Intro to Business Administration and Management - PDF

Intro to Business © 2024 STAGES Administration and Table of Contents Story-Based Management Seminars Table of Contents Chapter 1: “Why Does Your Business Exist?”....................................................... 2 Chapter 2: “What Does Your Market Want?”..................................................... 7 Chapter 3: “What Can You Oﬀer Your Market?”............................................... 19 Chapter 4: How Will You Create Your Goods, Services, and Experiences?........ 26 Chapter 5: “How Will You Sell Your Goods, Services, and Experiences?”.......... 40 Chapter 6: “How Will You Get Your Goods, Services, and Experiences to the Buyers?”........................................................................................................... 50 Chapter 7: “How Will You Finance All these Business Activities?”.................... 55 Chapter 8: “Location and Legal Form”.............................................................. 84 Chapter 9: “Et Voilà Your Business Model”....................................................... 95 Chapter 10: “The Role of People in Your Business Model”............................. 102 Chapter 11: “The Manager’s Role in All This”................................................. 121 Chapter 12: “What Departments Does Your Company Need?”...................... 131 1 Intro to Business © 2024 STAGES Administration and Chapter 1: “Why Does Your Business Exist?” Story-Based Management Seminars Chapter 1: “Why Does Your Business Exist?” WHAT EXACTLY IS A BUSINESS? As this is a course on business administration, a sensible starting point is to make sure that we all know what a business IS – and how it diﬀers from e.g. a hobby. Below are typical criteria of a business. A business must have owners. A business has a profit motive (i.e. it aims to generate income that is higher than it costs). A business has an overarching purpose (i.e. a “mission”). It follows a repetitive pattern for creating and selling its goods and services (i.e. a “model”). It is managed by one or more human beings who might not even be owners of the business. THE CHARACTERISTICS OF ANY COMPANY In summary, every company on this planet (whether large or tiny) shares these traits: It is Profit-Oriented (i.e. it sells its goods and/or services at prices that are high enough to more than cover all its costs); It follows a clear Purpose (i.e. “Vision”, “Mission”, “Strategic Goals”); It has a repetitive system for how to create and sell its goods and/or services (i.e. a “Business Model”); Its success is strongly aﬀected by its External Environment (e.g. economic situation, industry, customers, competitors, technology, legal regulations); Its success is strongly aﬀected by its Internal Environment (e.g. employees, resources, know how, internal structure, workflow, company culture); It is owned by one or more entities (e.g. human beings, other companies); It is managed by one or more human beings. These manager might be (a) the owners or they might simply be (a) employees of the company (with no ownership stake); The main role of the managers is to make decisions that will allow the company to fulfill its purpose within the constraints of the External and Internal Environment. 2 Intro to Business © 2024 STAGES Administration and Chapter 1: “Why Does Your Business Exist?” Story-Based Management Seminars THE ROLE OF PROFIT Unlike a non-profit organization or a hobby, one of the reasons that a company exists is to generate a profit. A profit is the amount of value that a company generates in a time period after all costs have been subtracted. The profit is the “result” that is left over for the owners. In the 21st Century, the term “profit” is often stigmatized negatively. In reality, though, it is simply the compensation to the owners, who have provided and risked their capital in a company (when they could have done something entirely diﬀerent with it). Employees receive salaries in return for the time and energy they have contributed to a company; Suppliers receive payments in return for goods and services they provide to a company; Creditors (e.g. banks) receive interest in return for the amount they have loaned to a company; The State receives taxes in return for the infrastructure it provides a company; Owners receive profits in return for providing/risking the amount they’ve invested in the company; Unless you also consider salaries, goods and service payments, and taxes to be unethical, it is illogical to think of ‘profit’ as something inherently ‘dirty’. WHAT DOES PROFIT CONSIST OF? Profit is the result of many diﬀerent types of income and expenses. The following are random typical examples of income and expenses: The amount that a business charges its customers when they buy its goods or services; (INCOME) The costs that a business has because it uses up raw materials; (EXPENSE) The amount that a business has promised employees in return for their work each month; (EXPENSE) Value decreases in a company’s machinery due to aging and use; (EXPENSE) Value decreases in a company’s land and buildings due to decreases in market value; (EXPENSE) The amount a business has to pay to someone else because it lost a court case; (EXPENSE) 3 Intro to Business © 2024 STAGES Administration and Chapter 1: “Why Does Your Business Exist?” Story-Based Management Seminars VISION, MISSION, AND BUSINESS MODEL: YOUR COMPASS Whether or not its owners and managers are explicitly aware of it or not, every company exists in order to achieve long-term objectives. And every company prioritizes specific values, customers, workflows, and income sources in order to reach these long-term objectives. Many companies formally record their long-term objectives and work priorities in documents known as a “Vision Statement”, a “Mission Statement”, “Core Values”, and a “Business Model”. If such documents are created primarily with the goal of appealing to the people that read them (e.g. customers, employees, media), then they will be worse-than-useless as strategy tools. In contrast, if suﬃcient thought is put into specifying, the true identity, long-term objectives, values, and priorities of a company, then such documents are incredibly helpful leadership tools. Whenever an individual employee has to make a decision, they can refer to these documents in order to identify the direction the company wishes the employee to take. Visit our tool to see “real-life examples” of Vision Statements, Mission Statements, and Core Values. While reading them, imagine yourself as an employee that must make a specific decision, such as e.g.: “Which of these five customer requests should I prioritize?” “Which of these eight employees should we hire?” “Which of these four supplier oﬀers should I select?” “Which of these three investments should we make?” Then ask yourselves which examples would give you clear guidance in such ‘small’ decisions. * We haven’t forgotten about business models. We’re just saving them for a later chapter. 4 Intro to Business © 2024 STAGES Administration and Chapter 1: “Why Does Your Business Exist?” Story-Based Management Seminars CORPORATE SOCIAL RESPONSIBILITY: MUCH MORE THAN A BUZZWORD Every company has stakeholders. Almost every company has the following typical stakeholder groups: Customers; Employees; Owners; Creditors; Suppliers; The Government (and its agencies); Local Communities (and their residents); Competitors; The Environment; A stakeholder is any group (or individual) whose well-being is aﬀected by the actions of the company and/or whose actions will influence the company’s ability to reach its goals. Considering how much influence a company has on the well-being of its stakeholders, it has a Corporate Social Responsibility (CSR) to treat all its stakeholders ethically, fairly, and responsibly. Typical examples of CSR are: Implementing product safety measures to protect consumer health and well-being; Oﬀering flexible work arrangements and promoting work-life balance for employees; Promoting diversity and inclusivity by implementing equal opportunity employment practices; Implementing fair trade policies to ensure fair compensation for suppliers and employees; Establishing recycling programs and reducing waste to minimize environmental impact; Investing in renewable energy sources to reduce carbon; Auditing (i.e. checking) suppliers to ensure they are free of child labor and unethical practices; Donating a portion of profits to local charities to support community development; For many owners and managers, a sense of social responsibility comes naturally. For those others for which it doesn’t, parliaments around the world have passed numerous laws that require them to act responsibly, regardless of their personal sense of duty. 5 Intro to Business © 2024 STAGES Administration and Chapter 1: “Why Does Your Business Exist?” Story-Based Management Seminars THE FOUR TYPES OF CORPORATE SOCIAL RESPONSIBILITY Companies assume responsibility for four main types of CSR: Economic Responsibility: An organization's duty to make decisions that allow it to continue providing jobs as well as goods and/or services that are of value to society. Environmental Responsibility: An organization's duty to take care of the natural world around us (e.g. actions to protect the environment, reduce pollution, and promote sustainability). Ethical Responsibility: An organization's duty to treat others with fairness, dignity, and respect (e.g. protecting workers' rights, maintaining fair labor practices, and promoting diversity.) Philanthropic Responsibility: An organization's actions to give back to society or support social causes. It includes donating money, time, or resources to charities or community programs. 