IB Business and Management SL Study Guide PDF

STUDY GUIDE: SL www.ib-academy.nl ib-academy.nl  Business and Management SL Study Guide Available on www.ib-academy.nl Author: Miloš Drezga, Bella Kelly Contributing Authors: Susan Abbas Nejad, Alex B...

STUDY GUIDE: SL www.ib-academy.nl ib-academy.nl  Business and Management SL Study Guide Available on www.ib-academy.nl Author: Miloš Drezga, Bella Kelly Contributing Authors: Susan Abbas Nejad, Alex Barancova Design Typesetting LATEX.guru Special thanks: Andjela Tričković This work may be shared digitally and in printed form, but it may not be changed and then redistributed in any form. Copyright © 2023, IB Academy Version: BaMSL.3.2.230308 This work is published under the Creative Commons BY-NC-ND 4.0 International License. To view a copy of this license, visit creativecommons.org/licenses/by-nc-nd/4.0 This work may not used for commercial purposes other than by IB Academy, or parties directly licenced by IB Academy. If you acquired this guide by paying for it, or if you have received this guide as part of a paid service or product, directly or indirectly, we kindly ask that you contact us immediately. Daltonlaan 400 www.ib-academy.nl 3584 BK Utrecht [email protected] The Netherlands +31 (0) 30 4300 430 Welcome to the IB Academy guide for Business and Management SL. Our Study Guides are put together by our teachers who worked tirelessly with students and schools. The idea is to compile revision material that would be easy-to-follow for IB students worldwide and for school teachers to utilise them for their classrooms. Our approach is straightforward: by adopting a step-by-step perspective, students can easily absorb dense information in a quick and efficient manner. With this format, students will be able to tackle every question swiftly and without any difficulties. We distinguish between two aspects: skill and understanding. Skill is fostered when students practice the syllabus material and can identify variations within the steps even if the same general principle may be applied throughout. 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For more information on our material or courses, be sure to check our site at www.ib-academy.nl. IB Academy Team If you would like to consider supporting our materials and be recognised for it, send us an email to [email protected]. TABLE OF CONTENTS 1. Business organisation and 7 environment – Introduction to business and management – Types of organisations – Organisation objectives – Stakeholders – External environment – Growth and evolution 2. Human resource 27 management – Functions and evolution of human resource management – Organisational structure – Leadership and management – Motivation 3. Accounts and finance 53 – Sources of finance – Costs and revenues – Break even analysis – Final accounts – Profitability and liquidity ratio analysis – Cash flow – Investment appraisal – Budgeting 4. Marketing 73 – The role of marketing – Market planning – Market research – The four Ps – E-commerce 5. Operations management 93 – The role of operations management – Production methods – Location 5  TABLE OF CONTENTS 6 BUSINESS ORGANISATION 1 AND ENVIRONMENT 1.1. Introduction to business 9 and management – The role of a business in combining resources – Functions of a business – Business sectors – Sectoral change – Entrepreneurship vs. intrapreneurship – Reasons for starting up a business – Steps in the process of starting up a business – Factors to consider when starting up a business – Problems that a new business might face – Elements of a business plan 1.2. Types of organisations 13 – Public vs. private sectors – For profit (commercial) organisations – For-profit (social) enterprises – Non-profit social enterprises 1.3. Organisation objectives 18 – Vision and mission statements – The need for change in objectives – Corporate social responsibility and business ethics – Purpose of ethical objectives – The evolving role and nature of CSR – SWOT Analysis – Ansoff matrix 1.4. Stakeholders 21 1.5. External environment 23 7  BUSINESS ORGANISATION AND ENVIRONMENT 1.6. Growth and evolution 23 – Economies and diseconomies of scale – Small vs. big businesses – Internal vs. external growth – External growth methods – The impact of globalisation on the growth and evolution of businesses – Reasons for the growth of multinational companies – The impact of MNCs on the host countries 8 BUSINESS ORGANISATION AND ENVIRONMENT Introduction to business and management 1 1.1 Introduction to business and management 1.1.1 The role of a business in combining resources The role of business is to combine human, physical and financial resources to create goods and services. Inputs Processes Outputs Resources that a Turning the inputs business uses in the The output or into manufactured production process provision of final goods or the (i.e. labour and goods and services provision of services raw materials) 1.1.2 Functions of a business Human resources Manages personnel of the organisation. Deals with: workforce planning, recruitment, training, appraisal, dismissals and redundancies, and outsourcing human resource strategies. Finance and accounts Manages the organisation’s money. Deals with: reporting and recording financial records, abiding by legal requirements (e.g., tax), produces final accounts. Marketing Identifies and satisfies the needs and wants of customers. In charge of ensuring that a firm’s products sell. Deals with: market research, test marketing, advertising and branding. Operations (management) Converts raw materials and components into finished goods. For a service this can be the process of giving that service. 1.1.3 Business sectors Primary sector The extraction, harvesting, and conversion of natural resources. Most prevalent in LEDCs. Primary sectors in MEDCs use more automated methods. The primary sector has little added value. 9  BUSINESS ORGANISATION AND ENVIRONMENT Introduction to business and management Examples: coal mining, vegetable harvesting. Secondary sector Manufacturing or construction of products by transforming the raw materials produced in the primary sector. Economically developing countries tend to dominate this sector. Examples: clothing production, car manufacturing. Tertiary sector Provides services to the general population. Tend to be dominant in MEDCs. Examples: haircuts, taxi service. Quaternary sector A subcategory of the tertiary sector. Involved in intellectual, knowledge based activities that generate and share information. Requires a highly educated workforce, and therefore is most prominent in MEDCs. Example: law firms, training and development firms. Primary Secondary sector Tertiary sector sector manufacture transport advertising extraction assembly warehousing selling 10 BUSINESS ORGANISATION AND ENVIRONMENT Introduction to business and management 1 1.1.4 Sectoral change Primary Secondary Tertiary Quarternary A shift in the relative share of national output and employment that is attributed to each business sector over time. As countries become more developed, they move towards secondary sectors, and eventually tertiary and quaternary sectors. Primary sector production yields low added value, in order to develop economically, a shift in business activity must occur to ave higher added value. Reasons for sectoral change Higher household income: higher demand for services as people have available money to spend on ‘wants’. More leisure time: with higher standards of living, people have more time/money to do recreational activities. Greater focus on customer service: firms realise the importance of customer service. Increasing reliance on support services: businesses use more sophisticated services such as subcontractors and specialists to help the business grow. 1.1.5 Entrepreneurship vs. intrapreneurship Entrepreneur an individual who plans, organises and manages a business, taking on financial risks in doing so. Intrapreneur the act of being an entrepreneur but as an employee within a large organisation. Entrepreneur Intrapreneur Owners/operators. Employees of the organisation. Takes substantial risks. Takes medium- high risks. Rewarded with profit. Rewarded with pay. Failure incurs personal costs. Failure absorbed by the organisation. Visionary. Innovative. Responsibility for the workforce. Accountable to the owner. 11  BUSINESS ORGANISATION AND ENVIRONMENT Introduction to business and management 1.1.6 Reasons for starting up a business Growth. Earnings. Transfer and inheritance: used for something that they can pass on (transference) to their children (inheritance) to give them a sense of security. Challenge: drive to have personal satisfaction, being successful boosts self-esteem. Autonomy: being your own boss, making decisions about the business, work hours, holidays etc. Security: if you are your own boss, you cannot be made redundant, dismissed, or be replaced with technology. Hobbies: just for fun, or because you are passionate about something. 