Operations Business Study Notes PDF

Operations Managing the processes that transform and add value to inputs to create outputs of goods and services. Role of operations management Strategic role of operations management – cost leadership, good/service differentiation Strategic role = focusing on decisions for achieving long-term goal...

Operations Managing the processes that transform and add value to inputs to create outputs of goods and services. Role of operations management Strategic role of operations management – cost leadership, good/service differentiation Strategic role = focusing on decisions for achieving long-term goals. The strategic goals are to improve: Productivity Efficiency Quality of outputs. It involves operations managers contributing to the strategic direction of strategic plan of the business Cost Leadership: involves aiming to have the lowest costs or to be the most price-competitive in the market. This is gained by offering greater value by means of lower prices, grater quality or by providing greater benefits and service at no extra cost. Most businesses who aim to be cost leader will have a high degree of standardisation. Can keep cost down through: Economies of scale in production and distribution Access to cheaper raw materials Exclusive access to a large source of low cost inputs Developing an efficient scale of operationsàeconomies of scale Using up-to-date technology in production Controlling production and research costs. Good/service differentiation: involves differing products from competitors. Is can be achieved through: Altering the quality Faster delivery (efficiency) Customisation More features and applications on the physical appearance Location of operations Improving the service Goods and/or services in different industries Goods can either be: Standardised (mass produced, uniform in quality, produced with a production focus) Customised (varied according to the needs of the customer, produced with a market focus) Can be reused Hard to modify once manufactured Perishable or non-perishable Tangible product that requires factory/machinery and space  Less labour intensive than services The manufacturing of goods has become automated with computer-aided design (CAD) and computer-aided manufacture (CAM). Services can be: Standardised (e.g. fast food restaurant) Customised (e.g. medical services, hairdressers) They are intangible Can only be used by the customer once Easier to change and customise More interaction with customers Require more people and have an office-centred production Interdependence with other key business functions All key functions are interdependent and rely in each other for success. Operations- must supply a product that has the features and quality consumers want as well as being reliable in distributing the product to the market. Marketing- connects operations directly with the customer. Identifies the nature of consumers’ desires and implements marketing strategies to encourage purchase of goods made in operations. Finance- required so production and distribution can take place. The finance manager creates budgets and makes funds available to purchase inputs, equipment and repairs. Human Resources- required for the hiring of employees to work in production. Ensures that there are enough employees with the appropriate skills. Influences on operations Globalisation, technology, quality expectations, cost-based competition, government policies, legal regulation, environmental sustainability Globalisation: Able to reduce the cost of operations by pursuing a global web strategy (location of different parts of the production process in different areas) which will reduce labour costs More abundance of raw materials, technology skills and low transport costs Can also act as a threat to a business as other businesses who apply cost leadership can dominate the market Able to reach new markets and provide franchises Gives consumers the opportunity to purchase products from the business that provides the most value for money Access to a global market for businesses to sell their outputs Technology: Enables service-based businesses to penetrate global markets with the international distribution of information through the internet and smart phones Can result in the development of new methods of production or new equipment that helps businesses perform functions more quickly and efficiently (lower cost) Computer-aided design (CAM) and computer-aided manufacture (CAM) has impacted the number of employees needed within operations It improves efficiency, logistics and reduces reliance on human labour Quality expectations: customer expectations and satisfaction with the product(s). Operations of the delivery of services can have a positive impact on customer satisfaction. Customers require world-class standards in products and after-sales support. Customers will have certain beliefs about: Durability (how long the product lasts given a reasonable amount of use) Reliability (how long the product functions without needing repairs or maintenance) Fit for purpose (how well the product does what it is supposed to) Cost-based competition: A business can gain a price advantage over its competitors by using operational strategies that lower costs through: Cheaper labour and resources Outsourcingàeconomies of scale, global web strategy Lowering quality Using cheaper inputs Government policies: Government policies are methods used by the government that encourage