6 Intro to Business © 2024 STAGES Administration and Chapter 2: “What Does Your Market Want?” Story-Based Management Seminars Chapter 2: “What Does Your Market Want?” WELCOME TO THE MARKET! The playing field for any company is its market. In business, a market refers to a group of customers who share similar needs and preferences. Transactions between a company and its market are carried out on a marketplace , which is any (physical or digital) platform on which buyers and sellers can exchange items of value: usually money in exchange for goods or services. Markets and marketplaces date back to our earliest civilizations. Without them, businesses could not exist. On the next slide, we’ll have a look at the six main markets that a business can operate in. ITS GOT FUN AND GAMES... 1. Consumer Market: A Consumer Market refers to a group of individual human beings who purchase products or services for their own personal use. This market segment includes people who buy things like clothes, food, and electronics for themselves, as opposed to businesses or organizations that buy items in bulk for their own use or resale. 2. Business Market: A Business Market includes other companies that purchase goods and/or services to use in their own operations. This market segment includes businesses that buy materials, equipment, and other products needed to operate and fulfill their own customers’ demands. 3. Reseller Market: A Reseller Market refers to companies or individuals that purchase products or services with the intent of selling them to others for a profit. This market segment includes businesses that purchase in bulk and then resell products, as well as individuals who buy and sell merchandise on platforms like eBay or Amazon. 4. Reseller Market: A Government Market refers to te buying of goods and/or services by government agencies. Typical buyers on the Government Market include ministries, magistrates, municipalities, parliaments, and any other government agency. 7 Intro to Business © 2024 STAGES Administration and Chapter 2: “What Does Your Market Want?” Story-Based Management Seminars 5. Institutional Market: Institutional Markets refer to organizations such as hospitals, schools, universities, prisions and (other) non profits organizations that purchase goods and/or services for their own use or to oﬀer to their members or recipients. Even if an organization is owned by a government (e.g. school), its buying activities are considered to take place on the Institutional Market. 6. Global Market: This last category is a separate dimension from the first five. Consumer, Business, Reseller, Government, and Institutional markets can each become Global Markets if the scope of buyers is based in more than one country. In this sense, Global Markets exist whenever imports or exports of goods and/or services take place. MARKET SEGMENTATION: NARROWING DOWN THE PLAYING FIELD Hypothetically, a company could try to sell its goods and services in all six of the previous market categories (i.e. consumer markets, business markets, government markets, etc.). Almost no company attempts this. In fact, even WITHIN a market category (e.g. within the consumer market), most companies don’t try to sell their products to ALL individuals in that market. Instead, they concentrate on the sub-set of the market which is the most likely (and able) to buy the company’s goods and/or services. This is referred to as target marketing. The reason companies focus on specific sub-sets of a market (rather than trying to sell to everybody) is that their finances are limited. Understandably, they want to use these limited resources to create the maximum impact with those customers that are most likely (and able) to buy their products (rather than wasting money on targeting customers that probably won’t buy them anyway). Target marketing begins with market segmentation. On the next slides, we’ll see how consumer and business markets are segmented. * Some very large companies (e.g. Coca Cola) whose product(s) have broad appeal actually DO target entire markets rather than just sub-sets. 8 Intro to Business © 2024 STAGES Administration and Chapter 2: “What Does Your Market Want?” Story-Based Management Seminars 1. FOUR METHODS OF SEGMENTING A CONSUMER MARKET (B2C) Geographic Segmentation is the practice of dividing a market into diﬀerent geographical units, such as countries, states, regions, cities, or neighborhoods. Examples of geographic segmentation include: Country (e.g. Austria) Region (e.g. East Austria) City (e.g. Vienna) District (e.g. Währing) Demographic Segmentation is the practice of dividing a market into segments based on demographic characteristics. Examples include: Age Gender Ethnicity Income level Occupation Education level Psychographic Segmentation is the practice of dividing a market into diﬀerent segments based on psychological characteristics such as beliefs, interests, lifestyle, values and attitudes. Examples include: Interests (e.g. fashionistas) Lifestyle (e.g. outdoorsy types) Values (e.g. environmentalism) Attitudes (e.g. fitness enthusiasts) Behavioral Segmentation is the practice of dividing a market into diﬀerent segments based on based on customer behaviors such as purchase habits and how they use a product. Examples include: Purchase Behavior (e.g. frequent shoppers) Usage Patterns (e.g. heavy users) Loyalty (e.g. repeat customers) Benefits Sought (e.g. convenience) 9 Intro to Business © 2024 STAGES Administration and Chapter 2: “What Does Your Market Want?” Story-Based Management Seminars 2. FOUR METHODS OF SEGMENTING A BUSINESS MARKET (B2B) Just like consumer markets, business markets can also be split up into smaller segments by Geographic Segmentation. Examples of geographic segmentation include: Country (e.g. all companies based in Austria) Region (e.g. companies based in East Austria) City (e.g. companies based in Vienna) District (e.g. companies based inWähring) Segmentation by Industry is the practice of dividing businesses into segments based on what industry they are active in (e.g. fashion & beauty, transportation, alternative energy equipment, steel production, etc.). Aside from geographic segmentation, this is the most common form of business market segmentation. Segmentation by Company Size occurs when companies are grouped into segments based on their size. Examples include segmentation based on: Market share Sales revenues Number of locations Number of employees Segmentation by Customer Needs splits the business market into segments based on what a business uses the sellers product for. based on customer behaviors such as purchase habits and how they use a product. For example some companies may use a product as a component with which to manufacture their own product. Others may use the exact same product for inhouse purposes. 10 Intro to Business © 2024 STAGES Administration and Chapter 2: “What Does Your Market Want?” Story-Based Management Seminars THE STEPS OF CHOOSING A TARGET MARKET Step 1: Choose an overall market (e.g. “Consumer Market”) based on your Vision, Mission, and location Step 2: Segment this market on the basis of one (or more) segmentation criteria. Step 3: Identify the wants and needs of the market segments that you’ve identified. Step 4: Analyze your External Environment (including competitors) Step 5: Analyze your Internal Environment (including your resources and capabilities) Step 6: Based on the output of Steps 3-6, select your target market(s); 11 Intro to Business © 2024 STAGES Administration and Chapter 2: “What Does Your Market Want?” Story-Based Management Seminars WHAT ABOUT THE EXTERNAL MARKETING ENVIRONMENT? When choosing and servicing its target market(s), a company needs to consider its External Marketing Environment. This term refers to any factor that is beyond a company’s control, but that aﬀects its ability to sell goods and services successfully. POLITICAL ENVIRONMENT the current Government policy of the market; programs of other influential political parties and organizations; ECONOMIC ENVIRONMENT all factors that determine the spending power and willingness of customers in a market (e.g. GDP, inflation, unemployment); SOCIAL ENVIRONMENT the beliefs, values and lifestyles in a given market that influence how people interact with goods and services; TECHNOLOGICAL ENVIRONMENT the level of technology that is typically used in a market; current advances in technology that may aﬀect the way companies carry out their activites; ENVIRONMENTAL ENVIRONMENT Landscape, climate, weather, and pollution conditions that aﬀect (a) a company’s ability to do business in a market and (b) the way it does business. LEGAL ENVIRONMENT the laws and other rules that specify what companies (a) must do, (b) can do, and (c) are not allowed to do. 12 Intro to Business © 2024 STAGES Administration and Chapter 2: “What Does Your Market Want?” Story-Based Management Seminars THE COMPETITIVE ENVIRONMENT When selecting a target market, you need to carefully look at the existing Competitive Environment of each market segment that you’re considering more closely. This includes: (a) the number and size of competitors; (b) their market share; (c) how they price their goods and/or services; (d) their production methods and technology; and (e) their strategies. These factors strongly aﬀect your ability to succeed in an industry. Competition can take the form of “Brand Competition”, “Substitute Products”, and “International Competition”. 1. BRAND COMPETITION The first type of competition that becomes apparent in a Competitive Environment in Brand Competition. Put simply, brand competition exists whenever another company is selling the same (type of ) good and/or service to the target market as you are. If, for example, you choose to sell hair styling services, your brand competition consists of all the other salons and stylists that are selling styling services to your target market. As soon as another company oﬀers the same type of product as you do to your target market, it becomes necessary for each of you to diﬀerentiate yourself in some way (i.e. to give the customers a reason to buy from YOU rather than from the competitor(s)). 