HSC Business Studies Syllabus Revision Guide

10.4 HSC TOPIC HUMAN RESOURCES

HSC Business Studies Syllabus Revision Guide

HSC Business Studies

Syllabus Revision Guide

CONTENTS:

10.1 OPERATIONS ……………………………………………..… 2 1. Role of operations management 3

2. Influences 5

3. Operations processes 8

4. Operations strategies 14

5. Operations ‘super summary’ 23

6. Operations acronyms 25

10.2 MARKETING ………………………………………………. 26 1. Role of marketing 27

2. Influences on marketing 30

3. Marketing process 33

4. Marketing strategies 38

5. Marketing ‘super summary’ 47

6. Marketing acronyms 49

10.3 FINANCE ……………………….…..….….….….…….…… 50 1. Role of financial management 51

2. Influences on financial management 53

3. Processes of financial management 56

4. Financial management strategies 64

5. Finance ‘super summary’ 70

6. Finance acronyms 73

10.4 HUMAN RESOURCES ….….…..….....…...……..….....….. 74 1. Role of human resource management 75

2. Key influences 77

3. Processes of human resource management 83

4. Strategies in human resource management 86

5. Effectiveness of human resource management 90

6. Human resources ‘super summary’ 92

7. Human resources acronyms 95

THE BUSINESS REPORT ….……..…..…...…….….….………. 96

10.4 HSC TOPIC HUMAN RESOURCES


10.1 HSC Topic: Operations

Outcomes:

The student:

H1 critically analyses the role of business in Australia and globally

H2 evaluates management strategies in response to changes in internal and external influences

H3 discusses the social and ethical responsibilities of management

H4 analyses business functions and processes in large and global businesses

H5 explains management strategies and their impact on businesses

H6 evaluates the effectiveness of management in the performance of businesses

H7 plans and conducts investigations into contemporary business issues

H8 organises and evaluates information for actual and hypothetical business situations

H9 communicates business information, issues and concepts in appropriate formats

The focus of this topic is the strategies for effective operations management in large businesses.

10.1 HSC TOPIC: OPERATIONS


1. Role of operations management

All goods and services are the result of deliberate decisions to design, conduct and continually improve systems of production, i.e. operations management. Operations management involves planning, organising, co-ordinating and controlling the transformation or inputs to outputs to meet the requirements of customers. It is about providing products reliably with consistent quality.

Strategic role of operations management – cost leadership, good/service differentiation As consumers can easily purchase goods from competitors, a competitive advantage must be developed. To gain a competitive advantage, the following must be addressed: Cost leadership – involves providing consumers with the best value for a relatively low price. Market share is gained by appealing to price-sensitive customers (those who consider price important) by offering either the lowest price or the lowest price compared to the value the customer receives. Cost leadership can also be gained by achieving low operating costs from offering no-frills products using fewer components and with a limited variety, e.g. Tiger Airways. Product differentiation – involves making a product that has different or unique features which enables a company to charge a premium and achieve above average returns. The differentiation feature (specialty) can be associated with design, technology, brand image or after-sales customer service. The resulting brand loyalty is likely to lower the customer’s sensitivity to price, i.e. a higher price can be charged. Brand loyalty can block out competition, who will have to come up with their own unique differentiating feature. Sometimes a product is differentiated by the owner, e.g. Steve Jobs with Apple. Basically, higher profitability can be achieved by either:

- Successful differentiation – high margins selling lower volumes. - Successful cost leadership – low margins selling high volumes.

Focus or strategy scope – determines whether a business uses cost leadership or product differentiation, e.g. Woolworths uses cost leadership. A focus strategy involves targeting market segments where competition is weakest so above-average returns can be made.

Goods and/or services in different industries Different industries provide very different goods and services. For example, in the school education system, operations is about what happens between teachers and students. In manufacturing, the operations deal with the production and assembly tasks carried out by workers in the factory. Operations management – relates to producing goods and services. In big business this can have a much larger scope, being on a global scale. Operations may be complex, requiring management of production for many different businesses at the same time and for multiple goods and services.



Interdependence with other key business functions Operations has a flow through affect influencing all aspects of business, e.g. in car manufacturing, staff levels, training and work schedules need to be determined so quality products are able to be produced without bottlenecks being created. This means that the size and organisation of a facility is linked to production levels, which is determined by the target market size. This, in turn, determines the qualifications and equipment needed to ensure efficiency. Target market → size of facility → production levels → qualifications and equipment needed Operations management becomes the core to which all other business functions contribute, i.e. it actually makes the product. Suppliers and customers are closely linked to operations management. Finance has to be managed to provide the funds needed by the suppliers and the employees to help produce the goods. Finance is also essential for marketing to sell the goods and services.



2. Influences

Globalisation, technology, quality expectations, cost-based competition, government policies, legal regulation, environmental sustainability

Operations management occurs in a dynamic environment, i.e. constant change. Business that doesn’t adapt to change → decrease in customers (market share) → decrease in profits, e.g. Coles in the early 2000’s compared to Woolworths. A business must constantly change and respond to the influences of the environment. These influences include:

1. Globalisation: Globalisation is a process that is leading to the development of a single world market. Globalisation is the result of the decrease in communication and transportation costs. Distances are no longer a barrier for business as governments have deregulated their systems to open their economies, resources are now global and finance can be easily borrowed from countries like Japan, China and USA. Australian businesses can now borrow from overseas and have a global labour force, e.g. over 5,000 Telstra employees work overseas. Globalisation has resulted in the development of factories in low wage countries such as Bangladesh, Thailand and Vietnam. This has enabled businesses to outsource tasks that are low skilled and repetitive. Outsourcing is where and outside business manufactures a component part or assembles a product for the operations function, e.g. Jetstar is now employing flight and maintenance crews from Singapore. Due to globalisation, both the production of goods and the market place where they are sold are global.

2. Technology: Technology is the knowledge of how things are done concerning both the hardware and software components. Not keeping up with technology changes, particularly in relation to equipment and operations methods, will lead to business failure. While new technology won’t necessarily lead to a competitive edge, it will prevent loss of competitiveness, e.g. car manufacturers introducing robotics, Qantas purchasing the A380 as it is more fuel efficient and carries more passengers.

3. Quality Expectations: Quality is meeting, or exceeding, a customer’s expectations. In the 1980’s and 90’s, quality was the main focus for operation managers. The Japanese called it lean production, i.e. decrease costs, ensure that products meet their design specifications and improve every aspect of the operations process (TQM – Total Quality Management). We now expect products to be of high quality so now the emphasis is on customisation.



4. Cost-based Competition: Cost-based competition is concerned with driving down the costs of warehousing and transportation while spreading overhead costs. Business gains cost advantage → lowers prices → attract customers from competitors, e.g. Woolworths did this with its warehousing and transportation logistics and gain market share over Coles. Overhead costs are the ongoing costs of a business, e.g. rent, electricity, wages. When a business is open 24 hours, (e.g. Kmart) overhead costs are spread over a higher inventory turnover. Cost-based competition does not try to cut costs through low value or low quality, but rather provides customers with the best value for money. The customers’ perception of value and quality is very important.

5. Government Policies: Government policies include regulations, subsidies, grants, taxes and tariffs that encourage or discourage aspects of the operations function. Different political parties have different views on important matters, e.g. Gillard’s Labor government introduced the Carbon Tax. It has been government policy to encourage car manufacturers in Australia to develop and manufacture products towards a ‘greener future’ ($6.2 billion was given as assistance – withdrawn from budget in 2011). Sometimes when a government sees a product as undesirable, they implement policies against it, e.g. tobacco packaging regulations and tax increase on pre-mix alcoholic drinks (alco-pops).

6. Legal Regulations: Legal regulations are the laws that regulate the way things can be done. They are important because of the potentially dangerous aspects of using equipment. The Occupational Health and Safety (OH & S) Act of 2000 was put in place to provide a safe working environment. Most responsible operations functions go further than OH & S by developing a culture of safety.

7. Environmental Sustainability: Environmental sustainability is concerned with air, waste, water and environmentally sustainable products and operations practises. Many operations functions impact on these, therefore strategies must be developed to reduce their impact. Customers are now very aware of the need for environmental sustainability and it often sways them to select one product over another, e.g. Walmart and Orica have already developed strategies to reduce emissions and are working towards carbon-neutral goals.



Corporate social responsibility: - the difference between legal compliance and ethical responsibility - environmental sustainability and social responsibility

Corporate social responsibility: Corporate social responsibility refers to the relationship between business and the broad society and the way this relationship is perceived and managed. The focus of corporate social responsibility is to make sure business activities have a positive impact on society and, more specifically, the stakeholders of the business. This does bear a cost to the business and creates a problem, i.e. profit vs corporate responsibility, e.g. Bluescope Steel would experience additional costs with a Carbon Tax, but it is argued that a Carbon Tax is needed by the broader community. Also, ANZ’s Indigenous mentoring and employment program in towns such as Moree benefits the community. The difference between legal compliance and ethical responsibility: Legal compliance is concerned with obeying the letter of the law, i.e. law abiding. Ethical responsibility is concerned with doing the ‘right thing’ and having a positive impact on the society in which the business operates. Doing the wrong thing can have economic advantage, but rarely in the long run, e.g. The Australian Wheat Board (AWB) paying kickbacks to Saddam Hussein was profitable short term until it was made public and then their share price plummeted. Environmental sustainability and social responsibility: Environmental sustainability is the ability to maintain the qualities that are valued in the physical environment, mainly concerned with energy efficiency, climate change and water and waste management. There is an increased concern regarding this, both in the wider community and in the impacting business. The main focus of energy efficiency and climate change is to decrease the business’ carbon footprint through things like the Carbon Tax. Water can have a huge impact on a range of businesses, e.g. cattle farming and cotton growing. The focus is now on water recycling. One of the problems with water is that it is an externality (something that the community bears the cost of rather than the business, e.g. community pays for roads rather than road transport companies. Waste management refers to the collection, transportation, processing and recycling of waste materials. The focus is on businesses to decrease waste, mainly by recycling, e.g. BMW use a lot of recycled materials and around 80% of a BMW car can be recycled. Levi Stauss & Co has three objectives concerning environmental sustainability. They are aiming to achieve carbon neutrality and 100% renewable energy (energy efficiency and climate change), reduce water usage (water) and become a zero-waste company (waste management)



3. Operations processes

Operations processes are the activities involved in the transformation of inputs into outputs. This may also be referred to as the production system or operations system. Inputs such as skilled labour, machinery, raw materials and/or component parts are used to transform customers (e.g. haircut), transform information (e.g. newspaper) or transform materials (e.g. mobile phone). Each activity adds value so that the output has a greater value than the cost of inputs. When assessing the performance of the operations functions, the manager determines how effectively the business:

- makes and assembles raw materials and components into finished goods and services - distributes to wholesalers, retailers and customers - provides after-sales customer service

Some approaches are:

- “Top down” approach – the operations business function interprets and aims to play its role in achieving the business objectives.

- Systems management approach – focuses on integrating operations with the other key functions to create sustainable competitive advantage.

Inputs: - transformed resources (materials, information, customers) - transforming resources (human resources, facilities)

Inputs – the inputs in an operation system are the:

- physical raw materials - skills/knowledge - machinery - component parts

Intangible inputs – time and money Inputs can be classified as:

- Materials, e.g. raw materials, component parts - People, e.g. labour, managers - Physical, e.g. factory and office buildings, land

Customers can also be transformed physiologically, (e.g. hospitals, dentists, surgeons, fitness instructors etc.) or psychologically, (e.g. theatres, cinemas, theme parks etc.) Transportation changes customers’ location.

- transformed resources (materials, information, customers) Transformed resources are the inputs that are changed or converted into something else as component or a finished good or service. Businesses use a combination of transformed resources (materials, information and customer), e.g. Qantas uses fuel, equipment and information. Customers are transformed by changing their location. The types of transformed resources are: Materials – the raw materials, component parts and supplies used during the operations process. Information – stored in files, in computer programs and in databases. This information is used to make plans, execute operations and keep controls over material inputs. Information comes from the analysis of the



performance of the operations system. In Australia, there is a big move away from manufacturing to quaternary and quinary industries. Customers – can be changed in different ways, e.g. customers feel value has been added to their lives after going on a cruise, watching a film or visiting a theme park.

- transforming resources (human resources, facilities) These are the resources that remain in the business and are applied to the inputs to change them to add value. Human resources – different to the rest of the inputs in a business, i.e. the human resources do the transforming. They apply the skill, knowledge and capabilities to materials to transform them into goods and services. The human resources function provides the business with suitably qualified, skilled and experienced employees. Facilities – these are the buildings, machinery, land, equipment and technology the business use in operations, e.g. Coca-Cola’s Northmead Factory utilises an automated assembly line.

Transformation processes: - the influence of volume, variety, variation in demand and visibility (customer contact) - sequencing and scheduling – Gantt charts, critical path analysis - technology, task design and process layout - monitoring, control and improvement

Transformation processes – the activities that determine how value will be added. These processes can add value in four ways:

- physical altering of the inputs or the changes involving customers - transportation of goods or services, e.g. having them shipped to a different location - protection and safety from the environment - inspection by giving customers a better understanding of the good or service

- the influence of volume, variety, variation in demand and visibility (customer contact) Most operations processes are similar; however, the differences come from the 4Vs, (volume, variety, visibility, variation). The influence that is most important depends on the type of production that is being used. The production methods are:

- Job – suits those products and service that require customer requests. It is a highly flexible system but with low output, e.g. designer homes and cars – costs per unit are high.

- Batch – products are made in batches or groups, e.g. bakery – suits businesses that have variations.

- Flow – involves a continuous flow of inputs and outputs. It is often associated with assembly lines. Products have little variation, e.g. Fuel refineries – costs per unit are low.

Volume: The most effective way to decrease costs is to produce large amounts of the same thing. A business producing high volumes will have a high degree of process repetition. A business with customization and low production will have many stoppages and adjustments. When volume is the most important factor, there will usually be a high level of equipment and technology and less labour, e.g. assembly lines using convey belts will be utilised. e.g. of high volume – Domino’s Pizza e.g. of low volume – Matt Moran’s restaurant ARIA



Variety: Sometimes customers want variety or flexibility rather than the lowest price, e.g. wedding reception venues. Variety refers to the number of different models and variations offered in the products or services. A business producing a high volume product with low variety will be capital intensive. e.g. of high variety – financial advice at Yellow Brick Road e.g. of low variety – Apple’s iPhone (same for each customer) Variation: Variation is associated with the changes that can occur due to the time of day, season, holidays and time of year. When there are steady levels with no variation, there will be high volume and capital costs. e.g. of high variation – Thredbo Ski Resort e.g. of low variation – Dairy Farmers Milk Visibility: Visibility is concerned with customer contact. Operations will be influenced by the degree to which customers can see the operations in action. Service-based businesses have a high level of visibility. Speed of operations can be important as customers usually have a low tolerance for waiting. e.g. of high visibility – Subway e.g. of low visibility – chicken growing/production at Steggles Chicken

- sequencing and scheduling – Gantt charts, critical path analysis Scheduling and sequencing: Sequencing is the planning of activity that decides on the order in which the work is to be performed. In most cases it is done on the basis of due date. Scheduling is a term used to indicate a detailed timetable of what work is to be done, when it is to be done and where it is to be done (e.g. your school time table). In bigger businesses, it involves matching things like employee skills, machine capacity and completion times. Sequencing and scheduling tools are used to identify all steps in the operations process and organise them into the most efficient order to complete. There are two approaches to scheduling:

- forwards scheduling – the work is started as soon as it is received - backwards scheduling – the work is started just in time to meet the delivery time or deadline

Task analysis – is the breakdown of exactly how the activities to manufacture a good, or to provide a service, are to be accomplished. Gantt charts: The most common form of scheduling is where activities are represented as a Gantt chart. It represents activities as a bar chart. They show the start, finish and progress of an activity. They record the number of tasks involved in each particular project and the estimated time needed for each task, but will not show the relationship between each of the tasks. Dates can be set for the completion of tasks. Gantt charts allow the business to compare the actual progress to the original expected progress and to effectively communicate the progress of activities to employees.



Critical path analysis: Large projects involve a network (i.e. a group or system of interconnected people or things). A critical path analysis (CPA) is an appropriate scheduling tool for use in an operation that involves a series of repeated tasks. It is a flow diagram that shows the interrelationship of tasks. The critical path time period is the longest sequence of activities through a project network. A delay in activities means the whole project is delayed.

- technology, task design and process layout Technology: The most significant change in the last couple of decades is the way technology is used in the transformation process. The machines and equipment used to transform inputs into outputs are called process technology. Process technology’s largest effect is computerisation, e.g. Robotics used at Coca-Cola’s Northmead Factory, the Airbus A380 which is on auto pilot 94% of a flight. Product technology is the innovation in the products themselves. Technology can give the business more flexibility as it:

- Allows the business to respond to changes in the market more easily, e.g. changing volumes and variations.

- Allows the business to apply software modelling programs, the internet and wireless communication to the process.

Flexible manufacturing systems → integrated approach to using technology Task design: Task design is the way the overall transformation process is broken down into manageable activities (e.g. Apple’s iPad). It is concerned with working out the most efficient and effective transformation process. It must be ensured that the employees have the appropriate skills, knowledge, capabilities and equipment to do the

In this example, each

number indicates how

many weeks it takes to

complete each stage or

task. To calculate the

critical time period from

task A to task F, the longest

sequence must be

calculated (i.e. 4+4+4+4 =

16 weeks).



job. Task design allows ongoing analysis and adjustments in each activity to ensure continuous improvement in productivity. Task design and product design must be done together to ensure maximum efficiency and effectiveness in the transformation process. Process layout: Process layout refers to the physical location of the transforming resources. It determines the way the transformed resources (materials, information and customers) flow through the operation. Tasks must be allocated to transform the resources the most efficient and effective way. A process layout is where all the machinery is arranged by what they do. The product/service moves from department to department depending on what transformation is needed, e.g. a machinery shop has the drills in the one section, the grinders in one section etc. and the product moves from department to department. A process layout is more flexible than a product layout. Product layout arranges activities in a line according to the sequence of operations for a particular product or service, e.g. car assembly line at Ford. Product layouts are used for assembly line manufacturing of large volumes of goods with few variations.

- monitoring, control and improvement Monitoring for a business refers to knowing how well its operations are working. It involves collecting information about the performance of operations process. These include:

- quality - speed - dependability - flexibility - customisation - costs

Data needs to be collected about:

- Operation costs - Waste from operations - Defects - Speed of manufacturing

A business’ plans must be monitored to check whether the planned activities actually occur. The output can be compared to the planned output. The purpose of monitoring and control is to ensure the operations process runs efficiently and effectively, producing the goods and services it was designed to do. Control is the process of comparing actual output with what was the planned output for that centre. Adjustments can be made if things go wrong. Sometimes these adjustments are radical, e.g. Pacific Brands relocating to China. Improvement is the function that suggests that adjustments and readjustment may need to be made to day-to-day activities in the short term, and even the entire operations process in the long term. Continuous improvement is the most common and involves the continuous search for small incremental steps that improves the operations function. TQM (total quality management) puts improvement (particularly improving quality) at the core of every activity of the business (e.g. Toyota factory). Just-in-time (JIT) or lean improvement is designed to meet the customers’ requirements immediately with a quality product and no waste (e.g. Coca-Cola’s Northmead factory). Improving operations is a key strategic goal. There can be improvements in the following areas:

- Quality – by getting it right the first time and having defect-free products and error-free services. - Speed – by increasing speed of production and delivery of services - Dependability – by being on time with a reliable operations system, and employees



- Flexibility – through having processes that are able to change - Cost improvements – by being efficient and productive to offer more value

Outputs: - customer service - warranties

Transformation process → outputs (either products [tangible] or services [intangible]) Outputs are the final products or services that a business offers to customers. They may be the final services or educated people (from the input of education). Outputs in banking are home loans and investments. Outputs in education are socially responsible young adults. Customer service: Customer service often determines whether a customer will chose a business’ product over a competitors’. It refers to the interaction between customers and the provider of the product/service. It is a service provided to customers before, during and after a purchase. Customer service is an intangible output that requires extensive contact with customers. Good customer service will increase consumer satisfaction. Customer service features include handling customer returns, answering questions and following up customer enquiries. Warranties: A warranty is an assurance that a business stands by the quality claims of the products they make and provide to the market. It is a contractual agreement between the manufacturer of the product and the customer. Under Australian law, all goods must have a level of quality, be suitable for the job, match the promotion and be free from defects. This is an implied warranty. Potential customers often find that a number of products meet their needs (e.g. cars, whitegoods etc.) and therefore, it is post-sales factors that become important. Businesses must comply with the Fair Trading Act 1987 (NSW) and Competition and Consumer Act 2010 (Cth).