1.1.7 Steps in the process of starting up a business 1. Write a business plan. 2. Obtain startup capital. 3. Obtain business registration. 4. Open a bank account. 5. Marketing. 1.1.8 Factors to consider when starting up a business Business idea. Sources of finance. Human resources: who will you hire, will they need training, etc. Enterprise: who will lead, organise and manage the business. Fixed assets: land and machinery needed. Suppliers. Customers. Marketing. Legal issues: do you have all of the patents, legislations, and documentation needed. 1.1.9 Problems that a new business might face Lack of finance. Cash flow problems. Marketing problems. Poor location. External influences: competition in the area, economic recession. 12 BUSINESS ORGANISATION AND ENVIRONMENT Types of organisations 1 Unestablished customer base. People management problems: poor choice of employees or leadership. Legalities. Production problems. High production costs. 1.1.10 Elements of a business plan Details of the business and the owners. Information about the product. A preview of the market. Finance. Personnel and the workforce. Marketing of the firm/product. 1.2 Types of organisations 1.2.1 Public vs. private sectors Private Public Owned and controlled by private Owned by the government. individuals. Provide essential goods and services Can be owned by one person or by that would be otherwise inefficiently many. provided by the private sector. Aim is to make profit. Organisations wholly owned by the E.g., H&M and Walmart. government are state owned enterprises. E.g., electricity and water companies. Businesses Private sector Public sector Unincorporated Incorporated businesses businesses Sole traders Private limited companies (Ltd.) Partnerships Public limited companies (PLC) 13  BUSINESS ORGANISATION AND ENVIRONMENT Types of organisations 1.2.2 For profit (commercial) organisations Types of for-profit organisations Unincorporated businesses businesses where there is no legal distinction between the owner of the business and the business itself–everything is carried out in the name of the owners. E.g., sole traders and partnerships. Incorporated businesses businesses that have a separate legal entity from their owners. E.g., private limited companies and public limited companies. Unincorporated. Individual who owns a personal business. Responsible for success or failure. May work alone or employ others. Startup capital usually includes personal savings and borrowing. Sole trader an individual who runs and owns his own business. Advantages Disadvantages Fewer legal formalities. Unlimited liability (unincorporated). Profit goes directly to one owner Limited sources of finance (hard to (direct). obtain bank loans). Autonomy. High risk. Personalised service. Workload and stress. Privacy of financial accounts. Limited economies of scale. Setup costs are inexpensive and Lack of continuity. time-saving. 14 BUSINESS ORGANISATION AND ENVIRONMENT Types of organisations 1 Partnerships a profit-seeking business owned by multiple people (at least two). Unincorporated. Ordinary partnerships have a maximum of 2–20 people. Money can be pooled from partners’ personal funds which have financial stake but don’t actually make decisions (silent partners). At least one partner must have unlimited liability. Advantages Disadvantages Set up costs are inexpensive and quick. Unlimited Liability (unincorporated). Financial strength (more partners Prolonged decision making. means more personal funds). Lack of harmony. Specialisation and division of labour Profits must be shared among multiple due to multiple partners. partners. Financial privacy (no need to publish accounts). Private Limited Company (Ltd.) a company that cannot raise share capital from the general public. The shares are sold to private family members and friends. E.g., IKEA, Lego, Rolex, Chanel, etc. Advantages Disadvantages Limited liability. Profits have to be shared among much No limit on the number of owners. larger number of members. Shares can only be sold privately. Setting up business takes time and it’s Better decision making. costly. Easier to raise additional funds. Company’s financial accounts are public. No member has full control of the company. Firms are not allowed to sell their shares to the public. 15  BUSINESS ORGANISATION AND ENVIRONMENT Types of organisations Public Limited Company (PLC) Often big, multinational companies boasting large numbers of employees that are able to advertise and sell its shares to the general public via the stock exchange. E.g., China mobile, HSBC, Samsung, Nike, etc. Flotation occurs when a business first sells all or part of its business to external investors (shareholders). This process is known as an initial public offering (IPO). Advantages Disadvantages Shares can be sold to the public. Takes time due to bureaucratic nature Efficient sources of finance are more of big companies. available (bank loans). Communication issues due to size. Limited Liability. Final accounts are public. Possibility of market dominance. Less able to offer personal services to Economies of scale. customers. Tax benefits. Compliance costs. Loss of control. 1.2.3 For-profit (social) enterprises Social Enterprise revenue generating businesses with social objectives at the centre of business operations. These run according to business principles but do not aim at making profit. Their surpluses from trading may be shared with employees and customers, passed on to a third party, used to buy resources, raise finance, employ staff etc. Cooperatives businesses owned and run by their members, including employees and customers. The common goal is to create value for the members by engaging in socially responsible business activities. All employees have a vote. Profits earned are shared between members. Advantages Disadvantages More incentive to work. Disincentive effects. Employees have decision making Limited sources of finance. power. Slower decision making. Social benefits (CSR). Limited promotional opportunities. Public support. 16 BUSINESS ORGANISATION AND ENVIRONMENT Types of organisations 1 Microfinance providers a financial service aimed at financing disadvantaged members of society and helping to stop the poverty cycle. E.g., small businesses, women, minority groups. Advantages Disadvantages Disadvantaged people have access to Immorality (micro-finance providers this. benefit from the poor/unemployed). Job creation. Limited finance. Social well-being incentives. Limited eligibility (not everyone qualifies). Public-private partnerships when the government works together with the private sector to jointly provide certain goods or services. 1.2.4 Non-profit social enterprises Non-profit social enterprises businesses run in a commercial manner but without profit being the main goal. These companies use surplus revenues to achieve social goals. Non-Governmental Organisations (NGOs) non-profit social enterprise that operates in the private sector, (i.e., it is not owned or controlled by the government). Set up to benefit society. E.g., UNICEF. Charities provides voluntary support for good causes (from society’s point of view), such as the protection of children, animals and the natural environment. Reliant on donors, endorsements, promotion etc. E.g., WWF. Advantages Disadvantages Social benefits. Bureaucracy. Tax exemptions. Disincentive effects. Tax incentives for donors. Charity fraud. Limited liability. Inefficiencies. Public recognition and trust. Limited sources of finance. 17  BUSINESS ORGANISATION AND ENVIRONMENT Organisation objectives 1.3 Organisation objectives 1.3.1 Vision and mission statements Vision statement specifies the long term aspirations of a business; where it ultimately wants to be. It often describes how the organisation wants to be perceived. They aim to influence the consumers’ perception of the business. Mission statement a declaration of the underlying purpose of an organisation’s existence and its core values. This statement is updated more frequently than a vision statement. Three levels of objectives can be distinguished: AIM Strategic objectives: the senior leadership sets the long-term goals, determines the actions necessary to achieve the goals and mobilises resources to Strategic execute the actions. (affects: whole company) How Objectives will the goals/aims be achieved by the resources? Tactical objectives: middle management develops medium-term action plans to achieve the strategic objectives of an organisation. (affects: department) Tactical Objectives Operational objectives: lower management develops short-term, day-to-day action plans to achieve the tactical objectives of the organisation as efficiently as possible. (affects: teams) Operational Objectives 1.3.2 The need for change in objectives Changing corporate culture. Risk Profile. Type and size of the organisation. State of the economy. Private vs. public organisations. Government constraints. Age of the business. Presence and power of pressure groups. Finance available. New technologies. 