2. SUBSTITUTE PRODUCTS Substitute Products are not as “apparent” at first glance as brand competition, but they’re just as- if not more – dangerous to your prosperity. Any product that is (a) dissimilar to yours but (b) fulfills the same customer wants and needs is a substitute product. Imagine, for example, that you want to lose weight. One way to fulfill this want would be to eat food with low calorie density. A second way would be to visit a fitness center frequently and do cardio. Both goods and services fulfill the same customer want, but they’re entirely diﬀerent from another. “Fitness Center” is a substitute product for “Low Calorie Food”. Most of the major market disruptions that have antiquated industry business models result from substitute products rather than direct brand competition. 13 Intro to Business © 2024 STAGES Administration and Chapter 2: “What Does Your Market Want?” Story-Based Management Seminars 3. INTERNATIONAL COMPETITION International Competition can take the form of either brand competition or substitute products. The real distinction from the other two categories is that the companies oﬀering alternatives are based in another country than yours. All too often, companies focus only on the local brand competition and substitute products, but fail to monitor what’s being oﬀered across the globe. In globalized markets, that’s a risky move. SUMMING IT UP: A PESTEL ANALYSIS AND... Managers summarize the external environment data that is relevant to their company performance in two separate documents. One of these is a PESTEL Analysis (also called “PESTLE Analysis”). PESTEL ANALYSIS A PESTEL Analysis is a tool used by organizations to summarize all the information on its External Environment that is relevant for producing and selling goods and/or services to its target market(s). Many PESTEL Analyses in real life are sloppy, inconsistent documents that only include information that was easy to find, regardless of relevance for the above goal. Don’t YOU be like them, Buddy! POLITICAL Your PESTEL Analysis must include all information relevant to ENVIRONMENT both (a) your and (b) your target market’s political environment in so far as it will aﬀect your ability to successfully produce and sell goods and/or services to the target customers. Don’t make the common mistake of (1) including data that was easy to find and (2) leaving out data that is diﬃcult to find. You need to have all the data that aﬀects your ability to sell – no less, no more. ECONOMIC Your PESTEL Analysis must include all economic data and ENVIRONMENT trends relevant to your target market’s ability and willingness to buy your products. Again: Don’t make the all-too-common mistake of (1) including data that was easy to find and (2) leaving out data that is diﬃcult to find. You need to have all the data that aﬀects your ability to sell – no less, no more. Anything else is bureaucracy – not strategy. 14 Intro to Business © 2024 STAGES Administration and Chapter 2: “What Does Your Market Want?” Story-Based Management Seminars SOCIAL ENVIRONMENT Your PESTEL Analysis must include all information concerning your target market’s beliefs, values and lifestyles in so far as it will aﬀect your ability to successfully sell goods and/or services to them. And yet again: Don’t make the common mistake of (1) including data that was easy to find and (2) leaving out data that is diﬃcult to find. You need to have all the data that aﬀects your ability to sell – no less, no more. TECHNOLOGICAL Your PESTEL Analysis must include all information relevant (a) ENVIRONMENT your target markets technological preferences in so far as it will aﬀect your ability to successfully produce and sell goods and/or services to the target customers. It should also contain information on (b) current technological innovations in so far as they can aﬀect your internal ability to produce and sell products. You know the drill by now, right? ENVIRONMENTAL Not a Typo! And: your PESTEL Analysis must include all ENVIRONMENT information concerning your target market’s landscape, topography, climate, weather, and preferences concerning sustainability in so far as it will aﬀect your ability to successfully produce and sell goods and/or services to them. PARTICULARLY in an era where there are 10,537 texts on every market’s environment: the PESTEL is reserved for the data that aﬀects your ability to sell. LEGAL ENVIRONMENT Your PESTEL Analysis must include a discussion of all local and internation laws, rules and regulations in so far as they will aﬀect your ability to successfully produce and sell goods and/or services to the target customers. Have we mentioned that many PESTEL authors make a common mistake yet? *Visit our tool to see a real-life example of a PESTEL Analysis. 15 Intro to Business © 2024 STAGES Administration and Chapter 2: “What Does Your Market Want?” Story-Based Management Seminars... AND A COMPETITOR ANALYSIS. The second document is a Competitor Analysis. FEATURES Product or service characteristics that set competitors apart from each other. MARKET SHARE Percentage of total sales in an industry held by each competitor. PRICING How competitors set their prices and how they compare to yours. UNIQUE SELLING PROPOSITION The distinct benefit that makes a competitor stand out from others. STRENGTHS AND WEAKNESSES Key areas where competitors excel or struggle compared to others. MARKETING Strategies and tactics used by competitors to promote their products or services. LOCATION Where competitors operate and how it aﬀects their business performance. *Visit our tool to see a real-life example of a Competitior Analysis. IMPORTANT FINAL WARNING BECAUSE THIS MISTAKE IS SO COMMON! A mistake that some managers make is to compile these two documents based on the data that is easiest to find rather than on the external parameters that genuinely have influence on whether their individual company will be successful. For example, Austria’s “annual export volume” is undoubtedly economic data. But let’s be honest: this statistic will have little influence on the success of e.g. a small massage institute in Tyrol. So it would be silly for the massage institute to include it in its PESTEL Analysis. So think with your head. “One Size Does Not Fit All” in either a PESTEL or a Competitor Analysis. You need to select the data you include based on its potential eﬀect on your specific organization’s success. Otherwise, both analyses will become purely bureaucratic exercises that cost you time and energy, but provide no value at all for strategy. 16 Intro to Business © 2024 STAGES Administration and Chapter 2: “What Does Your Market Want?” Story-Based Management Seminars In fact, they may even be dangerous, because they lure you into a sense of false security that you’ve “looked at all the important things”, when – in reality – you haven’t done that at all. MARKETING RESEARCH: A.K.A. “HOW DO WE FIND ALL THIS INFORMATION?” In these first two chapters, we’ve specified quite a few questions that companies need to answer. Among these are: “What wants and needs currently exist on various markets?” “Which of these wants and needs are we equipped to service well?” “How can we segment our overall market eﬀectively?” “Which of these market segments should we focus our eﬀorts on?” “What political, economic, social, technological, environmental and legal developments in our marketing environment might aﬀect our performance?” “Who are our direct and indirect competitors? And what are their key attributes?” Another valid question would be: “How does a company get the information that allows it to answer these questions?” The answer is marketing research. Without solid marketing research, a business strategy is as reliable as someone throwing darts with a blindfold. Marketing research is the process of collecting and analyzing data related to a company’s goods, services, and/ or target market(s). It involves researching customer preferences, market trends, marketing environment data, and competitor strategies. Like any type of research, marketing research is based on either Secondary Data (i.e. data that was generated by others) or Primary Data (i.e. data that was generated by the company itself ). Typical sources of secondary data are: trade publications, industry reports, research reports, census data, government publications, social media and online forums, online databases, websites, publicly available financial data and academic research. 17 Intro to Business © 2024 STAGES Administration and Chapter 2: “What Does Your Market Want?” Story-Based Management Seminars Below are common sources of primary marketing data. OBSERVATION Observation is a method of primary research that involves gathering data by observing behavior or activities in the target market. Kind of like the name suggests, no? This could include observing consumer behavior in retail stores or monitoring online conversations about a product or company. Observations can be qualitative (observing things such as e.g. body language, emotions interaction between people) or quantitative (measuring things such as e.g. average purchase size, frequency). SURVEY A Survey is a type of primary research in which people answer questions about aspects of a target market e.g. goods, services, companies). Surveys can be conducted online, in person, over the phone or through mail. For example, survey questions may require respondents to rate certain products on a scale of 1-10 or make choices between predetermined options. This type of research is used to gain insights into customer preferences and opinions on topics such as product quality, pricing and brand awareness. FOCUS GROUPS A Focus Group is a type of primary research in which a group of people are brought together to discuss a good or service and answer questions about it. This method allows researchers to gain real-time insights into the target market's thoughts, feelings and attitudes towards a good or service. Focus groups are also often used to test new ideas and to explore customer motivations. EXPERIMENTATION Experimentation is a type of primary research that uses controlled experiments to test the eﬀectiveness of various ideas and strategies. It involves changing one or more variables in order to measure the impact on customer behavior and preferences. Examples of experimentation can include e.g. altering the price of a product, testing diﬀerent advertising messages, or introducing new features. 