Twitter) to
presence reach new customers - Changes in consumer
- Reputation of the brand tastes and preferences
(highly trusted or (fashion)
CASE STUDY – Reflection of situational and SWOT analysis

Sydney International Boat Show

Current position
The SIBS current position is to achieve its core objectives being:

- To promote the ‘boating lifestyle

This is measured by the number of sales of boats at the show and after the show
- Increase volume of new boat registrations
- Increase volume of sales at the show

Where SIBS wants to be:

- Reducing the impact of seasonality is the main issue for the BIA and part of their activities is to shift sales
from summer to winter. Hence the SIBS are ultimately trying to increase its volume of sales and exhibitors
profit due to seasonality.
- Hence the SIBS are aiming to increase its $300 M sales volumes at the show and the $200 M made after the

Strengths Weaknesses

- The largest show in the southern hemisphere - Display diversity weak in some areas (trailer
- The most popular show with exhibitions (at
both whole sale and retail level) for selling their - Lack of guest rest areas
product or service.
- Parking restrictions/ shortages
- A desirable location (Darling Harbour), with
exhibition, halls, and marine displays within - Inability to grow externally due to DHA
walking distance of another. restrictions

- Successful history – 44 years old - No control over individual exhibitor displays

- SIBS includes the bank holiday in NSW

(important as it includes two of their important
dealers: bankers and motor dealers)

Opportunities Threats

- To increase physical size of display/ to utilize - GFC and economic cycles – affects expectations
external displays
- Weather
- To increase the number of interstate and
international exhibitors and customers on the - Inability to supply space requirements to
strength of the marina exhibitors

- To increase size of the sections/ halls (diving; - Different number of non boating shows
skiing; fishing) targeting our exhibitors (Caravan and Camping
show; Big Boy’s Toys; Nissan 4 X 4; Fishing Expo

 In addition, the SIBS is aiming to increase exhibitor sales during the show from 24% to 30% of the total
industry annual turnover of $2.1B
2. Product life cycle

The product life cycle consists of the stages a product passed through: introduction, growth, maturity and decline

We define a product as “anything that is capable of satisfying a customer’s needs. ”

Businesses should manage their products carefully overtime to ensure that they deliver products that continue to
meet customer wants. The process of managing groups of brands and product line are called, portfolio planning.

Introduction stage:

 Product brand and reliability are established

 Prices are lower than competitors in order to gain a market foothold
 Promotion directed at early buyers and users occurs and communications seek to educate potential
customers about the merits of the new product.
 Distribution is selective, which enables customer to gradually form an acceptance of the product.
 Market size and growth is slight.

 Possibly substantial research and development costs have been incurred in getting the product to this stage.
 Marketing costs may be high in order to test the market, undergo launch promotion and set up distribution
 Profits are unlikely
 Products must be carefully monitored to ensure that they start to grow. Otherwise, the best option may be
to withdraw or end the product.

Growth stage:

 Product quality is maintained and improved

 Price per unit of production is maintained as firms enjoy increased demand and a growing market share.
 Promotion now seeks a wider audience
 Distribution channels are increased as the product becomes for popular.

 Rapid growth in sales and profit due to an increase in output (economies of scale) and possible better prices.
 Cheaper for businesses to invest in increasing their market share as well as enjoying the overall growth of
the market.
 Significant promotional resources are traditionally invested in products during this stage
Maturity stage:

 Product features and packaging try to differentiate the product from those of competitors
 Price may need to be adjusted downwards to hold off competitors and maintain market share
 Promotion continues to suggest the product is tried and true – it’s still the best
 Distribution incentives may need to be offered to encourage preference over rival products.

 Sales plateau as market becomes saturated

 Most common stage for all markets
 Competition is at its peak as companies fight to maintain their market share.
 Marketing and finance become key activities
 Marketing expenditure must be monitored carefully, as any significant moves are likely to be copied by
 Most profit is earned during this time
 Expenditure of research and development is likely to be restricted to product modification and
improvement, to improve production efficiency and quality

Decline stage:

 Product maintained with some improvements or rejuvenation. Cut the losses by selling it to another
 Price is reduced to sell remaining stock
 Promotion is discontinued
 Distribution channels reduced and product offered to a loyal segment of the market only.

 Market shrinking, reducing the overall profit of remaining competitors

 Great care must be taken to manage the product carefully
 Possible to take out some production cost, to transfer to a cheaper facility, or sell the product into other
cheaper markets.
 Company may decide to end product, depending on whether it remains profitable.

Why do some products decline?

- Changing public perception of what is fashionable at certain times
- New technologies are constantly being introduced and with them come new products replacing old ones.
- New products reduce demand for older ones
- Fluctuations in economic activity result in shifts in spending habits
- Consumer behaviour is changing due to the need to reduce carbon emissions to prevent more climate
change – car manufacturers

Introduction Growth Maturity Decline

Third generation mobile Portable DVD players Faxes Typewriters

Email Personal computers Handwritten letters
E conferencing
Smart cards Cotton t-shirts Cheque books
Iris based personal identity
cards Breathable synthetic Credit cards
3. Market research/ analysis (7.3)

Market analysis is the process of systematically collecting, recording and analysing information concerning a specific
marketing problem.

It is vital that a market-orientated business understands as much as possible about its customers and the way in
which competitors are already serving them.

Market research is particularly important in launching a new product.

Market research is aimed at reducing the risk of failure

The three steps of market research

1. Determining information needs

Using only the most use information.

If it is useful it:
- Results in marketing strategies that meet the needs of the business’s target market
- Assists the business to achieve its marketing objectives
- May be used to increase sales and profits

2. Collecting data

Primary – facts and figures collected from the original sources for the purpose of the specific research problem

Observation involves recording behaviour of customers.

- Personal or electronic observation (Used in QVB)
 Provides many insights
 May work well in retail
 Can leave questions unanswered
 May raise serious ethical issues (privacy)
- Now possible for a business to access its loyalty program, consumer spending habits and customer database
through smart cards and bar coding.
Survey – means gathering data by asking or interviewing people
- Includes personal face to face interviews; telephone interviews; focus groups

 Captures views of existing and potential customers

 First hand information that provides details about customers’ opinions
 Gathering information through surveys has become difficult as respondent rates are declining – this has lead
to the use of electronic methods

Experiment method – involves gathering data by altering factors under tightly controlled conditions to evaluate
cause and effect.

 Determines whether changing one of the factors (a cause) will alter the behaviour of what is being studied
(the effect).
- Experiments carried out in the field are called test marketing – selling a new product in a small section of the
market in order to assess customer reaction.
 Good predictor of how a new product or service will be received by the larger market (provided that it can
be kept secret from competitors)

Secondary – is the information that has already been collected by some other person or organisation

Internal data – information collected from inside the business

- Annual reports
- Customer feedback
- Sales reports

External data – Published data form outside the business

- Magazines
- Government reports
- Internet sources

3. Data analysis and interpretation

Statistical interpretation analysis is the process of focusing on the data that represents average, typical or
deviations form typical patterns.

1. Tabulating data – this will allow comparisons to be made between individual categories

- Largely based in the marketing manager’s judgment, experience and intuition.

- For this reason it is preferable to involve a large number of people to gain a wider perspective and therefore
avoid the error of personal bias.

7.4 Establishing marketing objectives

Marketing objectives are the realistic and measureable goals to be achieved through the marketing plan.
This is considered the single most important step of the marketing planning process.
Marketing objectives should be closely aligned with the business’s overall objectives (E.g. 10% return on
shareholders funds may require a 7% increase in market share).
Marketing objectives should be more customers oriented than the business objectives.

Most common objectives include:

1. Increasing market share
2. Expanding product range
3. Expanding existing markets
4. Maximizing customer service

1. Increasing market share:

Market share refers to the business’s share of the total industry sales for a particular market. All marketing plans
aim to achieve a specified market share.

- Increasing market share is an important marketing objective for businesses that dominate the market,
because the small market gains often translate into large profits

Over the past few years, Coles has lost about 1.7% of its market share to Woolworths. While the percentage of
market share lost by Coles seems small, if Coles is successful in regaining this market share then sales will rise by
around $1.3 billion, with almost $620 million (half) taken from Woolworths

2. Expanding product range:

The total range of products offered by a business is referred to as the business’s product mix.

 Businesses are usually keen to expand their product mix, as this will increase profits in the long term. The
same product mix will not remain effective in the long term because customer’s tastes and preferences
change over time and demand for a particular product may decrease.

To develop an ideal product range, businesses must understand customers’ needs and want. Each item on a product
line should attempt to satisfy the needs of different target markets.

3. Expanding existing markets:

Product demand varies greatly from one geographic region to another – due to different climate, landforms or
customs, which influence tastes and preferences.

Geographical representation refers to the presence of a business and the range of its products across a suburb,
town, city, state or country.
Large businesses usually place factories, sales offices and service agent in multiple market areas to allow immediate
service to customers.

4. Maximizing customer service

Customer service means responding to the needs and problems of the customer. It is the most important objective.

High levels of customer service indicate:

- Improve customer satisfaction
- Positive reaction from customers towards the products they purchase.

 This leads to a sound customer base with the possibility of repeat purchases
 To keep existing customers and attract new ones, businesses need to talk and listen to the customers.

Customers are the LIFEBLOOD of any business. Customer service is an attitude that should be adopted by all
departments within a business.

Strategies a business can use to maximise customer service include:

1. Asking customers what they want
2. Train employees and reward them for excellent customer service
3. Anticipate market trends by conducting research
4. Find out what competitors are offering
5. Establishing long term relationships to create customer loyalty
6. Engrain the old saying – “the customer is always right”
7.5 Identifying target markets
A business identifies and selects a target market so it can direct its marketing
strategies to that group of customers. Target market is a group of
present and potential customers
 Allows the business to better satisfy the wants and needs of the to whom a business intends to
targeted group. sell its product.

This is because the business is able to:

- Use it’s marketing resources more efficiently, which is likely to result in the marketing campaigns being more
cost effective and time efficient
- Better understand the consumer buying behaviour of the target market
- Collect data more effectively and make comparisons within the target market over time.
- Refine marketing strategies to influence consumer choice.

Coupled with the identification of the target market is the collection of primary and secondary data in order to tailor
stock and service requirements to the groups’ expectations.

Businesses can choose one of three approaches to identify and select a consumer target market:

1. Mass marketing approach

- Seeks a large range of customers
- Model T Ford was first motor vehicle produced and sold in the mass market

 Assumes individuals in the target market have similar needs

- Therefore the business develops a single marketing mix and directs it at the entire market for the product

1 type of product with little or not variation

1 promotional program aimed at everyone
1 price
1 distribution system used to reach all customers

2. Market segmentation approach

Market segmentation occurs
when the total market is
Few businesses can sell their products to an entire market; therefore a
subdivided into groups of people
business will divide the market into a few distinct segments
who share one or more common
 Enables a business to design a marketing plan that meets the needs of
a relatively uniform group.
 Delivers tailored prepositions to customers

3. Niche Market approach

A narrowly selected target market segment

 The needs of customers in these markets are often neglected by large businesses because it is rarely
profitable for them to alter their marketing mix to cater for very small groups.

7.6 & 8.1 & 8.2 Developing marketing strategies

Marketing strategies are actions undertaken to achieve the business’s marketing objectives through the marketing

1. Market segmentation
Involves subdividing markets, channels or customer into groups with different needs, to deliver tailored prepositions
which meet these needs as precisely as possible.

2. Demographic segmentation
Consists of dividing the market into groups based on variables such as age, gender, family size, income and

Coca Cola targets 15 to 35 year old males with the energy drink Mother.
Diet Coke serves the more health conscious adult market.
Fanta is targeted at 13 – 16 years olds.