18 BUSINESS ORGANISATION AND ENVIRONMENT Organisation objectives 1 1.3.3 Corporate social responsibility and business ethics Corporate social responsibility (CSR) the consideration of ethical and environmental issues relating the business activity, towards all stakeholders and not just to owners or shareholders. E.g., the treatment of employees or how local communities would react to new projects. CSR aims to: Treat customers and suppliers fair and equally. Compete fairly (i.e., not engaging in predatory pricing). Treat the workforce with dignity and listening carefully to their needs. 1.3.4 Purpose of ethical objectives Altruistic attitude: the company genuinely does it for social benefits, they actually care about the impact of the company. Strategic attitude: businesses ought to be socially responsible only if such actions help them to become more profitable. Self-interest attitude: the belief that it is the government’s job to protect society. 1.3.5 The evolving role and nature of CSR Becomes more important as companies become more competitive. Because of globalisation we have so much choice, meaning that companies need a competitive edge, social responsibility might be this. More and more governments are imposing penalties on socially undesirable or unethical behaviour (e.g., carbon tax). Increase in education means people are more aware. Pressure groups raise awareness and affect consumer perceptions. 19  BUSINESS ORGANISATION AND ENVIRONMENT Organisation objectives 1.3.6 SWOT Analysis SWOT analysis aims to identify the key internal strengths & weaknesses and external opportunities & threats, seen as important to achieving an objective. The analysis of the internal Helpful Harmful to achieving the objective to achieving the objective strengths & weaknesses helps attributes of the organization business owners determine their Internal origin current market position, which is crucial to know before planning and implementing SMART objectives. A useful tool for: S WStrengths Weaknesses attributes of the environment External origin competitor analysis; assessing opportunities; risk assessment; reviewing corporate strategy; strategic planning. O T Opportunities Threats Examples of strengths Examples of weaknesses Products X is market leader in terms of Workers are striking demanding higher sales. wages. Customers are loyal to the brand. Machinery is obsolete, lowering production output. The analysis of the external opportunities & threats provides businesses with the information needed to respond to external factors that can impact the ability of the business to achieve its strategic goals and objectives. 1.3.7 Ansoff matrix Existing products New products Market penetration: selling an Existing markets existing product in an existing market, with the aim of Market Product increasing the market share of penetration development Increasing risk said product (e.g., promotions). Product development: changing or creating new products for the New markets same market. Market development: selling the same Market Diversification development products to a new market. Diversification: selling new products to new markets. Increasing risk 20 BUSINESS ORGANISATION AND ENVIRONMENT Stakeholders 1 1.4 Stakeholders Stakeholders individuals or groups that may hold interest in the business or may be affected by its decisions. We distinguish between two groups of stakeholders: Internal stakeholders who are directly involved in the running of the business; External stakeholders who are indirectly involved in the running of the business or are simply affected/interested in its activity. Stakeholders Internal External Owners (shareholders) Suppliers Employees Customers Management Communities Pressure Groups Competitors Government The interests of internal stakeholders Owners or shareholders put up the capital which runs the business. The reward is the gain they make from owning the business. If there was no reward, no one would bother to invest. Directors and senior management in small businesses, the owners are quite likely to be involved in the daily running of the business. This is not in case in bigger companies, where a board of directors may be involved and monitor the business’ activities. The performance of the business has a direct impact on them — if the business performs poorly, they might be made redundant. If the business performs well, they might be promoted or receive bonuses. Employees are involved in daily activities and bring projects to life. If the business underperforms, employees are often the first to fall victim and get dismissed. If the business performs well, they might be promoted or receive bonuses. 21  BUSINESS ORGANISATION AND ENVIRONMENT Stakeholders The interests of external stakeholders Suppliers: businesses depend on suppliers for resources otherwise production may be reduced. Customers: one of the most important external stakeholders. Businesses need customers to sell goods and services in order to remain operational. Additionally, many customers depend on the goods and services provided by businesses. Communities: businesses could play important roles in a community’s development by supporting charities, collaborating with schools or expanding projects to create jobs. Pressure: groups they are interested in the business as they attempt to influence its decision making processes (e.g., forcing the local council to act against industrial pollution). Competitor: other firms operating in the same market want to observe their competitors in order to predict future activities and to react accordingly. Government: legal institutions are interested in a company’s lawful conduct. For example, they could inspect a business’ licenses or tax records. Mutual benefit and conflict between stakeholders’ interests Conflicts may arise when there are many stakeholders, each with different objectives. For example, there might be a conflict between customers and shareholders as customers want the highest quality products for more affordable prices. Spending more on research and development to create new products might lower the amount payable in dividends to shareholders. Improving quality might also lead to higher costs and lower profits, directly affecting shareholders. As it is impossible to satisfy all stakeholders simultaneously, businesses need to focus on the ones that are important to them. In order to determine which stakeholders need to be satisfied, businesses compile a stakeholder analysis: visualising which stakeholders have the most interest in the company’s activities, and which have the most influence over the company. Power Government Consumers Example of a stakeholders analysis showing the interest and power of four stakeholders: government, pressure groups, consumers and Suppliers suppliers. Pressure groups Interest 22 BUSINESS ORGANISATION AND ENVIRONMENT External environment 1 1.5 External environment External factors outside influences that can impact a business such as laws, market trends or political changes. A civil war for example could significantly harm businesses selling luxury goods as the demand will drop severely. In order to monitor all these changes in the external environment, businesses conduct a combined SWOT and PEST analysis. These analyses take external factors into consideration that may affect economic activities, so that businesses are able to set SMART objectives. PEST analysis evaluates opportunities & threats on Political, Economic, Social and Technological factors. Examples of opportunities Examples of threats Political: political situation in the Political: stricter employment laws country is very stable. increases business risk. Economic: the economy is booming and Economic: high competition in people have growing income. particular market segment. Social: increasing average living Social: healthier lifestyle of consumers conditions means more people can afford reduces sale of soft drinks. luxury items. Technological: the invention of a better Technological: faster 4G mobile internet medicine obsoletes the current. network allows development of more complex apps like voice recognition. STEEPLE the same analysis as is done in PEST, but also includes Legal, Environmental and Ethical. Note: If the exam asks you to design a SWOT analysis, this automatically means you will need to do a PEST analysis as well in order to be able to properly analyse the external environment. Application is key – you have to look carefully through the case study in order to be able to create a SWOT analysis explicitly applicable to the company in the case study, and justify your answers at all times! You have to explain why something is a strength, weakness, opportunity or a threat. Without arguments your answer will not be considered complete. 