4. Operations strategies

Operations strategies include: - The activities involved in the production of a goods and supply of services. - Specific decisions about what and how the business produces goods and supplies services. - The influences on operations strategies must be considered by operations managers.

Performance objectives – quality, speed, dependability, flexibility, customisation, cost Performance objectives are the key areas of focus for operations and are therefore part of a business’s competitive strategy. Stakeholders judge the operations function and the aspects of operations performance they are judging are the performance objectives. Quality, speed, dependability, flexibility, customisation and cost are the main performance objectives. Quality – having the highest quality goods and services. Good quality prevents costs caused by product recalls and repairs. Dimensions to quality are:

- Performance- does it do what’s claimed - Durability- does it last? - Aesthetics- does it look good? - Serviceability- is it convenient to repair

Speed – producing goods faster and delivering services faster. This relates to productivity. Productivity is output divided by input and is sometimes measured in output per unit of time. CAD (computer aided design) and CAM (computer aided manufacture) can increase the speed without compromising quality. A risk of increasing the speed of operations is that quality may suffer. Dependability – consistently good in both quality and performance. It involves being reliable in providing what outputs are needed and when they are required. There is also dependability in delivery or supply – how well can the business always fill orders and distribute to markets. Flexibility – being more flexible than competitors and being able to make changes to operations. Businesses need to match the increase in demand and avoid a stock-out where the business runs out of inventory. Customisation – modifying a standard product to meet the individual needs of the customer. Custom designers can usually command a premium price. Cost – producing cheaper, more efficient and with better productivity than competitors. A key measure of costs is using efficiency ratios and average costs. An important objective for costs involves the break-even point. Used to determine the point at which business starts to make a profit. Costs can be categorised as:

- Fixed – do not change as output changes - Semi fixed – parts are fixed and parts are variable - Direct – are directly related to production - Variable – do change as output changes - Indirect – sometimes called overheads, e.g. salaries of administration staff.

New product or service design and development New products must be developed for a business to maintain competitive advantage. New product design is a lengthy and expensive process. Only a few products make it to final production from the large number that may be initially developed. Many businesses do not have the financial resources, knowledge or time to develop new products. This is why a business might supply their own version of a competitor’s new product and avoid the expense and risk of



product development, e.g. HTC entering the smartphone market after the proven successes of Apple, Samsung etc. The new product development process is as below:

1. Concept development – many ideas are discussed and assessed. 2. Cost benefit analysis – economic analysis to determine if the product is worth pursing 3. Production design – engineers design the product, work through technical difficulties and create

features 4. Product testing – feedback from testing and market research

Supply chain management – logistics, e-commerce, global sourcing Supply chain management: Supply chain management refers to those activities that procure materials and services, transform them into products and services and then deliver them to a customer. e.g. the supply chain of pumpkins: Pumpkin grower → transported to wholesaler → transported to Woolworths store → customer Logistics: Logistics management is concerned with all the business activities that acquire the materials, moving and storing them. This is important as most things come from outside the business. The logistics function is often outsourced to specialist businesses, e.g. DHL, Fox, FedEx. These specialist businesses have the expertise in things like tracking shipments. Alternative distribution systems available:

Transportation Type Advantages Disadvantages

Road (trucking) - Flexibility (just-in-time) - Low cost - Reliable

- Lacking capacity - Increased pressure on road

infrastructure

Railroad - Low cost - Able to move large volumes

- Lacking flexibility

Shipping (containerisation) - Enormous quantities - Very low cost

- Lacking speed

Air Freight - Speed - Costly

Logistics is crucial because it can gain a competitive advantage. It isn’t cheap but the advantages are incredible, e.g. Woolworths spent billions. E-commerce: E-commerce refers to the use of the internet for all aspects of commercial transactions. In recent years an electronic marketplace has emerged that has facilitated business-to-business commercial activity for both buyers and sellers (online shopping).



When businesses use e-commerce with their supply chain it is called e-procurement. E-procurement refers to electronic methods, primarily through the internet, used in the purchasing process. E-procurement:

- makes it easy to find suppliers on the internet which increases competition and keeps prices lower

- lowers administration costs because documents can be easily exchanged over e-mail - saves time - develops more effective partnership with suppliers

Global sourcing: Global sourcing is where products are acquired outside the home country. Businesses are increasingly sourcing raw material and component parts wherever they are cheapest, particularly from low-wage countries like Bangladesh, Vietnam, Thailand and India. Global sourcing is done to decrease costs. It has been made possible by the developments in transportation (particularly containerisation).

Outsourcing – advantages and disadvantages Outsourcing is when goods and services that would normally be a part of the business are obtained outside the business. In relation to supply chain management, it can provide significant value to the business, e.g. Apple purchased screens from LG and microprocessors from Samsung for the iPad 2. When businesses start, they conduct their business internally, except for accounting reports. If the business excels and grows, it is due to its strengths (core competencies). Therefore, managers concentrate on the core competencies and outsource the activities that other businesses do better and at a lower cost. There are some risks associated with outsourcing, particularly to overseas, e.g. Jetstar is experiences industrial relations problems after outsourcing to Singapore, Pacific Brands (Bonds, Hard Yakka) outsourced but have discovered transport costs are higher and quality is an issue. Advantages and disadvantages of outsourcing:

Advantages Disadvantages

- Provide greater flexibility – increase or decrease the quantity of products it wants manufactured.

- Access to the best technology – specialist businesses have the best technology.

- Danger of future competition – the supplier may gain expertise by manufacturing and design a competing product.

- Human resource problems – outsourcing means that jobs are lost.

- Language problems – language differences can make communications difficult.

Technology – leading edge, established Technology is knowledge of how things are done, both hardware and software components. Leading edge technology is the foremost position, the very latest way of doing something. It is most evident in the area of computer chips and microprocessors, which have enabled products such as mobile phones, computers and robotic equipment to offer more benefits to the customer, e.g. Walmart’s new radio-frequency identification (RFID) technology which sends a notification to the suppliers every time a product is purchased, ordering a replacement. This greatly lowers storage costs.



Established technology is the way something has been done for some time, e.g. the technology used for milking machines has been used for hundreds of years (however, the new “robotic milkmaid” is an example of leading edge technology).

Inventory management – advantages and disadvantages of holding stock, LIFO (last-in-first-out), FIFO (first-in-first-out), JIT (just-in-time)

Inventory management is often called stock and refers to the store of transformed resources waiting to be processed. In manufacturing operations the inventory may consist of the raw materials and component parts received from suppliers or the partly finished products in the transformation process, called work-in-progress. Sufficient raw materials are needed to maintain the operations process, i.e. no ‘downtime’, e.g. if the Coca Cola factory in Northmead has too few empty cans, then the process stops. On the same note, if there are too many cans, there are additional costs of storage and the higher cost reduces profits. Having no downtime is crucial as inventory of finished goods is needed to supply customers whenever the customer wants the product. Inventory management is crucial for customer service as it represents a huge cost for most businesses. Inventory is often between 30% and 90% of a business’ resources (called assets), e.g. for Kmart to be successful, thousands of items of inventory are needed as customers are rarely prepared to wait. Advantages and disadvantages of holding stock:


- Lower cost – large batches (bulk) of particular raw materials or component parts might result in lower cost through quantity discounts. Handling and transportation costs will also be lower.

- Allows a buffer – holding stock allows a safety aspect for when customers demand or inventory from suppliers is uncertain.

- Cost of storage - Danger of obsolescence – out of date with latest

trends, e.g. mobile phones are usually superseded within 6 months.

- Packaging/stock damage – after being kept for a long time

- Perishability – going off - Shrinkage – stock that is not accounted for

between when its received and sale (1% - 3% of inventory)

- Finance tied up in stock – could be used for something else, e.g. training

Inventory takes a lot of a business’ short-term resources or current assets. Therefore inventory has to be valued. This is important as it affects profit and the amount of tax a business pays. LIFO (Last-in-first-out) – a method of recording the value of inventory. Using this method, the inventory is valued on the last price paid for inventory. This means that stock purchased earlier and cheaper is valued at the same price as the latest stock, which is usually more expensive (inflation). This decreases the tax a business pays and is illegal in Australia. FIFO (First-in-first-out) – is a method where stock that is left over at the end of the year is valued based on its replacement value (i.e. current cost of the materials from suppliers). The COGS (cost of goods sold) includes all costs involved in getting the goods to the shop (invoice costs, transport costs and insurance costs). For this reason COGS is calculated on the invoice cost of the stock, i.e. the different prices which were paid earlier in the accounting period.



JIT (Just-in-time) – eliminates any activity in the entire supply chain that does not add value to the final product. It can also be called lean operations. The aim of JIT is to eliminate all types of waste such as over-production (where more is produced than is need for the next activity), storage costs and downtime (waiting time on resources, e.g. if labour or equipment is idle due to a machine braking down or an order of raw materials hasn’t arrived). The goal of JIT is to create a business culture in which all employees are encouraged to come up with ideas that could lead to continuous improvement. Russel and Taylor (2005) set out the following principals for continuous improvement:

1. Create a mind set for improvement – do not accept that the present way of doing things is necessarily the best.

2. Try and try again – don’t seek immediate perfection but move to your goal by small improvements, checking for mistakes as you progress.

3. Think – get to the real cause of the problem. Ask why – five times. 4. Work in teams – use the ideas from a number of people to brainstorm new ways. 5. Recognise that improvement knows no limits – get in the habit of always looking for better ways of

doing things. The danger of JIT is that if one activity in the supply chain fails, the whole operations function comes to a grinding halt.

Quality management - control - assurance - improvement

Quality management is as important as new product development. In business, quality is consistent performance to customers’ expectations. The operations function is concerned with meeting customer expectations. Therefore it is important to close the gap between customer expectation and customer perception (how they see a product), e.g. a certain level of customer service is expected at Kmart. An important principle is that quality is the responsibility of every employee in the business, which leads to continuous improvement.

Customer

expectations

Customer

expectations Customer

perception

Customer

perception

Customer

expectations

Customer

perception

Expectation > perception Expectation = perception Expectation < perception

Poor quality Good quality



Control: Quality control is the most common way of ensuring consistent quality in a business. It is the sampling technique that checks the quality of an item in the transformation process, e.g. quality checks of the temperatures of the cool room at McDonalds. Quality control → quality improvement Quality control minimizes the variations to defined limits and then builds systems and procedures to ensure these limits aren’t exceeded, e.g. Coca Cola allows only a 2ml variation either side of a 375ml can. Assurance: Quality assurance involves putting into place systems and procedures that make sure an error or fault will not happen, e.g. storing fresh meat below 4°C will prevent salmonella. While checking that the meat is stored bellow 4°C is quality control, the system that establishes what sort of checking and when it takes place is quality assurance. Quality management must be proactive, rather than reactive. Therefore employees must be trained to assess the quality of their work, i.e. self-inspection. Both managers and customers must be confident that the product has consistent quality. An important part of quality assurance is certification. Certification is where an independent organisation like Standards Australia inspects and certifies quality products. Improvement: Quality improvement involves all employees improving in a business. Operations managers understand that: Increased customer satisfaction → increased sales → increased profits → grows the value of the business. One of the most common approaches to improvement is TQM (Total quality management). TQM was developed by the Toyota factories in Japan and is based on continuous improvement. It is based on:

1. Customer defines quality and then the product designers and operations managers ensure that customers are always considered.

2. Quality is the responsibility of all employees. They therefore must inspect their own work with customers in mind and continually think of ways to improve what they do.

3. Develop a business culture that sees a need for quality and seeks to continuously improve in quality performance.

Overcoming resistance to change – financial costs, purchasing new equipment, redundancy payments, retraining, reorganising plant layout, inertia

Like businesses, products have a life cycle, i.e. they are born, they live, they die, e.g. the Sony Walkman revolutionised portable music, but made way for CD players and MP3 players, i.e. a change in technology produced products better suited to customer needs. If managers don’t adjust and cling to products that are dying, there is a gradual loss of customers as they change to products that better meet their needs. Change is inevitable, yet some managers resist change, e.g. Coles resisted while Woolworths embraced change and gained market share.



Managers are often too busy looking at day-to-day activities and problems that they don’t have time to change. Managers must develop strategies to overcome the resistance to change:

1. Financial Costs: A business might not want to change as the current system may be working and financial resources may be tight. However, if other businesses change while you don’t a loss of market share will be incurred and cost will become even greater. When managers are trying to convince shareholders that they require finance, debt financing is not a good option. Instead mangers could explain to shareholders that a greater portion of profits have to be retained to spend on the business, rather than be distributed as dividends, e.g. Microsoft.

2. Purchasing New Equipment: The cost of purchasing new equipment can be very expensive, but it is worth it because if a business doesn’t keep up with technology, future profits can be lost, e.g. Ansett Airlines resisted upgrading their fleet and as such, the older, less fuel-efficient and less cost-competitive planes couldn’t compete with Virgin’s newer planes. Strategies to overcome the resistant to change caused by the cost of new equipment include:

- Outsource the components that would be manufactured by the new equipment to businesses that have invested in the latest technology, e.g. Apple.

- Lease rather than purchase the new equipment. A big advantage is that no deposit is needed, you just pay each month. Leasing is where the equipment is owned by a financier and the business has the right to use it in return for monthly payments, e.g. Qantas leases its A380 Airbuses.

3. Redundancy Payments: Restructuring a business to cut costs and increase productivity requires a decrease in the size of the workforce. This means that a number of jobs are no longer need (redundant), but people losing their jobs are entitled to compensation, called redundancy packages. If managers consider the redundancy costs too high, they often resist restructuring the business, e.g. Patrick’s is one of Australia’s largest stevedoring (loads and unloads container ships) business. For years the business was grossly overstaffed and inefficient. The redundancy payments would have exceeded $400 million so the Australian government assisted with a levy on all containers coming into the country. Strategies to overcome the resistance to change caused by redundancy costs include:

- Equity finance from shareholders where the business increases share allocation, often called ‘options’. Existing shareholders get the option to purchase additional shares for a slightly reduced price.

- Effectively plan for redundancies so the necessary finance can be raised over a longer period.

4. Retraining: The cost of retraining is considerable because employees have to not only learn new skills, but often managers will also try and implement a new business culture, e.g. Kmart recently retrained every employee in improved customer service. Australian businesses are able to compete with businesses in low wage countries like Vietnam and Bangladesh due to flexibility. Australian business can vary a production run from 500 to 50,000 units. This is because the employees are multi-skilled due to continuous training.



Strategies to overcome the resistance to change caused by a lack of training include: - Change the culture of the business by getting all employees to embrace change. Business culture

refers to the attitudes and values held by all the human resources in the business. Continuous training → employees embrace change → improvement in everything the business does.

- Businesses must budget for training methods and reward employees who change their behaviour (Guy Rosso, CEO of Kmart did this).

5. Reorganising Plant Layout: In manufacturing businesses, the production line represents a large financial outlay. However, technological developments, particularly in robotics and computerisation, could significantly reduce costs if the layout was reorganised. Managers often won’t replace machinery that is still working with new technology. These businesses are called legacy businesses because they have a legacy of equipment and employees with the skills to use the older equipment.

6. Inertia: Inertia is the lack of resolve or energy to do something about a problem. Sometimes managers feel they do not have the leadership skills to make the necessary changes, but often it is because they are concentrated on short-term goals, e.g. increase profits for now but the business suffers in the long run. Managers often do this because their bonuses are connected to profit. Long-term goals are sacrificial. Strategies to overcome the resistance to change caused by inertia include:

- Often need to change the management team so that they are in line with the CEO’s vision for the business. Vision is how the business will look in three to five years if the CEO makes the proposed changes. It is almost inevitable that a new CEO (appointed by the Board of Directors) will bring in a new management team who share his vision, e.g. what Wesfarmers did when they bought Coles.

Global factors – global sourcing, economies of scale, scanning and learning, research and development

Global strategies → improve the competitive position in the global environment It is not easy, but Apple Inc. has shown that it can design, market and price a mobile phone better than its competitors. One of the reasons they could do this by incorporating global factors, including:

1. Global Sourcing: Global sourcing → supply chain management → continuous improvement at a lower cost Global sourcing is where the products or components are acquired outside the home country, usually because they are cheaper, e.g. Boeing’s new 787-9 Dreamliner is made up of parts that are globally sourced such as engines from UK, landing gear from France, fuselage from Italy etc. Basically, global sourcing + supply chain management → increased improvement, decreased costs and increased market share.

2. Economies of Scale: Managers must decide on capacity volume when designing a new factory. Capacity volume is the maximum amount of that product that can be produced in a given period of time.



Economies of scale are the cost savings that result from spreading fixed costs over increased output. Therefore, average cost decreases as the business gets bigger. This works on equipment used and also by purchasing large amounts of raw materials. Transportation costs are also important depending on the size of the operation and the location of the factory. Only works to an optimum level then diseconomies of scale are set in and occurs when the average costs of producing a product starts to rise.

3. Scanning and Learning: The global business environment is constantly changing. Technology is changing at a rapid rate. Therefore, businesses must be aware of the changes, i.e. scanning and must change the way the business responds and the way they achieve these new goals, i.e. learning. Scanning is often called data acquisition. It is done by using BIS (business information systems) which involves scanning real changes and identifying anticipated changes. Businesses must decide what changes need to be monitored. A vital part of scanning is interpretation, i.e. deciphering what the data means. Learning involves taking action to adapt the way things are done in the business to regain a competitive position, e.g. Samsung has to come up with a product to compete with Apple’s iPad. Everyone in the business needs to learn and embrace continuous change. The scanning and learning process:

1. Find out what the market place wants in a particular type of product. 2. Work out how well our business’ operations function performs compared to our competitors. 3. Work out what our operations function needs to do better. 4. Work out how this can be done.

4. Research and Development (R&D): Research and development is the business function concerned with developing new ideas and ways of doing things, i.e. the basis for new products. New idea → process design → new product All aspects of business in electronics is done to gain a competitive advantage, e.g. Quanta Computers R&D funds top universities in the USA ($200m)to develop the next generation of computing platforms. Research and development takes advantage of things like new materials and new knowledge of ways things can be done to develop a product. The businesses doing things first gain a competitive advantage, e.g. Apple was the first to effectively utilise touchscreen technology (iPod, iPhone, iPad).



5. Operations ‘Super Summary’

Operations: the process of converting raw materials into finished goods.

Operations management: the planning, organising, co-ordinating and controlling of the transformation of

inputs to outputs.

Strategic role: involves l-t management issues (3-5 years)

Influences: - Globalisation – single world market. Result of decrease in communication and transport costs. - Technology – the knowledge of how things are done concerning both the hardware and software

components. - Quality Expectations – meeting, or exceeding, a customer’s expectations - Cost-based Competition – driving down the costs of warehousing and transportation while spreading

overhead costs. - Government Policies – regulations, subsidies, grants, taxes and tariffs that encourage or discourage

aspects of the operations function. - Legal Regulations – laws that regulate the way things can be done, e.g. OH&S. - Environmental Sustainability – concerned with air, waste, water and environmentally sustainable

products and operations practises.

Strategies:

Addressing performance

objectives

Quality Having the highest quality goods and services. Good quality prevents costs caused by product recalls and repairs.

Speed Producing goods faster and delivering services faster. This relates to productivity.