the operations function of a business to be more innovative and competitive. A common way to support these innovative businesses is to provide monetary benefits such as a financial grant or tax concessions. There has been a gradual reduction in ‘protection’ of Australian businesses forcing them to be more efficient in their operations and reduce costs. Free trades, taxation, interest rates, government spending and environmental incentives. Legal regulations: The aim of government regulation of a business is to promote safety and fair business conduct. Many of the regulatory requirements exist at a local, state and federal level. It is the legal responsibility of the operations manager to be aware of all the laws relevant to the operations function and ensure that the business complies with them. Work Health and Safety (WHS), anti-discrimination, equal employment opportunity (EEO), local zoning, and GST collection. Environmental sustainability: Ecological sustainability refers to the development and use of methods of production that allow resources to be used by producers today without limiting the ability of future generations to satisfy their needs and wants. Consumers need to be aware of the cost and disposal of excessive packaging. Society will have a positive attitude towards businesses that are environmentally friendly and good corporative citizens. Involves the use of alternative resources, organic growing, recycling and packaging and catering for future generations. Corporate social responsibility -the difference between legal compliance and ethical responsibility -environmental sustainability and social responsibility Corporate social responsibility is a commitment by a business to operate ethically to protecting and contributing to the resources and interests of customers. It is how success and profitability is determined and how well it considers the interests of employees, consumers and the community. Legal compliance is mandatory and of greater importance than ethical responsibility as there are not specific laws the business would be breaking, yet unethical behaviours may lose customers. Ethical behaviour involves making decisions that are not only legally correct but also morally correct. For operations, a code of conduct will be concerned with: o minimising harm to the environment o reducing waste, recycling and reusing o producing value-for-money, quality products o improving customer service Environmental sustainability is about the present use not affecting the future use, looking after the environment for future generations. Social responsibility refers to the positive effect on the community- protecting interests of customers and wider society, e.g. initiatives/charity to community. By pursuing environmentally sustainable goals a business will be contributing to a better quality of life for society. Operations processes Inputs -transformed resources (materials, information, customers) -transforming resources (human resources, facilities) Common direct inputs= labour, energy, raw materials, skills/knowledge, machinery and technology. Transformed resources: inputs that are changed or converted in the operations process to a finished good or service. Materials- raw materials and intermediate goods (e.g. supplies, parts) used up in the operations  Information-influence and inform how inputs are used, where and which supplier to use and to keep control over material inputs. Customers-their choices shape inputs. Customers can be changed in different ways, e.g. feel that value has been added to their lives after seeing a film or going on holidays. Transforming resources: resources that remain in the business and carry out the transformation process to add value to inputs. Human resources-effectiveness of human resources determines the success of the transformation. The skill, knowledge, capabilities and labour of people is applied to materials to convert them into goods and services. Facilities-plant, machinery, buildings, land, equipment and technology used in operations. Transformation processes -the influence of volume, variety, variation in demand and visibility (customer contact) -sequencing and scheduling – Gantt charts, critical path analysis -technology, task design and process layout -monitoring, control and improvement The transformation processes are those activities that determine how value will be added. These processes can add value in four ways: Physical altering of the physical inputs or the changes that happen to people Transportation of goods or services, e.g. having them delivered to a more convenient location Protection and safety from the environment; for example, protecting assets Inspection by giving customers a better understanding of the good or service The influence of volume: The actual number of products or services produced by the operation. A business using mass production will produce a high volume with a high degree of process repetition. A business with customization and low production will allow for lots of stoppages and adjustments. When volume is the largest factor, there will be lots of capital facilities and technology, but less labour. Assembly lines using convey or belts will be common and organized. Low volume= 5 star restaurant, high volume = fast food restaurant. The influence of variety: Variety refers to the range of products made, number of different models and variations offered in the products or services. A business producing a high