18 Intro to Business © 2024 STAGES Administration and Chapter 3: “What Can You Oﬀer Your Market?” Story-Based Management Seminars Chapter 3: “What Can You Oﬀer Your Market?” LET’S TAKE A JOURNEY INWARDS... In the last chapter, we looked outward at markets and the marketing environment. Now it’s time to step back and reflect upon ourselves. Before deciding on its goals and how to get there, a company needs to know itself. Otherwise, it will set goals and strategies that are unrealistic in its current condition. Or it will oversee enormous opportunities it may have been qualified to takeadvantage of. This journey inwards begins with a precise, truthful identifications of the company’s strengths and weaknesses. While this may seem like a simple task, it isn’t. Accuracy - and the ability to observe yourself in a detached, honest manner - takes a lot of practice. We’ll start with potential strengths... STRENGTHS: WHAT ARE YOU BETTER AT THAN THE COMPETITION? The term “strengths” inherently implies that we’re comparing two entities: when compared to the second entity, the first entity has “strengths”. In our case, the first entity is your company. But what’s the second (i.e. “What are we comparing your company to in order to identify its ‘strengths’?”)? You have two options: compare your company to the industry average; or choose specific competitors and compare your company to these; Company strengths might be related to e.g.: size of customer base; location; technology; intellectual property; supply chain eﬃciency; production methods; distribution channels; customer service; quality of network; cost structure; level of financial reserves; etc. brand reputation; product portfolio; workforce quality; customer loyalty; 19 Intro to Business © 2024 STAGES Administration and Chapter 3: “What Can You Oﬀer Your Market?” Story-Based Management Seminars Identifying strengths should never be a “feel good”, one-session brainstorming event in which you write down whatever your team blurts out spontaneously (whether empirically right or wrong). Instead, this needs to be a serious process that involves individual preparation, significant research and multiple revisions. Your Strengths: Be accurate and precise, not hopeful or modest. WEAKNESSES: WHAT ARE YOU WORSE AT THAN THE COMPETITION? Just as methodically and diligently, you need to identify your company’s weaknesses. Again, the benchmark that you compare yourself to can be the “average company of your industry” or it can consist of specific competitors. What are you worse at than they are? The parameters you ought to look at are very similar to those we listed under potential “strengths”. Among the many possibilities are: dependency on a small customer base; location; outdated technology; weak intellectual property protection; age of equipment; supply chain eﬃciency; production methods; distribution channels; poor customer service; ineﬀective marketing; quality of network; high production costs; high overhead costs; environmental concerns; level of financial reserves; etc. brand reputation; outdated products; workforce quality; customer loyalty outdated Information System; Just as with the strengths analysis, an examination of your weaknesses is not something that should be done ‘lightly’ or ‘spontaneously’. It involves a lot of preparation and methodic research. Otherwise you’ll only identify weaknesses that even Captain Obvious is aware of, while overseeing the more ambiguous (and therefore more dangerous) weaknesses. Your Weaknesses: Be accurate and precise, not evasive or overly self-critical. 20 Intro to Business © 2024 STAGES Administration and Chapter 3: “What Can You Oﬀer Your Market?” Story-Based Management Seminars WHAT ARE YOUR OPPORTUNITIES AND THREATS? Now that we’ve looked internally at your company’s strengths and weaknesses, let’s look back outwards at your company’s external environment. No matter what the outside world is like at the moment, there are always opportunities and threats. The 1920s were the time of the Great Depression, a worldwide economic downturn that ruined millions of lives, sent tens-of-thousands of companies into bankruptcy, and paved the road for World War II. In spite of this, The Procter & Gamble Company (P&G) was able to identify numerous market opportunities and actually increased its profitability throughout this period. The period between 1950 and 1973 is referred to as the “Golden Age of Economic Growth”. During this time period, the global economy grew by an average of approximately 5% each year. In spite of this, the large automobile manufacturers Rolls- Royce and Studebaker each went bankrupt during this time. So we repeat: No matter what the outside world is like at the moment, there are always opportunities and threats. Here are a few examples of “non-obvious” opportunities that a company might identify: Due to the current indu.stry crisis, our employees are far more open to changes in our business model. Leasing our tuxedos to low-income earners rather than selling them outright. Leveraging our customer service data to create personalized AI chatbots for other industries. Utilizing our product waste as raw materials for a new line of upcycled, eco-friendly merchandise. Leveraging our expertise in supply chain management to oﬀer consulting services to non-competing industries. And here are examples of threats that a company might face: The merger of Graperfruit PLC and Banana Inc will create a competitor with 61% market share. The rise of 3D-printed alternatives could render our traditional manufacturing processes obsolete. Climate change-induced extreme weather events could disrupt our supply chain. The newly-raised, significantly higher salaries that our director competitor Papaya Partners oﬀers may attract many of our employees. The rising cost of keeping up with fast-paced technological changes could strain our R&D budget. 21 Intro to Business © 2024 STAGES Administration and Chapter 3: “What Can You Oﬀer Your Market?” Story-Based Management Seminars TIME TO SWOT! Now that you’ve meticulously researched and analyzed your company’s strengths, weaknesses, opportunities, and threats, it’s time to summarize the most important of them in a SWOT Analysis. The acronym “SWOT” stands for “Strengths”, “Weaknesses”, “Opportunities”, and “Threats”, and a SWOT Analysis is simply a document with four quadrants, one for each area we’ve discussed. The number of items to be included is an individual choice. The “Top 4-6” items per quadrant is a reference point for many companies. However, don’t be lured into adding an item (e.g. a strength) simply to meet a numerical target – or vice versa. That would be silly. In strategy, your “substance” is infinitely more important than “the form” you provide it in. YOUR USP IS NOT A DELIVERY SERVICE! What makes you special? Why do customers buy goods and/or services from YOU rather than from your competitors? Is your product better than theirs? Are they cheaper? Do you provide better customer service? Does your brand image attract them? Is it simply that your location is convenient? Whatever the reason(s) why customers buy from your company (rather than from the many alternatives that exist in a globalized economy): that is your Unique Selling Proposition (USP). Often enough, the reason(s) why customers REALLY buy from a company are not the reasons that companies assume (or wish for). In spite of this, it’s critical to identify your USP as accurately as possible. This - once again - involves marketing research (i.e. observing, surveying, and interviewing a suﬃcient number of customers). Don’t base your USP on wishful thinking! 22 Intro to Business © 2024 STAGES Administration and Chapter 3: “What Can You Oﬀer Your Market?” Story-Based Management Seminars THE MATCHING TASK: WILL THEY SWIPE LEFT OR RIGHT? In order for a company to be successful over the long run, its Vision, Mission, Core Values, SWOT, and USP need to match the target market(s), the business model and the goals it chooses. And just as importantly, they need to match with the goods and services it oﬀers. At its core, business strategy is about this matching process. If the strategic decisions you make don’t naturally integrate into who you are (and what your current reality is), then the outcome will be poor. This is why it’s so incredibly important to base your Vision, Mission, and Values on authenticity and your SWOT and USP on methodic research. * We’ll discuss “Business Models” in a later chapter. WHAT DO YOU HAVE TO OFFER? Based on the formula below, your company will decide what to oﬀer its target market(s): VISION MISSION VALUES Goods, Services, Wants and Needs of your SWOT + Target Market(s) = and/or Experiences USP that you should oﬀer BUSINESS MODEL GOALS Let’s see what you already know about products... Here are a few key terms that are central to any discussion of products. Good A tangible (i.e. “touchable”) physical item that can be used to fulfill a customer want or need. Service An intangible (i.e. “not physically touchable”) activity that is performed to fulfill a customer want or need. Product In our course, we use this term as the collective term for both “goods” and “services”. However, in other literature, this term is often used as a synonym for only “goods”. Experience The overall impression and emotions that a customer perceives while consuming a good or service. Research & Development The systematic process of inventing and creating new goods, services, and/or experiences. 