3. Geographic segmentation
Divides markets into geographical units – urban; rural; suburban; population density; climate; country

McDonalds provides beef free burgers in India and pork free burgers in Israel (religion)
Climate also impacts business’s segmenting of the market for warm or cool clothing (Jindabyne)

4. Psychographic segmentation
Based on personality, motives, lifestyles and opinions. These variables focus on why people behave the way they do.

EXAMPLE: Toyota Yaris owner will respond differently about the cost of vehicle maintenance and insurance to that
of a Porsche owner.

5. Behavioral segmentation
Divides customers into groups based on the way they respond to, use or know of a product. Groups include: regular
user; loyalty; benefits sought; purchase occasion; price sensitivity

Example of ‘benefits sought’ is the toothpaste market. Here, market research has found four main “benefit
segments” – economic, medicinal, cosmetic and taste.

Marketing Mix – the four P’s

The marketing mix refers to the combination of the four elements of marketing – produce, price, promotion and
place – that make up the marketing strategy.

7.7 & 7.8 Implementation, monitoring and controlling

Implementation is the process of putting marketing strategies into operation. Once the marketing plan has been
implemented, it must be carefully monitored and controlled.
Monitoring means checking and observing the actual progress of the marketing plan.
Controlling involves the comparison of planned performance against actual performance and taking corrective
action to make sure the objectives are attained.

When evaluating alternative marketing strategies, a business must develop a financial forecast that details the costs
and revenues for each strategy.

 Developing a financial forecast requires:

1. An estimation of the cost of the marketing plan
2. An estimation of the revenue (sales) the marketing plan is expected to generate.

 The three performance indicators used to measure the success of the marketing plan are:

- Sales analysis – the comparing o actual sales with forecast sales to determine the effectiveness of the
marketing strategy
 Inexpensive to collect and process sales figures
 Data for sales revenue does not reveal the exact profit level

- Market share analysis – an evaluation of the effectiveness of the business’s marketing strategies as
compared with those of its competitors
 Reveals whether changes in total sales (increases or decreases) have resulted from the business’s
marketing strategies or have been due to some uncontrollable external factor (currency

- Marketing profitability analysis – a method in which the business breaks down the total marketing costs
into specific marketing activities (such as advertising, transport and administration)
 Assesses the effectiveness of each marketing activity by comparing them with the results achieved.
 Helps decide how best to allocate marketing resources in the future

The marketing plan can be revised by either:

Changes in the marketing mix

 Production modifications
 Price modifications
 Promotion modifications
 Place modifications

New product development

If a business wasn’t to achieve long-term growth, it must continually introduce new products. This involves cost on
research and development to stay at the forefront of technology.

EXAMPLE: Sony builds its success on developing innovating products. Recently Sony introduced an extensive range
of entertainment products.

Product deletion – elimination of some production lines

- This must be done to maintain an effective product mix as outdated products may create an unfavourable
8.3 Differentiation and positioning of product and service

Product service differentiation is the process of developing and promoting differences between the business’s
products or services with that of its competitors.

Points of differentiation: Value for money is the desire

- Changes to packaging or labeling to obtain the best quality,
- Offering top quality service, greater convenience and better value for features and performance for
money a given price of a product.
- Customer service, environmental concerns, convenience and social/
ethical issues (last decade)

Customer service
- Expectation of a high level of customer service
- May include presentation of premises, atmosphere or range of products that set a business apart and
capture consumer interest.

Environmental concerns
- Greater concern for ‘quality of life issues’ – climate change
- Businesses such as the Body Shop are adopting green philosophies and policies by selling their products in
recyclable and reusable containers – leading to increased sales

- Consumers are often very busy and are selecting products that are convenient to use.
- EXAMPLE: in food preparation, the packaging and cooking requirements are designed to make the
preparation of food as convenient as possible.

Social and ethical issues

- Consumers are becoming ethically minded and will actively purchase products they believe will not exploit
workers, producers or the environment.

Ethical consumerism provides businesses with opportunities to satisfy the demand of this
growing number of consumers.


- In response to GM foods, by some consumers, various producers are labelling their

foods ‘GM-free’

- The Fair Trade Movement is gaining an influence with consumers increasingly

prepared to pay more for guarantees of fair labour practices and sustainable organic

- The cosmetic industry is delivering more natural products that are not tested on

Product/ service positioning refers to the technique in which marketers try to create an image or identity for a
product compared with the image of competing products.
Product or service positioning is something that is done in the minds of the target market: it is how potential buyers
perceive the product. This image gives the product its position within the market.

EXAMPLE: Brands such as Rolex and Ferrari evoke an image of the product’s quality

Whenever a new product is launched, the marketing manager needs to have clearly determined the desired position
of the product/service.

This will be achieved through the:

- Product / services name
- Price
- Packaging
- Styling
- Promotion
- Channels of distribution

8.4 Products – goods and services – branding and packaging
Products are goods are
A product is defined as “anything that is capable of satisfying customer needs” services that can be offered in
an exchange for the purpose
- They can be tangible goods or intangible services of satisfying a need or want.
- In reality products are combinations of both – Dinner
- Consequently, when customers purchase a product, they buy both the
tangible and intangible benefits (attributes) – a total product
concept The total product concept refers
to the tangible and intangible
benefits (attributes) a product
Branding possesses.

 Product branding

Companies distinguish their product offerings from competition via branding.

Helps consumers: A brand is a name, term, symbol,

design or any combination that
 Identify specific products that they like. Without branding, a identifies a specific product and
consumer selection would be random because buyers could have distinguished it from its
no guarantee that they were purchasing what they preferred. competition.
 Evaluate the quality of products, especially when a consumer lacks
the expertise to judge a product’s features. A brand name is that part of the
brand that can be spoken.
Helps businesses:

 Gain repeat sales because consumers recognise the products

 Introduce new products on to the market because consumers are already familiar with the business’s
existing brands.

Therefore, branding is a POWERFUL MARKETING TOOL

EXAMPLE: McDonalds is one business that aggressively protects its brand name – which is a registered trademark
(exclusive right of use) – against infringement
 Branding symbols and logos

A brand symbol or logo is a graphic representation that identifies a business or product

Brand symbols do not have to duplicate the words in a brand name – e.g. the able symbol – these businesses
encourage instant recognition of their brand symbol rather than brand name.

 Branding strategies

Brands are classified according to who owns them.

1. Manufacturers or national brand – owned by a manufacturer

EXAMPLE – Sunbeam appliances
 Have high appeal due to their wide recognition and availability, reliability and consistent quality

2. Private or house brand – owned by retailer or wholesaler

 Often cheaper because the retailer or wholesaler can but at lower costs

3. Generic brands – products with no brand name at all

EXAMPLE – No Frills (Franklins) or Home Brand


To assist sales, sometimes the packaging of a product is sometimes as important as the product itself

Packaging preserves the product, protects the product and attracts consumer attention.

The shape of the packaging can become part of the product itself (e.g. Coke bottle shape)


Marketers can use labels to promote other products and therefore greater
consumer satisfaction with products.
Labelling is the presentation of
information on a product or its
Usually the label will provide information about ingredients, operating
procedures, shell life, package size or country of origin.
A label is that part of the package
All labels must be truthful. This is stated in many statutes and government
that contains information
regulations. These regulations are aimed at protecting the consumer from
misleading or deceptive claims and the unsafe use of products.

8.5 Price and pricing methods

Price refers to the amount of money a customer is prepared to offer in exchange for a product.

Setting the right price is an important part of effective marketing. It is the only part of the marketing mix that
generates revenue. The other are all about marketing costs.

Price is also the marketing variable that can be changed most quickly, perhaps in response to a competitor price
change. Put simply, price is the amount of money for which a thing is bought or sold.

The price of a product may be seen as a financial expression of the value of that product. For a consumer, price is the
monetary expression of he value to be enjoyed/benefits of the purchase, as compared to other products.
Pricing methods

1. Cost based (mark up) pricing – the method of derived from the cost of producing or purchasing a product
and then adding a mark up.

Mark up is a predetermined amount that a business adds to the cost of a product, to determine its basic price.

Cost + (Cost x Mark up %) = Price

 Allows a business to cover additional costs (interest payments, insurance and transport)
 Provides an adequate profit margin.
 Difficulty in accurately determining mark up percentage (high and low both have implications)
 The product s priced after production and associated costs are incurred without taking into account
the other elements of the marketing mix or the state of the market

EXAMPLES: Clothing stores, hair salons and jewellery stores

A break-even analysis can be used to determine the appropriate mark up.

2. Market based pricing – a method of setting prices according to the interaction between the levels of supply
and demand – whatever the market is prepared to pay.

When demand exceeds supply there is a shortage in the market. This will force the price of goods up.

When supply exceeds demand there is a surplus in the market. This will force the price down.

The price of products therefore is constantly changing in relation to fluctuations in the levels of supply and demand.

 Can be difficult to apply because the levels of demand and supply with constantly change.

EXAMPLES: Fruit shops tend to use this especially if their supply is affected by drought or wild weather

3. Competition based pricing – where the price covers costs (cost of raw materials) and is comparable to the
competitors’ price.

- Often used when there is a high degree of competition from businesses producing similar products

Once a business has established a base price it can there decide to choose a price wither:
- Below that of competitors – undercutting competitions to break into an established market.
- Equal to that of competitors – following the price established by the price leader, which avoids the need for
market research to determine what a consumer will pay and the risks of price wars.
- Above that of the competitors – favoured by businesses who wish customers to perceive the product as
superior, which appeals to the status conscious buyer.

Pricing strategies Bundle pricing is where the

customers gain a package of goods
and services in addition to the
tangible good they purchased.
1. Price skimming – occurs when a business charges the highest possible price for the product during the
introduction stage of its life cycle.

The objective with skimming is to “skim” off customers who are willing to pay more to have the product sooner;
prices are lower when demand form the “early adopters” falls.

The success of a price skimming strategy is largely dependent on the inelasticity of demand for the product
wither by the market as a whole, or by certain market segments.

 High prices can be enjoyed in the short term where demand is relatively inelastic.
 In the short term the supplier benefits from ‘monopoly profits’, but as profitability increases, competing
suppliers are likely to be attracted to the market and the price will fall as competition increases.

The main objective of employing a price skimming strategy is to benefit from high short-term profits (due to
newness of the product) and from effective market segmentation.

EXAMPLE: Apple has been able to use price skimming effectively for its iPods and iPads due to the innovative nature
and lack of competition against its product in the early stages.

2. Penetration – involves the setting of lower, rather than high prices in order to achieve a large, if not
dominant market share.

This strategy is often used in businesses wishing to enter a new market or build on a relatively small market share.

This will only be possible where demand for the product is believed to be highly elastic (i.e. demand is price sensitive
and either the new buyer will be attracted, or existing buyers will buy more of the product as a result of a low price).

A successful penetration pricing strategy may lead to:

 Larger sales volumes/ market shares and therefore lower costs per unit (economies of scale)

The effects of economies of scale and experience lead to lower production costs, which justify the use of
penetration pricing strategies to gain market share.

 Promotion of complimentary and captive products

The main product may be priced with a low mark-up to attract sales. Customers are then sold accessories, which
are sold at higher prices.

3. Loss Leader – a product sold at or below cost price to attract consumers into a shop or online store (used
when business is overstocked)

The purpose of making a product a loss leader is to encourage customers to make further purchases of profitable
goods while they are in the shop.

Although the business deliberately sells a product at a loss to attract customers, it hopes that extra customers will
buy other products as well.