volume product with low variety will be capital intensive. Low variety= car factory with small variations. High variety= financial advice. The influence of variation in demand: amount of produce desired by customers Variation can change according to time of day, season, holidays and time of year. When there are steady levels with no variation, there will be high volume and capital costs. Low variation= bread and milk. High variation = ice cream factory The influence in visibility (customer contact): Operations will also be influenced by the degree to which customers can see the operations in action. Service-based businesses will have a high level of visibility. Speed of operations will also be important as customers usually have a much lower tolerance for waiting. High visibility= restaurant. Low visibility= beef producer. Sequencing= a plan showing the order in which activities occur Scheduling=used to plan the length of time activities take and the sequence of the use of resources Gantt charts records the number of tasks involved in each particular project and the estimated time needed for each task, good for long-term projects, easy to understand Critical path analysis a scheduling tool that allows manager to see shortest length of time to complete all tasks, precise in timing, good for short-term tasks Technology: It makes task more effective and efficient, high-tech or low-tech, less employees needed, increasingly important, cost is also relevant, allows more work to be done in a shorter time, machinery/manufacturing technology-robotics, CAD and CAM. Task Design: is how the task will be completed. It allows for ongoing analysis and adjustments in each activity to ensure continuous improvement in productivity. Classifying job activities, what needs to be done, making it easy for an employee to successfully complete tasks, job analysis, can be cone after a skills audit is conducted. Process layout: arrangement of machines in a sequence-grouped together by function/process they perform Monitoring- the systematic collection and analysis of information as a task progresses. These include: quality, speed, dependability, flexibility, customisation and costs. It is aimed at improving the efficiency and effectiveness of an operations process. The purpose of it is to see if resources have been allocated properly and are being used efficiently. Control- a function that aims at keeping the business’s actual performance as close as possible to what was planned by making adjustments to the operation process. It is about assessing the performance of a business. Improvement- suggests that adjustments and readjustments may need to be made to day-to-day activities in the short term and even the entire operations process in the long term. There can be improvements in: quality, speed, dependability, flexibility and cost. Outputs -customer service -warranties Outputs: good or service provided/delivered to a customer, are the final products that a business offers to customers. Customer service- is a service provided to customers before, during and after a purchase. It is an intangible output that requires extensive contact with customers. Good customer service will increase customer satisfaction. How a business meets and exceeds the expectation of customers in all aspects of its operations, key in developing long-term relationships. Warranties- an assurance that a business stands by the quality claims of the products that they make and provide to the market. Agreement to fix defects in products, an assessment of warranty claims can help a business to adjust transformations processes to be more effective. Operations strategies Performance objectives – quality, speed, dependability, flexibility, customisation, cost Quality= quality of service/conformity/design, can be measured in rate of returns and feedback. Good quality prevents costs by product recalls and repairs, dimensions of quality are: durability, performance, serviceability (convenient to repair) and aesthetics (does it look good). Speed= time it takes for production/operations process to respond to changes in the market demand, tested by analysing wait time and production speed, if the production is too fast the quality may suffer. Dependability= consistency and reliability of products, measured by warranty claims and complaints. Flexibility= how quickly processes adapt to market change, technology, ability to make changes to operations due to external factors. Customisation= creation of individualised products to meet specific customer needs. Cost= minimisation of expenses so that operations processes are conducted as cheaply as possible. New product or service design and development New product: design, development, launch and sales of new products allows a business to grow and maintain a competitive advantage, different approaches (customer approach/changes or innovation in technology). Service design and development: more complex, adding to the service offered to the customer, can be adding to variety/increase of choice, develop within cast structure. Supply chain management – logistics, e-commerce, global sourcing Supply chain management is the stream of processes of moving goods from the customer order through the raw material stage, supply, production and distribution of products to the customer. Integrating and managing the flow of supplies throughout the inputs/transformation process/outputs to best meet the needs of customers, supplier