23 Intro to Business © 2024 STAGES Administration and Chapter 3: “What Can You Oﬀer Your Market?” Story-Based Management Seminars FROM IDEA TO LAUNCH: SEVEN STEP DEVELOPMENT PROCESS The Seven Step Development Process is a framework used by companies to develop new products: IDEA GENERATION "Idea Generation" refers to the initial phase in the seven-step development process where new concepts or solutions are brainstormed and generated. It is the process of coming up with creative and innovative ideas to address a specific problem or challenge. During the idea generation stage, individuals or teams engage in activities such as brainstorming sessions, mind mapping, or conducting research to gather inspiration and insights. The goal is to generate a wide range of ideas without judgment or evaluation. The emphasis is on quantity and diversity of ideas rather than quality at this stage. IDEA SCREENING "Idea Screening" involves evaluating and filtering the generated ideas to identify the most promising ones for further development and implementation. The goal is to narrow down the pool of ideas to a select few that have the highest potential for success. Factors considered during idea screening may include market demand, competitive landscape, technical feasibility, financial viability, and alignment with the organization's values and capabilities. Idea screening is typically carried out by a cross-functional team that applies a systematic approach to objectively evaluate the ideas based on predetermined criteria. CONCEPT “Concept Development” begins with translating the selected DEVELOPMENT AND ideas into detailed concepts that encompass the key features, TESTING benefits, and value propositions. This process often involves conducting research, creating very basic prototypes, and developing visual representations or mock-ups to bring the concepts to life. Once the concepts are developed, they are subjected to testing to gather feedback and evaluate their potential success. This testing can take various forms, such as surveys, interviews, focus groups, or even small-scale market trials. 24 Intro to Business © 2024 STAGES Administration and Chapter 3: “What Can You Oﬀer Your Market?” Story-Based Management Seminars BUSINESS ANALYSIS After Concept Development and Testing, more detailed data AND MARKETING concerning e.g. production costs and market interest are STRATEGY available. The next step involves (a) a “Business Analysis”, which evaluates the financial aspects of the concept in detail and is strongly dependent on (b) the “Marketing Strategy” that you envision for the product. The final output of this step is a detailed cost estimate, sales forecasts, revenue projections, and potential return on investment, as well as decisions related to pricing, distribution, and communication. A Business Analysis also evaluates an organization’s ability to truly deliver the concept (i.e. whether the necessary skills, technology, infrastructure, and resources are present). PRODUCT “Product development” focuses on the actual development of DEVELOPMENT the final product takes. This involves activities such as engineering, prototyping, manufacturing, and quality assurance. Throughout the product development stage, continuous testing and evaluation are conducted to identify and address any issues or shortcomings. This includes usability testing, performance testing, and feedback from potential users or beta testers. TEST MARKETING "Test marketing" involves launching the product in a limited market to evaluate its performance, gather feedback, and make necessary refinements before a full-scale launch. During this phase, a carefully selected market segment is chosen to represent the broader target market. The product is introduced to this segment, and its performance is closely monitored and evaluated. Test marketing assesses customer acceptance, demand, competitor response, marketing eﬀectiveness, and potential challenges. COMMERCIALIZATION "Commercialization" refers to the full-scale launch of your product. It involves both (a) making the product available in your target market(s) (i.e. through distribution channels) and (b) making your target customers aware of its availability - and persuading them to try it out (i.e. communication measures). 25 Intro to Business © 2024 STAGES Chapter 4: “How Will You Create Your Goods, Administration and Story-Based Services, and Experiences?” Management Seminars Chapter 4: How Will You Create Your Goods, Services, and Experiences? Once you’ve decided on what to oﬀer your target market, you need to figure out how, where, and when to make it. How will you produce your goods? How will you perform your services? How will you create your experiences? That’s what this chapter is about: Operations Management. There will usually be diﬀerent ways in which you can produce a good (or perform a service) - each with pros and cons. In every case, though, deciding on your operations method will involve striking a balance between (a) “what customers are willing to pay for a good/service/experience that is produced in this manner” and (b) “production costs”. Typical factors that are aﬀected by your operations decisions are: Production costs; Product features; Product quality; “Time to market” (i.e. duration); Flexibility; Scalability; Technological requirements; Environmental impact; Risk; WHAT ARE PRODUCTION COSTS? Before we get into the details of Operations Management, let’s examine a term we just a bit more closely: “Production Costs”. Production costs are all the costs that arise because a good, service, and/or experience has been produced. This includes the acquisition costs of all the raw materials that are used up in the production process (e.g. wood, metal, glass, chemicals). It also includes the personnel expenses that arose because employees carried out a production process. And it includes any other cost that would not have arisen without the production process (e.g. decrease in value of machinery due to wear-and-tear, energy costs). Production Costs are clustered into two groups: “Direct Costs” and “Overhead Costs”. 26 Intro to Business © 2024 STAGES Chapter 4: “How Will You Create Your Goods, Administration and Story-Based Services, and Experiences?” Management Seminars PRODUCTION COSTS: Direct Material Costs + Direct Labor Costs + Production Overhead Costs = Production Costs Direct costs can be exactly attributed to each unit of output. Examples: Costs of the raw materials in each good or service; Costs of labor directly involved in production; Overhead costs cannot be exactly attributed to each unit of output. We divide them up with a key instead. Examples: Rent of operations location; Value decrease of operations location and equipment (“Depreciation”); Costs of equipment maintenance and repairs; A hair salon that only oﬀers hair coloring services calculates the production costs of a coloring service based on the following assumptions: An average hair coloring service requires.05 liters of hair dye. One liter of hair dye costs € 70. An average hair coloring service requires 41 minutes of a stylist’s time. The average work hour of a stylist (including all social security costs and other payroll taxes) amounts to € 44. The monthly utility costs of the salon amount to € 900. The monthly value decrease of all equipment used for coloring services amounts to € 20. The monthly salon rent amounts to € 3,700. The salon sells approximately 300 coloring services per month. DIRECT MATERIAL COSTS: (.05 * € 70) = € 3.50 + DIRECT LABOR COSTS: + (44/60) * € 41) = € 30.07 + PRODUCTION OVERHEAD COSTS: + (€ 900 + € 20 + € 3,700)/ 300 = € 15.40 = PRODUCTION COSTS PER COLORING: = € 48.97 PER MONTH = (300 * € 48.97) = € 14.691 27 Intro to Business © 2024 STAGES Chapter 4: “How Will You Create Your Goods, Administration and Story-Based Services, and Experiences?” Management Seminars We’ve looked at how to cluster production costs into “direct costs” and “overhead costs”. A second – closely linked – way to cluster production costs is according to whether they increase proportionally to each unit of production or not. Variable Costs increase (fairly) proportionally with each unit of output; Fixed Costs remain the same, regardless of how many units of output are produced; EXAMPLE: Variable costs are nearly always direct costs, while fixed costs are nearly always overhead costs. The two rules of thumb that “variable costs are almost always direct costs” and “fixed costs are almost always overhead costs” is so common that many organizations use the terms interchangeably. However, it is still highly recommendable for you to understand all four terms, since each of them is used regularly in business. THE CYCLE OF OPERATIONS MANAGEMENT Operations Management consists of a never-ending cycle of activities. These activities are typically split up into three areas: Operations Planning, Operations Scheduling, and Operations Control. We’ll look at each of these areas, beginning with “Operations Planning”. 