Dependability Consistently good in both quality and performance. It involves being reliable

Flexibility Being more flexible than competitors and being able to make changes to operations.

Customisation Modifying a standard product to meet the individual needs of the customer.

Cost Producing cheaper, more efficient and with better productivity than competitors.

Address supply chain management

Logistics Concerned with all the business activities that acquire the materials, moving and storing them, e.g. change transportation type (trucking, railroad, shipping, air freight).

E-commerce Refers to the use of the internet for all aspects of commercial transactions, i.e. an electronic marketplace (online shopping).

Global sourcing Where products are acquired outside the home country.

Outsourcing Outsourcing When goods, services or activities (but not the core competencies) that would normally be a part of the business are obtained outside the business.

Quality management

Quality control The sampling technique that checks the quality of an item in the transformation process.

Quality assurance Putting into place systems and procedures that make sure an error or fault will not happen.

Quality improvement

All employees improving in a business, e.g. TQM (continuous improvement).

Overcoming the resistance to

change

Financial costs Financial resources may be tight. Strategies to overcome this include: - Explain to shareholders that a greater portion of profits have to be retained to

spend on the business, rather than be distributed as dividends, e.g. Microsoft.

Purchasing new equipment

Can be expensive, but if it doesn’t happen, future profits can be lost. Strategies to overcome this include:

- Outsource the components that would be manufactured by the new equipment to businesses that has invested in the latest technology.

- Lease rather than purchase the new equipment.



Overcoming the resistance to

change

Redundancy payments

Restructuring a business to cut costs and increase productivity requires a decrease in the size of the workforce. Strategies to overcome this include:

- Equity finance from shareholders where the business increases share allocation, often called ‘options’. Existing shareholders get the option to purchase additional shares for a slightly reduced price.

- Effectively plan for redundancies so the necessary finance can be raised over a longer period.

Retraining High cost as they have to learn skills and business culture. Strategies to overcome this include:

- Change the culture of the business by getting all employees to embrace change.

- Budget for training methods and reward employees who change their behaviour

Reorganising plant layout

Costs could be reduced if the layout was reorganised. Strategies to overcome this include:

- Implement new business culture to alter standing as a legacy business.

Inertia The lack of resolve or energy to do something about a problem. Strategies to overcome this include:

- Often need to change the management team so that they are in line with the CEO’s vision for the business

Global factors

Global sourcing Where products are acquired outside the home country.

Economies of scale

The cost savings that result from spreading fixed costs over increased output.

Scanning and learning

Businesses must be aware of the changes, i.e. scanning and must change the way the business responds and the way they achieve these new goals, i.e. learning.

Research and development

The business function concerned with developing new ideas and ways of doing things.



6. Operations Acronyms Influences: “GTG LE CoQ” – pronounced “Got-to-go (GTG) le cock” G – Globalisation T – Technology G – Government policies L – Legal regulation E – Environmental sustainability Co – Cost-based competition Q – Quality expectations Processes: “4Vs” Volume Variety Variation Visibility Strategies: “POGO SQuINT” P – Performance objectives O – Outsourcing G – Global factors O – Overcoming the resistance to change S – Supply chain management Qu – Quality management I – Inventory management N – New product/service design and development T – Technology



10.2 HSC Topic: Marketing

Outcomes:

The student:

H1 critically analyses the role of business in Australia and globally









H10 applies mathematical concepts appropriately in business situations

The focus of this topic is the main elements involved in the development and implementation

of successful marketing strategies.

10.2 HSC TOPIC: MARKETING


1. Role of marketing

Consumers decide which businesses succeed and fail as they choose to purchase from businesses who best meet their needs. Marketing involves understanding customer needs and meeting their needs more effectively than competitors. Management must consider other stakeholders such as owners/investors (sufficient profit) and employees (adequate benefits). Marketing has to satisfy customer needs, i.e.

- Identify the group of customers who are the focus (target market) - Research their needs - Develop a product to meet those needs

After this the business must price the product so customers see value in buying it, communicate the information to the customer and make the product accessible to the customer.

strategic role of marketing goods and services Identifying and meeting customer needs is difficult as their needs are always changing, e.g. mobile phones are always evolving. Sometimes changes are gradual and predictable, e.g. change towards a healthy lifestyle has made it difficult for tobacco sellers. At other times the changes are rapid and turbulent, e.g. those associated with the Global Financial Crisis. Businesses must monitor changes in the environment and look out for potential customers. They must determine what motivates them and detect their unmet needs. Businesses must look for possible new competitors and new technology. This is called external analysis and is concerned with monitoring the unmet needs of customers, identifying strengths and weaknesses in competitors, trends in the market place and the technological, consumer and economic environment. Businesses must also conduct and internal analysis, which is concerned with things like profitability, customer satisfaction and product quality. An effective internal analysis enables the marketing function to build on its strengths and strengthen its competitive advantage. Strategic role of marketing → identify changing environment → adapt the business and its products

interdependence with other key business functions Operations, marketing, finance and human resources are all interdependent, i.e. the individual functions are unable to operate without the others. Marketing is the start of a process as it is concerned with finding out not only what the customer wants, but also with designing a product that meets the customer wants more effectively than competitors. After the product is designed (marketing function) it has to be manufactured (operations function) and staff need to be trained (human resources function). Money is needed (finance function) to do the market research, design the product, train employees and purchase new equipment.



production, selling, marketing approaches The marketing approach for a business is to satisfy the needs of its customers more effectively than its competitors. Approaches have changed over time and include: Production approach: From 1820 – 1920 and was all about production. The business had only a broad understanding of customer needs and manufactured a product that they considered met those needs. The production approach concentrated on low-cost manufacture achieved through large-scale production, e.g. Henry Ford’s T-model Ford which was only available in black. Selling approach: From 1920 – 1960 and was all about selling. This was a major change as managers thought they could deal with increasing competition with good sales teams. They were very aggressive and tried to convince customers that their product was much better than competitors. Radio advertising was utilised along with door-to-door salesmen. Marketing approach: A philosophy that believes success comes from a total focus on customer satisfaction, i.e. a satisfied customer will return for more (relationship marketing). It is much cheaper to retain an existing customer than to try to get new customers. Retain customers → achieve goals → increase profitability and growth Customer satisfaction is the core of a successful business. Businesses must provide a quality product. Most do this through TQM (Total Quality Management) which works towards continually improving every aspect of the production and distribution process. Businesses use outsides bodies like Standards Australia to certify that the business has procedures and systems that result in a quality product all the time. Keeping customers satisfied leads to repeat purchases (relationship marketing). Loyalty reward schemes are often used, e.g. Fly Buys.

types of markets – resource, industrial, intermediate, consumer, mass, niche Businesses must know the different types of market as a business that develops products that better meet the needs of customers in a specific market will have a competitive advantage. Markets are where the buyers of products are linked to the business selling the products. They can be physical places where buyers and sellers meet or intangible networks where buying and selling is conducted over great distance through computers. Different markets include:

1. Resource Markets – refers to business buyers who purchase the factors of production (land, labour, capital and enterprise) in order to make products or deliver services to customers. The factors of production are:

- Land – things such as agricultural land, mineral deposits, forests etc. - Labour – people who provide the range of skills businesses need. - Capital – such things as equipment and factories. These are tools used by businesses to produce,

manufacture and distribute the product (don’t confuse with $ capital) - Enterprise – the risk taking by entrepreneurs. Entrepreneurs provide the management skills that

combine the other factors.



2. Industrial Markets – refers to businesses that provide products needed to manufacture other products. Many buyers buy goods only because they are needed to make the product that they manufacture, e.g. Coca Cola buys aluminium cans from Alcoa.

3. Intermediate Markets – refers to the purchase of goods for resale, e.g. Woolworths purchases products to sell to retail customers.

4. Consumer Markets – consists of buyers who purchase goods and services for personal use, e.g. buyers who purchase clothes, food, electronics etc.

5. Mass Markets – refers to the large number of customers who want to buy a standard product such as electricity or petrol. From the 1930’s to the 1960’s, many products (e.g. washing machines) were mass-produced, i.e. the consumers were treated as the same.

6. Niche Markets – consists of buyers with specialised needs, i.e. a narrowly defined group of potential customers, e.g. the proposed Virgin space flight. The advantage of establishing a niche market is that large competitors are not interested in the market and there is no real competition, i.e. small businesses often target niche markets.



2. Influences on marketing

factors influencing customer choice – psychological, sociocultural, economic, government The factors influencing customer choice involves what motivates a customer to choose one product over a competing one, i.e. what lies behind the purchase decisions. Thousands of reasons are grouped into the categories:

1. Psychological Factors: Psychological factors influencing customer choice refers to the way we think, feel and reason when we decide to select a particular product and includes things like the way we perceive the product, our personality, lifestyle and attitudes and beliefs. Businesses must understand what the customer is feeling and reasoning because product features can be added that help the customer gain a more favourable feeling to the product. Customers buy from a particular brand mainly because it provides them with the psychological benefits of confidence, esteem and total satisfaction. A brand is a design, logo and name that distinguish a business’ products from competing products.

2. Sociocultural Factors: Sociocultural factors are those influences from the society and culture that the customer is a part of. It includes things like social class, family, household type, roles and status. The influence of family and peers has a huge impact on consumer choices. Therefore, changes in society and social structures need to be monitored. The trend towards a healthy lifestyle is one of the most significant sociocultural influences. There is strong social reaction to the aggressive advertising of products with too much fat to children (e.g. McDonalds advertising targeting children) and there are opportunities to develop products that cater to these changes.

3. Economic Factors: Economic factors refer to changes in spending and income in the wider economy, i.e. anything to do with money). Businesses use economic indicators (e.g. new car registrations, new building approvals and retail sales) to gauge how the economy is going. Fiscal policy is budget policy. Economy growing → confidence high → consumers more likely to make large purchases, e.g. cars, furniture, whitegoods etc. When there is a loss of confidence, consumers refrain from purchasing large items and save. This makes it difficult for retails, e.g. during the GFC David Jones was relying on “sales” to attract customers.

4. Government Factors: Government factors refer to the capacity of the government to tax, make grants and implement laws and regulations that impact on the type of product a business markets and the price, e.g. the regulations on tobacco where the federal government implemented the plain packaging of cigarettes to make the product less attractive to young people.



consumer laws - deceptive and misleading advertising - price discrimination - implied conditions - warranties

The purpose of consumer law is to protect consumers from business exploitation. State governments have many laws to protect consumers, but it is the Commonwealth government that develops laws to control business behavior. The Trade Practices Act (TPA), 1974 (Cth) sets out the rules for fair and reasonable behavior by business. The Australian Competition and Consumer Commission (ACCC) enforce these laws. TPA sets out laws → ACCC administers these laws. Important aspects of consumer law include: Deceptive and misleading advertising – illegal under the TPA. Examples include deceptive and misleading advertising information on the features of a product and using “bait advertising” where they promote a heavily discounted product when there are very few of the products for sale. Price discrimination – where a good is sold at different prices to different customers. The aim of the legislation is to try to stop the discrimination against small retailers, who are most likely forced to pay higher prices for products where larger businesses get the same product at a lower price. This practice is very hard to stop because the legislation allows for so many exceptions, i.e. ineffective. Implied conditions – both State and Territory Fair Trading Acts and TPA 1974 provide consumers with basic protection in relation to the goods and services they buy, i.e. they require that any goods sold will comply with the way they were described to the customer, will be of suitable quality and fit for their intended purpose. Warranties – a warranty is an important aspect in marketing as it provides customers with an assurance that the product will perform satisfactorily and that any defects will be corrected during the warranty period. They are particularly important in the marketing of new products. An extended warranty occurs when, for a price, a customer extends the standard warranty.

ethical – truth, accuracy and good taste in advertising, products that may damage health, engaging in fair competition, sugging

It is vital that businesses are perceived to be ethical. Ethical behaviour is concerned with the way moral, rather than legal, principles apply to a business. Truth, accuracy and good taste in advertising: Consumers have the right to expect truthful marketing of products and services. Consumer laws try to ensure this. Some examples of inaccurate and/or untruthful forms of advertising are:

- Hidden fees and surcharges that are not disclosed in the advertised price, e.g. insurance costs add significantly to vehicle hire rates, surcharges such as fuel and departure taxes are on airfares and there may be hidden activation fees on mobile phone services.

- Closing down or liquidation sales where prices appear to be marked down for clearance while there is little evidence of what the pre-sale price actually was.

- Undefined terms such as “organic”, “free range”, “biodegradable” or “light” enable advertisements to mislead or confuse consumers who are seeking environmentally-friendly or healthier options.

The ACCC (Australian Competition and Consumer Commission) has the power to charge businesses that use misleading advertising, e.g. Dodo was fined $26,400 for claiming that their broadband service was $39.90 per



month even though consumers could only purchase the plan if they were also signed up for a $29.90 home phone plan. Good taste in advertising is much more subjective. Ethnic minorities, animal welfare, bodily functions, children’s issues, the needs of the aged, medical research and fundraising appeals are some of the areas that demand sensitivity in advertising. Products that may damage health: It is estimated that the average Australian is exposed to over 2000 advertisements a day and some of these are for products that could be considered unhealthy, e.g. tobacco, alcohol, high-fat and high-cholesterol foods and over the counter pharmaceuticals. In 2011 there was a heated debate over plain packaged cigarettes with many studies showing young people will find them less appealing and of lower quality. Engaging in unfair competition: Unfair competition can take a number of forms:

- Price fixing – where two or more businesses agree to control or fix prices for goods or services they produce.

- Misrepresentation in advertising – false or misleading claims. - Bid rigging – when the tendering process is manipulated by the business involved. - Predatory pricing – a business uses its dominant position in the market place to lower prices to drive

competition out of the market. - Resale price maintenance – suppliers attempt to influence retailers to charge a fixed price to maintain

profit margins. Sugging: Sugging is an unethical practice that involves selling under the guise of research. It is illegal in Australia but very difficult to detect. Market research with the real purpose of selling products or services to the consumer can be subtle, e.g. surveying a household about primary school students may focus on selling programs to improve NAPLAN testing.



3. Marketing process

The marketing function is the most important in the business, as if the business gets it wrong, it fails to understand the needs of customers and/or develop a product concept that is competitive in the marketplace, and then the business will likely fail. A carefully considered marketing process is needed. A business must start with a situation analysis to understand the business environment. Situation analysis → market research, establish market objectives and identify customers. Objectives are achieved through strategies – must check to see if these strategies are working.

situational analysis – SWOT, product life cycle Situation analysis sets out the present state of the business, providing answers to questions asked in the planning process, describes the market and a business’ position in that market. It also describes the environment in which the business is operating, both internal (factors inside the business) and external (outside), e.g. Qantas’ internal factors include the types of planes they use and the training of staff while the threat of a terrorist attack is from the external environment. Qantas used hedging of aviation fuel prices to gain some control over an external influence. The two key elements of a situation analysis are: SWOT analysis and product lifestyle. SWOT analysis is one of the most effective tools to evaluate a business in terms of its competitors. From the internal environment:

- Strengths – anything the business does better than its competitors - Weaknesses – the things that competitors do better.

From the external environment: - Opportunities – changes in the external environment that can be exploited to achieve objectives. - Threats – changes in the external environment that make it difficult to achieve objectives.

e.g. Qantas SWOT analysis:

Strengths Weaknesses

Strong global brand Strong financial resources Loyal, highly skilled workforce Highly profitable Jetstar brand

Legacy of industrial agreements (higher costs) Cost structure has made international operations less competitive Losses on international routes Inability to settle industrial disputes

Opportunities Threats

Can take advantage of Tiger Air recent groundings to gain market share Substitute Qantas international routes with cheaper Jetstar Collapse of Air Australia in Feb 2012

Higher costs from aviation fuel and aircrew Industrial action as pilots react to the fear of cheaper Asian replacements Disputes led to grounding of Qantas planes which damaged the Qantas brand name

Product life cycle – a business must keep a very close watch on their products and the position of their products on the product lifestyle, i.e. the stages a product goes through. A business with too many products in the maturity stage of their lifecycle faces a dangerous situation. A business must have new products in the introductory stage or growth stage to take the place of those in the post maturity or decline stage. The stages are: introduction, growth, maturity and decline.



Introduction – characteristics include: - Until people get to know the product, sales will grow slowly. - Heavy promotion and the costs of development often mean negative profits. - Higher prices can be charged until competitors enter the market.

Growth – characteristics include:

- The heavy promotion pays off and sales grow rapidly. - It is very profitable because prices are high. - The profits attract competitors.

Maturity – characteristics include:

- Sales level off. - Only occasional advertising is needed to promote product, e.g. Weet-Bix.

Decline – characteristics include:

- Sales are falling and there is little purpose in fighting the trend. - Getting rid of stock requires heavy discounting.

Differentiation:

- Product design - High costs - Focus on quality - Improve distribution

Standardisation:

- Competitive cost important - Long production runs - Introduce small improvements - Cost minimisation

market research A business must undertake market research to find out customer needs. Market research is the way information needed for market decision-making is collected and analysed. This information will guide the decision making on such things as the needs of customers, what competitors are doing, new product development and so on.

SALE

S



There are three typical steps in the market research process: 1. Determine information needs – working out what information is needed to make the decision. 2. Collecting the data from primary and secondary sources. 3. Data analysis and interpretation.

Determining the information needs: Info is used to solve problems, e.g. if a new product is being developed and problems emerge, they must find out what benefits customers most value and find out more about the location and income of the target market. Managers then must decide on how to collect the information needed to solve the problems. Data collection (primary and secondary): Primary data – involves original research to solve the problem. The most common methods are:

1. Use of focus groups – involves collecting a small group of people who match the characteristics of the target market.

2. Surveys – refers to the questioning of a group of people as to their opinions on issues of importance to the marketing team. They are popular because they can be conducted relatively cheaply over the phone or prices can be offered.

Secondary data – refers to the facts and figures that have already been collected for other purposes, e.g. the ABS (Australian Bureau of Statistics) publishes facts and figures on things like geographic location, income and education levels. Therefore it is much cheaper than primary data. It comes from sources like government departments, media, company reports etc. Secondary data helps pick up trends in things like fashion, lifestyle, buying patterns and demographics. The marketing department can pick up anticipated changes in the external environment and respond to them. Data analysis and interpretation: Data and information are different. Data refers to the raw figures and facts which is then analysed to provide information that is useful in solving marketing problems. This info is then interpreted to solve the marketing plan. Interpretation is concerned with looking for relationships that explain the meaning of the data.

establishing market objectives Marketing objectives set out what the business wants to achieve with its marketing effort, i.e. objectives drive the marketing effort. Marketing objectives must relate to things like profit, quality and staffing. Good marketing objectives:

- must be specific - should be capable of being measured - must be realistic

Determine information data Need to work out what information is

needed to solve the problem

Primary – focus groups or surveys used Secondary – excellent for picking up trends

Original material collected

to solve the problem General material collected



Another objective model is the SMART model: S – specific, e.g. increase market share by 5% over last year M – measurable (get figures on), e.g. $100,000 increase A – achievable R – realistic T – time (needs to have a time frame), e.g. 1 year The most common type of market objective relates to market share which describes a business’ performance in the market place compared to its competitors. Other marketing objectives include:

- developing new products to take the place of products in the maturity of the product lifestyle - entering new markets, e.g. a NSW business opening new stores in Victoria

identifying target markets The total market is usually too large for a single product to meet the needs of customers in that market. Therefore most business’ target a particular group of customers with common characteristics at which to direct their marketing activities. The target market refers to the group of actual or potential buyers of the product. It is the group at which the marketing effort is directed. When a business really understands its target market, it can often develop new products to meet their needs, e.g. there is no doubt that The Wiggles understand their target market of preschool children.

developing marketing strategies Marketing strategies allow a business to achieve objectives. For the objective: increase market share by 5%, the strategy: heavily promote the product and/or reduce the price, could be used. The marketing mix (4 p’s – product, price, promotion and place) plays an important role in marketing strategies.

implementation, monitoring and controlling – developing a financial forecast; comparing actual and planned results, revising the marketing strategy

Implementation – a process whereby the marketing plans are put into operation. It must be effective (achieve its goals) and efficient (uses a minimum of resources). Monitoring – essential to ensure the plan is effective and involves watching what happens when the product is placed in the market. Monitoring is done by:

- Sales analysis – the breakdown of sales figures by product, customer or market for a given period of time, e.g. watching things like warehouse sales to retail shops and sales reports from the sales representatives.