rationalism/backwards vertical integration/cost minimisation/flexible responsive supply chain process Logistics: the transport of physical raw materials, inputs and the distribution of finished goods to markets. It involves the integration of information, transportation, inventory, warehousing, materials handling and packaging. Computerisation can make the task faster/more efficient. The role of logistics is to ensure that operations have the right items at the right quantity and the right time at the right place. E-commerce: the use of internet to buy and sell goods and services. Alter operation process, e- procurement, managing supplies in an organised way, makes trading easier, cheaper access to global markets, privacy and security issues, and increased risk of purchasing unsatisfactory or faulty materials. Global sourcing: business acquires the inputs it needs for production across the borders of a number of countries. A business seeks to find the most cost effective location for manufacturing a product, even if the location is overseas, may be cheaper to purchase inputs from overseas than create them, keep control over complex supply chains, lower costs, loss of control over quality, reliability and costs, slower lead times. Outsourcing – advantages and disadvantages Outsourcing: occurs where other businesses provide the raw materials and components, and also service inputs. Advantages- external provider specialised, lower costs, greater effectiveness, require less capital expenditure, can use employees of other business, may contribute to the speed, give the business flexibility to choose the suppliers it wants, requires less input from management, the business can focus on its core business. Disadvantages- if ineffective may be more expensive, not in control, if competitors are doing the same=less competitive advantage, dependent on other businesses, can involve a loss of jobs, can the security and confidentiality issues. Technology – leading edge, established Leading edge= most advanced or innovative, is sometimes still being developed Established= developed and widely used Inventory management – advantages and disadvantages of holding stock, LIFO (last-in- first-out), FIFO (first-in-first-out), JIT (just-in-time) Inventory management refers to the systems and processes that identify the quantity of goods or materials to be ordered and the timing of the delivery of those goods or materials. Inventory control has 3 aims: determine maximum and minimum stock, provide details of changes in inventory to trigger management decisions to reorder, strategies applied impact transformation process. Advantages of holding stock: consumer demand can be met, reduces lead times between order/delivery, storage of stock allows business to promote products in non-traditional/new markets, stock adds value to business, making products in bulk can reduce costs, dependability of delivery Disadvantages of holding stock: costs with storage, invested capital/labour/energy can be used elsewhere, if stock is unsold the business experiences a loss, increased management costs, goods may pass their expiry or use by date. LIFO (last-in-first-out): last goods produced are the first out or used and therefore each unity sold/used is the last one recorded, the newer stock is displayed for sale before products purchased at an earlier date. This endures that up-to-date stock is on display for customers. FIFO (first-in-first-out): first goods produced are the first ones sold/used, therefore the cost of each unit sold/used is first recorded, can be used if price of supplies/goods remain relatively stable, used when products have a used-by date. JIT (just-in-time): ensures exact amount of products or materials arrive only as they are needed, can save money as it eliminates inventories but require flexible operations/reliable suppliers. Quality management -control -assurance -improvement Quality management: involves setting performance objectives that clearly set quality as a foremost goal. Quality Control- involves checking transformed and transforming resources in all stages of the production processes, failure to meet pre-determined targets=corrective action Quality Assurance- involves monitoring and evaluation of the various processes of a project, service or facility to ensure that a minimum level of quality is being achieved by the production process. Assures set standards are met, pre-determined (universal) quality standards Quality Improvement- involves continuous improvement in all functional areas to reduce the rate at which mistakes occur. Ongoing commitment to improving goods/service and total quality management-quality is a commitment/responsibility of all staff Overcoming resistance to change – financial costs, purchasing new equipment, redundancy payments, retraining, reorganising plant layout, inertia Major reasons for resistance to change are: Financial costs-purchasing new equipment, redundancy payments, retraining, reorganisation of plant layout Inertia- psychological resistance, fear of losing jobs/uncertainty. Global factors – global sourcing, economies of scale, scanning and learning, research and development Global sourcing: refers to the process of acquiring raw materials, services and various parts that are needed to manufacture goods or services. A business may use a global web strategy. Economies of scale: occur when the amount of production increases and as a result of this increased output there is a decrease in the cost of production per unit of output. Scanning and learning: involves monitoring a business’s internal and external environment so that it can gather, analyse and use information for tactical or strategic purposes. Scanning the global environment to identify and learn the critical global trends that may impact on the business. Research and development: helps business to creating ideas for new products or services that will give them a leading edge over other businesses.  