Pricing is a competitive weapon and a very flexible part of the marketing mix. If a business undercuts competitors on
price, new customers may be attracted and existing customers may become more loyal. Therefore using a loss
leader can help drive customer loyalty.

EXAMPLE: Supermarkets frequently use the loss leader as evidenced by the promotion of weekly specials. Often
these heavily discounted items are located next to higher priced, more appealing products.

4. Price Points – this is the selling of products at predetermined prices, usually used by retailers.
This is where the business chooses a limited number of key prices or price points for selected product lines.

Angus and Coote stores is a good example of where you can find watches starting as low as $50, then moving to
different types of pricing structures such as $100, $300, $500, $1000 and $5000.

 Allows them to attract almost anyone who is in the market of buying a watch.

Price and quality interaction

Normally, products of superior quality are sold at higher prices usually due to the high manufacturing cost involved
in producing them.

 Perceived price quality relationship, helps determine the image customs have of the product or brand.

Low prices = perception of cheap or bad quality

High price = develops an aura of high quality and status

Premium pricing is a pricing strategy where a high price is charged to give the product an aura of quality and
status. It is based on the tendency for customers to assume that expensive products are of superior quality and

 If a business that has used premium pricing decides to lower their prices dramatically, it would damage their
reputation because it is inconsistent with the perceived images of such products.

Price quality relationships do not apply to all products. Cars, homes and furniture display a stronger price quality
relationship than frequently purchased such as groceries.

8.6 Promotion

Promotion describes the methods used by a business to inform, persuade and remind a target market about its

Promotion mix is the various promotion methods a business uses in its promotional campaign.

In Australia, businesses spend
Advertising is a paid, non-personal message communicated through a approximately $12 billion a year
mass medium. on various forms of advertising
The purpose of advertising is to:


The two basic aspects of advertising are:

1. What you want your communication to say
2. How you get your message across

A successful advertising campaign will increase sales and profits

 Advertising provides businesses with the flexibility to reach an extremely large audience or to focus on small,
distinct target market segments.

Advertising media
Advertising media refers to the
Main advertising media: many forms of communication
- Mass marketing (television, radio, newspapers) used to reach an audience.
- Direct marketing catalogues
- Telemarketing (telephone)
- E-marketing (internet)
- Social media advertising (Facebook)
- Billboards (large signs)

Personal Selling

Personal selling involves the activities of a sales representative directed to a customer in an attempt to make a sale.

- Focuses on oral communication between potential buyers of a product with the intention of making a sale.

 Message modifies to suit the individual customer’s circumstances

 Individualised assistance can create long term relationships
 Sales consultant can provide after-sales customer service in relation to product features, installation,
warranties and servicing costs.

 Can be quite expensive.

Relationship marketing

This is the development of long-term cost effective and strong relationships with individual customers.

AIM: to create customer loyalty by meeting the needs of customers on an individual basis thereby creating reasons
to keep customers coming back.

The ’80-20’ principle states that 80% of sales come from 20% of a business’s customer base. Therefore a strong
relationship with this loyal group of customers should be developed and maintained.

EXAMPLE: Fly Buys loyalty reward program operated by Coles in 1990s and Woolworths in 2007, which offer
‘rewards’ to those ‘loyal’ customers.

Can provide a business with a competitive advantage as it offers:

 Personalized service
 Personalized communication
 Customer database
Sales promotion

This is the use of activities or materials as direct inducements to customers.

Aims to:
1. Entice new customers
2. Encourage trial purchase of a new product
3. Increase sales to existing customers and repeat purchases

This is done through sales promotion techniques:

- Coupons A premium is a gift that a
- Premiums business offers to the
- Refunds customer in return for
- Samples using the product
- Point of purchase displays

Publicity and public relations

Publicity is any free news story about a business’s product

Publicity differs from advertising in that it is free and its timing is not controlled by the business.

Main aims include:

- Enhancing image of the product
- Raising awareness of the product
- Highlight the favourable outcomes of the business
- Reduce any negative image that may have been created

Public relations are those activities aimed at creating and maintaining favourable relations between a business and
its customers.

 Exposes a business or idea to an audience by using often-unpaid third parties as outlets.

 More effective and sometimes cheaper than advertising
 Promotes a positive image
 Effective communication of messages

Communication process

Marketing managers must be able to communicate clearly, efficiently and succinctly to their target markets. If the
communication process becomes distorted or inefficient, the message becomes distorted.
A channel is any method used for carrying a message.
Any interference or distraction that affects any stage in the promotional communication process is noise.

This may lead to:

- Loss of sales
- Wasted promotion
- Unnecessary cost

Often customers may be more willing to purchase a product if the message is communicated via a respected and
trusted channel, such as opinion leader or by word of mouth.
Opinion leader – a person who influences others as their opinions are highly respected and often sought out for

EXAMPLE: Actors, athletes etc.

Word of mouth – occurs when people influence each other during conversations.
Receiver usually places more trust in someone they know as opposed to a business advertising its products.

EXAMPLES: Facebook is now being used by businesses as social media platforms to engage in a form of word of
mouth communication.

8.7 Place/Distribution

Place or distribution are activities that make the products available to customers when and where they want to
purchase them.

This is necessary because:

- Once a business manufactures a product, it must see that the product gets to its customers
- Most products are not used by the business that makes them.

Most businesses use third parties or intermediaries to bring their products to market. They try to forge a
“distribution channel” – the routes taken to get the product from the factory to the consumer.

Distribution channels

Traditional distribution channels include:

1. Producer to customer - used in services (car repairs)

2. Producer to retailer to customer – used for bulky or perishable items (furniture or fruit)
3. Producer to wholesaler to retailer to customer – used for the distribution of consumer goods (resells smaller
quantities to retailers)
4. Producer to agent to wholesaler to retailer to customer – used for inexpensive, frequently used products.

Innovative distribution methods Different channels of distribution are

used to get the right product in the
1. Telemarketing right quantity to the right location at
2. Internet marketing the right time.

Channel choice

How a business chooses the channel of distribution best suited to its product depends largely on the business’s
market coverage – the number of outlets a firm chooses for its product.

1. Intensive distribution – business saturates the market with its products (convenience goods such as milk,
lollies and newspapers)
2. Selective distribution – using only a moderate proportion of all possible outlets. A customer is prepared to
travel and seek out a specific retail outlet that stocks a certain brand (clothing, furniture and electrical
3. Exclusive distribution – use of only one retail outlet for a product in a large geographic area – exclusive and
expensive products (Bentley cars)

Physical distribution issues

Physical distribution is all those activities concerned with the efficient movement of the products from the producer
to the customer.

1. Transport
The method of transportation a business uses, largely depends on the type of product and level of service the
business wishes to provide – the most common methods of transportation are rail, sea and air.

2. Warehousing

This is a set of activities, which involves receiving, storing and dispatching goods. The warehouse is the central
organising point for the efficient delivery of products.

3. Inventory

Inventory control is a system that maintains quantities and varieties of products appropriate for the target market.

Too much stock = high storage costs

Too little stock = lost sales or ‘stock out costs’

If a business is repeatedly ‘out of stock’ they will not only lose sales, but customer loyalty and market share.

8.8 People, processes and physical evidence

1. People

The people element refers to the quality of interaction between the customer and those within the business
who will deliver the service

People are the most important element in any service or experience; this is because customers base their
perceptions and make judgments about a business based on how the employees treat them.

Consequently, all businesses should develop a culture of customer focus and put it into practice.

Recent research on customer buying behaviour suggests that the ‘moment of truth’ – the opportunity for the
customer to make a judgment – is about 15 seconds.
Positive judgment leads to greater customer loyalty, a strengthened customer base and repeat sales.

2. Processes

Processes refer to the flow of activities that a business will follow in its delivery of a service.

Any business with inefficient process will lose customers and damage their reputation
EXAMPLE: McDonalds has an efficient delivery system.

3. Physical evidence

Physical evidence refers to the environment in which the service will be delivered. This also includes the
materials needs to carry out the service (signage, brochures, letter heads, logo and website)

A business should provide high quality physical evidence to create an image of value and excellence.

EXAMPLE: A luxury hotel uses material cues – physical evidence – so that the customer will form a good
impression of the business.

8.9 E-marketing

E marketing is the practice of using the Internet to perform marketing activities.

 Enables businesses to access global markets through the setting up of websites that can promote products
and dispatch them globally within 24 hours of ordering.
 Effective way of attracting new customers
 Faster and more efficient way of running a business.

 Risky for Australian businesses as consumers will find online shopping more convenient and therefore will
purchase from overseas retailers and bypass local businesses.

E-marketing technologies

1. Web pages / website – a display of information accessible on the web through a web browser

 Provides detailed information about the business (location – maps and photographs; available products;
online ordering facilities)
 When searching for a website of a particular business, the user will normally pick the first website that
comes up in the search engine

2. Podcasts – involves the distribution of digital audio or video files over the Internet.

 Very effective way of reaching customers if the podcast is aimed at the same audience as the target
customers of the business. (Sporting goods store chooses to advertise through a podcaster aiming at

3. SMS (short message service) – the means by which text messages can be sent between mobile phones.

 Advantage over email in that it can be deliver automatically to one or more recipients without the need for
them to log on.
 Alerts regular customers of any specials or deals on offer and notify suppliers of the arrival of a goods

4. Blogs – an online journal that can be added to by readers.

 Possible to add comments, ask questions and provide feedback – gain public feedback from new ideas
 Informal in nature therefore it can build trust and present a human face to the public.
 Allows a business to establish a reputation
5. Web2.0 – refers to the transformation of the World Wide Web into a more creative and interactive platform
for information sharing, rather than just a means of retrieving information.

Developments of social networking sites (Facebook and twitter) have made it easier for individuals and
businesses to create and share many different types of content on the web.

Networking sites can provide a powerful public relations tool.

 Low cost

E-marketing approaches

1. One-to-one approach

With this approach a person who is using the Internet becomes the subject of attention for e-marketers.
(Person typing into Google “luxury powerboats”. On the right hand side, advertisement based on the key words
the user searched will appear with links that the user can access)

2. Appeal to specific interests

Aimed at a market segment based on age gender lifestyle or geographic location.

(If people respond to online surveys, indicating that they are interested in travel, the person is likely to get
emails offering travel deals – hence specific interests)

3. Niche marketing

Aims to create websites that cater for a specialized market.

(Website that deals with education courses on marketing techniques)

4. Geo targeting

Finding out the geographic location of people accessing a particular website.

Advantages Disadvantages

 Inexpensive – easy to reach a large target  Customer cannot physically examine the
audience for a low outlay of funds product

 Easy for the consumer to research the product  Problem of not having a secure payments
system or a system that protects the consumer
 Easy for marketers to assess the success of the from identity theft.
technique by measuring hits on the sit compared
to online purchases.

Social media advertising

SMA is a form of online advertising using social media platforms such as Facebook and Twitter to deliver
targeted commercial messages to potential customers.

Main advantages:
 Inexpensive in comparison to other tradition forms of advertising
 Easy to use and monitor
 Effective way of gaining exposure
 Constantly builds relationships with their customers.

Main disadvantages:

 Marketer does not have control over what online consumers write about the business’s product –
 Difficult for a marketer to accurately measure the reach (number of people exposed to the messages)
and frequency (the average number of times someone is exposed) of SMA
 Raises ethical issues of privacy

In 2010, Twitter unveiled a new platform, making their website more advertisement friendly.
The new platform started carrying sponsored tweets such as Coca Cola, creating a media rich experience.

Coca Cola sent out a tweet promoting a product and within the first 24 hours, the tweet was seen 86 million
times, producing an average frequency rate of 6% compared with a 0.02% standard online advertisement.