23  BUSINESS ORGANISATION AND ENVIRONMENT Growth and evolution 1.6 Growth and evolution 1.6.1 Economies and diseconomies of scale Growth and evolution refers to the expansion of sales and the increased scale of production. Growth is an important factor for businesses to consider due to the costs involved – these can increase or decrease. Economies of scale as the production output of an enterprise increases, the cost per unit output decreases as fixed costs are spread out over more units of output. Diseconomies of scale as the business expands and the scale of its operations is beyond the minimum efficient scale, the average costs per unit output rises. Diseconomies of scale may occur when: Communication becomes more complicated and coordination more difficult because a large firm is divided into departments. The control and coordination of large businesses is very demanding; more supervision leads to more costs. 1.6.2 Small vs. big businesses Small business Big business Closer to its customers: ability to offer Economies of scale: larger production more personal services. output = decreased cost per unit. Less competition: small businesses can Market leader status: big firms tend to create a monopoly in a niche market. be more influential. Greater focus: they do not offer Survival: greater capacity is used to products to mass markets. spread the risk. 24 BUSINESS ORGANISATION AND ENVIRONMENT Growth and evolution 1 1.6.3 Internal vs. external growth Internal/organic growth a business grows using its own resources to increase the scale of its operations and sales revenue. External growth a business grows by collaborating with, buying up or merging with another firm. Organic growth can be achieved by selling new products, increasing production and sales through marketing or finding new markets. For most businesses internal growth is slow, but it does so at less risk than external growth and can be financed through internal funds. External growth is a much quicker alternative to organic growth. External growth can be a quick way to reduce competition in a market, gain economies of scale, gain entry into foreign markets or achieve synergy. 1.6.4 External growth methods The terms mergers and takeovers both describe the situation when firms join together and operate as one organisation, albeit with one important difference. The term mergers is used to describe two businesses that join to create a third new company, whereas the term takeover refers to the purchase of one business by another. There are few different types of mergers: Horizontal integration: firms are in exactly the same line of business and at the same stage of production. Backward vertical integration: firms are at different stages of production. The merger occurs with a business which is in the previous stage of production. Forward vertical integration: firms are at different stages of production. The merger occurs with a business which is in the next stage of production. Lateral integration: merging of firms with related goods which do not compete directly with each other. Diversifying merger (conglomerate): merging of firms in completely different lines of business. Joint venture a type of external growth strategy that combines the contributions and responsibilities of two firms to a shared project by forming a separate legal enterprise. The reason why firms form a joint venture is to enjoying the advantages of mergers, such as economies of scale and reduced competition, without losing their identity. Most joint ventures are friendly, allowing businesses to share their areas of expertise. 25  BUSINESS ORGANISATION AND ENVIRONMENT Growth and evolution Strategic alliance an agreement between parties to pursue shared objectives while remaining independent organisations, and without forming a legal partnership entity. These are often formed to share costs and risks, information and expertise. E.g., sharing R&D costs, manufacturing capabilities, distribution channels etc.. Franchising an arrangement where the franchisor sells the rights to sell their products or use the company name or brand to the franchisees. 1.6.5 The impact of globalisation on the growth and evolution of businesses Globalisation worldwide movement toward economic, financial, trade, and communications integration. Increased competitiveness. Increased difficulty of meeting customer expectations (because of high competitiveness). Larger customer base. Economies of scale. Broader choice of location. More external growth opportunities. More opportunities for sources of finance. 1.6.6 Reasons for the growth of multinational companies Increased customer base. Cheaper overseas production costs (e.g., China, India, Bangladesh). Economies of scale. Companies can avoid protectionist policies. Spread risks by being in multiple markets. 1.6.7 The impact of MNCs on the host countries Advantages Disadvantages Creates jobs. Profits are sent back to home country. Can boost GDP. Can push local companies out of Introduces new skills and technologies. business causing unemployment. Introduces competition. Low CSR: exploits the country’s natural resources. 26 HUMAN RESOURCE 2 MANAGEMENT 2.1. Functions and evolution 28 of human resource management – Human resource planning – Internal and external factors that influence human resource planning – Common steps in the process of recruitment – Types of training – Types of appraisal – Dismissal, termination and redundancy – Common steps in the process of dismissal – Changing employment patterns and practices – Outsourcing, offshoring and re-shoring 2.2. Organisational structure 36 – Changes in organisational structures 2.3. Leadership and 39 management – Key functions of management – Management vs. leadership – Leadership styles 2.4. Motivation 42 – Taylor – Maslow’s hierarchy of needs – Herzberg’s motivation-hygiene theory – Adam’s equity theory – Pink – Types of financial rewards – Types of non-financial rewards 27  HUMAN RESOURCE MANAGEMENT Functions and evolution of human resource management 2.1 Functions and evolution of human resource management 2.1.1 Human resource planning Human resources (HR) all the people working in a business. Workforce/HR planning a process that identifies current and future HR needs to ensure that staffing is sufficient, qualified, and competent enough to achieve the organization’s objectives. There are four key parts of HR planning (which will be further examined later): Recruitment hiring the right person for the right job. Training ensuring an employee receives proper professional development (i.e., acquires the necessary set of skills needed to complete the tasks efficiently). Appraisal evaluating an employee’s job performance. Termination or dismissal managing the situation of employee’s voluntary or involuntary leave. Labour turnover a measure used in HR planning of how many people leave a business over a given period of time, usually expressed as a percentage of the total labour force. number of staff leaving over a year Labour turnover = × 100 average number of staff employed in a year High labour turnover This means that there is a reason why staff do not stay in the firm for a long period of time. Perhaps there is an aspect of the business that demotivates the workforce and lowers their productivity (resulting in extra costs for the business as it constantly needs to be on a lookout for new staff). High labour turnover suggests that staff may only be staying for a short time for a certain reason. There may be a key factor such as motivation, packages etc. that are affecting retention. Staff hired may be incompetent. Remuneration packages might not be competitive. 28 HUMAN RESOURCE MANAGEMENT Functions and evolution of human resource management 2 Low labour turnover Fresh blood may encourage innovation and new ideas. Existing employees are loyal to the business, and likely more motivated to work. Managers have recruited the right people for the right job. A very low labour turnover means that the business is stable but also lacks progress; ‘fresh blood’ in the business is important to stimulate innovations and new ideas. 