- Market share analysis – refers to the products’ share of the total market and profitability refers to the money that is left over after all expenses have been paid.

Controlling – process of comparing actual results with planned results. It is done by developing a financial forecast and comparing actual results against the planned results. Financial forecasting – involves working out the expected costs and revenues of implementing the plan, i.e. makes an estimate of costs such as the cost of manufacturing the product (including development costs),



promotion costs and distribution costs. It also estimates revenue from sales. However it is not easily done, even though it will be based on careful research of customers and their needs. Revising the marketing strategy – essential if the forecast proves to be inaccurate as it enables the business to get the plan “back on track” as quickly as possible. The marketing mix is usually the starting point of any revision, e.g. if sales are below the forecast the business can:

- Lower the price and use discounts (price) - Increase spending on promotion (promotion) - Increase the distribution intensity (place) - Improve the benefits from the product through things like better warranty and better after sales

service (product)



4. Marketing strategies

Marketing strategies refers to the ways the marketing function goes about achieving the marketing objectives. A business must know its market and the needs of their customers. This is done by breaking it up into smaller parts where customers have common characteristics, i.e. market segmentation. Then a business identifies which segments match the business’ resources. A business could develop products that fit a number of segments, i.e. product/service differentiation. The business then decides what image (in terms of price and quality) it wants to but forward, before developing products that will most competitively meet the needs of customers, price, promote and distribute them. Marketing strategies → achieve marketing goals → consistent with overall business goals

market segmentation, product/service differentiation and positioning Market segmentation: Market segmentation occurs when businesses focus their efforts on a particular group of customers who have similar needs. This is because customers’ needs in the total market are so varied, e.g. Supre targets young women. Segmentation allows a business to develop a more competitive product/approach. Segmentation → focus on needs of that group → provide better products for that group (therefore more competitive) Markets can be segmented on many variables including:

- Gender – is crucial in providing different products/styles for women and men. Not only clothes but also housing, furniture, entertainment and cars, e.g. the Nissan Micra is aimed at females while the Toyota Hilux is aimed at men.

- Age – crucial in determining the needs, e.g. Huggies target families with babies. - Income – very important in products we purchase, e.g. cars, clothing, furniture and housing all contain

segments directed at the rich. - Lifestyle – interests vary greatly from person to person, e.g. health magazines and gyms meet certain

lifestyle needs. Product/service differentiation: Product/service differentiation occurs when businesses decide to compete across a number of segments by changing their products to meet the specific needs of the customers in each segment, e.g. the smartphone market. Product/service differentiation is better able to satisfy customer needs in a particular segment but it is a more expensive strategy than having a standardised product designed to generally meet the needs of all customers in all segments. Standardised products can take advantage of economies of scale (lower costs). Economies of scale are the cost savings, such as bulk-buying, associated with large-scale production. However, customers are increasingly heterogeneous (have individual needs). The increase in market share for HTC and the consistent market share of Apple’s iPhone 4 supports this.



Positioning: Positioning provides the ‘fit’ between customers in a particular market segment and the business resources and skills required to develop a product that will successfully meet the needs of customers in that segment. Positioning is a perception or image that potential buyers have of a product compared with its competitors, e.g. a restaurant with a top chef will be positioned at the top of the market while McDonalds will be positioned lower, promoting value for money. This shows the relationship between market segmentation, product/service differentiation and positioning.

products – goods and/or services - branding - packaging

There are two aspects to a product:

- The core product refers to the benefits the product offers to customers, e.g. a can of drink quenches thirst, a car gets you from point A to point B etc.

- The actual product includes not only benefits but also added features, positioning, brand and packaging. It also includes intangible features such as a guarantee, possibly delivery and installation and after-sales service. The actual product is also called the augmented product.

Product strategies refer to the ways a product itself can be used as a strategy to improve competitiveness, e.g. a car could be made more competitive by extending the warranty. Typically, the core product is augmented with features like:



- Quality - Styling - Warranty - After-sales service - A brand name that can be trusted - Provision of credit, including interest free periods - Packaging

Branding: A brand is the heart of marketing and therefore a business. Marketing is all about making the business’ products different from its competitors’. If a customer doesn’t see a difference, they will buy the cheapest or the most convenient. A brand is a logo, name, symbol or design (often a combination) that distinguishes a business’ products from other products in the market place. Over time a customer identifies the product with the characteristics of the brand, (e.g. style, reliability, price etc.). Satisfied customers develop brand loyalty. Brand supports positioning, e.g. Sony does not have to convince customers of quality every time they release a new product. Brands like Sony develop brands over a long time and it costs a lot of money to achieve this dominance in the market place. Brand dominance → high profit margins Packaging: Packaging has both a functional and marketing role. It protects goods in transit and it contains information such as identification of the brand, weight and possibly the instructions of the product (functional role). It also is important in getting potential customers attention (marketing role). Packaging is all about making the product more competitive. It can give info about possible uses and dangers associated with incorrect use. It can add to the aesthetics of the product. Packaging is essential to calculate the maximum space in things like standard containers. Packaging impacts significantly on the cost of distribution. It needs to support the positioning of the brand, i.e. an expensive, highly positioned product wouldn’t be placed in cheap packages.

price including pricing methods – cost, market, competition-based - pricing strategies – skimming, penetration, loss leaders, price points - price and quality interaction

There are three methods of pricing a product:

1. Costs – businesses can work out how to price their products on the cost to develop, manufacture and distribute. They then add a margin to this (profit) and this becomes the price. It is called cost-based pricing.

2. Market – used by businesses producing commodity products (e.g. wheat, wool, coal, iron ore). They

tend to be price takers and are literally forced to accept the market price. This price fluctuates on the world market.

3. Competition based – businesses look very closely at competitors’ prices because if a business is

charging more, a customer is likely to go to a competitor. Charging too much less than competitors



can lead to a price war. Lower prices should only be used in the long run if a business has cut costs, e.g. like Woolworths did to Coles.

Pricing strategies – prices are can vary and different pricing strategies can be used to gain a competitive advantage. The key strategies are:

1. Skimming strategies – where the business sets a relatively high price at first and then lowers the price over time. This helps the business recover its development costs before competition forces a lower market price. The price is set at what the market will bear, e.g. Microsoft’s Xbox 360.

2. Penetrating strategies – where a business sets a lower price (below competitors) in order to increase

market share. If successful it will increase sales and market share and usually lower per unit costs through economies of scale. Usually only done for a short period of time as it will impact profit, unless economies of scale are achieved and profit is maintained.

3. Loss leaders – are prices set at a very low level to encourage consideration of a product newly

introduced to the market or to encourage customers to consider other products, e.g. Woolworths use this with specials, hoping customers do the rest of their shopping there. Businesses must be careful they are not using ‘bait advertising’, which is illegal.

4. Price points – is psychological and refers to cut-offs in the minds of customers, e.g. $9.99 is less than

$10 even though it is rounded up to $10 at the checkout. In the minds of customers, under $10 is ok, but $10 or over is the price point that becomes too high.

Price and quality interaction: Customers are individuals, varying greatly, with some being price sensitive, i.e. price is the dominant criteria when a customer makes their choice between competing products and services. Other customers consider quality, service and image as the dominant criteria when choosing between competing products and services. Therefore, a business must understand its customers’ sensitivity to the different factors, e.g. some Qantas customers are price sensitive where a 5% increase in prices would see them choose another airline while some customers insist on the full service (meals, drinks, entertainment). The solution to the price and quality interaction is multi-branding, i.e. the development of several products, positioned in terms of quality and price, and supported by a logo, name or symbol the customer associates with the value or quality of the product, e.g. Qantas underwent multi-branding with their Jetstar brand.

Promotion - elements of the promotion mix – advertising, personal selling and relationship

marketing, sales promotions, publicity and public relations - the communication process – opinion leaders, word of mouth

Promotion is about effective communication with customers. If a customer doesn’t know about a product, they won’t buy it, regardless if it’s the best product. A business can use many techniques to communicate. This mix of techniques is called the promotion mix.



Elements of the promotion mix: The promotional mix refers to the way techniques (such as advertising, personal selling and relationship marketing, sales promotions, publicity and public relations) are combined so that they effectively meet the communication requirements of a particular business at a particular time.

1. Advertising – paid communication with the target market and it is usually designed to be persuasive. It can be very effective and expensive. Advertising uses various types of media such as television, newspapers, magazines, radio, social media (e.g. Facebook, Google) and viral advertising. Viral advertising involves promoting products in such a way (usually humorous) that customers want to send it to friends (usually via email). A lot of advertising supports the brand and positioning, e.g. the milk aspect of Cadbury’s advertising suggests quality and high market positioning.

2. Personal selling and relationship marketing – personal selling is what teams of sales representatives

employed by manufacturers do when they sell products to retail outlets. It is one of the most important promotional tools and is becoming a partnership between the supplier and the retailer, e.g. Dulux Paint sales reps at Bunnings will replace stock, clean the shelves, ensure the display is attractive, often serve customers and do point of sale advertising by setting up promotional material. Relationship marketing is concerned with building a long-lasting relationship, not only between manufacturer and retailer customer but also between the retailer and their customers, e.g. Myer gets 60% of its business from customers who own a Myer card. There is an ethical dimension to relationship marketing as social media is increasingly used as a tool to build relationships, some of which are dubious, e.g. Paddle Pop and Smarties aimed at young children.

3. Sales promotion – are non-media communication, e.g. promotional activities such as vouchers,

loyalty card offers and competitions. They are very cost effective and often include special displays in retail stores.

4. Publicity and public relations – increasingly used to communicate with a target market. Public

relations is a planned effort to present a business and its products in a positive light, i.e. ensure strong public image. It involves activities that are not paid for directly. Big businesses have specialist PR departments to deal with any media aspect that has the potential to affect the image of a business. PR is about ensuring that every aspect of the business gives a positive message customers feel good about. Publicity is concerned with creating newsworthy stories about the business and its products. Celebrities are often used to wear the products or the talk about them, e.g. Ricky Ponting with Swisse Vitamins, Derrick Rose $260 million Adidas deal over 14 years. Celebrities are used because people (young people in particular) listen to their message. Using celebrities is not always ethical as they sometimes do not use the product. It is also unethical to endorse products like alcohol and tobacco. Publicity is about creating and reinforcing an image of the business in the eyes of customers. An effective way of creating a positive image is through sponsorship of special events and sporting teams.

The communication process: Marketing is all about communicating with potential customers or buyers in a way that will influence their behavior. Two important aspects are:

- Understanding what influences buyer behavior - Understanding who influences buyer behavior

What – key influences include personal and psychological factors as well as social and cultural environments in which people live. Who – buyer behavior is influenced by other people who do things like suggest buying a product or service and influence whether they buy it or not and where they buy it from.



The people who influence buying decisions in this way are called opinion leaders. Opinion leaders are people you respect and tend to agree with their views on a whole range of things, including fashion and taste. The internet and social media have increased the influence of opinion leaders greatly. National sporting figures and celebrities tend to be very effective opinion leaders, e.g. Nicole Kidman, Michael Clarke. Word of mouth communication relies on local opinion leaders. It refers to personal endorsement.

place/distribution - distribution channels - channel choice – intensive, selective, exclusive - physical distribution issues – transport, warehousing, inventory

The distribution process is about allowing the customers access to the product when they want it. The distribution channel links the point of manufacturing to the final customer. Traditional distribution channel: Manufacturers produce the product → wholesaler → retailer → customer Although all parties work together, they are all trying to achieve their own goals (maximise profits), often at the expense of those before or after them. Modern distribution channel – involves vertical distribution where the one business designs, manufactures, sells, and delivers the product to the final customer, e.g. Walmart, and Woolworths with their ‘Select’ brand. Channel choice: The intensity of the distribution refers to the number of outlets selling the product. The choice of distribution channel is crucial to success, e.g. Poppy King manufactured lipsticks and delivered them through an exclusive distribution channel. Her business failed, but if she had of chosen a selective channel she may have been successful. The main channels are:

1. Intensive distribution – chosen when the manufacturer wants to uses as many outlets as possible, e.g. Coca-Cola uses supermarkets, service stations, vending machines etc.

2. Selective distribution – is used when the manufacturer wants the product widely distributed but not

quite to the degree of intensive distribution, e.g. groceries, clothing, furniture

3. Exclusive distribution – is often used for products positioned at the top of the market that are high quality and with prices that indicate exclusivity, e.g. Rolls-Royce cars.

Physical distribution issues: Physical distribution is about efficiency, i.e. using as few resources as possible to achieve the goals. It is important as it is a cost component of the final product. If done efficiently (by managing transport, warehousing and inventory more effectively) it allows a business to gain a competitive advantage over its competitors.

1. Transport – cost-reduction advances in transport have been very significant. The most important being standardization of packaging to ensure the pantechnicons (warehouse) and containers are fully loaded and that a business is minimizing its unit cost of transport. Another advancement is the



adoption of pallets and the fitting of automatic “roll-on-roll-off” conveyor belt technology to trucks that means the driver can load and unload without assistance.

2. Warehousing – technological advancements have led to cost reductions, e.g. Woolworths stopped

using the old warehouse sheds and went to totally sealed warehouses with no lights or windows. They are totally automated and run by computers. Very few staff are needed and they warehouse and distribute incredibly large amounts of products. Coles then followed.

3. Inventory – stock must be available when the customer wants it, but businesses must take into

account the cost of storage.

people, processes and physical evidence The classical marketing mix (4 p’s) has typically related to traditional manufacturing but now in Australia there has been a big move from businesses manufacturing goods to provide services. This is due to a great deal of manufacturing being outsourced to low-wage countries. The people, processes and physical evidence are crucial parts of the marketing mix in a service business. People: People are central to a business, e.g. Kmart focuses greatly on customer service, putting employees through training on how to deliver it. Therefore recruitment and selection of employees is critical. Employees selected with desired basic skills → training to enhance/develop interpersonal skills → happy customers → repeat purchases Processes: Processes are very important, e.g. McDonalds, as a fast-food restaurant, must be fast. They spend a lot of time and money on this, especially on the drive through. Physical evidence: Physical evidence in the market place can give a business a competitive advantage. It is the part of the marketing mix where the customer makes judgments about the business. Quite often the physical evidence is the most important factor in the customer’s evaluation of the product, e.g. flying first class on a plane has very high expectations. If the physical evidence of that expectation isn’t there, then you won’t repeat purchase and you will be negative in your word of mouth comments.

e-marketing E-marketing is concerned with using the internet to research customer needs, develop a brand to meet that need and then use the internet to sell that product, e.g. the success of www.bookdepository.co.uk probably led to the failure of Angus & Robertson and Borders. E-marketing has an enormous potential, mainly across two areas:

1. Access to customers – the internet can target an enormous market and because it is so large, there is a great deal of potential to develop a product that satisfies a small niche in that market, e.g. the Apple App Store. Of course building a global brand is entirely different and very difficult.



2. The area of costs – businesses such as www.bookdepository.co.uk are able to set up factory-type processes using relatively unskilled labour and consequently they have low costs. Competing businesses are often very high cost, with highly skilled employees and very expensive retail premises.

E-marketing is growing rapidly and so is the range of products including:

- Consumer products - Whole range of business services (these include call centres to telephone businesses and banks,

graphic artists, computer programming and accounting services)

Increasingly, functions in a business are outsourced in the e-marketing environment.

global marketing - global branding - standardization - customization - global pricing - competitive positioning

Businesses are often tempted to enter the global market as the potential market is enormous. Before doing so, it is important for a business to consider the following marketing concepts:

1. Global branding: Customers generally buy things because they have confidence in the brand. If brand was irrelevant, the customer would buy the cheapest. There has been a move from local brands to become global brands, i.e. recognized in most countries. The main reasons for developing a global brand are:

- Growing internationalism of tastes and buying patterns, e.g. smartphones, computers. - Economies of scale, e.g. Apple have been able to achieve high quality, low cost products.

The advantages of developing a global brand are:

- Potential cost savings, i.e. standardize design, packaging, logo and name across production. - Customers are increasingly mobile and tend to purchase familiar brands when they travel - Strong brands attract good prices and significant market share.

2. Standardisation: Localised and national markets are changing because of travel, communication and transport. This is contributing to customer needs and tastes becoming increasingly alike. It therefore makes sense to market a standardized product, e.g. Apple iPhone. A standardised product is a product designed to meet the needs of every market segment in a particular market. They can achieve economies of scales resulting in high quality at low prices. The advantages of a standardised product are:

- High degree of similarity in putting together effective marketing campaigns in different countries. - Cost savings with things like packaging and staff training.



3. Customisation: Very few products can be marketed in the same way, i.e. without some degree of customisation. Customisation is concerned with ensuring there is a better fit between the needs of customers in a global market and the product, e.g. a standardised Barbie Doll can be customized by adding clothes etc. The degree of standardisation varies with the product and market. National values are important in food products, but not in electronic products. Cultural values are important to the elderly and those on low income, but not to the young and wealthy.

4. Global pricing: Global pricing is a difficult concept as every product sold in a particular country is sold in that country’s currency. Currencies change their value in relation to other currencies all the time. Pricing is important as it is the link between marketing and the business’ profitability. The purpose of the business is to deliver value to the customer and pricing is the technique that enables this. A well perceived brand can charge higher prices, e.g. Apple. They can do this by convincing customers of value, particularly to do with design, the applications and intuitive operations.

5. Competitive positioning: Competitive positioning is concerned with creating an image in the minds of customers of the value the business’ products can give the customer in a global market where competitors are trying to create an image that their product offers the customer better value. It is all about value. The purpose of positioning and branding is to make the value clear to the customer. The following can influence competitive positioning:

- The number of competing businesses in that market. - The relationship a business develops with its customers, e.g. Apple with their stores and their social

media channels that they use to keep the customers informed and to launch new products. - Product and technology development, HTC is building an image of developing new products that

better meet the needs of customers, i.e. product differentiation. A great deal of very expensive advertising is needed to support the competitive position of a global business.



5. Marketing ‘Super Summary’

Marketing: understanding and meeting customer needs.

Marketing management: consider other stakeholders, e.g. owners/investors (sufficient profit) and

employees (adequate benefits).

Strategic role: - Maximise sales - Maximise profits - Increase market share - Maximise customer satisfaction

Approaches: - Production approach – (1820 – 1920). The business had only a broad understanding of customer

needs and manufactured a product that they considered met those needs. Concentrated on low-cost manufacture achieved through large-scale production.

- Selling approach – (1920 – 1960). Managers thought they could deal with increasing competition with good sales teams. They tried to convince customers that their product was much better than competitors using radio advertising and door-to-door salesmen.

- Marketing approach – A philosophy that believes success comes from a total focus on customer satisfaction, i.e. a satisfied customer will return for more (relationship marketing). It is much cheaper to retain an existing customer than to try to get new customers.

Types of market: - Resource Markets – the factors of production (land, labour, capital and enterprise). - Industrial Markets – products needed to manufacture other products. - Intermediate Markets – resale, e.g. Woolworths buys from intermediate market. - Consumer Markets – goods and services for personal use. - Mass Markets – standard product, e.g. electricity or petrol. - Niche Markets – consists of buyers with specialised needs.

Influences: - Psychological factors – the way we think, feel and reason when we decide to select a particular

product. - Sociocultural factors – influences from the society and culture that the customer is a part of, e.g. it

includes things like social class, family, household type, roles and status. - Economic factors – changes in spending and income in the wider economy. - Government factors – capacity of the government to tax, make grants and implement laws and

regulations that impact on the type of product a business markets and the price.