Facebook is the social media platform generating the most growth, spending $1.3 billion world wide to meet
its over 500 million users.

8.10 Global Marketing

A business’s marketing plan must be modified to suit overseas markets.

All businesses operating on a global scale need to rely on market research to understand the complexities of the
global marketing environment before they can design the marketing mix.

Global branding – the worldwide use of a name term, symbol or logo to identify seller’s products.

Businesses do this because:

- It’s cost effective, one advertisement globally
- Uniform world wide image
- Successful brand name can be linked to new products introduced

EXAMPLES: Nike, McDonalds and Sony

Standardised approach – a global market strategy that assumes the way the product is used and the needs it
satisfies are the same all over the world (Electrical equipment; mobile phones; soft drinks)

 Cuts costs
 Results in larger production runs
 Increases economies of scale
 Improves R&D

EXAMPLES: VW Golf; Perfume; Sony TV’s

Customised approach – a global marketing strategy that assumes the way the product is used and needs it satisfies
differ between countries.

EXAMPLES: McDonald’s has a standardised approach for its logo, however other elements (Big Mac) are customised
to suit the local market.
- Serves beer in Italy and France Over the last decade, as the scale of
- Sake in Japan
globalisation has intensifies, it has
- Noodles in Philippines become apparent that a
- Halal meat in Middle East
standardised approach is being
- Spring rolls in China used more frequently that
- No meat in India.
customised approaches.

Global pricing

One of the biggest challenges for TNC’s is global pricing – how to coordinate pricing policy across different countries
– very important because it generates revenue and therefore impacts profits.

Three possible pricing strategies: A TNC is any business that has

production facilities in two or
1. Customised pricing – When consumers in different countries are charged more countries and that
different prices for the same product – this could be done through a cost operates on a worldwide
plus method – with additional costs added for: transport, tariffs, scale.
insurance and packaging.

2. Market customised pricing – allowing even more flexibility than the customised pricing strategy because it
sets price according to local market conditions (demand and competition in the overseas market and may
even be influenced by currency fluctuations)

3. Standard world wide price – the practice of charging customers the same price for a product anywhere in
the world – but there are risks of undercutting by domestic businesses and exchange rate fluctuations that
may impact export prices.

Competitive positioning

Relates to how a business will differentiate its products in a global environment

It centres on how a business will carve a place in the competitive marketing environment as in a domestic market.

The global business must differentiate itself from competitors – not just by price but also product leadership,
positive customer relationships and operational excellence.

To develop this, businesses must gain a deep understanding of their dynamic environments and form strategies
according to evolving conditions.

EXAMPLE: Volkswagen has done this over the past few years, and gained a world market share of 12%.


Operations refer to the
1.2 Introduction
business processes that
involve transformation or,
Operations is the business function, which take inputs or raw materials and
more generally
transforms them into finished products.
Operations is informed by:
- The business’s drive to maximise profits Transformation is the conversion
- The needs of consumers of inputs (resources) into outputs
(goods and services)
Apart from transformation, operations involves the creation of value – value
Value adding is the creation of
Minimising waste, also called lean production, is an operations approach value as inputs are transformed
designed to eliminate waste. into outputs.
Sources of waste include the under use of labour, over production, errors
Lean production aims to
and defects requiring remediation, under utilisation of machinery, slow lead
eliminate waste at every stage of
times and carrying of excess inventory.
production. It involves analysing
each stage of the production
The growth of the Fair Trade movement is a direct result of consumers
process, detecting where
advocating for operation processes in production and supply to integrate
inefficiencies are and correcting
notions of a fair price, decent working conditions and local sustainability.

Operations - It is
the core key
business function

Assets - a large
proportion of the
assets of a business
are in operations.
Importance of

Other key business
Visibility - part of a
functions are
business most
interdependent on
commonly seen by
operations. They
exist because of

Strategic means affecting all

1.2 Strategic role of operations management key business areas. A role is
strategic not so much by time
length, but rather the level in
which it integrates and affects
key business areas.
Strategic role of operations involves operations managers contributing to the strategic direction/ plan of the

Operations management is concerned with working with and through other people to ensure that production
deadlines are met in an effective and efficient manner.

An effective business achieves their desired goals and objectives in a set

Management is a process of
time period.
working with and through
other people to achieve the
EXAMPLE: Apple had a goal for their iPhone to attain 1% of the global phone
goals of the business in a
market by the end of 2008 (global phone market is 1 billion per year). Even
rapidly changing
though this sounds like a “gentle goal”, this meant Apple aimed to sell 10
million iPhones in 2008. They achieved this.

Costs in the operations function

Types of costs incurred in the operations function

Input Labour Processing Inventory Quality


 Capital  Full – time and  Machinery  Back order  Prevention of

 Land part time staff maintenance  Logistics/ loss through
 Resources  Casual staff  Electricity distribution quality planning
 Interest on  Sub -contractors  Product design  Storage and training
investment  Redundancy  Template and  Insurance  Sampling and
 Leases on  Overtime tooling  Inventory inspection
machinery  Prototyping management  Error and
remediation -
warranty claims,
returns and

Cost leadership Myer demonstrates cost leadership in its

supply chain management through the
Cost leadership involves aiming to have the lowest costs or to be the use of international distribution centres,
most price-competitive in the market. A key aspect to cost which invested in IT, transformed
leadership is that although trading with the lowest cost, the overall operational processes and employed new
business should still be profitable. staff.

Economies of scale occur when a business becomes large enough

to benefit from its size. This will enable the business to negotiate Economies of scale refer to the cost
better rates with its suppliers and to take advantage of advantages that can be created because of an
improvements in technology. increase in scale of business operations.

EXAMPLE: IKEA achieves significant economies of scale as a result LOWER INPUT COSTS + INCREASED OUTPUT
of flat packs. This means more goods can be transported at the
same time and more goods can be easily stored in the warehouse.
IKEA then passes these savings along to the customer in the form of lower prices, thus maintaining a competitive

Strategies for cost leadership:

1. Develop an efficient scale of operations (economies of scale)

2. Use up to date technology
3. Control production costs (labour raw; materials; overheads)
4. Control other costs

1.3 Good/service differentiation

Good/service differentiation involves providing a product or service, which is different or distinguishable from those
of the competitors.

The risks associated include that competitors may imitate market leader’s innovations and consumer preferencnes
can still change.

Products may be differentiated by:

 Varying the product features – McDonalds introduced the Angus Burger in 2009. The burger is ‘different’
because it uses 100% Angus beef, has a salad mix and a gourmet sourdough bun.

 Varying product quality – Done by making a low-quality model that is very affordable, more expensive, by
increasing the quality of the product. The Angus burger is an example of this - ‘premium’ product and is
subsequently more expensive than a Big Mac. By offering this wide range, McDonalds increases their market

 Varying augmented features – Augmented features are additional features or benefits associated with a
product. For example: GPS and Blue Tooth are standard features with the Renault Koleos. A reverse camera
may be fitted for an additional cost. In the case of a Toyota Rav4, all these features can be fitted for an
added cost.

The strategic role of operations management is to determine which of these strategies may be undertaken will
still maintaining cost leadership

Services can be differentiated by:

 Varying the time spent on a service – Lattouf Hair Spa chain in Sydney offer a free head massage with
aromatherapy oils as standard, prior to any hair dressing service. They are the first hairdressing salons to
offer this.

 Varying the level of expertise brought to a service – If a person has a higher level of expertise then they can
provide more specialized service. Experienced trades people generally charge more for their services.

 Varying the qualifications and experience of the service provider – highly qualified and experiences service
providers can significantly affect the quality of the service provided.

 Varying the quality of materials and technologies used in service delivery – The use of computer-based
technologies such as accounting software, CAD and CAM programs, medical technologies, ICTs can
significantly affect the quality of the service provided. Notable in services sector.

Operations management must decide on the service mix used, to ensure that the requirements of the
customer are met, while still maintaining a cost leader focus.

Cross branding

Cross-branding or strategic alliances can be used to differentiate goods and services.

This approach add value to products by offering consumers added benefits (Woolworths-Caltex alliance)
Goods and services in different industries

 Goods in different industries

Standardised goods are uniform in size and quality and will always be the Standardised goods are those that
same. are mass-produced, usually on an
assembly line. Standardised goods
EXAMPLE: A Big Mac meal in Sydney will be the same as in Paris. This helps are uniform in quality and meet a
to achieve economies of scale as mass production reduces manufacturing predetermined level of quality.
costs. IKEA products are standardised in all markets they serve, with the Produced with a production focus.
exception of the US. IKEA found that standardised products didn’t work, as
serving sizes and bed sizes are different. Customised goods are those that
are varied according to the needs of
Customised goods are designed according to the needs of the customers. customers. These goods are
These goods will be more expensive. produced with a market focus
rather than a production focus.
EXAMPLE: Tailored suits and designer cakes. Technology has also allowed
customers to customise some products, for example iTunes allows people to
make playlists, which are unique to them.

Manufactured goods are tangible. This means we can see and touch them. They are produced in a capital-intensive
manner using machinery and technology.

Services on the other hand provide intangible products and are mostly labour intensive.

Intermediate goods are goods used in conjunction with others to form a final product.

EXAMPLE: A manufacturer converts steel into tiny screws.

 Services in different industries

Services can also be standardised or customised.

EXAMPLE: The fast-food industry aims to standardise their services. This differs from industries that are
characterised by professionally educated and trained people (Accounting services or legal services who are generally

Self service

Self service means encouraging the customers to take the initiative to help themselves.
This is evident in the financial services sector and travel industry. In this way, businesses concentrate on
customization when people cannot help themselves.

1.4 Interdependence with other key business functions Interdependence refers to the
mutual dependence that the key
In most businesses, closely related tasks are grouped together – for functions have on one another. The
example, sales and marketing, finance and administration and operations key business functions work best
and research and development when they overlap and employees
work towards common goals. Each
Operations & HR area depends on the support of the
- Operations provides the majority of employment. others if it is to perform at capacity.
- HR contributed to operations through the acquisition,
development, maintenance and separation of employees.
Operations & Marketing
- Marketing connects the operations function to the consumer
- Marketing identifies consumer demand and therefore determines the supply that must be produced.

Operations & Finance

- Business will be based on budgets, which will be submitted, by all of the functions (inclusive of operations).
- Finance is concerned with making decisions on how to raise finance so that production and distribution (key
elements of operations) can take place.
- Financial manager carefully monitor inputs and outputs thorough working capital management to ensure
the business remains liquid.

CASE STUDY: Bunnings Warehouse or REX (See Excel Book)


2.1 Main influences on operations management
Globalisation refers to the
1. Globalisation movement of goods, people and
capital around the globe. This has
From a business perspective, globalisation: been facilitated by the reduction
and removal of trade barriers
 Provides a source of market opportunities. (Trade liberalisation).
 May act as a threat to business as businesses effectively apply cost
leadership principles to undercut the market and dominate.

Globalisation and operations management

Global operations can present cost saving opportunities for management if operations managers choose the most
appropriate means of sourcing and if they consider the advantages offered by locating different parts of their
operations in different countries.
Operations that are well set up will allow the business to respond to the changing global business environment.

 Manufacturing is often located overseas to take advantage of lower employment costs.

- Businesses in recent decades have relocated aspects of operations to India to take advantage of a computer
literate workforce and lower rates of pay.
- Optus operates its customer service over there.

 Relocating production overseas can also make the supply of raw materials easier and cheaper to source.
- IPhones are designed in California, but made in China.