28 Intro to Business © 2024 STAGES Chapter 4: “How Will You Create Your Goods, Administration and Story-Based Services, and Experiences?” Management Seminars OPERATIONS PLANNING: HOW, WHEN, AND WITH WHAT? Operations Planning is the planning (and control) of resources, equipment, and processes in order to eﬃciently produce and deliver goods, services, and experiences. In this chapter, we’ll consider the following key questions of Operations Planning: “Where will we produce our good/service/experience?”(= Location Planning) “How many units of our good/service/experience will we produce in a specific period of time?” (= Capacity Planning); “What steps, equipment, and employee activities will we use to produce a good/service/experience?” (= Methods Planning); “How will we arrange our employees and equipment in order to produce a good/service/experience?” (= Layout Planning); “What steps and controls will we implement to ensure our good/service/experience provides the level of quality we promised?” (= Quality Planning) “How will we ensure that our operations meet our ethical, social, and environmental standards?” (= CSR Planning) OPERATIONS PLANNING 1: LOCATION PLANNING Companies need to consider many questions when deciding on where to carry out the production of your goods and/or services: "How important is it for the location of our production to be near our target customers?" o If 'very', then: "Is the location in close proximity to our target customers?" "Is there an available and skilled labor force in the area?" "What is the cost of labor in the location?" " What labor regulations apply in the area?" "Does the location provide convenient access to transportation infrastructure?" "How close is the location to suppliers and raw materials?" "Are utilities such as electricity, water, and gas readily available and at a reasonable cost?" "What environmental regulations apply in the area?" "Are there any tax incentives or government support available in the area?" "Is there suitable real estate available in the area?" "What is the quality of life like for employees and their families, including access to schools, healthcare, and amenities?" 29 Intro to Business © 2024 STAGES Chapter 4: “How Will You Create Your Goods, Administration and Story-Based Services, and Experiences?” Management Seminars "Does the location align with our company's Core Values and culture?" "What are the risk factors (e.g. natural disasters, political stability, economic stability) in the area?" Remember that the location for your production does not automatically have to be identical to the location of your Headquarters (or sales oﬃces), two points we’ll address in later chapters. OPERATIONS PLANNING 2: CAPACITY PLANNING Capacity Planning involves determining how many units of a good or service need to be available to customers at a specific period of time. It is always a trade-oﬀ between “availability” and “costs”. Example: The decision of whether to open one cash register or five cash registers at your supermarket on Saturday morning is an example of capacity planning. Ultimately, your decision will be strongly aﬀected by your brand image. For example, a luxury brand cannot aﬀord to “let customers wait”, while a budget brand sometimes can. A company’s capacity planning can vary depending on seasonality (or even time of day). A key capacity decision is whether to produce goods in advance (i.e. “make-to-stock”) or per customer order (i.e. “make-to-order”). OPERATIONS PLANNING 3: METHODS PLANNING Methods planning concerns how you will create each unit of your good or service (i.e. What steps? What equipment? What employee activities? What sequence?) Typical questions that managers consider are: What will the steps of your production process be? In what order will they be carried out (i.e. in what sequence)? What types of equipment will you use to produce your good, service and/or experience? What steps will be carried out by people and what steps will be carried out by a machine? Will each step of your production process be highly standardized or will your employees be permitted to customize steps depending on the situation? Standardization: A process (or a step in a process) is performed in exactly the same way every single time it is carried out. 30 Intro to Business © 2024 STAGES Chapter 4: “How Will You Create Your Goods, Administration and Story-Based Services, and Experiences?” Management Seminars Customization: Depending on the needs of the situation (e.g. customer wishes), a process (or a step in a process) can be modified by an employee when it is carried out. STANDARDIZATION AND ECONOMIES OF SCALE Standardization often goes hand-in-hand with economies of scale. If a production process is always carried out identically (i.e. standardized), then it becomes far easier to automate the production process with technology (i.e. to carry them out in a repetitive manner by a machine). This is because the technology will simply repeat the same pattern of activities – over and over. Technological equipment generates fixed costs. Because of these fixed costs, the cost per unit of production output decreases with every additional unit of output the company produces. That is what is meant by “economies of scale”. Example: A company produces shoes. It buys a machine for €100,000. The machine can only be used to produce shoes, and will be used up in a year. The company also incurs variable costs (e.g. raw materials) of € 1 per pair of shoes it makes. If it produces only one pair of shoes, then the cost per unit will be € 1 + (€ 100,000/1) = € 100,001. If it produces two pairs, the cost per unit will be € 1 + (€100,000/2) = € 50,001. For three pairs, it will be € 1 + (€100,000/3) = € 33,334. And so on. Economies of scale, Baby! OPERATIONS PLANNING 4: LAYOUT PLANNING 1. PROCESS LAYOUT Let’s produce a table based on a Process Layout. In a Process Layout, similar machines or processes are grouped together into Workstations. Each workstation focuses on a specific function (e.g. “cutting”, “drilling”, “painting”, “food preparation”, “cooking”, etc.) You can find an interactive visual example of this in our online tool. 2. PRODUCT LAYOUT Now, we’ll produce a table based on a Product Layout. In a Product Layout, all workstations and equipment are arranged in a linear or straight-line fashion. Each workstation performs a specific task in the production process. This setup is known as an Assembly Line. You can find an interactive visual example of this in our online tool. 31 Intro to Business © 2024 STAGES Chapter 4: “How Will You Create Your Goods, Administration and Story-Based Services, and Experiences?” Management Seminars ADVANTAGES COMPARED TO OTHER LAYOUTS Increased Eﬃciency (due to the smooth and sequential flow of materials and operations, unnecessary movement is minimized); Higher productivity; Consistent quality; Lower costs per unit (e.g. than with a Process Layout) due to the above; Simplified training (as employees focus on one work step rather than an entire area); Easier supervision; DISADVANTAGES COMPARED TO OTHER LAYOUTS High initial investment; Limited flexibility (i.e. an Assembly Line is typically set up to produce a specific product. It cannot be “customized” as easily as workstations in a Process Layout can); Dependence on Demand and Volume (i.e. due to the high initial investments, product layouts are only cost eﬀective if these fixed costs are distributed over high-volume output); Monotony and Worker Fatigue (due to performing repetitive tasks); Risk of Production Interruptions (i.e. if one station along an assembly line breaks down – or is delayed – then every station after it has to wait); 3. CELLULAR LAYOUT Now, we’ll produce a table based on a Cellular Layout. You can find an interactive visual example of this in our online tool. In a Cellullar Layout, production is divided up into Cells. Each cell is responsible for building a component (i.e. a module) of a final product. Individual cells often include (smaller) assembly lines. In the end, the components (i.e. modules) that the cells produce can be combined in many diﬀerent ways to create diﬀerent types of products. ADVANTAGES COMPARED TO OTHER LAYOUTS Combines the higher flexibility of a Process Layout with the higher eﬃciency of a Product Layout; Ability to create a diverse range of products that draw on the same “Lego blocks” (i.e. modules); Higher worker engagement than in a Product Layout; 32 Intro to Business © 2024 STAGES Chapter 4: “How Will You Create Your Goods, Administration and Story-Based Services, and Experiences?” Management Seminars DISADVANTAGES COMPARED TO OTHER LAYOUTS High initial investment; Highly complex (i.e. requires the highest level of planning); All products must originally be designed in modular form (i.e. highly standardized); 4. LAYOUT PLANNING (FIXED POSITION LAYOUT) Last, we’ll produce an airplane in a Fixed Position Layout. You can find an interactive visual example of this in our online tool. In a Fixed Position Layout, the good being produced is too large, too heavy, or too complex to be moved easily. For this reason, it remains stationary while the equipment, machinery, and workers are brought to it. ADVANTAGES COMPARED TO OTHER LAYOUTS It is the only feasible option for certain types of manufacturing (e.g. construction projects, shipbuilding, aircraft manufacturing) ; Reduces the need for product movement; DISADVANTAGES COMPARED TO OTHER LAYOUTS Requires careful planning and coordination; May lead to congestion and limited workspace; Can be highly time-consuming and labor-intensive; May result in substantial ineﬃciencies without excellent planning and control; OPERATIONS PLANNING 5: QUALITY PLANNING Quality is the degree to which your output meets customer expectations. Any good, service and/or experience that you oﬀer must deliver quality. Unless you don’t want customers. Imagine your cooking a paella for your friends. You can either do this in an eﬃcient, resourceful manner. Or you can do it chaotically and wastefully, leaving the mother of all messes in the kitchen behind you. Does this mean that your goods, services and/or experiences should always be of the highest level of quality (i.e. the absolute maximum that a customer might hope for)? No. The harsh reality is that quality costs money. In most cases, “higher quality” means “higher costs”. For this reason – over the long run - the level of quality that your goods, services and/or experiences oﬀer needs to harmonize with their sales price. 