2.1.2 Internal and external factors that influence human resource planning External factors impact the size and availability of the pool of potential employees for the business. These can include: Technological change: e.g., better technology can lead to more working from home. Demographic change: e.g., an aging population, reduced birth rate or migration etc. These factors affect the size of the labour pool and the skills they have to offer. The state of the economy: e.g., in a recession, the unemployment rate is higher which allows business to ‘pick and choose’ people with right skills and experience (also they are willing to accept lower wages). Demographic change Changes in demographic populations. Ageing populations: Increased dependent population, reduced labour mobility, changes in consumption patterns, change in employment patterns. Changes in labour mobility Friends and family affect geographic mobility. Relocation costs. Cost of living. Language and cultural differences. New communication technologies Electronic/online recruitment. Online meetings. Flexitime and teleworking. Online training courses. 29  HUMAN RESOURCE MANAGEMENT Functions and evolution of human resource management Internal factors changes from within the business itself. These can include: Changes in business organisation: businesses change the way they are organised in order to better meet their strategic objectives. Changes in labour relations: labour unionisation causes businesses to give in to some of their requirements in order to keep the business running and the workforce motivated. Changes in business finance: financial difficulties cause businesses lay off some workers to minimise the costs. 2.1.3 Common steps in the process of recruitment Due to changes in internal circumstances (e.g., higher demand, introduction of a new job etc.), a business may need to start the process of recruitment. Recruitment can be divided into 3 steps: 1. Identification: recruitment starts with defining the job description: details the basic roles and responsibilities of a job, and a person specification: to communicate what skills, qualifications and experience candidates need for the job. The business also needs to decide whether it is best to recruit internally: find a current employee that could carry out the new job or recruit externally: find a completely new person from outside the business. 2. Application: to find the best applicants, businesses make a job advert: communicating the job description and person specification to inform potential candidates. The job advert should be placed so that it reaches its target audience. The business can decide to process the applications externally: hire a recruitment agency to handle the application process for them. 3. Selection: after some time the applicants may be shortlisted based on how well they fit the job, interviews may be scheduled in order to select the best applicant for the job. Internal recruitment hiring people from within the firm to fill a new position. External recruitment the process of hiring people from outside the organisation. 30 HUMAN RESOURCE MANAGEMENT Functions and evolution of human resource management 2 2.1.4 Types of training On the job training done while the employee is doing their normal job while at the workplace. E.g., a senior employee helps the junior employee comprehend all the tasks and acquire new skills needed to carry out the job efficiently. Advantages Disadvantages Cost effective: using in-house Trainees may pick up bad practices. specialists. Internal trainers may lack up to date Training is more relevant as it is training. specifically for the firm. Trainers cannot complete their own Reduces disruption to daily operations work whilst training new workers. as it is on site. May be incomplete due to a lack of Helps establish relationships and resources. promote teamwork. Productivity may be low until all skills The location is convenient for workers are learnt. and trainers. Induction training the training received when first starting a job, this is a type of on the job training. Advantages Disadvantages Establishes expectations and good Can be time consuming. working habits from the start. Key staff need to be freed from their Helps new workers understand the duties. corporate culture. Information overload for new recruits. Speeds up settling in process. Induction can be lengthy in large firms. Morale is boosted when new recruits feel more confident. Mentoring another type of OTJ training involving a dyad of a mentor and a mentee. The mentor shares their experiences with the mentee to help them gain skills and knowledge. Advantages Disadvantages Synergy is created as it shares personal Time consuming for mentors. experiences. Mismatched pairings can be stressful. Mentoring can be informal/formal. Requires long-term commitment which Good mentors create a positive can disrupt business operations. environment for mentees to act Training mentors might be costly. without fear of punishment. 31  HUMAN RESOURCE MANAGEMENT Functions and evolution of human resource management Off the job training happens outside working hours, where the employees are being trained away from the job. This could involve workshops, conferences etc. Advantages Disadvantages Experts who may not exist internally There is a potential loss of output are able to be used. whilst workers attend the offsite A wider range of training can be training course. provided. Hiring specialist trainers can be very There are no distractions from expensive, and colleagues at an offsite venue. transport/accommodation costs may Networking can take place, so add cost. employees can meet new people. It is debatable whether all skills are transferable to the business. Finding time for staff to get off work can be difficult. Cognitive training focuses on helping employees develop their thinking and processing skills. This type of training is of crucial importance for businesses that require their employees to make quick, wise and effective decisions, link investment banking, marketing departments of companies etc. Advantages Disadvantages Helps workers improve their mental May not cater for workers with processes acquire new knowledge, aid different goals. decision-making and solve work-related Can be expensive. problems. Might not meet the needs of an organisation. Difficult to measure effects of the training. Behavioural training focuses on helping employees develop certain interpersonal skills such as stress management, communication, dealing with emotions etc. 32 HUMAN RESOURCE MANAGEMENT Functions and evolution of human resource management 2 2.1.5 Types of appraisal Staff appraisal is the processes of reviewing the performance of employees against pre-set objectives. There are four different appraisal strategies: Formative appraisal: an ongoing process that focuses on giving the employees recognition for what they have done well and indicating possible mistakes so that they can learn from them. Summative appraisal: measures an employee’s performance based on standards set by the business, making it easy for the business to sum up how a particular employee performed against the standards. Usually done at the end of a particular project. 360 degree appraisal: feedback on the employee’s performance is not only received from the manager, but also from co-workers (appraisal from multiple perspectives). This type of appraisal is usually combined with one of the previous two to give another perspective on the performance. Self-appraisal: employees reflect on their own performance by rating themselves on various performance indicators. This type of appraisal is usually combined with those explained earlier. 2.1.6 Dismissal, termination and redundancy Business can deal with voluntary or involuntary leave of employees in several ways: Termination: happens when employees leave the business at the end of their contract because they want to work on their professional development, change career, retire etc. These employees expect to receive a reference from their ex-employer. Dismissal: happens when an employee has broken some of the terms of their contract, which could be due to missing work, poor discipline, dishonesty etc. These employees do not receive a reference from their ex-employer. Redundancy: happens when a job is no longer required, making the employee redundant through no fault of her own. Causes can be, e.g., a drop in production, a merger or takeover, automation etc. 33  HUMAN RESOURCE MANAGEMENT Functions and evolution of human resource management 2.1.7 Common steps in the process of dismissal Evidence must be gathered during all stages of the dismissal process. Managers must effectively communicate the message to avoid rumours spreading. 