Marketing The process of developing a product and implementing a series of strategies aimed at correctly promoting, pricing and distributing the product to its target market. Role of marketing Strategic role of marketing goods and services Central and strategic roleè brings the products of the business and customers together to increase the market share of the business. Interdependence with other key business functions Operations: as the sales of a product decline over time, the operations manager and marketing manager need to design and develop new products, operations needs data from marketing to know what to produce. Finance: the business needs to know how much money it can put into marketing. Human Resources: staff must be hired and trained to have experienced employees marketing the products. Production, selling, marketing approaches Production= emphasis on quantity and reducing costs, demand greater than supply. Mass market, low-cost production. Selling= businesses think of customer only after product has been made, emphasis on selling and advertising. Supply greater than demand, persuasive sales techniques Marketing= focuses on the customers’ needs and wants, emphasis on customer satisfaction, modification- societal approach emphasises quality, safety and the environment, customer focus, customer orientation, relationship marketing. Types of markets – resource, industrial, intermediate, consumer, mass, niche Resource= where the production and sale of raw materials occur, e.g. land. Where the factors of production are sold exchanges, these resources are then sold to firms producing goods/services for customers Industrial= markets for manufactured products, e.g. agriculture, mining. Those who buy goods/services that go into the production of other products Intermediate= markets to provide the link between producers and the marketplaces where consumers make their purchase decisions, (wholesalers) e.g. supermarket. Those who buy goods/services to resell/rent to others, wholesalers-steps to produce the final product Consumer= markets that sell directly to the individual. A market for goods at their final point of consumption Mass= market for goods appealing to the majority of customers, e.g. milk, bread, electricity Niche= smaller markets for more specialised goods/services, appealing to fewer people, e.g. luxury cars. Influences on marketing Factors influencing customer choice – psychological, sociocultural, economic, government Psychological: personal characteristics of an individual (perception, attitudes, lifestyle, personality and self- concept). Sociocultural: forces exerted by other people and groups (family and roles, religion, culture, peers). Economic: the amount of money available to spend (boom, recession). Government: policies and laws directly/indirectly influence business activity and consumers’ spending habits (interest rates, fiscal and monetary policies, age restrictions, income tax). Consumer laws -deceptive and misleading advertising -price discrimination -implied conditions -warranties The Competition and Consumer Act 2010 attempts to promote fair and competitive behaviour in the marketplace. Deceptive and misleading advertising= overstating benefits, offering discounts and special offers that don’t exist, bait and switch advertising (promotes a product that is heavily discounted even though the business has very little supplies). Price discrimination= the process of a business giving preference to some retail stores by providing them with stock at lower prices than is offered to the competitors of those retailers. Implied conditions= terms unspoken or written in a contract. The product needs to be good quality, of reasonable standard and fit for purpose. Warranties= a promise by the business to repair or replace faulty products. A business must either refund or exchange goods recognised as faulty at the time of leaving the store, this is an implied warranty. Ethical – truth, accuracy and good taste in advertising, products that may damage health, engaging in fair competition, sugging Ethical behaviour refers to the generally accepted code of behaviour. When marketing a business should act in an ethical way. They need to consider health concerns, social obligations, cost of marketing, sugging and fair competition. Truth, accuracy and good taste in advertising: it is expected that all promotional material is truthful, accurate and in good taste. Consumers have a right to accurate and truthful information from businesses about their purchases. Products that may damage health: restrictions on products that damage health, e.g. tobacco smoking Engaging in fair competition: business behaviour must be fair and ethical towards their competitors. Sugging: selling under the guise of a survey. This is not illegal but it is unethical as it involves an invasion of privacy and deception. Marketing processes Elements of the marketing plan are: 1. Executive summary 2. Situational analysis 3. Market research 4. Establishing marketing objectives 5. Identifying the target market 6. Developing marketing strategies 7. Implementing, monitoring and controlling. 