 Some countries have reputations for particular skills and expertise – driver for relocation of production
- Italy has a reputation for contemporary design whilst Japan has a reputation for technological design.

The emergence of global consumers cannot be overlooked. In countries like India and China, the middle class is
expanding rapidly. With this affluence comes the demand for consumer goods.
India is tipped to be the 5th biggest consumer market globally by 2025.

Most businesses cope with this by offering standardised products. However, there will be times when a product will
have to be differentiated, as in IKEA where there beds are not the same size.

It is essential that markets be thoroughly researched to determine whether products are culturally sensitive.
EXAMPLE: Gloria Jeans failed in China due to distinct differences in tastes and preferences.

 Language barriers can be a difficulty to overcome as well.

Supply chain management and the global web Supply chain refers to the
range of suppliers a business
Supply chain management is crucial because: has and the nature of its
- A global business needs to have reliable suppliers who are able to relationship with those
respond to changes in demand. suppliers.
- Without suppliers, the operations process will not have any inputs to
produce outputs.
Global web refers to the network of
Cost leadership principles will be integral to the selection of suppliers. suppliers a business has chosen on
The global web strategy aims to achieve this by locating reliable suppliers the basis of lowest overall costs,
who are close to the manufacturing facilities. lowest risk and maximum certainty
in quality and timing of suppliers.
In supply chain management the global web strategy is one in which the
business aims to minimise costs across the range of its suppliers.
Imitation, innovation and the supply chain
There are two alternative approaches to the supply chain, depending Reverse engineering is a process that
on whether a business is an imitator or an innovator. involves a business taking a product of a
competitor that has already been
A business that imitates will tend to create products similar to those released into the market. The product is
that already exist, but will aim to do so at a lower cost. As aspect of then taken apart to see how it is made.
imitation can be seen in businesses who engage in reverse The imitating business then tries to
engineering. make their own version of the product,
but does so using different materials
Innovation occurs when the business creates novel (new) products and at a lower cost.
and in doing so, leads the market.

 Improve an existing product
 May lead to a new and easier way of life through the creation of products that solve a problem in a way not
previously done.
 May make a technological breakthrough that allows for leap in the quality of life and opportunities for

How does innovation affect operations?

By differentiating products and therefore making them novel in the market. This means the supply chain will need to
be shaped around the need for innovation.

EXAMPLE: Companies like Apple and McDonalds take an innovative approach to operations. This approach allows a
business to be a market leader. Other organisations are imitators. Burger King for example, waits for McDonalds to
innovate and then produce a similar product, at a lower cost. Burger King’s Angry Angus vs. McDonald’s Angus
To prevent reverse engineering, companies like Toyota, patent products to preserve their place in the market.

2. Technology

Advancements in technology is a driver of globalisation, hence they have encourages and facilitated global

Administration and operations rely on technology.

Administration Operations

1. Use of planning technologies – CPA, MRP 1. Use of machinery – assembly line production
(Material Requirements Planning) and Gantt
charts 2. Use of robotics – self check out

2. Office technologies - PCs, printers, faxes, mobile 3. CAD (Computer Aided Design) & CAM (Computer
phones Aided Manufacture) & CIM (Computer
Integrated Manufacturing) technologies
3. Use of soft ware – word processing

A business can gain a competitive advantage through the use of technology.

- Woolworths was the first supermarket to introduce self-checkout robots.

 Less time queuing
 Aimed at shoppers with only a few items.
 Although expensive, it has resulted in saving for HR

When deciding whether or not to invest in technology, management must consider:

- Technology used by competitors
- The cost of technology and how that cost will be financed
- The time taken to introduce the technology
- Staffing implications – training costs

Computer Aided Design (CAD) – this technology allows architects, designers and engineers to draw and manipulate
3D designs using a computer.

 Allows designs to be viewed from a number of different angles and emailed to clients all over the world.

Computer Aided Manufacture (CAM) – this technology links the design to the manufacturing process through

 Fewer workers are needed in the manufacturing process

 Fewer errors are made

3. Quality expectations Quality refers to how well designed,

made and functional goods are, and
Quality informs all operations processes. the degree of competence with
which services are organised and
The expectations people have of a business determine the way that delivered.
products are designed, created and delivered to customers.

Consumers have an expectation that the goods and services that they purchase are of a good quality and offer
value for money. This means that operations must be completed to a basic minimum standard.

Quality expectations of goods Quality expectations of services

1. Quality of design 1. Professionalism of the service

- Quality of raw materials - Cleanliness and layout of the facility
- Innovative design - Courtesy of staff and attention to detail
- How well it meets customer needs
2. Reliability of the service provider
2. Fitness for purpose - Efficiency of the service
- Does it do what it is designed to do - Overall levels of competence
- Is it easy to use
3. Level of customization
3. Durability - How well the particular needs of the customer
- Is it reliable and long lasting are met through the expertise and experience of
- Is it easy to maintain and repair the service provider.
- Is there good after sales service

4. Cost based competition

Cost based competition is derived
Cost based competition occurs when operations management employ a from determining the breakeven
cost leadership approach. point (the level at which the firm
matches total costs and total
Businesses may seek to do this by: revenue) and then applying
- Reducing the cost of their inputs – sourcing cheaper suppliers. strategies to create cost advantages
over competitors.
 Allows lower prices will still maintaining profit margins.

Some businesses may use a differentiation strategy.

Costs can be fixed or variable.

Fixed – do not change and must be covered, regardless if not sales are made (Rent, insurance, salaries)

Variable – change with level of business activity and directly related to output (Electricity, labour, production level).
The higher the level of output, the greater these costs will be.

economies of

Businesses Produce
Buy bulk that standardised
products for
reduce larger


5. Government policies

All businesses operate in a political-legal environment and therefore are impacted by government policies.

- Political decisions affect the business riles and regulations, directly affecting business functions.
- Government policies change due to a change in government or shift in social expectations.
- Therefore government policies are a notable source of change, influencing business operations.
- Introduction of the carbon tax – a price imposed for the use of carbon.

Operations and government policies

Government policies such as the OH&S and WHS (2010) standards, environmental regulations, employment
relations and trade and industry policies will all have an impact.
Consequently, operations manager need to be aware of and fully understand these policies.

GST introduced in 2007

The Federal Government provides financial assistance in the form of grants and tax breaks to businesses that export.
The reduction of trade barriers in the form of tariffs and the negotiation of trade agreements has facilitated the
global expansion of many Australian businesses around the globe. BY 2013, the car industry is expected to have zero
tariffs. This has increased pressure on Ford and Holden.
In 2009 & 2010 Pacific Brands relocated production controversially overseas in response to the removal of the
protections enjoyed by the clothing-manufacturing sector in Australia.

6. Legal regulations
Governments regulate businesses to promote safety and fair business conduct. The operations manager has the
legal responsibility to ensure that these laws are complied with.

The expenses associated with meeting the requirements of legal regulations are termed compliance costs.

Failure to comply with laws can result in:

- Large fines
- Closure of the business while the problem is still being addressed
- Some instances, prison sentences

Area of regulation Legislation Legal obligations & implications

Workplace safety Occupational Health & Safety Act An OHS assessment must be
1991 (Cwlth) conducted to ensure that the work
environment is physically and
Work Health and Safety Act 2011 mentally safe:
- Safe worksite
- Safe machinery
- Safe systems of work
- Information, training and

Hazardous Materials Occupational Health and Safety Act Training, warning signs and safety
1991 (Cwlth) precautions to prevent injury.

Dangerous Goods (Road & Rail Use of hazardous materials is to be

Transport) Act 2008 (NSW) avoided.

Safety measures to transport

hazardous and dangerous goods.

Environmental Protection Federal Environmental and Hazardous waste, fuels and

Biodiversity Conservation Act 1991 chemicals must not enter the

Climate Change National Strategy on Energy Stronger energy efficiency

Efficiency Opportunities Program requirements (e.g. energy efficient
lighting in a building industry)

Australian standards for quality, Competition and Consumer Act Quality standards – products must
environmental impacts and safety 2010 (Cwlth) perform the task intended
and information. - Formerly Trade Practices
Act 1974 Goods need to comply with
environmental standards – labels to
Fair Trading Act 1987 (NSW) inform consumer

Safety standards
Information standards
7. Environmental sustainability Environmental sustainability
means that business operations
Environmental sustainability refers to business activities that meet should be shaped around practices
the needs of current society without compromising the ability of that consume resources today,
future generations to meet their own needs. without compromising access to
those resources for future
With evidence mounting in regard to the devastating human impact of generations.
unbridled economic growth and development, businesses will
increasingly have to consider their role in sustaining high living
standards for future generations.

How are governments addressing this?

Governments around the world are attempting to provide tougher regulations ad mechanisms to reduce the
impact of development.
The Australian Government is introducing a Carbon Trading Scheme (July 2012), to make Australia’s largest
polluters pay for every tonne of carbon they emit. It is hoped that they will reduce carbon pollution by at least
160 million tonnes a year by 2020.

8. Corporate social responsibility (2.2)

Corporate social responsibility
Corporate social responsibility focuses on doing right by an refers to open and accountable
organisation’s stakeholders. business actions based on respect
for people, community/society and
It starts with the company’s visions, ethics and values, and extends to the broader environment. It
the way products are manufactured, marketed, priced and distributed. involves businesses doing more
It encompasses every facet of the business process and value chain than just complying with the laws
including: and regulations.

- Employment policies and practices

- Supply chain management
- Health, safety and environmental practices
- Transparency and corporate governance


Ethics – the standards of behaviour that are expected by management, and commonly known throughout the
organisation whether expressly communicated or not

Corporate governance – the system by which companies are directed and managed. It influences how the
objectives of the company are set and achieved, how risk is monitored and assessed and how performance is
optimised. Good Corporate governance encourages organisations to create value and provide accountability and
control systems.

Social responsibility – Occurs when an organisation acts in the best interests of society as well as itself. The
challenge is to balance corporate citizenship with a fair level of profits.

Social responsibility occurs when organisations do things for the greater good of society. Acting in such a way is an
example of enlightened self-interest where the business also received benefits in the form of enhanced reputation
and consumer acceptance.

EXAMPLE: Production of products that are environmentally friendly (green bags at supermarkets)
Bendigo Bank – Operation of Community Banking where local communities own and operate banking facilities.
Difference between legal compliance and ethical responsibility
Legal compliance refers to businesses abiding by the word of the law, whereas ethical responsibility encompasses a
much broader integration of social, community and environmental concerns.

Legal compliance involves making sure that the laws and regulations relating to the operation of a business are
strictly observed. Most of our laws are based on ethical principals but this does not necessarily mean that strict
compliance with the laws relating to business operations is ethically responsible.

Ethical responsibility in operations management is where managers understand value systems and morality (wrong
or right) with the production of goods and services. Ethical managers will implement programs where the operations
of a business not only comply with the law but will also build into those programs what is morally and socially right.
The most important area of ethical responsibility relates to how managers deal with all the stakeholders of the

How to ensure an organisation acts ethically?

1. Develop a code of ethics

2. Change the corporate culture
3. Empower all staff to implement and abide by new policies
4. Encourage “whistle blowing” where staff report breaches of the code
5. Develop an environmental policy to conform to acceptable community standards.

3.2 Inputs

Inputs are the resources used in the transformation process.

Four common inputs include:

1. Labour (human effort – physical and mental)
2. Energy (electricity or fuels)
3. Raw Materials (basic components of manufactured goods – wood) Capital labour substitution
4. Machinery and technology (necessary to enable transformation means that machinery and
processes) – there is concern over capital labour substitution – the technology displace people by
machinery and technology displace people by doing the work they do. doing the work they do.
This makes labour redundant. However, there is a period of training that
takes place, as people acquire new skills relevant to new technologies.