1. Verbal Warning 2. Official written warning if misconduct is repeated 3. Dismissal 2.1.8 Changing employment patterns and practices New technologies and new social trends have influenced work practices in many countries. Some examples are: Teleworking: employees work a set amount of hours at the office and the remainder from home. Flexitime: employee has to work a set amount of hours per week, the allocation of time spent completely depends on employee’s preferences. Migration for work: due to better infrastructure and better connectivity of the whole world, people can easily migrate daily, sometimes even great distances, for work. Portfolio working: a person employed in a number of different jobs, carried out simultaneously, usually on a part-time or temporary basis. Part-time employment. Migration of workers: a person who works in a country or state of which he/she is not a national. 2.1.9 Outsourcing, offshoring and re-shoring Outsourcing the process of transferring internal business activities to an external firm in order to reduce costs. Advantages Disadvantages Outsources may carry out work to To cut costs, subcontractors may ‘cut higher quality standards. corners’ (unethical). Outsourcers will bid for work (i.e., try Quality management can become more to give you the best price). difficult. Reduces labour costs when workers are Subcontractors must be monitored to outside the business. ensure quality standards are being met. Allows the business to concentrate on Outsourcing may cause redundancies. core functions. May be unethical due to the exploitation of workers in LEDCs. 34 HUMAN RESOURCE MANAGEMENT Functions and evolution of human resource management 2 Offshoring relocating business activities and processes abroad. Advantages Disadvantages Companies can benefit from external To cut costs, subcontractors may be factors such as currency exchange. ‘cutting corners’ (unethical). Cheaper wage costs overseas. Quality management can become more Overseas locations may have better difficult. access to raw materials. May be unethical due to the exploration of workers in LEDCs. Companies have been seen to evade tax by doing this. Reshoring the transfer of business operations back to their countries of origin. Advantages Disadvantages Improves quality management. Can be more expensive. Transporting goods from overseas to Provides a USP. home countries is expensive. 35  HUMAN RESOURCE MANAGEMENT Organisational structure 2.2 Organisational structure Levels of hierarchy the level of responsibility in the business. Each level means that there is a senior and a junior. Chain of command the formal route that a decision in an organisation must follow. Traditionally, this means that decisions travel from the top (CEO) to the bottom (workers) of the hierarchy. Span of control the number of subordinates directly under the authority of a manager and whom managers are responsible for. Delegation giving one’s subordinate the authority to make a particular decision or carry out a particular task while still keeping the responsibility for the outcome of that task or decision. This usually happens when the span of control is wide. Centralisation indicates that all major decisions in the business are made by a small group of employees (usually managers) that work closely with the head of the business (CEO). Decentralisation the opposite of centralisation. The core strategic decisions made by senior managers, while middle managers have other decision-making responsibility. Bureaucracy the relative importance of rules and procedures. If a business is relatively bureaucratic, there are many rules, regulations and set ways of doing things; this means that personal initiative or delegation is not expected. De-layering removing a layer in the hierarchy of the business. It means the removal of a layer of management. It is intended to make the business less bureaucratic, which increases the decision-making capability of middle managers. Also, it reduces costs as not so many managers need to be employed. 36 HUMAN RESOURCE MANAGEMENT Organisational structure 2 Types of organisational structures Tall organisational structure common in well-established businesses; it is characterised by many levels of hierarchy, narrow spans of control, long chains of command, centralised decision-making and limited delegation. Flat organisational structure the opposite of the tall structure; it is characterised by few levels of hierarchy, wider spans of control, shorter chains of command, decentralised decision-making and increased delegation. Organisational structure by hierarchy a traditional way of representing structure of a business. It shows the chain of command in a particular business. E.g., senior managers > middle managers > junior managers > workers. Organisational structure by function an organisational structure where employees are grouped by departments they belong to (marketing, finance, HR). After that has been determined, employees are then organised by seniority. Organisational structure by product an organisational structure based on what a particular business produces. This involves dividing workforce based on what a company produces. Organisational structure by region present in businesses that carry out certain aspects of the business activity in different parts of the world. E.g., they have departments in Europe, America, Australia etc. Note: When asked to analyse any of these organisational structures on the exam (i.e., advantages and disadvantages), you will need to (1) use the specific terminology outlined in the syllabus point but also (2) refer to leadership in the organisation and motivation of the workforce — how does a particular organisational structure affect motivation of the workforce compared to another. 37  HUMAN RESOURCE MANAGEMENT Organisational structure 2.2.1 Changes in organisational structures Along with the basic organisational structures, some businesses have attempted to adapt their structure in accordance with the changes in the business environment. Two different ways to deal with changes in business environment are project-based organisation and shamrock organisation. Project-based organisation a market structure in which employees are organised around different projects that a firm carries out. Project-based organisation is supposed to be more flexible and responsive to market demand (therefore more typical of market-oriented businesses). There are project managers that delegate and are responsible for a particular project. After the project is done, the team is split up and reassembled to begin another project. Each team “borrows” members of different departments to complete the projects such as accountants, operations managers etc. Advantages Disadvantages Higher level of delegation: the project Increased training costs. manager delegates tasks to different Not all members of the workforce will team members, which tends to be be able to fit into this organisation motivating for those workers as they structure. feel empowered. Each team member will do their part of the job efficiently since they are specialists in their field. Shamrock organisation a market structure in which a business trims its workforce to retain only multi-skilled core, which is concerned with the creation of a product. All other supporting, non-central functions are outsourced to the periphery. This model suggests that businesses can reduce costs and gain competitive advantage by trimming their workforce. Thus, on the shamrock, we have 3 leaves: 1. Core managers: employees that are essential for the business 2. Contractual fringe: activities that are outsourced to specialist businesses 3. Flexible workforce: made up of part-time, temporary or seasonal workers that are employed when necessary 38 HUMAN RESOURCE MANAGEMENT Leadership and management 2 Advantages Disadvantages Allows for complete specialisation of The insourced workers will suffer from the core: they will concentrate on lack of job security which might lead to innovations and gathering new ideas. decreased motivation and lower The flexible workforce will be easier to productivity. hire and fire. Not all members of the workforce will Can save on staffing costs. be able to fit into this organisation Can hire experts in certain fields due to structure. outsourced workers. 2.3 Leadership and management 2.3.1 Key functions of management There are 5 major functions of management: Planning: managers need to set strategic, tactical and operational objectives that affect different parts of the organisation. Organising: managers need to make sure the business has sufficient resources to achieve objectives, which requires good organisation. Commanding: managers need to make sure all individuals know which duties they are to perform and to provide instructions if needed. Coordinating: managers must bring together the various resources to achieve objectives. Since many different tasks happen at the same time, managers need to make sure that all these are done at the specific time and place they are supposed to be done. Controlling: managers have power to control for quality of different processes and change them if necessary. They also have the power to increase or decrease the scale of operations depending on the circumstances in the market. 