1. Situational analysis – SWOT, product life cycle A situational analysis is the current situation of the business. SWOT- provides the information needed to complete the situational analysis and gives a clear indication of the business’s position compared to its competitors. The strengths and weaknesses are the internal forces within the business. Opportunities and threats are the external forces as they operate outside the business and cannot be controlled by the business. Product lifecycle- different marketing strategies should be used as products travel through the product life cycle Introduction/establishment: profits are limited, penetration policies will be used, business establishing a loyal customer base Growth: profitability will grow, costs will increase, marketing strategies will need to change, businesses lower their costs. Maturity: steady income stream with limited prospects, marketing strategies modified, try to differentiate through price, after-sales service or by making the product easier to access. Post-maturity: increased competition and changing customer preferences, can either decline, renew, steady state (profits stay the same) or cessation (business shut down). 2. Market research Primary research: surveys, interviews, observations, experiments Secondary research: *can be internal or external-census, data, competitor’s sales data, annual reports 3. Establishing market objectives Businesses generally adopt a SMART approach to setting objectives: Specific – the objective needs to be clear Measurable – the business needs to find ways to measure success Achievable – the business needs to have the financial and human resources to achieve goal Realistic – the objective should be reasonable Time bound – the time frame must be reasonable Marketing objectives usually include: Increasing market share Expanding the product range Expanding existing markets Maximising customer service 4. Identifying target markets To appeal to a target market the business needs and in-depth understanding of the nature of consumer markets. Consumers can be grouped into segments of: Demographic Sociocultural Geographic Psychographic 5. Developing marketing strategies Marketing involves a number of strategies designed to price, promote and place products in the market. The marketing mix consists of four elements called the 4Ps: Product – the product is a combination of quality, design, name, warranty, packaging and exclusive features. Customers buy products that satisfy their needs as well as provide them with intangible benefits. Price – the right price needs to be chosen to prevent the product from not selling at all if the price is too high or receiving lower turnover as well as cheap image if the price is too low. Promotion – the promotion strategy is the method that is to be used by the business to inform, persuade and remind customers about its products. Place – deals with the distribution of the product and consists of two parts which are transportation and the number of intermediaries involved. 6. Implementation, monitoring and controlling – developing a financial forecast; comparing actual and planned results, revising the marketing strategy Implementation- is the process of putting the marketing strategies into action. Implementation of the marketing plan involves integrating it with all sections of the business, establishing lines of communication, motivating the employees and making them familiar with the marketing objectives and strategies. Monitoring- means checking and observing the actual progress of the marketing plan. The information is used to control the plan. Controlling- involves the comparison of planned performance against actual performance and taking corrective action to make sure the objectives are achieved. The controlling process requires the business to outline what is to be accomplished by establishing a performance standard which is a forecast level of performance against actual performance can be compared. Cash flow statements, balance sheets, profit and loss Developing a financial forecast a business must develop a financial forecast that details the revenues and expenditures for each strategy when evaluating alternatives. Cost benefit analysis is a helpful tool used to itemize fixed and variable costs and draw up a profit forecast showing profit and return. Developing a financial forecast requires two steps that are: cost estimate- how much the marketing plan is expected to cost and revenue estimate- how much revenue will be generated as a result. Comparing actual and planned results this is the monitoring which will involve comparing actual results with planned results. Revising the marketing strategy the marketing plan can be revised and corrective action taken is needed. Marketing strategies Market segmentation, product/service differentiation and positioning Identifying the niche markets within the mass market by grouping people with similar characteristics. Demographic: age, sex, Geographic: location Psychographic: lifestyle, social class, personality Behavioural: consumer loyalty, purchase occasion, benefits sought, usage rate Product/service differentiation= how a business separate themselves from the competition. Price, product quality, providing after-sales. Positioning= process or marketers creating an image/identity for