33 Intro to Business © 2024 STAGES Chapter 4: “How Will You Create Your Goods, Administration and Story-Based Services, and Experiences?” Management Seminars Based on (1) customer expectations, (2) your sales price, and (3) your production costs, you need to make a quality decision for each of your goods, services, and/or experiences (i.e. “What level of quality should this product oﬀer?”) Then, you need to develop a set of quality standards and procedures to ensure that each good, service, and/or experience you create meets this level of quality. As we can see, Quality Planning involves: (a) planning the target quality of your goods, services, and/or experiences; and (b) developing standards and procedures to ensure that each unit of output meets this target quality. However, quality planning isn’t limited only to your operations output. It also focuses on how this output is created. Specifically, this involves: (c) planning the target quality of the process(es) you will carry out to create your output; and (d) implementing standards that ensure that each process you carry out meets this target quality. There are many quality standards and philosophies that companies can choose from (if they so desire). This allows them to build on what is already known, rather than having to “re-invent the wheel”. TOTAL QUALITY Total Quality Management (TQM) is a philosophy MANAGEMENT (TQM) that focuses on systematically and continually improving the quality of all aspects of the organization (e.g. processes, output, customer services). QUALITY ASSURANCE (QA) Quality Assurance (QA) refers to all the activities a company takes to make sure that its goods and/or services meet customer quality expectations. It focuses on preventing defects before they occur. This is done by carrying out Quality Control measures. QUALITY CONTROL (QC) Quality Control (QC) refers to the individual techniques that are used (in context of Quality Assurance) to monitor and test goods and/or services to make sure that they meet the predefined quality standards. Quality control involves regular inspection and testing based on statistic probabilities. 34 Intro to Business © 2024 STAGES Chapter 4: “How Will You Create Your Goods, Administration and Story-Based Services, and Experiences?” Management Seminars ISO STANDARDS ISO Standards, are international guidelines that provide specific criteria that certain products (or processes) have to meet. They are designed to ensure consistency in global trade as well as quality in operations. Example: most fastener manufacturers follow ISO norms when deciding on the size and dimensions of e.g. screws and nails. SIX SIGMA Six Sigma is among the most popular methods in Quality Management. It focuses on improving processes by reducing defects. The goal is to achieve a level of performance where a process produces only 3.4 defects per million executions (i.e. six standard deviations from the mean in a normal distribution, hence “Six Sigma”). CONTINUOUS IMPROVEMENT The Kaizen philosophy of Continuous Improvement (KAIZEN) is based on making small but ongoing improvements to processes, goods, and services, rather than taking “great leaps” at greater intervals. OPERATIONS PLANNING 6: CSR PLANNING In operations, Quality planning is closely linked to Corporate Social Responsibility Planning. This is because both are heavily collected to the materials and the processes that are used in operations. Typical CSR questions that you must answer in context of your operations planning are: Environmental impact: “How can we ensure that our operations minimize negative environmental eﬀects, such as pollution and waste generation?” Health and safety: “What steps can we take to ensure the health and safety of our employees and customers in context of all our operations decisions and activities?” Energy eﬃciency: “How can we optimize energy usage and reduce our carbon footprint?” Supply chain ethics: “How can we promote transparency and ethical practices throughout our entire supply chain?” 35 Intro to Business © 2024 STAGES Chapter 4: “How Will You Create Your Goods, Administration and Story-Based Services, and Experiences?” Management Seminars OPERATIONS SCHEDULING: TIMING IS EVERYTHING It’s not enough to plan your capacity, methods, and layout - you also need to plan when every step of the operations process will take place. This is called “Operations Scheduling”. As a manager, you need to determine the timeline for completing a series of tasks or processes. This includes deciding on what tasks need to be completed by whom and coordinating when and where they will take place. In standardized companies, it is also quite common to specify the exact amount of time that is allotted to each step (e.g. 22 seconds, 18 minutes 15 seconds, etc.). Common plans used in Operations Scheduling are: Master Production Schedule: Provides an overview of the total production plans of a company for a time period (e.g. month); Detailed Schedule: Breaks down the total production plans into highly detailed day-to-day schedules; Staﬀ Schedule: Specifies who (i.e. which specific employees) will be involved in the production (and when/where); MATERIALS MANAGEMENT: HOW MUCH INVENTORY DO WE NEED? In order to produce a good, a company needs raw materials (i.e. the physical ingredients that become a part of the finished good). For example, an oak table cannot be produced without wood. Similarly, once a good has been produced, it often isn’t immediately taken away from the operations location by the buyer. In fact, in the case of make-to-stock production, there ISN’T even a buyer yet. So the finished good(s) need to be stored someplace. As the name suggests, Materials Management involves all decisions related to the flow of materials: from the moment raw materials are ordered to the moment finished goods are delivered to the buyer. SUPPLIER SELECTION INVENTORY CONTROL WAREHOUSING PURCHASING TRANSPORTATION The purpose of materials management is to ensure that the right amount of material is available at the right time, while keeping inventory costs (i.e. storage costs) as low as possible. 36 Intro to Business © 2024 STAGES Chapter 4: “How Will You Create Your Goods, Administration and Story-Based Services, and Experiences?” Management Seminars A major decision in this regard is whether or not to own a warehouse... If a company performs services, then it won’t need to store a physical finished good. However, the company MAY still require raw materials for the service (e.g. massage oil for a massage). MATERIALS MANAGEMENT: THE ROLE OF THE WAREHOUSE Most companies buy their raw materials before they use them. Most companies don’t immediately transport finished goods to buyers once production is complete. For these two reasons, companies need an area with appropriate conditions (e.g. security, temperature) in which to store raw materials and finished goods. That’s where a warehouse comes in. A warehouse is any building used for the storage of goods and materials. Its processes are “receiving”, “putaway”, “storage”, “picking”, “packing”, and “shipping”. Warehouses can (a) store both raw materials and finished goods/merchandise or (b) they can specialize on one aspect, such as “materials for production” (i.e. “Production Warehouse”) or “finished goods/merchandise (e.g “Central Warehouse”, “Distribution Centers”). If a company doesn’t want to own its own warehouse, it can also rent space in a shared Public Warehouse. Warehouses oﬀer both advantages and drawbacks- In regard to the statements in our online exercise, the general consensus is that if a company owns a warehouse…... it has greater control over its inventory management because it is less dependent on the availability and reliability of suppliers;... customer satisfaction will often be higher because they have to wait less for goods (in case they’ve already been “made to stock” and stored in the warehouse);... inventory costs are considerably higher because of the initial investment and the maintenance costs of the warehouse (and its staﬀ );... "lead time" (i.e. waiting time) is usually lower, because raw materials are readily available (and do not have to be ordered/delivered directly prior to production);... it will need to invest more in staﬃng and training, simply because the warehouse needs to be managed and staﬀed;... it has a clear advantage when producing for peak demand seasons (e.g. December) because it can produce in advance and simply store the finished goods;... it can benefit from economies of scale in its production. This is because it can produce larger amounts (i.e. and store the goods it can’t immediately sell). The fixed 37 Intro to Business © 2024 STAGES Chapter 4: “How Will You Create Your Goods, Administration and Story-Based Services, and Experiences?” Management Seminars costs of the production equipment is thereby divided over more units of output (which lowers the costs per unit).... it can produce more evenly throughout the year, because goods that are produced in low demand months can be stored in the warehouse for the future;... there is a greater risk of producing and storing goods that will become obsolete (e.g. to changing tastes). Because of the ability to store finished goods for a long time, companies may produce higher amounts than the market ultimately wants;... the warehouse should be located near the factory in case it primarily stores raw materials. o However, if the prime funtion of the warehouse is as a distribution center of finished goods, it’s more important for it to be located near good infrastructure and/or customers. SUPPLY CHAIN MANAGEMENT: TAKING A BIRD’S EYE PERSPECTIVE Every company produces goods, services, and/or experiences. But it’s rare for any single company to carry out every single task from the origin (e.g. planting the seeds of a Coﬀea plant) to the final customer experience (e.g. sipping an espresso in a coﬀee shop). Instead, companies tend to focus on a specific link of the Supply Chain. Think of the supply chain as all the major activities needed to create a good, service, and/or experience for the final consumer: from the origins of the raw materials all the way through to the consumption. Simplified example of a supply chain: In order to match and exceed your competitors, it’s not enough to focus only on your company’s task within your supply chain(s). Instead, every link of the supply chain needs to be optimal. This involves intelligent supplier selection, customer selection, and ongoing coordination of all your interconnected activities – the realm of Supply Chain Management. 