Inputs are classified as either transformed or transforming resources.

Transformed resources Transforming resources

 Materials = raw materials and intermediate  Human resources (labour)

goods  Facilities (plant, factory or office)
 Information (internal and external)
 Customers (needs and feedback)

Transformed Resources

Transformed inputs are those resources that are changed or converted in the operations process.
Transformed resources are also considered the resources that give the operations process its purpose or goal.
They include:

1. Materials

- Materials are the basic elements used in the production process and consist of two types: raw materials and
intermediate goods
- Raw materials are the essential substances in their unprocessed state.
- Intermediate goods are goods manufactured and used in further manufacturing or processing.

2. Information

Information is the knowledge gained from

research, investigation and instruction, which KPI’s are specific
result in an increase in understanding. criteria used to
measure the efficiency
EXTERNAL: comes form market reports, media and effectiveness of
reports, government statistics (ABS) the business’s
INTERNAL: comes form internal sources such
as financial reports and KPI’s such as lead
times and inventory turnover rates.

3. Customers

- Customers become transformed resources when their choices shape inputs.

- Customer orientation is essential to a business
- Customer orientation takes the preferences and interest of consumers Customer relationship
as an input and their desires and preferences act as a transformed management refers to the
resource. systems that businesses use
- To better understand the desires and preferences of customers, to maintain customer contact.
businesses can implement a customer relationship management

 Improves customer service
 Increases competitiveness
 Identifies changes in consumer tastes
 Improves services
 Makes the operations process more responsive to customer desires.

Transforming Resources

Transforming resources are those inputs that carry out the transformation process.
- They enable change and value adding to occur.

They include:
1. Human resources

The effectiveness with which HR carry out their work duties and responsibilities can determine the success with
which transformation and value adding occurs. This is because it is employees who coordinate and combine
other resources such as machinery and finance to produce goods and services.

Skills enable inputs to become transformed through the application of particular qualities or abilities to operate
Effort and time

In this sense, they are the most CRUCIAL of all inputs

2. Facilities

Facilities refer to the plant (factory or office) and machinery used in the operations processes.
The plant and machinery can make a very significant difference to a business and its capacity to transform.
The facilities determine the nature of the operations environment.

3.3 Transformation processes

Transformation is the conversion of

inputs into outputs.

Transformation differs between

manufacturing businesses and service

- A manufacturer transforms inputs into

tangible products
- A service organisation transforms inputs
into intangible products.

Transformation process involves VALUE ADDING

Transformation processes are influences by:

1. Volume – how much of a product is made

Refers to not only the amount of the product made, but also the volume flexibility – how quickly the product can be

Volume flexibility is essential to ensure:

- That lead times are met – lead times are the time taken for an order to be filled once the order has been

A business with a high volume is likely to produce a standardised product where HR performs simple repetitive tasks

A business with a low volume is likely to produce customised products where the number of different tasks requires
different skills (Expensive gourmet restaurant – Aria)

It is essential that businesses are able to respond to changes in demand. Failure to deliver orders will result in loss of
business and over production will create wastage.

2. Variety – the mix of products

Refers to the mix of products, which is also referred to as mix flexibility. In other words, the range of goods or
services delivered by the business.

A business with a high variety will produce a number of different goods and services, and tend to cater more for
individual’s needs, meaning there is more flexibility and complexity involved in the operations process. (Dressmaker)

A business with a low variety would produce high volumes of a limited range of products. (Garment factory)

3. Variation in demand – the amount of a product desired by consumers

Refers to the fluctuations in demand over time. This can depend on the time of day or time of year.

When demand is predictable (low variation) as in the case of bread or milk, a low variation approach strategy will be
taken – where operations will use more capital than labour and focus on low costs.

When there is volatility in demand the operations manager will need to anticipate and plan for changes in demand.
A business that would have high variation demand would be a business specialising in home heating, where demand
would be high in winter and lower in summer (seasonal influences)

4. Visibility – the nature and amount of customer contact (feedback)

Operations are influenced by the degree to which customers can see the process.

Service based industries have a high visibility where as manufacturing based firms have a low visibility.

In visible operations, the quality of labour will be important. Employees will have to be well trained, highly skilled
and adaptable.

Many businesses will have a mix of visibility. A 5 star restaurant will be highly visible in the dining areas, but the
kitchen will be less visible.
Influence of the four V’s

Volume and variety will have the most influence on the operations process. A business that is a high volume
producer will be limited in flexibility to produce a large variety or respond quickly to changes in demand.

Sequencing and scheduling

Sequencing refers to the order in which activities in the operations process occur.

Scheduling refers to the length of time activities take within the operations process.

Both of these important aspects assist with structuring and ordering transformation processes.

The two main scheduling tools include:

1. Gantt Chart – a type of bar chart that shows both the scheduled and completed work over a period of time.
It is often used for planning and tracking a project.

- The activities that need to be performed
- The order in which they should be performed
- How long each activity is expected to take

 Allows a manager to compare actual progress with planned progress

2. CPA (Critical Path Analysis) – is a scheduling method that shows what tasks need to be done, how long they
take and what order is necessary to complete those tasks.

- The critical path is the shortest length of time it takes to complete all tasks necessary
- Enables a manager to see what needs to be done
- Allows them to assess and consider the timing for each of the tasks to be complete.

SCHEDULING gives direction and organisation to operations processes, providing overall coordination and a means
of control.

 Shows the likely impact on the whole project if not action were taken

What can a business do if a project is delayed?

 If there is a float elsewhere it might be possible to switch staff from another activity to catch up on the
delayed activity
 Hiring additional people or making labour work overtime – this increases costs.


Technology is a key input into the operations process. Business technology involves the use of machinery and
systems that enable the businesses to undertake the transformation process more efficiently and effectively. Most
technology assists employees in working ore productively.

Pair of scissors = low tech Robots = hi tech

In the manufacturing sector

technology can be used to speed up
(shorten) processes and enable the fuller utilisation of raw materials. This makes the operations processes more cost

In the services sector, office and communications technology have enabled whole markets to open up and allows for
a small to medium business to trade globally.

- The capital cost of technology is relatively high so businesses need to decide whether to purchase
technology or lease it. Leasing is more common because it is cheaper (lease payments are tax deductible),
which allows money saved to be spent elsewhere.

- Additional costs may include set up or cabling, and the loss of workers who may be displace due to the
acquisition of technology (capital labour substitution)

Office technology

- Have created the opportunity for people to do more work in less time, ‘Hot desking’ is another
which means greater range of tasks can be completed in their working method of teleworking. It
time (efficiency). involves one desk shared
- Enabled workers to work at a great distance form the office between several people
- Emails/ video conferencing/ webcam who use the desk at
- In many businesses, the ‘virtual office’ and ‘paperless trading’ is different times.
becoming a reality and, as office structures changes, ‘hot desking’ is not

Manufacturing technology

Key manufacturing technologies include robotics, CAD and CAM.

Robotics are used in engineering and specialized areas of research, as well as on assembly lines where a
programmable machine capable of doing several different tasks is required. Robotics applies to highly specialized
forms of technology, capable of complex tasks.
Robotics can help shape transformation processes so that they are very high quality, of a consistently high standard,
efficient and with minimal waste.

Computer Aided Design (CAD) – this technology allows architects, designers and engineers to draw and manipulate
3D designs using a computer.

 Allows designs to be viewed from a number of different angles and emailed to clients all over the world.

Computer Aided Manufacture (CAM) – this technology links the design to the manufacturing process through

 Fewer workers are needed in the manufacturing process

 Fewer errors are made

Task design – this involves classifying job activities in ways that make it easy for an employee to successfully perform
and complete the task.

Task analysis determines the ingredients and the order of steps required to make the products, whereas task design
determines how the product can be made.

Once task analysis has been completed, task design is performed. Due to a separation between manufacturing and
administrative operations, in task design, it is necessary to group skills and competencies because this helps when
acquiring staff. A prospective employee will be screened against these skills and competencies to ensure a match.

Sometimes, a business already has available staff, however the staff may not Skills audit is a formal process
have the requisite skills and therefore managers may wish to conduct a skills used to determine the present
audit – a formal process used to determine the present level of skilling and level of skilling and any skill
any skill shortfalls that need to be made up wither through recruitment or shortfalls that need to be made
through training. up wither through recruitment or
through training.

Plant (factory/office) layout

Plant layout is the arrangement of equipment, machinery and staff within the facility (factory or office)

An operations manager needs to consider the best layout to ensure:

- Enough space for the projected volume of production

- Effective use of production equipment
- Appropriate technology
- Adequate location of stock and warehousing requirements
- A work environment that is of a sufficient quality
- Conformity with OHS standards and other legal regulations.

The layout options are the:

1. Process layout – the arrangements of machines and equipment are grouped together by the function or
process they perform.

- Sometimes called the ‘functional layout’

- Deals with high variety, low volume production (process production)
- Each product has a different sequence of production and the production is intermittent, moving from one
department to another.
- A feature of this approach is the creation of work cells or work teams.

EXAMPLE: Typical of hospitals

2. Product layout – where the equipment arrangement related to the sequence of tasks performed in
manufacturing a product.

- Workstations are arranged to match the sequence of operations, and work flows from station to station.
- Product production is characterised by the manufacturing of high volume of constant quality goods.
- An assembly line is the most common layout for this type of production because it aims to achieve the best
possible combination of personnel and machine use – assembly line balancing.

EXAMPLE: Production of motor vehicles

3. Fixed position layout – where a product remains in one location due to its weight or bulk

- Characterised by project production - deals with layout arrangements for large-scale, bulky activities such as
the construction of bridges, ships and aircraft or buildings

4. Office layout – organised around discrete workstations – desk areas required by office workers

- Office layout is tailored to meet the needs of the business

- EXAMPLE: A manufacturing business will have an informal office layout whilst a hospital will have a layout
that provides a degree of privacy.
Monitoring, controlling and improvement

1. Monitoring is the process of measuring actual performance against planned performance.

- All operations processes should be monitored for their effectiveness.

- The main transformational processes should be subject to control. This requires effective monitoring and a
strong focus on continuous improvement.

- Monitoring and controlling lead to improvements when there is a focus on quality and standards.

- Monitoring involves the measuring of all aspects of operations, from supply chain management and the use
of inputs through to transformation processes and outputs.

- Monitoring is typically arranged around the needs to measure KPIs (lead times, turnover rates) – the
predetermined variables that are measured so that appropriate controls to operations processes can be

- Monitoring gives operations managers a chance to measure how the business is going and to assess
performance against targeted levels of performance.

2. Control occurs when KPIs are assessed against predetermined targets and corrective action is taken, if required.

- Controlling compares what was intended to happen with what has actually occurred.

- Controls are implemented if there is a discrepancy between performance and goals, so that changes and
improvements can be made.
Bottlenecks are aspects of the
- Control requires operations managers to take corrective action – transformation process that are
making changes to the transformation process (redesigning the slowing down the overall processing
speed, possibly creating an
impediment leading to a backlog of
incompletely processed products.
facilities layout or adjusting the level of technology to correct the problem.

3. Improvement refers to the systematic reduction of inefficiencies and wastage, poor work processes and the
elimination of bottlenecks

- Improvements occur by analysing the operations process and determining what can be changed to improve
quality, speed, dependability, flexibility, customisation and cost.