their product, brand and organisation. These can be based on factors such as price, quality, value, safety. A positioning matrix may be helpful. Positioning strategies include: positioning by benefit, price or quality, direct comparison, use occasion or users Products – goods and/or services -branding -packaging Goods/services should be seen as flexible and product range/use, what to emphasise, position should be taken into consideration Branding: a brand name is a way of distinguishing a product from its competitors, branding strategies include: generic brand (e.g. no frills), individual brand (e.g. dove, lux) Packaging: often first image of the product- image should be positive and effective while aiming to protect and maintain quality. Should offer a reason to purchase product, this may be: nutritional information, benefits, feature, design and colour. Price including pricing methods – cost, market, competition-based -pricing strategies – skimming, penetration, loss leaders, price points -price and quality interaction Pricing methods: Cost- (mark up), adding a percentage to purchase price. Market based- setting prices according to supply and demand. Competition based- considers total cost to the business of manufacturing or providing a good or service to the consumer and then adds an additional amount. Comparable to competitors’ price. Pricing strategies: Skimming- a business charging the highest possible price Penetration- setting prices at the lowest possible price to gain an immediate groups of customers. Used to gain market share rapidly. Loss leader- selling products at a loss to entice customers into the business Price points- selling products only at predetermined prices, e.g. $29.99, $39.99. Price and quality interaction: products that are a higher price usually have a higher quality than those sold at a low price. Higher price products also tend to seem better quality than low-cost product. Prestige/premium pricing= high price is charged to give the product an aura of quality and status. Promotion -elements of the promotion mix – advertising, personal selling and relationship marketing, sales promotions, publicity and public relations -the communication process – opinion leaders, word of mouth Elements of the promotion mix: Advertising - conveys a non-personal message to a large market. Personal selling- activities of a sales representative directed at a customer to make a sale Sales promotions – use of activities/materials as direct inducements to customers, e.g. coupons, samples, loyalty cards Publicity and public relations – free news story, creating and maintaining favourable relations between a business and its competitors. Relationship marketing- long term, cost effective and strong relationships with customers, e.g. Fly Buys The communication process: Opinion leaders- respected and trusted well known members in the public eye, e.g. sports stars, singers Word of mouth- friends and family communicating experiences and beliefs on products to others. Place/distribution -distribution channels -channel choice – intensive, selective, exclusive -physical distribution issues – transport, warehousing, inventory Distribution channels: routes taken to get the product from the business to the customer, e.g. ProduceràRetaileràCustomer. Channel choice: Intensive- saturate the market, e.g. milk Selective-moderate proportion of all possible outlets, e.g. clothes sold in department stores, e.g. big W Exclusive-the use of only one retail outlet for a product in a large geographic location, e.g. boutique. Physical distribution issues: Transport- needed to deliver products to stores. Warehousing- involved in receiving, storing and dispatching goods. Inventory- (stock) need inventory control to maintain quantities and varieties. People, processes and physical evidence *For service-based industries. People: having well-trained staff who can support the products of the business. The quality of interaction between the customer and those within the business who will deliver the service. Processes: the flow of activities that a business will follow in its delivery of a service. Physical evidence: the environment in which the service will be delivered, e.g. signage, brochures, calling cards, website, etc. E-marketing The practice of using the internet to perform marketing activities. Webpage, podcasts, sms, blogs, web 2.0, social media advertising. Global marketing -global branding -standardisation -customisation -global pricing -competitive positioning Many TNCs adopt global marketing, e.g. Coca-Cola. Global branding: worldwide use of a name, term, symbol, logo to identify a seller’s products. Standardisation: the needs it satisfies are the same throughout the world, e.g. mobiles Customisation: the needs it satisfies are different between countries, e.g. McDonald’s menus. Global pricing: customised, market-customised, standardised. Competitive positioning: how a business will differentiate its products from other businesses.  