Consumer law: - Deceptive and misleading advertising – they promote a heavily discounted product when there are

very few of the products for sale, i.e. “bait advertising”. - Price discrimination – where a good is sold at different process to different customers. - Implied conditions – State and Territory Fair Trading Acts and TPA 1974 specify products will be of

suitable quality and fit for their intended purpose. - Warranties – an assurance that the product will perform satisfactorily and that any defects will be

corrected during the warranty period.



Strategies:

Segmentation and

differentiation

Market segmentation When businesses focus their efforts on a particular group of customers who have similar needs.

Product/service differentiation

When businesses decide to compete across a number of segments by changing their products to meet the specific needs of the customers in each segment.

Product

Branding Developing a recognisable and trusted brand that consumers associate with.

Packaging Having packaging that supports the positioning of the brand. Both marketing and functional role (i.e. also protects product and used for ease of storage.)

Price

Skimming strategies Sets a relatively high price (what the market can bear) at first and then lowers the price over time.

Penetrating strategies Sets a lower price (below competitors) in order to increase market share.

Loss leaders Set at a very low level to encourage consideration of a new product or other products, e.g. Woolworths’ specials.

Price points Is psychological and refers to cut-offs in the minds of customers, e.g. $9.99 is less than $10.

Promotion

Advertising Paid communication with the target market.

Personal selling What teams of sales representatives do when they sell products to retail outlets, e.g. Coca Cola.

Relationship marketing Building long-lasting relationships between manufacturer and retailer and retailer and customers.

Sales promotion Non-media communication, e.g. promotional activities such as vouchers, loyalty card offers and competitions.

Public relations A planned effort to present a business and its products in a positive light.

Publicity Creating newsworthy stories about the business and its products.

Place

(distribution channel choice)

Intensive distribution Chosen when the manufacturer wants to uses as many outlets as possible, e.g. Coca-Cola uses supermarkets, service stations, vending machines etc.

Selective distribution Is used when the manufacturer wants the product widely distributed but not quite to the degree of intensive distribution, e.g. groceries, clothing, furniture.

Exclusive distribution Is often used for products positioned at the top of the market that are high quality and with prices that indicate exclusivity, e.g. Rolls-Royce cars.

Global marketing

Develop a global brand More recognisable as customers are increasingly mobile.

Create a standardised product

A product designed to meet the needs of every market segment in a particular market. They can achieve economies of scales resulting in high quality at low prices.

Create a customizable product

Ensure there is a better fit between the needs of customers and the product in a global market.

Develop competitive positioning

Create an image in the minds of customers of the value the business’ products can give the customer in a global market.

Marketing objectives set out what the business wants to achieve with its marketing effort. They must relate

to things like profit, quality and staffing. An objective model is the SMART model: S – specific, e.g. increase market share by 5% over last year M – measurable (get figures on), e.g. $100,000 increase A – achievable R – realistic T – time (needs to have a time frame), e.g. 1 year The most common type of market objective relates to market share which describes a business’ performance in the market place compared to its competitors. Other marketing objectives include:

- developing new products to take the place of products in the maturity of the product lifestyle - entering new markets, e.g. a NSW business opening new stores in Victoria



6. Marketing Acronyms Factors influencing customer choice: “PEGS” P – Psychological factors E – Economic factors G – Government factors S – Sociocultural factors Consumer laws influences: “WIPD” – pronounced “whipped” W – Warranties I – Implied conditions P – Price discrimination D – Deceptive and misleading advertising Ethical influences: “TAPES” T – Truth A – Accuracy and good taste in advertising P – Products that may damage heath E – Engaging in unfair competition S – Sugging Strategies: “4Ps + PEG” 4Ps – Product, Place, Price, Promotion P – People, processes and physical evidence E – E-marketing



10.3 HSC topic: Finance G – Global marketing

Outcomes:

The student:









H10 applies mathematical concepts appropriately in business situations

The focus of this topic is the role of interpreting financial information in the planning and

management of a business.

10.3 HSC TOPIC: FINANCE


1. Role of financial management Role of financial management – to provide the link between what a business wants and the resources that will be needed to achieve its objectives.

strategic role of financial management Strategic role of financial management – the process of ensuring that the resources needed to achieve business goals are available when they are needed. In large business, it is done by a senior management team, led by the Chief Financial Officer (CFO). Senior management team → set direction of business → turn goals into achievable objectives This is not an easy task due to the dynamic external environment, which is often turbulent and affects the financial markets, e.g. GFC in 2008, Euro crisis in 2012.

objectives of financial management - profitability, growth, efficiency, liquidity, solvency - short-term and long-term

Objectives of financial management – concerned with levels of profitability and growth that will satisfy investors in the business and make it possible to attract funds to finance the growth. Efficiency is important as it impacts on costs and profitability. Liquidity and solvency are important as investors need to be confident the business can repay any monies due in the short or long term. Liquidity – short term Solvency – long term

1. Profitability – revenue from sales (minus) the costs of manufacturing the product or delivering the service. Profit is important as it is a major factor when people decide to invest.

2. Growth – the increase in the value of the business over time and is usually measured by changes in

the share price, e.g. Google shares went from $83 to $300 in 18 months.

3. Efficiency – achieving lower costs by increasing output from inputs such as labour or machinery, e.g. the Airbus A380 is more efficient than the 747, employees at Virgin are more efficient than those at Ansett as they are multi-skilled (cabin staff clean plane).

4. Liquidity – ability to pay short term debts, e.g. Qantas’ fuel bill must be paid in 7 days. To do this, s-t

assets such as customer debt and inventory may need to be turned into cash.

5. Solvency – ability to pay long term debts, often called gearing or leverage. Businesses often use debt to expand their operations, e.g. Centro used debt to build shopping centres in regional Australia.

Short term – relates to the accounting period, i.e. financial year (July 1 → June 30) Long term – period greater than the accounting period, e.g. a 10 year mortgage Liquidity objectives – ensuring there is sufficient money to repay s-t debts as they fall due. Solvency objectives – ensuring there is an ongoing cash flow to meet debt repayments in l-t.



interdependence with other key business functions



2. Influences on financial management

internal sources of finance – retained profits Retained profits – money that has been earned by the business and not distributed to its shareholders as dividends. This increases the share price, e.g. Microsoft did not pay dividends and the share price went from $2 to over $200. Even though shareholders pay capital gains tax when they sell the shares, it is often less than income tax on dividends. Retained profits are used to grow the value of the business, i.e. for the development of a new product, research and development, equipment purchase, training of employees etc.

external sources of finance - debt – short-term borrowing (overdraft, commercial bills, factoring), long-term

borrowing (mortgage, debentures, unsecured notes, leasing) - equity – ordinary shares (new issues, rights issues, placements, share purchase plans),

private equity External sources of finance typically involve money that people with a surplus of cash want to invest so they get a return on it. They can lend the cash as debt or become owners in the business through equity finance. Banks often facilitate this by bringing together lots of small surpluses, but it is also done by individuals on the stock exchange (ASX – Australian Securities Exchange). Debt:

Short-term borrowings

(shorter than the

accounting period i.e.

<12 months)

Overdrafts An agreement between a commercial bank and a business that allows the business to have a deficit balance on its cheque account to an agreed amount. It is continuing credit for the business.

Commercial Bills (Bank Bill)

A written instruction to repay a specified amount of money on a specific date in the future. There are three parties – lender, borrower and organizer (i.e. bank who does this for a fee – the bank doesn’t provide the funds, but guarantees the money will be repaid.) Bank bill is usually for amounts over $100,000 and for a period of between 7 and 180 days, but can be “rolled over”, i.e. extended.

Factoring The sale of customer debt to a financier or financial institution. Some businesses factor all their accounts receivable as it is sometimes cheaper than having an accounts department (form of outsourcing).

Long-term borrowings

(greater than the

accounting period i.e.

over a year +)

Mortgages Secured loans by the land or building the loan is financing. It is a legal document that is registered at the Titles Office. This means it cannot be used to secure another loan. Interest on mortgage is lower as it is safer for the lender.

Debentures Used by large finance companies to borrow funds from the general public. It involves a loan contract where the borrower gives a written promise to pay the money back on a specific day, along with interest payments at regular intervals. A prospectus must be produced. The business’ assets are used to secure the loan. Debentures are very expensive, especially the prospectus.

Unsecured notes (bonds)

Like debentures but without the secured creditor. The interest rate is usually 1% higher to cover the extra risk. Lenders need to check the borrowing company’s credit rating.

Leasing Where the owner of an asset agrees to someone else or another business using the asset in return for periodic payments. Advantages include:



- no upfront payment – conserves cash - flexible payments – linked to once a year sales, e.g. wheat

harvester - Easier to update technology as payments linked to life of asset - Lease payments are tax deductible

Equity:

Ordinary Shares – can be split in the following four categories:

Large companies issue shares to start their business. The money is used to buy the assets the business needs and provides cash needed to operate the business initially. An ordinary share is a part ownership in a business. It allows a share in profits (dividends) and allows them to vote in the AGM (Annual General Meeting).

o New Issues Companies supply a prospectus, which outlines the business’ idea, their strategies and their financial projections. The money received → putting the idea into practice.

o Share Placement Where blocks of shares are sold to large financial investment institutions. Cheaper as a prospectus is not required, i.e. reputation gets them through. ASIC must approve the prospectus to ensure protection of potential shareholders and ensure corporate law applies.

o Rights Issues Where existing shareholders are invited to buy new shares in proportion to the existing shares they own, e.g. 1 rights issue for every 2 they own as they get them below market value. This is done to raise capital.

o Share Purchase Plans Where a company can issue a maximum of $5,000 in new shares to each existing shareholder without having to issue a prospectus. Therefore it is cheaper and easier. Attractive to small investors as there is no brokerage (fee for buying shares) and shares are at a discounted price.

Private Equity Private equity involves investment in unquoted businesses, i.e. no on the ASX. Private investors may buy out a company due to its asset value, e.g. when Myer was purchased from the old Coles Group. When it became successful, Myer was then sold to the general public by issuing ordinary shares.

financial institutions – banks, investment banks, finance companies, superannuation funds, life insurance companies, unit trusts and the Australian Securities Exchange

Financial Institutions:

Banks Invest money deposited by customers, generally lending it out and charging interest at a higher rate than that given to the depositors. The big 4 banks are: ANZ, NAB, Commonwealth, Westpac. Banks provide loans to businesses and other services such as overdrafts, bank bills, cheque accounts, credit cards and leasing.

Investment Banks Also called merchant banks, they help individual companies and governments to raise funds (capital). They don’t take deposits, but rather offer financial advice, e.g. Macquarie Bank.

Finance Companies Provide consumer and business finance. They arrange finance from debentures and also provide lease finance. GE Capital Australia (GECFA) provides finance for Harvey Norman customers (interest free for a period, then very high rate.)

Superannuation Funds They are important as they invest the large amounts of savings made by their customers in things like shares and property.

Life Insurance Companies Shares are purchased in companies as they invest the surplus funds from insurance premiums. This allows businesses to transfer the risk of something bad happening, e.g. fire, death, injury, burglary.

Unit Trusts Allow a number of investors to pool resources and invest them.

Australian Securities Exchange (ASX)

Formed in 2006 replacing the Australian Stock Exchange. It provides a forum for sale/exchange of shares of those companies listed.



influence of government – Australian Securities and Investments Commission, company taxation

The Australian government has a significant influence on financial management as they establish the framework of regulations for financial management in the Corporation Laws. ASIC (Australian Securities and Investments Commission) – enforce company and financial laws to protect consumers, investors and creditors. They also inform the public about Australian companies. Company Taxation – influences things like international competitiveness, particularly the cost structure of a global business. The Federal Government sets the company taxation rate, currently set at a flat 30% of taxable profit (could go to 28% in 2013).

global market influences – economic outlook, availability of funds, interest rates Economic outlook – the perceptions of how global economic events might impact on the local economy. It influences financial management as it affects business and consumer confidence, e.g. in 2011 natural disasters (QLD floods), the soaring Australian $, concerns that the US would move back into recession and the Euro financial crisis all worried both consumers and businesses. Availability of funds – refers to the level of confidence in the banking system that determines their willingness to make loans. This is now a very global influence. If confidence high → money for loans is readily available with the banking system actively chasing potential borrowers, e.g. in 2007 when the global economy was booming compared to in 2009 during the GFC. Interest rates are often lowed to improve the flow of funds, but it is not easy to reverse a loss of confidence. Interest rates – refers to the cost of borrowing and expresses the risk involved, i.e. high interest rate → compensate for high risk of borrower not repaying. Large businesses can borrow from anywhere in the world where surplus funds are available. Interest rates vary from country to country depending on the actions of the central bank (Reserve Bank in Aus.) Interest rates around the world (early 2012):

- Japan = 0.1% - USA = 0.25% - UK = 0.5% - Australia = 4.75% - Brazil = 12.5%

Each country has different economic circumstances, e.g. Japan, USA and UK are dealing with high levels of unemployment while Brazil is dealing with high prices and high inflation.



3. Processes of financial management

planning and implementing – financial needs, budgets, record systems, financial risks, financial controls - debt and equity financing – advantages and disadvantages of each - matching the terms and source of finance to business purpose

The process of financial management focuses on large businesses that tend to plan in 3 to 10 year time frames. Typical planning (i.e. how much finance and where it will come from) is concerned with things like:

- introducing new technology - expanding operations globally - refurbishing and extending the research and development in the business, e.g. Kmart plans to

refurbish 520 stores in the next 3 years. The following need to be considered when planning:

1. Financial needs – how much finance will be needed to achieve the business’ objective and when it will be needed. The CFO must determine the best type of finance for efficiency and effectiveness, e.g. Kmart used retained profits. Growth objectives such as new technology have several financial implications such as training employees to use the new technology. These have issues for liquidity, costs and profitability in the s-t, but will hopefully increase productivity, revenue and profitability in the l-t.

2. Budgets – financial forecast of the finance needed to achieve the objective and when the finance will

be needed. Budgets provide specific details. A number of budgets will be developed for things like: - Capital expenditure - Ongoing operations - Cash flow

The important thing about budgets is that they can be used to not only plan but also monitor and control projects by ensuring management knows when there is excess expenditure in a particular area.

3. Record systems – concerned with the gathering, storing and retrieving of all information that relates to strategies designed to achieve the objective. It allows constant monitoring. Large businesses need MIS (Management Information Systems) to monitor all aspects.

4. Financial Risk – the possibility of not being able to repay a debt when required. Large businesses can

plan for financial risk by transferring it to other businesses specializing in risk, e.g. insurance companies and hedging businesses (Qantas hedged against fuel prices increasing → competitive advantage). Financial planning takes place in a turbulent, external environment. Qantas management (financial planner) must anticipate things like aviation fuel increases. To ensure they are in a strong financial position and they cover their costs, Qantas does things like:

- Placing fuel surcharges on fares - Reducing the number of flights on particular routes - Eliminating some of the less profitable routes - Swapping high-cost Qantas routes with low-cost Jetstar routes

5. Financial controls – concerned with putting effective control tools into place which allow managers to

compare what was planned with what actually happened and take corrective action if necessary. Typically control tools include:

- Budgets - Financial statements - Ratio analysis

The purpose is to make sure that what was planned is actually working. The financial controls must be built into the planning process.



- debt and equity financing – advantages and disadvantages of each Businesses tend to use a mixture of both, depending on the industry (general rule of thumb is debt should be about 66% of equity). If the rate of debt to equity is higher, e.g. 80% (i.e. highly geared), then banks will be worried about the business’ ability to pay repay l-t debts, e.g. mortgages. If the rate is lower than the industry average, e.g. 20%, then the business will be seen as a take-over target as there is potential to increase the value of the business by using debt to fund additional project.


Debt Financing - Flexible repayment periods - No initial expensive outlay - Interest is tax deductible - Ownership and control of the

business remains with the owners

- Over the life of the loan, interest rates may rise, meaning repayments increase, leading to increased gearing and financial risk

- Danger that an external factor (e.g. 2008 GFC) cuts off supply to credit

Equity Financing - No funds to repay - No interest charges - High degree of stability and control - Low risk as dividends don’t have to

be paid if circumstances change

- The business has to make higher profits to attract investors

- Dividends paid to shareholders are not tax deductible

- Owners lose some control of the business to purchasers/shareholders

- Limits growth as focus on equity limits finance available for growth

- Profits have to be shared with additional owners

- matching the terms and source of finance to business purpose Current assets should be used to pay current liabilities, i.e. s-t funds used to pay s-t debts. Non-current assets should be used to pay non-current liabilities, i.e. l-t funds used to pay l-t debts. Long term assets need to be funded so that the repayments on the loan can be matched to the earnings of the asset, e.g. a 2 year lease or 2 year loan should be used to fund computers as the productive life of a computer is 2 – 3 years (similarly, 4 years for vehicles, 10 years for factory equipment). A 5 year bank loan should never be used to pay suppliers and a bank overdraft should never be used to fund assets such as a vehicle.

monitoring and controlling – cash flow statement, income statement, balance sheet Preparation of elementary financial statements:

1. Cash flow statement – cash flow is crucial and financial managers therefore must be sure that when bills need to be paid, the cash is available. Some businesses like JB Hi-Fi make most sales around Christmas and are slower around winter. Therefore, money must be invested in the good times to pay bills in the slower times or to fund expansion.



July $’000

August $’000

September $’000

October $’000

November $’000

Opening Balance

2 4 1 (4) (7)

Cash In 6 7 5 6 21

Cash Out 4 10 10 9 9

Closing Balance

4 1 (4) (7) 5

Cash inflow comes from normal operations of the business, i.e. selling its good or service. It can also come from other activities such as issuing more shares or taking out a loan or through the selling of assets like land, property etc. Cash outflows are caused by things like paying suppliers, purchasing assets such as equipment, paying tax or dividends. Cash does not only include money from the cash register, but anything that can be quickly turned back into cash, e.g. shares in another business.

2. Income statement – summary of the activities of a business. Can also be called the revenue statement, trading statement or the profit + loss account. It measures the business over time, usually a year, and provides an insight into the business’ performance.

The main idea of the income statement is to add up all the money received from selling goods. Businesses generally buy products from suppliers and add a profit margin, e.g. 50%, and then resell to the customer. The costs are deducted from the selling price (sales) and the profit is left, i.e. sales – costs = profit. Costs can be either COGS (cost of goods sold) or expenses (e.g. rent, electricity).

Continuing Operations 2009 $’000 Revenue (sales) 2,327,266

COGS (1,823,675)

Gross Profit 503,591

Other income 1,653

Sales and market expense (230,411)

Occupancy exp. (84,551)

Admin exp. (21,288) (8,036) Finance costs (8,036)

Other (25,465)

Net Profit 135,493

Income tax exp. (41,055)

Profit for the year 94,438

3. The balance sheet – measures the overall wealth of a business, i.e. a financial snapshot of the business at a particular point in time. The balance sheet sets out:

- The value of the resources the business owns or controls. - How these resources were financed or paid for. - The value of the owner’s share of the assets.

A cash flow statement –

would normally cover

whole financial year.

Numbers in brackets like

(4) indicate negative

numbers. The closing

balance of one month

becomes the opening

balance of the next

month.

From the income statement, the gross profit (or net profit) ratio can be calculated. COGS = opening stock + purchases – closing stock GP ratio = (GP/revenue x100) e.g. (503,591/2,327,266 x100) = 21.6% of revenue is turned into gross profit. The income statement measures the performance of a business, i.e. how much profit.



The accounting equation is used: Assets = liabilities + owners’ equity A = L + OE Assets are the resources a business use to conduct operations. There are current assets (short term) which will be used or turned into cash in led than 12 months (financial year), e.g. cash, customer debts (accounts receivable), stock etc. Non-current assets (long term) are resources that will have value for longer than 12 months, e.g. vehicles, equipment, land, fittings and fixtures etc. Liabilities are what the business owes, i.e. money owed to people or institutions other than the owners. Current liabilities are short term debts, e.g. trade credit (debt owed to suppliers, must pay within 30 days, called accounts payable), overdrafts (debts owed to the bank where the business can take out instant loans into negative balance). Non-current liabilities are long term debts, e.g. 10 year bank loan, 20 year mortgage. Owner’s equity refers to the owners claim on the assets of the business after the liabilities have been paid, i.e. the net worth of the business. It is what would be left over if the business was sold and all debts were paid.