Improvement can be sought in:

- Time (minimisation of bottlenecks and assessment of lead times)
- Process flows (smoothness of transitions in transformation process)
- Quality (pursuit of quality goals and standards)
- Cost (assessment and review of per unit costs and fixed and variable costs)
- Efficiency (reduction of waste and creation of greater output per unit - economies of scale; sigma six

The concept of continuous improvement involves an ongoing

commitment to achieving perfection. Although the goals of Sigma six is a quality management
perfection will never be reached, the ‘striving’ is important to approach that seeks to identify and
business culture. remove the causes of problems in
The process becomes one of setting higher and higher standards in the operations process, achieving
the continual pursuit of improvement. Japanese business culture virtually defect-free production.
applies the term kaizen to describe this process. We use the terms
‘zero defects’ or ‘sigma six’

3.4 Outputs

Outputs refer to the end result of the business efforts – the good or service that is provided or delivered to the

Customer service and warranties are important outputs as they add value to the product.

 Customer service refers to how well a business meets and exceeds the expectations of customers in all
aspects of operations.

Customer service is an intangible output that requires customer contact. It can increase customer satisfaction and
contribute to one’s competitive advantage.

It may include:
- Answering questions and providing after sales advice
- Frequent and meaningful communication
- Anticipating customer needs
- Following up customer inquiries and complaints.

Warranties – business promises to correct any defects in their products or in the services they deliver.

Under Australian law, all businesses must ensure that their goods:
- Have a level of quality that is comparable to the price and product description
- Are suitable for the purpose they will be used for
- Match the product description in any advertising or promotion
- Are free from defects or faults.

4.1 Performance Objectives

Operations strategy is the total patterns of decisions and actions, which set the role, Performance objectives
objectives and activities of the operations so that they contribute to, and support the are goals that relate to
organisation’s business strategy. The operations function can provide a competitive particular aspects of the
advantage through its performance objectives – quality, speed, dependability, transformation processes.
flexibility, customisation and cost.

1. Quality

Quality means the good or service is as it is supposed to be in appearance and performance.

- Quality is often determined by the consumers expectations, which are used to inform production standards
applied by the business.

Quality performance objectives include: Sony and Panasonic invest huge

amounts of money into R&D, creating
- Quality of design – how well a product is made or service is innovative products that lead change
delivered. in the consumer electronic market.
This means that the price of their
products needs to cover the
investment in innovative designs and
Design determined the inputs, how the transformation processes will be arranged and will perform in relation to
the production of the good or service.

As a performance objective, a business needs to decide the quality of the product it will deliver to the market as
high quality inputs add cost, and this will be reflected in a higher price that some consumer may not wan to

- Quality of conformance – the focus on how well the product meets

Mercedes Benz vehicles
the standard of a prescribed design with certain specifications.
combine very high quality
design with high standards of
- This is a measure of how consistently products achieve compliance
or conformance with the desired specifications.

- Quality of service – how reliable the service is, how well the service meets the specific needs of the client
and how timely or responsive the service delivery is?

Externally, the ability of a business to meet these objectives:

 Enhances the product or service’s image in the market
 Avoids customer complaints

Internally, it prevents errors:

 Slowing down speed
 Causing internal unreliability and low dependability
 Causing wasted time and effort, therefore saving cost.

2. Speed

Speed refers to the time taken for the operations process to respond to changes in market demand.

Speed aims to satisfy customer demand through goals of:

- Reduced wait times

- Shorter lead times
- Faster processing times

Tools to improve speed include:

- Autonomous design
- Development teams

Externally it means the elapsed time between a customer asking for a product and getting it.
 Externally it also enhances the value of the product or service to customers

Internally it:
 Helps overcome internal problems by maintaining dependability
 Reduces the need to manage transformed resources as they pass through the operation, thereby saving

3. Dependability

Dependability refers to how consistent and reliable a business’s products are

- A highly durable product is dependable

- The number of complaints determines a dependable service.

 Externally it enhances the product or service in the market, or at least, avoids customer complaints.
Internally it prevents:
 Late delivery slowing down throughput speed
 Prevents lateness causing disruption and wasted time and effort, therefore saving costs

4. Flexibility

Flexibility refers to how quickly operations processes can adjust to changes in the market (changes in demand can
cause pressure on capacity).

- Best achieved by increasing capacity of production (can be done by utilising plant and machinery better, or
buying new technologies that increase flexibility and capacity).

 The ability of a business to achieve this objective enables them to meet a broader range of consumer desires
and respond to changes in demand.

Product flexibility – the goods and services it brings to the market

Mix flexibility – mix or variety of goods ands services produced
Volume flexibility – quantity or volume it produces (determined by demand)
Delivery flexibility – delivery times of its products.

5. Customisation

Customisation refers to the creations of individualised products to meed the specific

needs of customers. Mass customisation is a
process that allows a
- Visibility or customer contact is an indicator of customisation (high visibility = standard, mass-produced
greater degree of customisation) item to be personally
modified to meet
High degree of customisation provides advantages of: customer requirements.
 The establishment of a regular clientele – this offsets the relatively low
volumes that such businesses experience
 Volume and delivery flexibility

6. Cost

Cost, as a performance objective, refers to the minimisation of expenses so that operations processes are conducted
as cheaply as possible.

Low cost businesses = High volume + Low variety + Low variation in demand + Low visibility

 Achieving some, or even all of the performance objectives will create a positive customer reaction and a
reduction of some costs.

- By achieving quality the business does not require a large budget to fix mistakes, and therefore cost savings
will arise due to the efficient use of resources.
- Achieving speed will save the business time and money
- Achieving flexibility will reduce costs by contributing to the speed of response.

 Establish and maintain a competitive advantage

- A business that does things right (quality), responds quickly (speed), is reliable (dependability), has the ability
to respond to change and customers’ needs (flexibility and customisation) and us a low cost operations
(costs), will tend to have a competitive advantage in the marketplace over its rivals.

4.2 New products or service design and development

New product/service development is the complete process of bringing a
new product or service to market.
Product utility is the
The development process involves: usefulness and value that
- Identifying a market opportunity product has from a
- Creating a product that will appeal to that market customer’s point of view.
- Testing and modifying the product until it is ready for production.

NPD focuses on satisfying the needs of customers who already consume the products of a particular business, as
well as attempting to sell to new customers – maintains their competitive advantage.

New product/service design refers to those activities involves in creating the styling, appearance and feel of the
product, deciding on the product’s mechanical make up, selecting materials and engineering the various
components necessary to make the product work.

When designing services, a business Implicit service is the intangible Explicit service is the
must take into account what the explicit aspect of the service – the tangible aspect of the
service will be and what the anticipated feeling that comes with the service (application of time,
implicit service will be. provision of the service. expertise and effort)

Steps in developing new product

1. Idea generation
 SWOT analysis (Chapter 2)
 Brainstorm with focus groups

2. Idea screening
 Eliminate ideas that won’t work
 Consider customer benefits, market growth, competitions manufacturing needs,
profit expectations
 Feasibility

3. Concept development
 Develop marketing and engineering details
 Identify target market
 Specify feature the product must have
 Computer modelling for prototype design (form, fit and
 Estimate production costs

4. Business analysis
Develop estimates for:
- Selling price
- Sales volume
- Break even point (sales revenue = production costs + profitability) DESIGN DEVELOPMEN
5. Market testing
 Produce prototype of product
 Test product in real use situations
 Feedback from focus groups
 Refine prototype
 Produce small quantity and test market

6. Technical implementation
 Engineering operations planning
 Identify suppliers
 Plan logistics
 Contingency planning (what if?)

7. Commercialisation
 Product launch
 Promote product – advertising
 Initiate distribution channels

8. New product pricing

 Product costs (FC & VC)
 Forecast volumes, revenue and profit
 Competition

4.3 Supply Chain Management

Supply chain management (SCM) involves integrating and managing the flow of supplies throughout the inputs;
transformation processes (throughput and value adding) and outputs in order to meet the basic needs of customers


It is said that the effective goal of supply chain management is to reduce inventory.


 Sourcing – refers to the purchasing of inputs for the transformation processes.

 Global sourcing – refers to businesses purchasing supplies or services without being constrained by location

Factors influencing choice of sources or suppliers include:

1. Consumer demand
2. Quality of inputs required
3. Flexibility and timeliness of supply
4. Cost of supplier

Strategies for sourcing

1. Supplier rationalisation involves assessing the number of suppliers in order to reduce the number of supplier to
the least amount.

 Less contracting
 Less wastage and duplication
 Improved timeliness
2. Backwards-vertical integration – purchasing through mergers or acquisitions of suppliers.

 Guarantees supply as supplier is owned by the business

 Achieve time and cost savings

3. Cost minimisation – use of offshore suppliers to minimise costs

 Take advantage of low cost labour and cheap regulatory costs in countries such as India and Philippines


E-commerce involves the buying and selling of goods and services via the Internet.

1. E-procurement – the use of online systems to manage supply

 Allows suppliers direct access to the business’s level of supplies

- Enabled by business to business arrangement (B2B) – direct access from one business (supplier) to another
(buyer), allowing the supplier to assess the needs of the buyer and meet them in a timely manner

2. E-commerce and the consumer

- Businesses may opt to sell directly to consumers in transactions called business to consumer – B2C – the
selling of goods and services to consumers over the Internet, with payment usually by credit card.


Logistics is the management of the flow of goods between the point of origin and the point of destination in order to
meet the requirements of customers and corporations.

Involves the integration of:

- Information
- Transportation
- Inventory
- Warehousing
- Material and handling
- Packaging
- Security

The role of logistics is to ensure that operations have the right items in the right quantity at the right time at the
right place for the right price in the right condition for the right customer.

Distribution refers to the ways of getting the goods and services to the customer

Traditional distribution channels include:

1. Producer to customer - used in services (car repairs)
2. Producer to retailer to customer – used for bulky or perishable items (furniture or fruit)
3. Producer to wholesaler to retailer to customer – used for the distribution of consumer goods (resells smaller
quantities to retailers)
4. Producer to agent to wholesaler to retailer to customer – used for inexpensive, frequently used products.

Storage involves finding a secure place to hold stock until it is required.

- May be long or short term
- JIT (Just in time inventory)

Warehousing is the use of warehouses for storage, protection and, later, distribution of stock.
Must consider the cost of:
- Premises
- Carrying excess stock
- Insurance and security

Distributions centres differ from warehouses in that they are not intended Coles and Woolworths use a
for long-term storage. network of distribution centres to
- Strategically located to minimise the time to take to supply stock assist with inventory management,
to retail outlets distribution and costs management.

PURPOSE: Short-term storing, handling and wholesale distribution goods

Materials and handling is another important aspect of the movement and storage of goods and therefore particular
standards and methods of operating need to be applied. This is because some goods require particular skills, care or
attention when being moved (glassware).
- Government has regulations that require dangerous goods to be stored and handles in particular ways

4.4 Outsourcing – advantages and disadvantages

Forms of outsourcing
1. Captive – ‘do it yourself’
2. Non captive – external third party provider
Advantages Disadvantages

 Simplification  Cost and uncertainty associated with

Reducing number of activities performed by the business payback
Time to repay the cost of organising
 Efficiency and costs savings outsourcing
Access to cheaper labour, regulatory differences and skilled
labour in offshore locations all lead to cost saving for the  Issues with communication and
business language
May lead to difficult negotiations and
 Increased process capability confusion over expectations.
Comes from access to improved technologies and highly skilled
labour  Loss of control of standards and
information security
 Increased accountability Less control over the quality of inputs
Through the use of SLAs (service level agreements) supplied.