39  HUMAN RESOURCE MANAGEMENT Leadership and management 2.3.2 Management vs. leadership Management Leadership Time and devotion Management is more 9–5. 24 hours a day. Handles strategic decisions. Roles and Administer day to day Accountable for more. responsibilities operations. More innovative. Deal with how and when. Deal with what and why. Influence on others Adhered to due to power. Inspire and motivate by Focus on tasks. example. Focus on people. Risk taking Follow predetermined rules. More radical. Tackles tasks by abiding by Take risks to move the policies. organisation forward. Vision Deal with stable Create a culture of hope. environments. Shine during times of change. 2.3.3 Leadership styles Autocratic Leader holds as much power and decision-making authority as possible. Consults minimally with the senior management. Typical for companies that have a lot of unskilled and untrusted workers. Close supervision and detailed instructions. Usually associated with the tall organisational structure. Advantages Disadvantages Authority is clear; decisions are made Employees do not develop quickly. decision-making skills and cannot operate independently. 40 HUMAN RESOURCE MANAGEMENT Leadership and management 2 Paternalistic Leader aims to assume the role of a ‘father’ figure, where the employees are his or her family. Has great concerns for the employees and provides them with a sense of safety. Extreme loyalty and trust with employees and their full commitment. Advantages Disadvantages Employees take great pride in the Leaders might not have an objective eye organisation, and do whatever is when assessing the performance of necessary so they don’t let the leader workers. down. Democratic Employees are usually involved in the decision-making process, but the leader still has the final say. One of the most popular leadership styles since it is motivating for employees and they feel empowered and part of a team. Usually associated with the flat organisational structure and with project-based and shamrock organisation. Advantages Disadvantages Workforce is motivated since they are Since the workers are involved, consulted in the decision-making decision-making process is longer. process. Not efficient when it comes to making quick decisions. 41  HUMAN RESOURCE MANAGEMENT Leadership and management Laissez-faire In French: “to leave alone”. A lot of freedom is given to the employees. Extremely democratic form of leadership. Tends to work when the workforce is extremely motivated, skilled, educated and open-minded. Usually associated with the flexible forms of organisational structures. Advantages Disadvantages Employees enjoy the freedom this Interests of individuals might differ leadership style provides; they are more from the interest of the organisation. innovative and creative. Reduced productivity if the workforce is not in the same ‘mental state’ as the leader. Situational No leadership style is deemed the best. The type of leadership that will be pursued will depend on the situation. Advantages Disadvantages In emergency situations, businesses Changing leadership style too often might switch the leadership style to the might result in confusion of the most convenient one. workforce. 42 HUMAN RESOURCE MANAGEMENT Motivation 2 2.4 Motivation Theorist Theory Findings Taylor Scientific management Pay, above all is the main source of motivation Maslow Hierarchy of needs Levels of human needs, from physiological to self actualisation Herzberg Two-factor theory Hygiene factors (which do not motivate alone) and motivators Adams Equity theory Workers are motivated if there is fairness in remuneration packages Pink Drive theory Autonomy, mastery and purpose are the drivers of motivation in modern societies of the 21st century 2.4.1 Taylor Employees are primarily motivated by money. Productivity can be improved by aligning output and efficiency targets with remuneration. Division of labour (scientific management): breaking down different aspects of a job or task and assigning different people to each particular part of the work. Piece rate system: workers are paid a standard level of output and receive a higher rating they exceed that level. Drawbacks Ignores the non-physical contributions of workers. Hard to measure in some professions. Ignores non-financial factors that motivate people. Fails to acknowledge that workers can be innovative and independent. Entails monotonous tasks, leading to employee dissatisfaction. Sets clear goals for the workforce and the consequences of their work are transparent. Gives workers a sense of target. Does not take into account individual differences. Views workers as machines with only financial needs. 43  HUMAN RESOURCE MANAGEMENT Motivation 2.4.2 Maslow’s hierarchy of needs Maslow’s theory is based on the hierarchy of needs, where every level of that pyramid has a certain class of needs. Se lf-f ulfi lm en tn eed s Being promoted and given more responsibility, Ps Self- introducing new ideas, taking on challenging yc ho new job assignments. log actualisation ica ln eed s Esteem needs Being given recognition for doing a job well. Working with colleagues that support you at Ba Love and belonging sic work, teamwork, communication. ne ed Safety needs Having job security, safe working conditions. s Receiving a wage high enough to meet weekly Psychological needs bills, food, shelter. Needs at the bottom of the pyramid are the basic ones as they are concerned with survival. Once these are satisfied, the worker moves to the next level, and once a level is ‘passed’, the needs on that level become less important. In practice, very few manage to reach the top of the pyramid, because in order to do so, all other needs must be fully satisfied. Advantages Disadvantages Based on the level an employee is on, Difficult for business to decide on a business can see what rewards are specific reward. suitable for him. Difficult to determine when a Workers feel like they are being taken particular level of needs has been care of, which increases productivity satisfied. and motivation. Not feasible for all jobs to provide all levels of the hierarchy The levels of the hierarchy are difficult to quantify. Freelance workers do not have many of these things, but can still be motivated and successful. The model neglects to suggest what happens to people with all of these things, such as Bill Gates. 44 HUMAN RESOURCE MANAGEMENT Motivation 2 2.4.3 Herzberg’s motivation-hygiene theory In Herzberg’s motivation theory, there are two sets of factors affecting people’s motivation: Hygiene factors: these are factors that need to be in place in order to remove workers’ dissatisfaction with their job. These represent pay, working conditions, company policies, relationship with higher levels of the hierarchy, treatment at work etc. Improving these factors should remove dissatisfaction, but it will not motivate the workforce. If these are not met however, there will be a fall in productivity. Motivators: these are factors that give workers job satisfaction. They represent a sense of achievement, chance of promotion, recognition of effort, responsibility etc. Improving these will make the workers more motivated and will lead to increased productivity. Job enlargement: giving workers variety in what they do. Job enrichment: giving workers more complex, challenging tasks to exploit their potential. Job empowerment: delegating decision making to workers over their areas of job, helping to boost morale. Advantages Disadvantages Job enrichment. Job enrichment may be expensive and Makes clear for the business what needs difficult to organise. to be done in order to remove Workers may get used to improved dissatisfaction and improve motivation. pay/conditions and take these things for granted. Does not apply to all occupations such as low skilled/ paid jobs. Research sample included only high skilled workers, therefore findings don’t necessarily apply. Not all employees want extra responsibility or stress. 45  HUMAN RESOURCE MANAGEMENT Motivation 2.4.4 Adam’s equity theory Workers will naturally compare their efforts or rewards to those of others in the workplace. The degree of equity in an organisation is based on the ratio of inputs (contributions made by the employee) to outcomes (financial and non-financial rewards). Degrees of equity Equity norm: workers expect an equitable remuneration for their contribution in their jobs. Social comparison: workers determine what is fair based on comparisons of their inputs and outcomes with those of their peers. Cognitive distortions: workers who feel undercompensated become demotivated so might withdraw any goodwill, resulting in altering their effort or outputs. Drawbacks Equity is subjective. Some people may be more sensitive to equity. Neglects to include demographic, psychological, and cultural variables. Scale of equity can only be so useful. 