Current Assets

Cash - $82,943

Stock - $300

Accounts Receivable - $30

CA Total - $83,273

Current Liability

Accounts Payable - $30,000

Rent - $217

CL Total - $30,217

Non-Current Assets

Cash Register - $1,200

Fixtures and Fittings - $20,000

NCA Total - $21,200

Non-Current Liability

Bank Loan - $25,000

NCL Total - $25,000

Total Assets

TA - $104,473

Total Liability

TL - $55,217

Owners’ Equity

Capital (TA – TL) - $49,256

Different users have different uses of financial statements:

- Investors – people or organisations with surplus cash which they want to place somewhere it will grow in value over time. They would be interested to know the performance of the business.

- Creditors – an individual or organisation owed money by a business because they supplied that business with goods “on credit”. They would be interested to know if the business can pay the money back on time.

- Banks and financial institutions – they are interested to know if the business can pay the interest and principal (amount borrowed) of the loan.

Summary of financial statements:

- Cash flow statement – know when cash is available. - Income statement – performance of the business, usually over a year. - Balance sheet – measure overall wealth of the business.

The balance sheet – both

sides must equal each

other, therefore

A = L + OE

A business owner is

entitled to add value to

the business in case of

resale. This is called

goodwill and is an

intangible asset (can’t be

touched). It is a NCA.

Goodwill = the asking

price for a business – the

value of the total assets.



financial ratios - liquidity – current ratio (current assets ÷ current liabilities) - gearing – debt to equity ratio (total liabilities ÷ total equity) - profitability – gross profit ratio (gross profit ÷ sales); net profit ratio (net profit ÷

sales); return on equity ratio (net profit ÷ total equity) - efficiency – expense ratio (total expenses ÷ sales), accounts receivable turnover ratio

(sales ÷ accounts receivable) - comparative ratio analysis – over different time periods, against standards, with

similar businesses See next page



limitations of financial reports – normalised earnings, capitalising expenses, valuing assets, timing issues, debt repayments, notes to the financial statements

Financial reports (those mentioned above) are designed to provide basic information to a wide range of stakeholders. They have limitations as they are general. Limitations of financial reports:

Normalised earnings

Businesses typically have good years and bad years, due mainly to changes from the external business environment (e.g. 2008 GFC, inflation, interest rate changes etc.) e.g. in 2008, Rio Tinto had reduced earnings due to the GFC but in 2011 they had record earnings due to the high prices of iron ore and coal. For this reason, it is wise to adjust the earnings and overcome this limitation by normalizing the earnings. This involves averaging the earnings over a number of years to remove distortions created by exceptional circumstances. It provides a more realistic assessment of the earnings performance of a business.

Capitalising expenses

Where expenses (e.g. putting in a new software system to process sales) are regarded as a capital item and put into the balance sheet rather than the income statement. Otherwise, it would reduce the profit on the income statement. The Commonwealth Bank did this in 2010.

Valuing assets Where the value of a particular asset is estimated. Sometimes it is done accurately, but other times it is done optimistically (over-estimated) on assets like land and equipment and this will distort the accuracy of the reports. The method of valuing assets is called the historic cost. Over time, the assets change value (e.g. property rises while equipment depreciates).

Timing issues Concerned with ensuring the costs that have been incurred in generating the revenue are shown in the financial reports (e.g. purchasing stock on credit that has to be repaid in 2014 and then selling it in 2013 – if the profit is included in 2014 reports and the credit repayment included in 2013 reports it distorts the true picture). Some managers deliberately adjust the inflows of cash and the payment of debt and this is a significant limitation of financial reports. Another aspect is Accounting Standard AASB137 which refers to a liability of uncertain timing or amount. The timing of liabilities (e.g. holiday leave, long service leave) can be manipulated and distorts the books.

Debt repayments Can be a limitation because of provisions (a liability of uncertain timing and amount – e.g. holiday leave, long service leave, superannuation etc.). They are different to debts such as payments to suppliers which have certain timing, i.e. pay on the invoice date and the amount is very specific. It is the uncertain timing and amounts that creates the limitations.

Notes to the financial statements

Notes to the financial statements report detail and additional information (such as the accounting standards that underpin the statements) that have been left out in the main statements. Typical notes to the financial reports include statements like:

- recently issued or amended accounting standards - critical accounting judgments and estimates - events subsequent to balance date

ethical issues related to financial reports Audited accounts: All private and public companies are required to have their accounts audited. Auditing is a process designed to establish the truth and fairness of the financial reports. It is done by qualified independent accountants. There are 2 types of audits:



1. Internal audits – used as a control mechanism to ensure the accuracy of the accounts. 2. External audits – conducted by independent accountants. They allow external users of the

information (e.g. investors, Australian Taxation Office) to be confident the reports are true and fair. Inappropriate cut-off periods: Financial reports must be prepared according to the conventions and standards in the accounting framework. This allows all reports to be compared and understood easily. One convention in the accounting framework is that profits need to be matched with the costs and revenues that generated that profit. The problem is that when a business has to report regularly, the cut-off period isn’t clear. If the cut-off period is inappropriate, the reports give a false impression. Ethics training is the best management strategy to deal with this problem. Misuse of funds: The misuse of funds refers to a range of dishonest practices (generally stealing). They are common and the people stealing are often in debt and are desperate (e.g. gambling debt). Dishonest practices are best dealt with by having effective systems and procedures where all financial transactions are carefully analysed by different sections of the business and discrepancies are quickly investigated.



4. Financial management strategies

cash flow management - cash flow statements - distribution of payments, discounts for early payment, factoring

Cash flow management – refers to the way the movement (or flow) of cash from one aspect of the business to another is managed. Credit sales invoice (trade credit) → cash locked up → must be collected (accounts receivable), but customers try to delay payment → cash available for running the business Cash flow statements: Cash flow statements show the inflows and outflows of cash. It is often easier to predict the outflows, but inflows can be estimated by looking at last year’s sales, e.g. McDonalds have daily projections (sales estimates) that they believe they will meet. Cash inflows come from things like:

- sale of goods - collection of accounts receivables

Cash outflows come from things like:

- payments to suppliers - expenses (e.g. wages, leasing payments, electricity etc.)

Distribution of payments: Businesses can often negotiate when expenses like lease payments can be paid, i.e. link it to the cash flow cycle, e.g. a wheat farmer can link the lease payments for tractors and headers to the once-a-year payment for their wheat. Discounts for early payments: Discounts for early payments allows a customer to deduct a percentage (e.g. 5%) if the bill is paid in 7 days rather than the normal 30 days. This allows the business to move the cash faster from accounts receivables to another section of the business more quickly. The 5% discount is often cheaper than using an overdraft. Factoring: Factoring refers to the sale of customer debts to a financier. It does add to the business’ expenses (usually around 3% for the factoring service), but very effective for rapidly growing businesses as there is pressure to pay suppliers. Factoring should be used in conjunction with an effective credit policy so the debts are collected efficiently and the need to factor is minimized.



working capital management - control of current assets – cash, receivables, inventories - control of current liabilities – payables, loans, overdrafts - strategies – leasing, sale and lease back

Working capital (or liquidity) management is all about paying suppliers bills and other expenses as they fall due. It is measured by the working capital ratio (liquidity or current ratio), i.e. ability to pay s-t debts.

- control of current assets – cash, receivables, inventories Control of current assets – cash: Cash is controlled by cash budgets which set out the anticipated sources and uses of cash on a monthly basis. It is both a planning and controlling tool. It enables managers to time payments on things like insurance when they have a cash supply. Control of current assets – receivables: Businesses sell on credit, supply an invoice and expect to be paid on time, but their customers are often reluctant to pay bills on time. Strategies to correct this include:

1. Credit policy – a set of guidelines to staff on how to monitor and collect customer debt. It should include:

- Setting a credit limit, i.e. the maximum value of credit prepared to give to a customer. - Set the credit period, typically 30 days but depends on the industry (e.g. sea-food is 7 days,

antiques is 90+ days). - Set the collection policy, which is a guide to staff on what to do when customers fail to pay

on time, e.g. how to ring customers and advise them of the credit period.

2. Factoring – good for when the business is growing rapidly as it is important to have control of current assets and receivables. The customer debt is sold to a factoring service, who give the business the money immediately, but charge a small fee (usually 3%).

Control of current assets – inventories: Inventory of stock is often one of the largest assets and includes raw materials, work in progress, component parts or finished goods (retail businesses – mainly finished goods as inventory while manufacturing businesses –raw materials, component parts etc.) Businesses need inventory so they can respond quickly to customer orders. Therefore, they need an inventory policy:

1. Inventory policy – manages inventory like: - Where in the factory the inventory is stored. - What items are stored and how many of each. - Condition or quality of items. - Usually computerised.

2. Just in time (JIT) – where each inventory item is supplied just in time to be used, e.g. Coca-Cola at

Northmead factory in Sydney use JIT (cans arrive on trucks and are immediately filled – don’t have to hold them as stock).



- control of current liabilities – payables, loans, overdrafts Current liabilities are s-t and therefore have to be paid in the accounting period. Most are accounts payable, i.e. s-t debt to suppliers (30 days to pay – also called trade credit). Control of current liabilities – payables: S-t debts to suppliers need to be paid on time, not before or after. Strategies need to maximise benefits and remove dangers. If the payment is early, the business is missing out on ‘free money’ from trade credit. Trade credit allows a business to use the money until it has to be paid. If the business pays late there is an ethical issue as they expect others to pay on time. Control of current liabilities – loans: Loans are often used as a substitute for controlling receivables, (e.g. when important customers are overdue, managers often use money from loans and overdrafts to pay wages as they fear that ringing big clients about overdue bills will upset them). Interest is the cost of the loan → increases expenses → decreases profitability. Therefore, capital budgeting is crucial, which is concerned with the finance needed for particular projects. Projects are assed in terms of their risk and returns. Control of current liabilities – overdrafts: Overdrafts can help deal with deficits, i.e. periods of negative cash flow. Budgeting cash is an excellent way of controlling overdraft.

- strategies – leasing, sale and lease back Strategies – leasing: Leasing is a contract that enables a business to control an asset in return for regular payments. Advantages include:

- The payments can be matched to the earnings of the asset. - Conserves working capital. - Allows control and use of an asset.

Strategies – sale and lease back: Sale and lease back became popular in the 1990’s. It was common for large businesses to sell their land and buildings to a financier and then lease them back, e.g. David Jones sold their major city stores and leased them back. Advantages include:

- Improves working capital (rather than just conserving it) - The money received can be used for additional projects.

profitability management - cost controls – fixed and variable, cost centres, expense minimisation - revenue controls – marketing objectives

Profits are maximised by controlling costs, e.g. Virgin with its cost effective planes and multi skilled employees.



Cost controls: Cost controls are the single most important aspect of running a business as it affects profitability and competitiveness. It is very important for big companies (e.g. Qantas, Telstra) who can’t really grow due to the massive competition. Therefore they must cut costs to improve profits. Businesses need to benchmark costs, i.e. the process of comparing costs with the most efficient business in the industry, e.g. Toyota sets the benchmark so other companies must set strategies to lower costs. Cost controls – fixed and variable: Fixed and variable costs added together = total costs. Fixed costs do not vary with output, e.g. Rio Tinto buys a dump truck for a set price and this cost doesn’t vary with how much it is used. Variable costs do vary with output, e.g. the fuel the dump truck uses is variable as the more it is driven, the more fuel it uses. Variable costs also include things like labour costs, electricity costs and raw material costs. Decrease VC’s → increase profit and/or decrease price charged to consumers → increased competitiveness. Cost controls – cost centres: A cost centre may simply be a work area, a department or whole factory and the idea is to separate it from the rest of the business in terms of its cost. Cost centres can be set up to control the variable costs associated with having a work unit. These costs may be associated with raw materials, storing inventory, overtime payments, labour etc. A manager needs to be responsible for the costs and needs to record, measure and monitor cost usage effectively. Cost controls – expense minimisation: Expense minimisation is all about reducing expenses such as wages, rent and leasing payments. If done effectively, it leads to a competitive advantage over competing businesses. The Fair Work Act places importance on minimising expenses through negotiations and agreeing to a collective agreement, e.g. Rio Tinto negotiates with employees to improve productivity through expense minimisation. These individual agreements can only be with employees earning over $100,000 a year. Revenue controls – marketing objectives: Controlling costs is important but a business must also maximise revenue. This can be done by clearly defining marketing objectives.

i) Sales objectives – need to continuously improve the process that results in sales, e.g. improve the supply of customer orders. The business must know what the customer wants, i.e. if customer needs are met more effectively, sales will improve. Customer needs could be met by providing:

- Better quality - An improved product - Better design - Faster or more reliable delivery

ii) Sales mix – refers to the breakdown of sales revenue by products, which are typically expressed in

percentages, e.g. Woolworths has gained market share as they continually improve their sales mix.



Customers demand analysis → provide products to meet customer needs → increased revenue → increased profitability.

iii) Pricing mix – refers to the breakdown of products on the basis of their contribution to profitability. It is critical for retail businesses, e.g. Big W who uses price points (psychological reference points in the minds of customers e.g. $9.99) in their pricing mix.

iv) Pricing policy – the overall pricing strategy that the business will adopt. It is affected by demand and

supply of the products. It also looks at how competitors price their products.

global financial management - exchange rates - interest rates - methods of international payment – payment in advance, letter of credit, clean

payment, bill of exchange - hedging - derivatives

Global financial management requires greater complexity compared to domestic financial management as the goods and services need to be paid for in the local currency. It creates uncertainty because exchange rates fluctuate and makes it difficult for a business to plan. Exchange rates: Risk comes from dealing in foreign currencies that are subject to fluctuation. A strong Australian Dollar (when the A$ is greater than the US$) affects many Australian businesses including:

- Manufacturing businesses - Tourist businesses - Businesses providing education to students overseas.

In every case, the price of their products increases as the A$ increases in value. Retail businesses face increased competition from overseas and online businesses. Interest rates – the price of money. Interest rates vary between countries. Interest rates can be used as a strategy to gain a competitive advantage, e.g. as a global business, BHP Billiton can borrow money in the Japanese market where the interest rate is 0.1% (August 2011).



Methods of international payment: Most business-to-business trade is conducted through credit. Because of foreign exchange and collection issues, this creates risk. There is a risk of the goods not being delivered and the goods not being paid for. The following methods help deal with this risk:

Payment in advance Simplest form and is where the money is transferred to the exporters bank account before the goods are shipped. This minimises risk for the exporter and maximises risk for the importer. Risk could be minimised by conducting credit checks.

Letter of credit More convenient and minimises risk for exporter and importer, but is more expensive. The importers bank guarantees that the money will be paid as soon as the goods arrive.

Clean payment A way of avoiding the fees of a letter of credit. It is where the exporter and importer handle all the shipping documentation and the banks role is limited to paying the money when required. It is cheaper as checking the shipping documentation is time consuming.

Bill of exchange A bill of exchange is a document that instructs the buyers to pay for the goods on a specific date. Minimises risk for the exporter by allowing the exporter to keep control of the goods.

Hedging – a strategy that enables a business to insure against the effects of exchange rate fluctuation. Hedging enables a global business to plan without the danger of a negative movement in the currency impacting on their plans. Derivatives – a contract where the value of the contract is derived from, and dependent upon, the value of another product. Derivatives can be used to hedge against increases in things such as:

- Commodity prices (e.g. oil, wheat, cotton etc.) - Changes in interest rates - Currency fluctuations



5. Finance ‘Super Summary’

Financial management: provide the link between what a business wants and the resources that will be

needed to achieve its objectives.

Strategic role: provide the financial resources to allow the implementation of the business’ strategic plan.

Objectives: - Profitability – revenue from sales (minus) the costs. - Growth – the increase in the value of the business over time. - Efficiency – achieving lower costs by increasing output. - Liquidity – ability to pay short term debts. - Solvency – ability to pay long term debts (gearing).

Influences: Internal sources

of finance Retained profits Money that has been earned by the business and not distributed to its

shareholders as dividends.

External sources

of finance – s-t debt

Overdrafts The ability to have a deficient balance in a cheque account.

Commercial Bills (Bank Bill)

A written instruction to repay a specified amount of money on a specific date (3 parties – lender, borrower and organiser). Bank guarantees money will be repaid.

Factoring The sale of customer debt to a financier or financial institution.

External sources

of finance – l-t debt

Mortgages A loan secured by the land or building that the loan is financing.

Debentures Borrowing funds from the general public and involves a loan contract where the borrower gives a written promise to pay the money back on a specific day, along with interest. A prospectus must be produced.

Unsecured notes (bonds) Like debentures but without the secured creditor. Interest rate is usually 1% higher to cover the extra risk.

Leasing Where the owner of an asset agrees to another business using the asset in return for periodic payments.

External sources

of finance – equity

Ordinary Shares – can be split into four categories:

New Issues – investors purchase shares of the business. Share Placement – blocks of shares are sold to large financial

investment institutions. Cheaper as no prospectus. Rights Issues – existing shareholders are invited to buy new shares

in proportion to their existing shares. Share Purchase Plans – a company can issue a max of $5,000 in new

shares to each existing shareholder without a prospectus (cheaper)

Private Equity Investment in unquoted businesses, i.e. not on the ASX.

Financial

institutions

Banks Invest money deposited by customers (generally lending).

Investment Banks Help individual companies and governments to raise funds (capital) by offering financial advice.

Finance Companies Arrange finance from debentures and provide lease finance.

Superannuation Funds Invest the savings made by their customers in things like shares and property.

Life Insurance Companies Invest the surplus funds from insurance premiums.

Unit Trusts Allow a number of investors to pool resources and invest them.

Australian Securities Exchange (ASX)

Provides a forum for sale/exchange of shares.

Government influences

Australian Securities and Investments Commission (ASIC)

Enforce company and financial laws to protect consumers, investors and creditors.

Company Taxation The Federal Government sets the company tax rate (currently 30%)



Global market

influences

Economic Outlook The perceptions of how global economic events might impact on the local economy.

Availability of Funds The level of confidence in the banking system that determines their willingness to make loans.

Interest Rates The cost of borrowing and expresses the risk involved.

Financial reports: Limitations of financial reports

Normalised earnings Averaging the earnings over a number of years to remove distortions created by exceptional, external circumstances.

Capitalising expenses

Where expenses are regarded as a capital item and put into the balance sheet rather than the income statement as it would otherwise reduce the profit on the income statement.

Valuing assets Where the value of a particular asset is estimated. It can be done optimistically (over-estimated).

Timing issues Concerned with ensuring the costs that have been incurred in generating the revenue are shown in the financial reports

Debt repayments Can be a limitation because of provisions (a liability of uncertain timing and amount – e.g. holiday leave, long service leave, superannuation etc.)

Notes to the financial statements

Notes to the financial statements report detail and additional information that have been left out in the main statements.

Ethical issues of financial reports

Audited accounts Internal audits – used as a control mechanism to ensure the accuracy of the accounts. Establishes the truth and fairness of the reports.

External audits – conducted by independent accountants.

Inappropriate cut-off periods

The cut-off period isn’t clear. If the cut-off period is inappropriate, the reports give a false impression. Ethics training is the best strategy to deal with this.

Misuse of funds Refers to a range of dishonest practices (generally stealing). Best dealt with by having effective systems and procedures where all financial transactions are carefully analysed.

Strategies: Cash flow management strategies

Distribution of payments

Businesses can negotiate when expenses like lease payments can be paid, i.e. link it to the cash flow cycle

Discounts for early payments

Allows a customer to deduct a percentage (e.g. 5%) if the bill is paid in 7 days rather than 30 days. Means faster cash movement for the business.

Factoring The sale of customer debts to a financier.

Working capital management strategies

Leasing A contract that enables a business to control an asset in return for regular payments. Conserves working capital.

Sale and lease back Selling an asset and then immediately leasing it back. Improves working capital.