38 Intro to Business © 2024 STAGES Chapter 4: “How Will You Create Your Goods, Administration and Story-Based Services, and Experiences?” Management Seminars OPERATIONS CONTROL: ARE WE MEETING OUR TARGETS? You’ve planned the major elements of your operations. You’ve scheduled the operations process. You’ve integrated materials management and supply chain management. Is it time for you to lean back? Of course not. Now, your task is to make sure that the operations processes are all carried out according to plan. AND that the output of the operations processes (e.g. the finished good, the service, the experience) meets the level of quality that you planned. The above is part of Operations Control, which involves: monitoring the various stages of production to ensure they are proceeding as planned; allocating resources (e.g. materials, equipment, manpower) to diﬀerent production tasks based on demand and capacity; Performance Measurement (i.e. tracking key data to evaluate the productivity and eﬃciency of your operations processes); Quality Control (i.e. checking (1) goods/services/experiences and (2) the production processes themselves to make sure they meet the quality level you planned; trouble-shooting and problem-solving; 39 Intro to Business © 2024 STAGES Chapter 5: “How Will You Sell Your Goods, Services, Administration and Story-Based and Experiences?” Management Seminars Chapter 5: “How Will You Sell Your Goods, Services, and Experiences?” All the Operations Management and Logistics in the world won’t be enough if you’re not able to successfully sell your goods, services and/or experiences. (But on the other hand: all the sales success in the world won’t help you much if you can’t produce them and get them to your customers!) Numerous factors play a role in selling your output to customers. We’ve already looked at two of them - the product itself, and your distribution strategy. In this chapter, we’re going to focus on to further factors: the pricing of the product and your communication strategy. PRICING YOUR PRODUCTS: WHAT’S THE RANGE? For every good, service, and experience, the range of prices from which you can choose a sales price (i.e. the price that you will charge your customers for your good, service, and/or experience) is limited on both ends. You cannot aﬀord to set a sales price that is lower than your production costs per unit. You also cannot set a sales price that is higher than what your customers are willing to pay. It is within these two boundaries that companies set the sales prices for their products. MINIMUM: WHAT ARE YOUR PRODUCTION COSTS? MAXIMUM: WHAT ARE YOUR CUSTOMERS WILLING TO PAY? PRICING WITH A CUSTOMER PERSPECTIVE: CUSTOMER-ORIENTED PRICING Pricing Step 1: Learn what your customers are willing to pay. There is never only one road that leads to Rome. And there is never only one operations method with which to produce a good, service and/or experience. Usually, you’ll identify a few diﬀerent options, each with it own pros and cons. The option that you will ultimately choose depends significantly on what customers are willing to pay for a product. Customer-Oriented Pricing applies marketing research (e.g. surveys) to learn about what customers are willing to spend on a good, service, and/or experience. This willingness is aﬀected by multiple factors, such as product features and quality, packaging, brand perception, and communications measures (e.g. advertising). 40 Intro to Business © 2024 STAGES Chapter 5: “How Will You Sell Your Goods, Services, Administration and Story-Based and Experiences?” Management Seminars It may seem odd to you that the starting point for setting a sales price is the customer’s psychology, rather than your production costs. But there’s a good reason for this. Identifying the amount that customers are willing to spend on your product conveys the absolute maximum that you can charge. Before you know this, it would be unwise to decide on a final operations method (and the resulting production costs). PRICING WITH A COST PERSPECTIVE: COST-ORIENTED PRICING Pricing Step 2: Calculate the production costs of your various operations options. Now that you know the maximum sales price that you can charge, you need to decide on an operations method whose productions costs are low enough to leave you with a gross profit after a sale. In total, this gross profit needs to be high enough to cover all your company’s other, “non-production costs” (e.g. marketing, sales, administration) and still leave you with a net profit. Calculating your (minimum) sales price based on your production costs is referred to as “Cost-Oriented Pricing”. Cost-Oriented Pricing focuses on the total number of units that a company expects to sell during a future time period (i.e. based on marketing research). Based on this number, managers calculate a sales price that will be suﬃcient to cover both a company’s variable costs and its fixed costs. Such calculations often involve a “Break Even Analysis”... *Reminder: Variable Costs and Fixed Costs were discussed in Chapter 4. SALES REVENUES - PRODUCTION COSTS = GROSS PROFIT - ALL OTHER COMPANY COSTS = NET PROFIT 41 Intro to Business © 2024 STAGES Chapter 5: “How Will You Sell Your Goods, Services, Administration and Story-Based and Experiences?” Management Seminars BREAK EVEN ANALYSIS: HIGHWAY TO THE PROFIT ZONE As a company, one of your mandates is to generate a net profit. Put simply, the amount you receive for all the products you sell (i.e. your sales revenues) over a specific time period (e.g. one year) must be higher than all the costs you’ve incurred during the same time period. The “crossover point” from a loss into the profit zone is known as the Break Even Point. This is the minimum number of units of your good, service, and/or experience that you need to sell in order to generate a net profit of € 0. If you sell more than this number of units, you will generate a net profit; If you sell less than this number of units, you will generate a loss; We calculate the break even point by means of a Break Even Analysis. Let’s take a look at how such an analysis works... Example: A salons oﬀers only manicure & polishing services. Its variable costs (e.g. nail polish) per service are € 1.50. Its fixed costs are € 2,000 per month. If it sets its sales price at € 25 per nail polishing service, then its break even point would be €2,000/ (€25 – €1.50) = 85.1 (i.e. 86) services per month; If it sets its sales price at € 29 per nail polishing service, then its break even point would be €2,000/ (€29 – €1.50) = 72.7 (i.e. 73) services per month; BREAK EVEN POINT = FIXED COSTS/ (SALES PRICE – VARIABLE COSTS) PRICING: HARMONIZING CUSTOMER-ORIENTATION AND COST-ORIENTATION When deciding on the sales price(s) of your product(s), you should never take an “either or” approach. It’s just as unwise to consider ONLY the customer perspective as it is to consider ONLY the cost perspective. You need to consider both. Among the “variables” that you’ll have to fine-tune are (1) sales price, (2) product features and quality, (3) customer demand, and (4) operations method. You’ll ask yourself questions like: “How will each operations method I can choose from aﬀect my product features, product quality, and production costs?” “If I set the sales price higher, how will this aﬀect customer demand?” “If I reduce my production costs by modifying or eliminating certain product features, how will this aﬀect demand?” 42 Intro to Business © 2024 STAGES Chapter 5: “How Will You Sell Your Goods, Services, Administration and Story-Based and Experiences?” Management Seminars This harmonization process will be iterative (i.e. you will have to make small, incremental changes to each of your variables and see how they aﬀect the other variables) until you find an optimal compromise between forecasted sales revenues and production costs YOUR PROMOTIONAL MIX: COMMUNICATING WITH YOUR TARGET GROUP It’s not enough to design, produce, price, and distribute a product. You need to make your target group aware of it. And what’s more: you need to do this ongoingly. Memories are short. To do this, companies rely on “promotion”, which is the umbrella term used for any activities that attempt to influence the buying behavior of a target group. Among the most common promotional measures are: Direct Marketing; Digital Marketing; Personal Selling; Sales Promotions; Advertising; and Public Relations; Let’s see what you already know about these... PROMOTIONAL MEASURE #1: DIRECT MARKETING Direct Marketing is a marketing strategy in which companies communicate

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