2.4.5 Pink Pink’s motivation theory relies on what psychologists call the ‘third drive’. This suggests that businesses need to stimulate the intrinsic motivation which occurs when someone gets satisfaction from an activity itself, without threats or rewards from the outside. He identified three factors of the self-determination theory that motivate people: Autonomy: workers need to be autonomous in order to be more motivated, which means that businesses need to provide an environment that permits employees to shape their own professional lives. This is done through flexibility of businesses; flexibility on when, how, who and what their employees do. Mastery: businesses need to provide learning opportunities for their employees, where they will be able to be innovative. Employees will gain mastery when they are given tasks that matter to them and are neither too easy nor too difficult. Purpose: people are motivated when they are able to see benefits of their work. In order to achieve this, businesses need to emphasise their purpose, and show the workers that they contribute to this purpose, which will in turn increase their motivation. 46 HUMAN RESOURCE MANAGEMENT Motivation 2 2.4.6 Types of financial rewards Salary Regular fixed lump-sum payment to staff, typically paid monthly. Advantages Disadvantages Provides job security. Employees might not always be Workers know that they will receive a maximally motivated and productive. regular income. They know that if they do more or less the same amount of work every month, they will receive their fixed salary; this can reduce productivity. Wages (time based) Staff is paid per hour of work (daily or weekly). Advantages Disadvantages In case workers need to stay over hours, The pay workers receive is not linked they will receive extra payment. to the amount of output they receive; workers feel their work is being valued. therefore, they might ‘go slow’ in order to make sure they work over hours to receive more income. Wages (piece rate) Staff is paid per unit/batch of output. Advantages Disadvantages Workers know that if they are more Workers might concentrate more on productive, they will be rewarded for quantity produced and less on quality. that. This might increase costs for the They see that their work has a business as quality check/assurance monetary value. systems would need to be put in place. 47  HUMAN RESOURCE MANAGEMENT Motivation Commission Staff is paid with respect to their sales results – an employee gets a percentage for each unit sold. Advantages Disadvantages The very nature of the financial reward External factors affecting sales is the advantage. (recession, inflation) affect the income Workers will try to achieve the best of the workers, which is demotivating; sales results possible, which would there’s nothing they can do in case they result in a higher financial reward, can’t sell more goods because of while the business benefits from higher recession or inflation. sales. Financially oriented, staff might make arrangements with customers that put the organization in a disadvantageous position. (a banker might give out a short-term loan to a business without previously checking whether the business can pay for it, which is disadvantageous for the bank). PRP (profit-related pay) The income of the employee depends on the profitability of the company. Advantages Disadvantages It can be motivating for the workforce. External factors affecting sales (and If the business shares the profit of the thus profitability) of the business whole organization with the staff, this automatically affect employees, which gives them a sense of ownership over can prove to be demotivating as they the business and belonging. The success have no power over the factor causing of the company = their success. decreased sales. 48 HUMAN RESOURCE MANAGEMENT Motivation 2 Performance Related Pay Rewards employees (in individual, teams or as a workforce) who meet certain goals Pay rise Performance bonus Gratuity Advantages Disadvantages Creates incentives. Targets can be unrealistic. Fair, since hard work is rewarded. Can be stressful. Helps to develop a performance Inappropriate for jobs where quality culture. overrides quantity (e.g., doctors). Non-financial motivators may be neglected. Employee share ownership schemes Rewards employees by giving or selling them (at a discounted rate) shares in the company. This works well because that way, success of the company has a direct financial benefit to shareholders. Advantages Disadvantages Keeps employees engaged. Might not yield direct profits. Helps retain staff. Makes employees feel responsible. Fringe payments (perks) Financial benefits to employees in addition to their wage or salary (e.g., health insurance, housing allowance). Advantages Disadvantages Encourages employee loyalty. Costly. Help meet an employee’s safety needs. People high up in the company will Make workers feel valued as employers receive very expensive benefits. provide extra benefits to enhance wellbeing. 49  HUMAN RESOURCE MANAGEMENT Motivation 2.4.7 Types of non-financial rewards Empowerment Usually takes the form of managers giving their employees more responsibility and involving them in (or giving them) decision-making (powers). Advantages Disadvantages Employees see empowerment as There is a danger of the employee motivating. making decisions that can put the Giving them more responsibility and business in a disadvantageous position. involving them in the decision-making process usually makes them feel motivated, as they are glad to see that their contribution is valuable to the business. They also see the opportunity for promotion in the future as a result of empowerment. Teamwork Involves putting employees in groups where employees are encouraged to work collaboratively with each other in order to fulfil a task. Advantages Disadvantages Workers might feel stimulated by When teams fails, the whole others in the group, which increases organization suffers. their productivity. Disputes between employees in a team Working in a group also initiates feeling can reflect on the whole of the of belonging and common effort which organization. Not every organization can also be motivating (refer to can use this non-financial reward Maslow’s theory). (consider different corporate structures). 50 HUMAN RESOURCE MANAGEMENT Motivation 2 Job enrichment (type of job enlargement) This is an attempt to give employees greater responsibility and recognition by expanding their role in the production process; involves giving an employee more work to do of a similar nature. Advantages Disadvantages Having more recognition for their This non-financial reward cannot be work motivates the workers (check used in all contexts. different motivation theories). Not all employees feel motivated by this. In some organizations, low-skilled workers that do repetitive jobs would not usually be interested in this type of reward. Job rotation (type of job enlargement) This involves an employee changing jobs and tasks they do from time to time, in order to give them a greater sense of the whole production process. Advantages Disadvantages This can be very motivating for the Job rotation might be costly for the workforce, as they are able to see how business. the tasks they work on everyday are In order to allow workers to work in important for the whole of the different departments, they will need business. training. 51  HUMAN RESOURCE MANAGEMENT Motivation 52 ACCOUNTS AND FINANCE 3 3.1. Sources of finance 55 – Internal sources of finance – External sources of finance 3.2. Costs and revenues 58 – Revenue Streams 3.3. Break even analysis 59 – Contribution – Break even analysis – Determining the break-even point – Causes for changes in break-even – The benefits and limitations of break-even analysis 3.4. Final accounts 62 – The purpose of accounts to different stakeholders – ACCA’s 5 ethical principles of accounting – The profit and loss account – The balance sheet – Types of intangible assets 3.5. Profitability and liquidity 65 ratio analysis – Profitability ratios – Liquidity ratios 3.6. Cash flow 67 – Profit vs. cash flow – The working capital cycle – Cash flow forecasts – The relationship between investment, profit and cash flow – Dealing with cash flow problems 3.7. Investment appraisal 69 – Payback period – Average rate of return (ARR) 53  ACCOUNTS AND FINANCE 3.8. Budgeting 72