Control of current assets – receivables

Establish an effective credit policy

A set of guidelines on how to monitor and collect customer debt. It should include:

- Setting a credit limit (max value of credit) - Set the credit period (typically 30 days) - Set the collection policy (what to do when customers fail to pay)

Factoring The sale of customer debts to a financier.

Control of current assets – inventories

Establish an effective inventory policy

An inventory policy should outline: - Where in the factory the inventory is stored. - What items are stored and how many of each. - Condition or quality of items. - Usually computerised.

Just in time (JIT) Where each inventory item is supplied just in time to be used.



Profitability management strategies

Benchmark costs Compare costs with the most efficient business in the industry.

Cut variable costs Decreasing VCs like labour, electricity and raw material costs leads to increased profitability and competitiveness.

Expense minimisation

Reducing expenses such as wages, rent and leasing payments leads to a competitive advantage.

Maximise revenue Can be done by clearly defining marketing objectives: Sales objectives –continuously improve the process that results in sales Sales mix – the breakdown of sales revenue by products Pricing mix – the breakdown of products on the basis of their contribution to

profitability. Pricing policy – the overall pricing strategy that the business will adopt.

Global financial management strategies

Choosing the best method of international payment

Payment in advance

The money is transferred to the exporter’s bank account before the goods are shipped. Min risk for exporter, max risk for importer.

Letter of credit The importers bank guarantees that the money will be paid as soon as the goods arrive. Min risk for importer & exporter

Clean payment The exporter and importer handle the shipping documentation and the bank pays the money when required.

Bill of exchange A document that instructs the buyers to pay for the goods on a specific date. Min risk for exporter.

Hedging Where a business insures against the effects of exchange rate fluctuation. Enables a global business to plan without the danger of a negative movement in the currency impacting on their plans.



6. Finance Acronyms Financial objectives: “PLEGS” P – Profitability L – Liquidity E – Efficiency G – Growth S – Solvency (gearing) Financial institutions: “BUF SAIL” B – Banks U – Unit trust F – Finance companies S – Superannuation funds A – Australian Securities Exchange (ASX) I – Investment banks L – Life insurance companies Planning and implementing: “R B CNR” – remembered as “red and blue corner” R – Record systems B – Budgets C – Financial controls N – Financial needs R – Financial risks



10.4 HSC topic: Human Resources

Outcomes:

The student:









The focus of this topic is the contribution of human resource management to business

performance.

10.4 HSC TOPIC: HUMAN RESOURCES


1. Role of human resource management

strategic role of human resources Strategic management – involves moving a business from its current position in the market to the managers’ vision of the business in a time frame (e.g. five years). Top management → establish strategic goals (e.g. increase market share from 12% to 15% over the next five years) Human resource managers are important in developing the strategic plan because the business achieves their goals through the people they employ. They must identify the employee skills, attributes and behaviours that will be required to achieve the goals, e.g. Kmart wishes to increase market share by increasing customer service and to do this they must train staff and give them skills to achieve this goal. Strategic human resource management (HRM) is concerned with developing management policies that will deliver the employee skills, attitudes and behaviours.

interdependence with other key business functions The marketing function is the heart of the business as it has to constantly research the environment to find opportunities and identify threats. Market research → find best fit → product → customers/resources/goals → operations function

Finance

All stages require human resources. (all functions are interdependent) Those that have the skills, attributes and behaviours to do the job well give the business a competitive advantage.

outsourcing - human resource functions - using contractors – domestic, global

Outsourcing of the HR function was popular in the 1980’s and 1990’s as it was cheaper to not have your own HR employees, which have to be paid all year.

- human resource functions

Starts with job analysis – concerned with working out what tasks need to be done for objectives to be achieved and the skills needed to do the tasks. Then recruit and select the people best able to do the tasks. Training and development is also important. HR also has other functions such as:

- grievance procedures - monitoring OH&S issues - EEO (equal employment opportunities) issues - Planning for the development of a business culture

Today, the operations function has taken over many HR roles, e.g. recruitment, training and OH&S. Outsourcing is still used, e.g. employment and recruiting agencies.



Businesses use outside employment agencies to conduct recruiting, particularly for temporary jobs that are low skilled and do not require costly training. Large businesses still recruit ‘high value’ employees as they want a strong relationship to form. It is important to keep these employees as they are expensive to train. Employee attributes are the most important criteria when recruiting as skills can be taught but it is difficult to change attitudes. Business has a particular business culture → select employees with special attitudes → achieve goals *An external employment agency cannot achieve the above. The main focus of HRM is to outsource any function that improves efficiency and cuts costs. Most businesses keep ‘in-house’ any HR activity that requires understanding the business and its customers, identifying future leaders and promoting change.

- using contractors – domestic, global Use of contractors can give businesses’ flexibility as there is no long term commitment between a contractor and a business. When not required, a contractor can be let go, unlike a permanent employee who would have to be dismissed. Employees and contractors have different employment contracts, i.e. legal difference. The ATO defines an independent contractor as an entity (individual, partnership, trust or company) that agrees to produce a designated result for an agreed price. An independent contractor:

- is paid for results achieved - provides all or most of the necessary equipment to complete the work - is free to delegate work to other entities - has freedom in the way the work is done - provides services to the general public and other businesses - is free to accept or refuse work - is in a position to make a profit or loss

Large businesses use contractors globally and domestically as they are cost-effective. Domestically – cost effective because of the flexibility, e.g. letting contractors go in the GFC. Globally – cost effective because there is a greater pool of talent, labour law variances and wage rates, e.g. Levi produces jeans cheaper by using contractors in Vietnam. Many large businesses approach the HR function by building a core of ‘high value’ employees, in a long term relationship and an outer ring of employees in a more casual relationship. These relationships are mainly concerned with outsourcing.



2. Key influences

stakeholders – employers, employees, employer associations, unions, government organisations, society

Employers: want to ensure that the employment relations framework:

- provides flexibility, choice and productivity in working arrangements - hands employees and employers the responsibility of deciding wages and conditions - provides opportunities for businesses to respond to changes in the external environment

Employees: ensure that:

- agreements to increase productivity are adequately rewarded - there is appropriate training leading to career opportunities - the workplace is safe and free from harassment - they have a reasonable degree of job security

Employer associations: represent businesses in a particular industry and give bargaining strength to the employer. They also lobby governments to ensure the employers’ views are considered when regulations are formed. Employer associations want to ensure:

- industry-wide increases in productivity - fair reporting of all the employers’ view in negotiations

Union: give bargaining strength to employees. They want to ensure their members:

- are fairly paid - work in a safe environment free from harassment and discrimination - receive expert help in negotiating agreements with employers - have a high degree of job security

Government organisations: most important one being Fair Work Australia which is responsible for dispute resolution for setting minimum wages and conditions as well as overhauling the award system. The Federal Government wants to ensure that:

- there is sufficient flexibility in employment relations to provide the greatest improvement in productivity, maximum employment and the development of an economy-wide competitive advantage

- the focus of the federal workplace human resource management system is an agreement-making between the employer and the employee. These are called collective agreements and are achieved through enterprise bargaining between the employer and the employee

- the government achieves its goal through organisations such as Fair Work Australia Society: is affected by business operations as the people who own/work in businesses make up most of society. Decision making in the HR process influences the availability of goods and services and the prices they are sold at. It also affects the standard of living and the rate of economic growth, e.g. all Australian strikes inconvenience society. FWA has reduced the number of strikes. Summary of the stakeholders in the HR process: Employer – concerned about productivity and costs because these affect the competitive position of the business. Employee – concerned about working conditions and pay. The government – concerned about things like discrimination in the workforce, e.g. modernising the award system (under Fair Work Australia) to make things simpler. Unions and employer associations – represents employees and employers. Shareholders – issues such as productivity as it impacts on profitability.



legal – the current legal framework - the employment contract – common law (rights and obligations of employers and

employees), minimum employment standards, minimum wage rates, awards, enterprise agreements, other employment contracts

- occupational health and safety and workers compensation - antidiscrimination and equal employment opportunity

The current legal framework influencing HRM consists of:

1. Common law – refers to laws made by judges in courts. 2. Statute law – those made by the Parliament. The statute law is the Fair Work Act (Cth) 2009. This

legislation established Fair Work Australia as the independent umpire. Fair Work Australia has established the minimum conditions for employment in areas like pay, working conditions, hours of work and holidays on an industry basis (called modern awards). Modern awards commenced on Jan 1

st 2010 and it is intended that there will be a continuous shift of

employees from state awards to the Federal modern awards. To gain above award conditions, employers and employees need to negotiate. Employees want more benefits and employers want higher productivity. Once an agreement is reached, a contract is signed and if the contract is breached, the other can go to the Federal Court to seek compensation. There will be no industrial actions during the term of an agreement as it is a protected period. Industrial action can occur towards the end of the agreement. 72 hours’ notice must be given. If an agreement can’t be reached, FWA help mediate or arbitrate an agreement:

- Mediate – where FWA guides both sides - Arbitrate – where FWA determines the new agreement

Enterprise bargaining is where employer and employees negotiate a collective agreement.



- the employment contract – common law (rights and obligations of employers and employees), minimum employment standards, minimum wage rates, awards, enterprise agreements, other employment contracts

The employment contract – is established when an employee accepts an offer of employment (written or verbal. It gives both employer and employee rights and obligations; some from common law, but most from awards. Common law agreement – contract of agreement and is legally binding. It sets out how the employee will be rewarded and the work requirements of the employee. Often used by professionals, e.g. doctors and lawyers Contracts of employment often have “trial” periods, where the employee must be paid and can be oral or written (though written creates certainty) A typical contract outlines:

- nature of the work - rewards - general info, e.g. hours of work



Rights and responsibilities of the employer: - pay correct wages - reimburse employees for work-related expenses - ensure a safe working environment - not act in a way that may damage an employee’s reputation or cause mental distress or

humiliation - not act in a way that will damage the trust and confidence necessary for an employment

relationship - forward PAYE tax instalments to the Australian Taxation Office - make appropriate Super contributions

Rights and responsibilities of the employee – obligations include:

- obey the lawful and reasonable instructions of the employer - exercise due care in the performance of work and do it competently - account to the employer for all moneys while employed - make available to the employer any process or product invented while employed - disclose to the employer information received relevant to the business - be faithful to the employers interest (e.g. not passing info to competitors)

Each modern award contains the 10 minimum employment standards such as penalty rates and sick leave. It is a part of NES (National Employment Standards) and is set out by FWA. The minimum standards are:

- max weekly hours of work – 38 hours per week - Requests for flexible working arrangements (e.g. parents with children under school age or with a

disability) - Parental leave – up to 12 months unpaid leave plus the right to request an additional 12 months - Annual leave – 4 weeks paid leave per year - Personal/carers leave – 10 days paid - Unpaid carers leave – 2 continuous days unpaid - Compassionate leave – 2 days paid - Community service leave – unpaid leave for voluntary emergency activities and up to 10 days

paid leave for jury duty - Long service leave - Public holidays – a paid day off on a public holiday except where reasonably requested to work - Notice of termination and redundancy pay – up to 4 weeks’ notice and 16 weeks redundancy pay,

the actual amount depending on length of service

- occupational health and safety and workers compensation OH&S refers to all procedures put in place to ensure that the workplace is safe. It involves both legal and ethical issues. The employer must ensure (legal duty) the health, safety and welfare of employees. If employees are not following procedures, the business culture must be changed. Workers compensation in Australia is a compulsory employer-financed, “no fault”, occupational disabilities program for work-related injury and disease. After an accident the injured worker receives all necessary medical and rehabilitation care and does not suffer loss of income. Workers comp is a legal consideration, but the aim is to ensure the worker is in the same position if the accident had not happened (the ethical aspect).

- antidiscrimination and equal employment opportunity Anti-discrimination refers to measures aimed at stopping unjust or harmful treatment on the basis of things like race, age, gender, disabilities or sexual preferences.



The legal issue is set out in the legislation: - Racial Discrimination Act 1975 - Sex Discrimination Act 1984 - Disability Discrimination Act 1992 - Equal Opportunity Act 1987

The ethical issue is difficult to enforce/detect as it is difficult to prove. EEO (Equal Employment Opportunities) – tries to provide opportunities to groups of people who may have been denied a fair go in the past. The legal issues are set out in:

- Affirmative Action (EEO for Women) Act 1986 (Cth) This legislation requires large companies with more than 100 employees to report publicly on the number of women in new appointments and promotions. The aim is to get senior management to think about what is right.

economic Economic influences refer to changes in the level of spending in an economy. When the economy is booming, employees have greater bargaining power as businesses compete for skill levels, e.g. the Australian mining sector since 2010 → increased wages. When the economy is in recession, the demand for business products will fall, so it is necessary to reduce staff to cut costs. There will be a lot of skilled employees unemployed and therefor employees have less bargaining power.

technological Technological influences – have a huge impact on human resource management and their staff requirements, e.g. Walmart’s barcoding meant they only needed a third of their previous checkout staff → competitive advantage. Walmart are now using RFID (Radio Frequency Identification Technology) → NFC (Near Field Communication), i.e. Google Wallet. Changes in technology (the way things are done) require training to use the new technology. Short term – can be an issue getting the finance to train Long term – leads to increases in productivity and profitability and reduces costs

social – changing work patterns, living standards Social influences – to do with changes in society, i.e. the attitudes, values and benefits in society Recently changes have been dramatic including:

- changing work patterns - changing living standards

Changing work patterns – in the last 10 years there has been a decline in full-time work and an increase in part-time and casual work – called casualisation of the workforce (Australia has one of the most casualised workplaces in the world). Significant features include:

- the disappearance of almost all unskilled jobs - increase in the number of women in the workforce



- growth in the service industries (retail, food services, accommodation and travel) - reduction of workers in manufacturing - increased mobility of workers (from one business to another) - increased numbers of employees working from their homes

Changing living standards – used to be measured by GDP/capita (sum total of goods and services produced in a country in a year/population). However todays’ standard of living involves more so it is measured in terms of HDI (Human Development Indicators) as it includes things like:

- longevity - infant and maternal mortality rates - education - crime rates, etc.

According to this, Australia had the highest standard of living in 2011. This was due to equality in income distribution, access to education and employees thinking about a work-life balance when negotiating agreements.

ethics and corporate social responsibility Ethics and corporate social responsibility influences – refer to the responsibility of businesses to work with the full range of stakeholders to help solve societies problems. Typical e.g.’s of CSR include:

- ensure employees have a safe workplace that is free from accidents, harassment and discrimination – there are 135,000 incidents of work-related fatalities, permanent disabilities or serious temporary disabilities per year. In the 2005/06 financial year, the cost of work-related injuries/illness was $58 billion.

- AEC (Australian Employment Covenant) – a plan to place 50,000 Indigenous people in long-term jobs within 2 years, e.g. Fortescue Metals and ANZ have Indigenous employment programs.

- Sustainability – e.g. BHP Billiton accepts the need to work against global warming, so they are working to reduce carbon emissions.



3. Processes of human resource management HRM is about developing effective relationships with employees. It is concerned with the acquisition, development and maintenance of these employees and also separation through retirement, resignation or dismissal. HRM → employ staff → if they have the right skills → then trained → competitive advantage Employees are a valuable resource → achieve business goals

acquisition HRM must decide and identify the tasks that need to be done by employees and the skills that are needed. The process of acquisition (recruitment) involves:

- identifying staffing needs - recruiting applicants with the right skills - selecting the best candidate

In Australia (and most developed countries), there has been a move away from manufacturing (e.g. Pacific Brands moving offshore) to a service orientated economy. This changes the skills required and means specific attributes are important, as well as skills, e.g. the ability to relate to a wide range of people. Also, applicants are not willing to take any job and question things like:

- happy workplace - career development - challenging and interesting work - training and development opportunities

This affects the recruitment process. Job analysis – determining the skills and attributes an employee would need to do the job effectively. Effective job analysis → successful recruitment process Job analysis →job description Job description (job design) – informs a potential applicant how the job will be done. Job specification – describes the type of potential applicants who can do that job. Effective recruitment → effective selection Selection – process of choosing the best candidate to ensure a match between the skills and attributes of the individual and the job. Must take into account anti-discrimination and equal opportunity legislation. There are several methods of selection, most common being interviews and work simulations. The methods must be reliable, valid and cost-effective. Reliability – accuracy + consistency Interview – most common where applicants answer questions that help predict future job performance. Some e.g. questions are:

- What is your previous work experience? - What do you think you have to offer the business? - What are your interests?

Work simulations – often more reliable as candidate demonstrates their skills in front of an assessor, e.g. welding ability



Personality profiling/testing – used for some jobs like retailing and service where they select the profile that demonstrates the ideal attributes. Behavioural question are use such as:

- What would you do in this circumstance? Validity – the degree to which a method actually selects the work behaviours in the job specification, e.g. compassion is important for an aged care home. A structured approach to interviews (formal) helps validity. Costs must be taken into account, e.g. too expensive to offer work simulations to 10 people but a chat over coffee would not find the best candidate. The method chosen will be a balance between reliability, validity and cost effectiveness. The final aspect is background checks, where qualifications, experience, criminal behaviour etc. will be verified.

development Development – concerned with improving employee skill and knowledge. Effective development → raise employee skill levels → increase productivity Productivity – increase in outputs using the same inputs in a given period of time. Development → increased skill of employees → could increase wages, therefore decrease prospect of unemployment Induction – the training given to new employees to enable them to do the job effectively. It is the immediate aspect of development. Effective induction not only gives new employees basic skills, but also helps them understand the business culture and settle into the social aspects of the workplace. Socialisation – fitting in and feeling a sense of belonging. Training program – the systematic way knowledge and skills will be taught to the employee. A typical training plan includes:

- Needs analysis – concerned with identifying the knowledge and skills the employee will need. - Industrial design – sets the objectives for the training program (things the employee has to know

and skills they need to have), how they will be taught and how the program will be assessed. Has a high cost, therefore requires a budget.

- Implementation – the strategies used to teach the knowledge and skills to employees, e.g. on the job training, instructional video, mentoring etc.

- Evaluation – finding out if the training program was successful. How the business benefits from an effective training plan:

1. Training improves flexibility by ensuring employees carry out the required tasks in a cost effective manner and monitor the quality of work and develop multi-skills in a range of business activities.

2. Prepares employees for future jobs in the business. It develops l-t relationships, establishes career paths and identifies the skills and knowledge required for the next promotion.

3. Can protect a business from skills shortages. 4. Easier to adapt to changes in the external environment. Training is need to introduce new products or

change work practices. Training programs are very expensive and can create liquidity problems (ability to pay s-t debts). But in the l-t, productivity increases → competitive advantage.



maintenance Maintenance – concerned with building l-t relationships with employees. Various strategies are used, such as:

- Reward management – monetary and non-monetary benefits employees receive for their work. For businesses to attract and retain employees, the wages and salaries offered need to be competitive.

- Performance appraisal – provides feedback to both the employee and supervisor. Constructive feedback → employee satisfaction, motivation and acceptance of future challenges → improvement in how the job is done in the future.

- Employee participation - Concern for OH&S, work-life balance and workplace bullying

separation Separation – the process where an employee leaves a business, either voluntarily or involuntarily. Voluntary separation – requires that the employees receive all relevant entitlements, e.g. payment for any long-service leave. Involuntary separation – (usually called dismissal). FWA defines 2 types: unfair and fair dismissal. Unfair dismissal – large companies are not permitted to dismiss an employee unfairly. Employees can appeal to FWA if they feel it was unfair (harsh, unjust or unreasonable – or, in the case of redundancy, not genuine). Small businesses with fewer than 15 employees can dismiss employees, but must follow the Small Business Dismissal Code. The most common reasons for dismissal:

1. Unsatisfactory performance – fail to meet the required work performance standards. Can be the businesses fault if acquisition process was poor. Could also indicate inadequate training and support.

2. Misconduct – mainly stealing and insubordination (disobedience, disrespect and public criticism of business)

Sometimes the separation process can lead to problems with unions → legal or industrial action. Dismissal can be costly. Therefore, separation has implications for the acquisition, development and maintenance processes (interdependent).