 Access to skill/resources lacking within a business  Loss of corporate memory and costs
Highly skilled, disciplined labour at a low cost (Vietnam and associated with IT, organisational
India) change, redesign and management
of hierarchies.
 Provides a capacity to focus on core competencies thus A business might use outsourcing to
improving in house performance eliminate hierarchies; yet managing
Focus on the things that they cannot outsource: vision, purpose complex outsourcing agreements can
and competitive advantage create its own hierarchies, thereby
creating business inefficiency.
 Strategic benefits
1. Get around trade barriers
2. Use of a vendor provides greater expertise
3. Different time zones allows Australian businesses to
conduct operations during the day and have processing
work done overnight.
4. Strong partnerships can lead to innovative solutions
that may increase business efficiency and productivity

4.5 Technology – Leading edge and established technology

Leading edge technology is the technology that is the most advanced or innovative at any point in time. .

Businesses will seek to obtain a competitive advantage by Toyota was the first car
being the first to develop new of cutting edge technology. manufacturer to develop hybrid
It can help businesses:
- Create more products quickly and to higher standards Apple was the first business to
- Reduce waste come up with tablet. Android
- Operate more effectively have now copied them
Established technology is technology that has been
developed, accepted and widely used.

Established technologies are functionally sound and help to establish basic

standards for productivity and speed.

Some include:
- Robotics

BOTH forms of technology give businesses:

- Efficiencies
- Productivity gains
- Capacity to improve operations processes

4.6 Inventory Management

Inventory or stock refers to the amount of raw materials, work in progress and finished goods that a business has on
hand at any particular point in time.

Inventory management is concerned with ensuring that there is enough inputs available as required to complete
orders and with the handling of the outputs prior to dispatch to the customer.

This management process includes the stockpiling and storage of these goods so that the production process can be
continued uninterrupted and customer demand is satisfied.

Advantages and disadvantages of holding stock

Advantages Disadvantages

 Meet consumer demand when stock is available  It is expensive to hold stock. Costs include storage
charges, spoilage (deterioration of product –
 Lead time between order and dispatch is reduced perishable foods), insurance, theft and handling
 Stock is an asset on the business’s balance sheet
 The capital invested in stock can negatively impact
 Stock can be distributed to distribution centres, which cash flow
then rapidly transports the products to places as
indicated by demand.  Stock can become obsolete (out-dated)

 Older stock can be sold at reduced prices,

encouraging sales of other products and improving
cash flow.

Inventory management systems

1. LIFO – last in first out

- Simplified cost analysis

- Suitable for goods with no use by date (machinery)
- An accounting of recording inventory costs

 Results in lower net income for the business.

Because as time passes, inflation will cause prices to rise, but if inventory is valued on a LIFO basis
(selling new inventory first) the business will show less profit on sales as the sale date will be closer to
the purchase date and inflation will have little impact on the price of the good, and therefore the
business’s profit.

 Lower net income will result in a financial advantage because the business will pay less tax on a lower
net income.

2. FIFO – first in first out

- Simplified cost analysis
- Oldest stock sold first
- Appropriate for perishable stock (used by supermarkets)

 Ensures that stock on the balance sheet has a higher value.

 This will make COGS lower and income higher than if LIFO had been used.

3. WAC – Weighted Average Cost

- A method of calculating ending inventory cost.

- It takes Cost of Goods Available for Sale and divides it by the total amount of goods from Beginning
Inventory and Purchases. This gives a Weighted Average Cost per Unit.

4. JIT – Just in Time inventory

- Aims to hold as little stock possible

- Only the exact amount of stock is delivered from suppliers as required.

 Improves liquidity and therefore cash flow – as it minimises the amount of capital tied up in inventory.

- For this system to work, the suppliers must be reliable and have excellent inventory management systems in
place. Scheduling software is used to order the correct stock and information is exchanged through EDI
(electronic data exchange)

 Reduced storage and stock security costs

 Increased liquidity as less capital is tied up in stock
 Risk of obsolescence is reduced
 Risk of spoilage is reduced
 Less warehouse space allows space to be used for cash generating activities

4.7 Quality Management

Quality management refers to those processes that a business undertakes to ensure consistency, reliability, safety
and fitness of purpose of product.

1. Quality Control – reduced problem and defects in the product by using inspections at various points in the
production process

 Aims to ensure that the finished outputs reach the consumer with the required level of quality

- Involves the checking of transformed and transforming processes at all stages in the production process.


Inspections are performed when:

- Raw materials or inputs are received prior to entering production
- Whilst transformation is taking place
- When products are finished, prior to dispatch
Problems with inspections:
 Does not add value
 Costs (in terms of tangible and intangible costs – materials, labour, time, morale, customer goodwill and
lost sales)
 It is sometimes conducted too late, resulting in defective goods being received by the customer.

2. Quality Assurance – use of a system to ensure that set standards are achieved in production

- Done through a series of measurements and assessing them against pre-determined quality standards.

The two aspects of QA include:

 Fitness for purpose – how well a product does what it is designed to do
 Right first time – so that products do not need to be reworked which wastes time, energy and other

- A series of QA standards have been established due to the impact of

Yakult meets the highest
globalisation and the international emphasis on quality. Such
international food
standards include the widely used ISO 9000 series of quality
manufacturing standards
certifications, Standards Australia and AS/NZS for Australia and New
with an ISO of 90001:2000
Zealand standards.
- These standard enhance domestic and international competitiveness.

3. Quality Improvement – or TQM is an integrative philosophy of management for continuously improving

the quality of products and processes.

- TQM assumes that quality is the responsibility of every organisation

- This approach is widely used in japan and is known as kaizen.
Sigma six is a quality management
Improvements in quality can be measured using KPIs: approach that seeks to identify and
- Percentage of defects per 100 units manufactured remove the causes of problems in
- Warranty claims the operations process, achieving
- Percentage of repeat customers virtually defect-free production.
- Accidents or OHS incidents

A focus on improvement of quality management is likely to help:

- Obtain and maintain a competitive advantage

4.8 Overcoming resistance to change

Why might stakeholders resist change?

Financial costs

 Purchasing new equipment

- Rapid changes in technology increase ongoing requirements to update equipment.
- Managers may resist the change when assessing the cost of the equipment in comparison to their return on
- If expected gains are small, manager may defer purchase and continue with existing equipment (regardless if
it is obsolete) until there is greater evidence of improve efficiency or time to plan more effectively, the
required outlay of money.

 Redundancy payments
- Introducing any change that aims to improve efficiency, such as new technology, flatter organisational
structures or outsourcing, often creates a surplus of workers in a business, making them redundant (no
longer needed)
- Involves costly redundancy payments
- A business may defer changes to avoid large outlays of money

 Retraining
- New systems, technology and structures create a need for staff retraining.
- Costly as operations are interrupted while workers learn and practice new skills – decline in productivity and
increase in errors as workers try to adapt to and become more proficient in their newly acquired skills.
- Staffs are often reluctant or unable to learn new skills and this creates resistance.

 Reorganisation of plant layout

- New technologies such as robotics and CAD and CAM software, flatter management structures and changes
in the production process make it necessary to change plant layout.
- This may be a resistance factor due to its cost, inconvenience, unavailability of space and loss in production

Psychological factors

 Inertia - means the tendency for things to remain in their existing state
- Business owners may resist change as they may be cautious in their decision-making or feel that change is
pointless as the business is operating successfully with reasonable profits and few problems without the

Other factors relating to staffing

 De-skilling
 New skills
 Loss of job prospects/ opportunities for promotion
 Cultural incompatibility with takeovers and mergers

Managing change effectively

Change is inherent in the business world. Therefore those organisations that best manage change and respond to
internal and external influences will be more successful over the long term.

Essential aspects of managing change include:

1. Identifying the need for change
2. Setting achievable goals (SMART)
3. Creating a culture of change
4. Use appropriate change models
5. Review and revise

1. Identifying the need for change

Before initiating change, key decision makers in the organisation must recognise the need for change.
- Clearly communicating the need for change will encourage support from the relevant stakeholders
- Making change purposeful and linking the change with the vision and future direction of the business will
help develop a sense of purpose for change and will reduce resistance to change.
Reasons why businesses would need to respond to change include the need to:
1. Remain productive and competitive
2. Be legally compliant
3. Incorporate new technology
4. Aid efficiency and customer expectations
5. Respond to stakeholder suggestions
6. Provide a motivating and challenging workplace
7. Increase sales and market share
8. Resolve disputes
9. Ensure a successful and profitable business

2. Setting achievable goals

- Must be SMART goals (Specific, Measureable, Achievable, Realistic and Timed)

- Important to provide short term wins when undertaking change, so that people involved in the change
process feel a sense of achievement in their work, as well as valued and recognised – builds momentum in
the change process

3. Creating a culture of change

A culture of change is one that readily accepts that change is ongoing and that the only thing certain in business
is that it is always changing.

This type of culture allows for the:

 Removal of structural barriers to change
 Encouragement of greater levels of innovation
 Readiness and willingness to be adaptable and flexible

Strategies to develop a culture of change:

 Behavioural management teamwork approach

Helps develop a culture of change as it emphasises the need to ensure employees are well looked after and

 Change agents – key workers who, by their actions and attitudes, lead others in the organisation to see the
need for change.
Change agents and teams foster collaboration and transfer information at a faster rate to a wiser and more
diverse range of people than an individual manager or CEO.

 Change models – a framework providing a pathway for the implementation of a business change process.

Kurt Lewin’s unfreeze/change/freeze model

 Unfreeze: Breaks down the forces supporting the existing system and prepares the business for
 Change: The new procedures and behaviours must be communicated and implemented.
 Refreezing: Requires that the manager offer positive reinforcement to make sure the change

Lewin's force field analysis is used to distinguish which factors within a situation or organisation drive
a person towards or away from a desired state, and which oppose the driving forces.

4.9 Global factors

 Global sourcing
Global sourcing is a term that refers to a business purchasing inputs regardless of location. This allows
businesses to source inputs from low cost locations and thus acquire economies of scale.

A global web strategy is one method a business can use to source Apple maintains its research,
components used in production from around the world. A global web develop, marketing and financial
strategy will locate its financial headquarters in a developed country, operations in California, with the
source its inputs form around the world, product in the country with majority of its products
the lowest labour costs and export to a global market. manufactured in China by the
Foxconn Technology Group.
Economies of scale

Economies of scales are the cost advantages that a business can exploit by expanding their scale of production.

Where the more a business produces, the cheaper per unit it is to produce.

Allows the business to be more:

 Price-competitive
 Efficient
 Profitable (hence an increase in sales)

Economies of scale can include:

- Lower cost inputs because discount from purchasing in bulk
- Discounts in interest rates for debt borrowings as larger sums are borrowed
- Where a business has developed vertical integration (merging of two businesses) internationally, one
subsidiary may sell to another, thus increasing sales for the group.

Scanning and learning

- In today’s business environment, managers have to process increases in the quality and quantity of
information when making decisions. This can lead to an ‘information overload’, creating a gap between the
knowledge of managers and the information that is needed in the business environment for the business to
develop a sustainable competitive advantage.

- Managers will try to overcome ‘information overload’ through environmental scanning – allows managers to
learn from the environment (critical for ongoing survival and success).

 Improves managers’ knowledge

 Assist them with problem solving and strategic planning

Three forms of scanning:

1. Ad-hoc scanning – not planned and usually infrequent
2. Scheduled scanning - done on a regular basis (once every 6 months)
3. Continuous scanning – ongoing data collection and analysis on a broad range of factors in the business
Research and Development

Innovative companies spend time and money on R&D. This is a way of gaining and maintaining a competitive
advantage. R&D is expensive but offers advantages of:

 Extending the product cycle  Improving quality

 Opening up new markets internationally  Reducing costs
 Providing a reputation as an innovator  Increasing profits.