4. Strategies in human resource management

leadership style Leadership style – the way managers interact with others and it influences efficiency and employee absenteeism. The initial work on leadership style was done by Frederick Taylor. Autocratic Leadership – where managers use a high degree of direction and permit little or no participation in decision making by subordinates. No longer used in developed world, but still used in low-wage countries. Participative Leadership – where managers encourage a high degree of employee participation in the decision making as well as open communication channels. Employees don’t vote but have input, i.e. feedback. Leadership style used → influences the ways employees do their work at every skill level The leadership style can help to develop long-term relationships with employees. Motivated employees → retain staff → decrease cost of staff turnover

job design – general or specific tasks Job design – process where a set of tasks and responsibilities are combined to make up a job. The approach to job design is influenced by the nature of the business, e.g. electronics assembly in China design specific task jobs (done over and over within 30 seconds) to cut down training costs. However, McDonalds have a number of different approaches that better meet the social and personal requirements of their employees including:

1. Job rotation – where employees move from task to task for variation and counter boredom. Requires additional training (increased costs) for employees to become multi-skilled.

2. Job enlargement – where employees complete several tasks to avoid boredom. Again requires multiskilling and additional training.

3. Job enrichment – where the employee can see the whole approach and understands their role in the final product.

4. Self-managing teams – where the employee is not closely supervised and has some control over how the tasks are done. They are taught to monitor their own quality.

The difference of general job designs and task specific job designs is the amount of directions the employees will be given, e.g. a plumber is simply asked to “fix a broken water pipe”, not specifically how to do it.

recruitment – internal or external, general or specific skills Managers must decide which recruitment strategy is best for the job – including:

- internal – from within, i.e. promotion positions - external – from outside the business - recruit people with specific skills - recruit people with general skills and then train them to do the job




Internal recruitment - Builds l-t relationships when people realise they have a career in the business

- Employees gain expertise - Greater return on money

invested in training - Builds a pool of highly talented

and well trained employees

- Difficult to respond to change as business culture has been developed, e.g. Coles Group before Wesfarmers takeover

External recruitment - New ideas and ways of doing things

- Costly - Unsure of new employee

opposed to tried and tested one

Often a combination of external and internal recruitment is used, i.e. external for graduates, internal for promotions. External is required more in growth times as the business is looking to expand. Factors like how scarce the skills are and how permanent the jobs are affect the strategy used. Permanent jobs → build l-t relationships → internal recruitment for promotions Temp jobs → external recruitment agencies used

training and development – current or future skills Development → T + D programs → affects liquidity (ability to pay s-t debts) T + D is expensive, so some businesses are tempted to minimise these costs. Currently Australian businesses focus their formal training on induction and OH&S. HR must make sure employees are well trained for their current job and also be prepared for future jobs.

- Training for current job – establishes competitive advantage, improves quality and productivity → decreased costs in the l-t as less time spent on fixing errors.

- Training for the future – l-t relationship → protecting against skill shortages (retaining employees) Unfortunately in Australia, training for the future is a low priority as businesses often focus on s-t productivity. Businesses tend to rely on other businesses or the employees themselves (uni, TAFE) to get trained before hiring them. T + D is about investing in employees → shows employees they are valued → l-t relationship

performance management – developmental or administrative Performance management – the continuous process of identifying, measuring and developing the performance of individual employees and employee teams. It is fairly new after being developed by Toyota. Must aim to align the performance of employees with the goals of the business. This means that employees are constantly adjusting the way they do things to better meet the business’ goals. Any individual who is struggling is given both training and coaching. This is development performance management. The most difficult aspect of development performance management is setting the goals. Everyone must know what they have to achieve for performance to be measured.



The administrative aspects (keeping tabs on things) of performance management are complex and costly as they require sophisticated computer software to keep extensive records. E.g. Orica does this and can match salaries to performance, i.e. reward hard working high achievers.

rewards – monetary and non-monetary, individual or group, performance pay Reward management – the monetary and non-monetary benefits employees receive for their work. For the employees at the bottom of the skill scale, the monetary benefits tend to be awards (minimum – modern awards). Above the minimum skill level jobs, monetary reward management is determined by negotiation between employees and employers in collective agreements. At the highest skill levels (e.g. CEO level), common law agreements are used to determine the reward packages. Here the agreements are individual agreements. Reward management programs also include non-monetary benefits, which come from the nature of the work rather than the wages. They include:

- interesting and challenging work - socialisation - recognition and titles - fringe benefits, e.g. laptops, company cars, super etc.

At the lower end of the skill scale, feedback, recognition and socialisation are crucial for telling an employee they are valued, e.g. McDonalds crew person of the month. Most Australian businesses give both monetary non-monetary benefits. Reward packages → align employees to achieve business goals High performers → want recognition and T+D → improved career path and l-t relationship Increasingly, business are organising employees into work teams, e.g. Kmart reward teams that achieve or exceed monthly sales objectives. Performance pay – where wages and salaries are linked into individual performance in achieving measurable goals. Becoming increasingly common.

global – costs, skills, supply Large businesses develop HR strategies → take advantage of global opportunities → increase productivity and remain competitive Businesses have to decide whether to use own employees or those in the global environment who have the required skills but at a lower cost. They must find the most cost effective locations with the right people for the job. There are global environments where both goods and services can be produced in a more cost effective manner, e.g. Pacific Brands in Asia, Telstra has call centres in India. The most recent development in both the relocation and production of outsourcing is the development of l-t collaborative partnerships with suppliers. This allows a great deal of control and a focus on quality. Often key employees are shared between both businesses.



Skills shortages occur in areas like engineering, accounting and mining in both Australia and OS. This may be due to businesses not doing enough training. In 2010 the Australian Government allocated $3.2 billion to improve training. Global skills shortage → must identify key employees → increased investment in training those who make a significant contribution to increase the value of the business Also requires an innovation in recruit talent. In the past, experience was required, but now in a skills shortage, businesses identify talent and then mentor and train.

workplace disputes - resolution – negotiation, mediation, grievance procedures, involvement of courts and

tribunals Industrial disputes can produce both benefits and costs. Often benefits are overlooked, but include the resultant changes after the dispute, which can increase productivity. Change is difficult to achieve because of inertia and the fear that change threatens job security. Costs of disputes can be considerable including:

- loss of income for employer and employee - being seen as an unreliable supplier - potential to promote distrust between stakeholders

Benefits of disputes are most often the resultant changes, e.g. Patricks stevedoring business had benefits from their dispute including:

- increased productivity - increased profitability

Resolution – negotiation, mediation, grievance procedures, involvement of courts and tribunals

1. Negotiation – discussion aimed at reaching agreement, usually a compromise is required. Typically union representatives and senior management.

2. Mediation – a third party is invited to try to reach an agreement (unbiased). Mediators are skilled in analysing issues and helping the disputing parties to reach their own agreement.

3. Grievance procedures – generally relate to individuals (often employees) who feel resentment because they feel something is unfair or wrong. A formal system is used to lodge a complaint:

a) Initial meeting with supervisor b) If not resolved complaint taken to a manager c) If still not resolved complaint taken to the union

4. Involvement of courts – if unable to resolve, FWA makes provision for disputes about a breach of a collective agreement to be resolved by the Federal Court.

5. Tribunals – if the two parties cannot make a collective agreement, the FWA tribunal may become involved if the dispute is affecting the national interest.



5. Effectiveness of human resource management

indicators

- corporate culture - benchmarking key variables - changes in staff turnover - absenteeism - accidents - levels of disputation - worker satisfaction

Indicators, often called KPI (Key performance indicators), help a business define and measure progress towards business objectives (in this case HR objectives). They indicate whether the strategies are working or not (if not must be modified) and they include: Corporate culture – the attitudes, values and behaviours in a business, i.e. how things are done, e.g. Woolworths employees refer to “we” when talking about the business – a sense of belonging, safety and quality are important attitudes. Benchmarking key variables – the process of measuring the performance of variables, such as the effectiveness of recruiting, training, productivity and so on against a standard. The standard is usually the way the most successful business in an industry do the job, i.e. best practice. A business needs to match its competitors in productivity and quality or its market share will decrease. HR management must make sure they recruit people and train correctly. Each business must identify the key resource variables which affect it, e.g. safety at Orica, customer service at Kmart Changes in staff turnover – where people leave a job and have to be replaced. High levels of turnover must be avoided as they are disruptive, expensive and bad for morale. Poor workplace (business) culture → high staff turnovers. HR strategy should be concerned with involving employees in the business, i.e. recognition, promotion, development, performance based pay Absenteeism – refers to employees who are away from work without leave. A clear indicator that HR strategies are not working. Workers away → must be replaced → increased costs → casual labour may be less trained → poorer quality → decrease profitability. Reasons for absenteeism come from poor HR strategies and include:

- Doesn’t have skills, attributes and behaviours to do job well → limited job satisfaction - Job design may be poor → boring - T + D may be lacking - Recognition is poor

Accidents – an indicator that HR strategies in things like job design and training are not working well. Australian businesses have a lot of accidents. Responsible managers are concerned to ensure that their employees have the opportunity to work in a safe environment. Levels of disputation – the levels of disputation in a business could indicate a workplace where safety is not taken seriously as disputes over safety are common. The trend in industrial disputation has been declining for some time. Worker satisfaction – when employees feel valued, engaged and challenged. A high level of satisfaction indicates that HR strategies are working and is usually associated with high levels of productivity. Worker satisfaction can be measured with simple attitude surveys. The standard responses for the things that make for a high level of satisfaction include:

- Recognition - Challenging work - Safe working environment



- Appropriate rewards (performance based pay) - Employee participation



6. Human Resources ‘Super Summary’

Human resources management: the systems that have been developed to manage people within a

business.

Strategic role: involves the l-t planning of staffing in a business. It also involves ensuring that staff are

productive, well-trained and satisfied.

Influences: Stakeholders

Employers Seek and employ labour. Provide employment and determine wages and working conditions.

Employees Individuals engaged by employers to perform tasks for monetary rewards.

Employer associations Support associations for employers that represent the interests of employers.

Unions Organisations that represent groups of employees on issues such as pay and conditions, health and safety and job security.

Government organisations

The government develops the legal framework of employment and establishes independent organisations, e.g. FWA

Society Affected by HR processes as people who are employees and employers make up the majority of society.

Legal

The current legal framework

Common law – refers to laws made by judges in courts. Statute law – those made by the Parliament, i.e. the Fair Work Act (Cth) 2009. Fair Work Australia has established the minimum conditions for employment in areas like pay, working conditions, hours of work and holidays on an industry basis (called modern awards). Mediate – where FWA guides both sides Arbitrate – where FWA determines the new agreement

The employment contract

Established when an employee accepts an offer of employment (written or verbal). It gives both employer and employee rights and obligations. Sets out:

- rights and obligations of employers and employees, - minimum employment standards, - minimum wage rates, - awards, - enterprise agreements,

Common law agreement – contract of agreement and is legally binding. It sets out how the employee will be rewarded and the work requirements of the employee.

Occupational health and safety

OH&S refers to all procedures put in place to ensure that the workplace is safe. It involves both legal and ethical issues.

Workers compensation

A compulsory employer-financed, “no fault”, occupational disabilities program for work-related injury and disease.

Antidiscrimination Refers to measures aimed at stopping unjust or harmful treatment on the basis of things like race, age, gender, disabilities or sexual preferences.

Equal employment opportunity

Tries to provide opportunities to groups of people who may have been denied a fair go in the past, e.g. Affirmative Action (EEO for Women) Act 1986 (Cth)

Economic Economic Refer to changes in the level of spending in an economy. Booming = employees have greater bargaining power. Recession = demand for products will fall, so it is necessary to reduce staff to cut costs. Employees have less bargaining power.

Technological Technological Huge impact on human resource management and their staff requirements as they require training.

Social

Social To do with changes in society, i.e. the attitudes, values and benefits in society.

Changing work patterns

Casualisation of the workforce, disappearance of unskilled jobs, increase in number of women, growth in service industry, increased mobility of workers etc.

Living standards Used to be measured by GDP/capita, but now involves HDI (Human Development Indicators) such as longevity, education, crime rates, mortality rates etc.



Ethics and corporate

social responsibility

Ethics and corporate social responsibility

The responsibility of businesses to work with the full range of stakeholders to help solve society’s problems, e.g. safe workplace, jobs for Indigenous, environmental sustainability.

Processes: Acquisition The obtaining of employees and involves:

- identifying staffing needs - recruiting applicants with the right skills - selecting the best candidate

Job analysis – determining the skills and attributes an employee would need to do the job effectively. Job description (job design) – informs a potential applicant how the job will be done. Job specification – describes the type of potential applicants who can do that job.

Development Concerned with improving employee skill and knowledge. Induction – the educational process of making a transition to a new workplace or role. Performance appraisal – evaluating the performance of employees. Training – educating an employee in the skills and process of the job. Development – selecting employees for programs that focus on future roles, i.e. management.

Maintenance Concerned with building l-t relationships with employees. Reward management – monetary and non-monetary benefits. Performance appraisal – evaluating the performance of employees. Employee participation. Concern for OH&S, work-life balance and workplace bullying.

Separation Where an employee leaves a business. Retirement – usually reached retirement age. Resignation – employee decides to leave the business. Voluntary – offered to employees who then must receive all entitlements, e.g. pay for long-service leave Involuntary – (dismissal) either fair or unfair (where FWA becomes involved).

Strategies: Leadership

style strategies

Autocratic Where managers permit little or no participation in decision making by subordinates. Still used in low wage countries.

Participative Where managers encourage employee participation in the decision making.

Job design strategies

Job Design Process where a set of tasks and responsibilities are combined to make up a job. Job rotation – employees move from task to task for variation. Job enlargement – employees complete several tasks to avoid boredom. Job enrichment – employee can see the whole approach and understands their role. Self-managing teams – employee is not closely supervised and has some control over how the tasks are done. They are taught to monitor their own quality.

General tasks or specific tasks

How many directions are needed, e.g. plumber asked to “fix that pipe”, not how to specifically do it.

Recruitment strategies

Internal Advantages: - l-t relationships as people realise they

have a career in the business - Employees gain expertise - Return on money invested in training - Builds a pool of highly talented and

well trained employees

Disadvantages: - Difficult to respond to change as

corporate culture has been developed, e.g. Coles Group before Wesfarmers takeover

External Advantages: - New ideas and ways of doing things

Disadvantages: - Costly - Unsure of new employee opposed to

tried and tested one

General skills Recruit people with general skills and then train them to do the job.

Specific skills Recruit people with specific skills who won’t require as much training.



Training and development

strategies

Current skills Training for current job – establishes competitive advantage, improves quality and productivity → decreased costs in the l-t as less time spent on fixing errors.

Future skills Training for the future – l-t relationship → protecting against skill shortages (retaining employees)

Performance management

strategies

Performance management

The continuous process of identifying, measuring and developing the performance of individual employees and employee teams.

Development Aim to align the performance of employees with the goals of the business. Employees are constantly adjusting the way they do things to better meet the business’ goals.

Administrative Involve keeping tabs on things and require computer software to keep records.

Rewards management

strategies

Monetary Financial incentives provided to complete a job.

Non-monetary Includes: - Personal satisfaction - Socialisation - Recognition and titles - Fringe benefits, e.g. laptops, cars, super etc.

Individual or group

Group – work teams sharing rewards for the performance of workplace tasks. Individual – workers earning over $100,000 can negotiate individual agreements.

Performance pay

Where wages and salaries are linked into individual performance in achieving measurable goals. Becoming increasingly common.

Global

strategies

Costs Labour costs vary greatly from country-to-country.

Skills Skills shortages often occur when the business does not do enough training, e.g. mines with apprentices.

Supply Labour force is declining in industrial areas (Europe and Japan) but increasing in low-wage areas (Bangladesh, Vietnam, Taiwan)

Workplace disputes

strategies

Resolution 1. Negotiation – aim to reach an agreement. Usually a compromise is required. 2. Mediation – a third party tries to reach an agreement (unbiased). 3. Grievance procedures – individuals (often employees) who feel resentment because

they feel something is unfair. A formal system is used to lodge a complaint: i) Initial meeting with supervisor ii) If not resolved complaint taken to a manager iii) If still not resolved complaint taken to the union

4. Involvement of courts – FWA makes provision for disputes about a breach of a collective agreement to be resolved by the Federal Court.

5. Tribunals – if the two parties cannot make a collective agreement, the FWA tribunal may become involved if the dispute is affecting the national interest.

Effectiveness: The following indicators are used to assess the effectiveness of HRM:

Corporate Culture The attitudes, values and behaviours in a business, i.e. how things are done.

Benchmarking key variables

Measuring the performance of variables, such as the effectiveness of recruiting, training, productivity and so on against a standard (the most successful business in an industry, i.e. best practice).

Changes in staff turnover

Where people leave a job and have to be replaced. High levels of turnover must be avoided as they are disruptive, expensive and bad for morale.

Absenteeism Employees who are away from work without leave. Can be caused by low job satisfaction, low morale, stress or poor health. High levels of absenteeism disrupt schedules, low productivity and are costly.

Accidents An indicator that HR strategies in things like job design and training are not working well.

Levels of disputation

Could indicate a workplace where safety is not taken seriously as disputes over safety are common. Monitoring industrial disputes will give an indication of the effectiveness of grievance procedures and dispute resolution processes.

Worker satisfaction

A high level of satisfaction indicates that HR strategies are working and is usually associated with high levels of productivity. Worker satisfaction can be measured with surveys, polls, suggestion boxes and group discussions.



7. Human Resources Acronyms

Influences: “STEELS” S – Stakeholders T – Technological E – Economic E – Ethics and corporate social responsibility L – Legal S – Social Indicators: “WAT BLAC” – pronounced “what black” W – Worker satisfaction A – Absenteeism T – Turnover of staff B – Benchmarking key variables L – Levels of disputation A – Accidents C – Corporate culture

THE BUSINESS REPORT


The Business Report: Please note: There are many, many ways to write a business report that is capable of getting full marks. This is merely how I structured mine and it is what worked for me. Feel free to experiment and discuss it with your teacher and then do what works best for you.

Structure: 1. Executive summary 2. Body – this should involve:

Headings o Sub-headings

3. Recommendations 4. Summary

How to: 1. Read the stimulus material very carefully. Underline the key points it is asking you to address and

identify the parts of the course that they come from. These key points will become your headings in

your body.

2. Write on the top of your first page “Executive Summary” and then put it aside – the executive

summary will be written last.

3. Begin writing the body. Use the headings you have identified in the stimulus and then break these

down further by using sub headings.

4. When writing the body, use some full sentences but try to steer clear from solid blocks of writing.

Utilise dot points effectively.

5. Draw diagrams, flow charts and graphs when you can. Markers love to see information expressed in

different ways.

6. Use terminology. Perhaps the most important thing you can do is to use the correct terminology from

the syllabus – this is what separates band 4 or 5 responses from band 6 responses.

7. Never use first person. Always write in third person. A business report is a formal document and you

should never say “I recommend that the business…” or “I would change the way that…”. Try using “It

is recommended that…” and “The business should change the way that…”

8. Offer strategies and recommendations throughout the report. These are essential. 9. Write the heading “Recommendations” and briefly list the most important recommendations you can

offer to the business. These must directly relate to the stimulus provided.

10. Write the heading “Summary” and basically summarise the key points of the report. Try to use full

sentences for this part.

11. Go back to your first page that has “Executive Summary” written on it and write your executive summary. The executive summary should outline the main points of the report. Remember to list the current problems that the business is facing (these will be expressed in the stimulus). I like to end my executive summary with a key finding. Just write “A key finding of this report is…” and list something that directly relates to the stimulus of the question. An example is “A key finding of this report is that all of the business functions are interdependent” or “A key finding of this report is that while establishing a new business can be challenging, it can offer the owner both financial and personal satisfaction”.

HSC Business Studies Syllabus Revision Guide

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Transcript of HSC Business Studies Syllabus Revision Guide