Finance The planning and monitoring of a business’s financial resources in order to allow the business to achieve its financial objectives. Role of Financial Management Strategic role of financial management The strategic role of financial management is to provide the financial resources to allow the implementation of the business’s strategic plan. It ensures that a new business continues to operate, grow and is able to achieve its financial objectives. Objectives of financial management -profitability, growth, efficiency, liquidity, solvency -short-term and long-term Profitability: Profitability is the ability of the business to maximise its profits. This is achieved by carefully monitoring the business’s revenue and pricing policies, costs and expenses. Growth: Growth is the ability of the business to increase its size in the longer term. Growth ensure that the business it sustainable into the future. Efficiency: Efficiency is the ability of the business to maximise its costs and manage its assets so that maximum profit is achieved with the lowest possible level of assets. Liquidity: Liquidity refers to the ability of the business to pay short-term liabilities using its current assets. Therefore the current assets need to be greater than current liabilities. Solvency: Solvency is the extent to which the business can meet its financial commitments in the longer term (12 months+). Short-term: Short-term financial objectives are the tactical (one to two years) and operational (day to day) plans of the business. They are mainly concerned with managing cash flow and ensuring that the balance between current assets and current liabilities is positive for the business. Long-term: Long-term financial objectives are the strategic plans of the business. They are mainly concerned with the growing of the business and tend to be broad goals, e.g. increasing profit and market share. Interdependence with other key business functions Operations: Finance is required for inputs, machinery, land, etc. to create value whilst receiving a return on investments. Marketing: Finances are required for advertising to occur, e.g. ads, which generates sales that help the business increase its value and short-term financial goal of managing cash flow. Human resources: Finance is an important aspect to help human resources achieve its resources. The information finance gathers on earnings, productivity and customer satisfaction provides insights into the staffing and development needs of a business and without this HR cannot do its job effectively. Influences on Financial Management Internal sources of finance-retained profits Internal sources of finance are obtained from within the business. They include owners’ equity, retained profits and sale of assets. Owners’ equity- is the funds contributed by owners or partners to establish and build the business. Retained profits- are the part of the net profit of a business that are not distributed but are invested back into the business to be a cheap and accessible source of finance. External sources of finance -debt- short-term borrowing (overdraft, commercial bills, factoring), long-term borrowing (mortgage, debentures, unsecured notes, leasing) -equity- ordinary shares (new issues, rights issues, placements, share purchase plans), private equity External finance refers to funds provided by sources outside the business, e.g. banks and government. Debt: short-term borrowing Overdraft: an arrangement between the business and its bank that allows the business to borrow money from the bank at short notice through its cheque or current account. Commercial bills: are a type of bill of exchange (loan) issued by institutions other than banks. Factoring: is the selling of a company’s accounts receivable (money that is owed to the business) at a discount to a finance company for immediate cash. Debt: long-term borrowing Mortgage: loans with a fixed schedule of payments that is repaid over a number of years with interest Debentures: are fixed interest securities issued by a company that will pay a fixed interest rate on the money loaned to the company for a set time period. They are issued by a company for a fixed rate of interest and for a fixed time. Unsecured notes: are loans made by finance companies and are not secured by any assets, and therefore presents the most risk to the investors in the note (the lender). For this reason it attracts a higher rate of interest than a secured note. Leasing: involves the payment of money for the use of equipment that is owned by another party. It allows a business to use an asset in return for payments over a set time. Equity: ordinary shares Ordinary shares are the usual way that an investor can buy part ownership of a public company (a business listed on the Australian Securities Exchange or ASX). New issues: a security that has been issued and sold for the first time on a public market; sometimes referred to as primary shares or new offerings. Rights issues: the privilege granted to shareholders to buy new shares in the same company. Placements: allotment of share, debentures, etc. made directly from the company to investors. Share purchase plans: an offer to existing shareholders in a listed company the opportunity to purchase more shares in that company without brokerage fees. The shares can also be offered at a discount to the current market price. Private equity Private equity refers to securities that are held in companies that are not listed and not publicly traded in the Australian Securities Exchange (ASX). The aim of the private company (like the publically listed companies who sell ordinary shares) is to raise capital to finance future expansion/investment of the business. Financial institutions- banks, investment banks, finance companies, superannuation funds, life insurance companies, unit trusts and the Australian Securities Exchange Banks Banks are the most important source of funds for businesses. Banks accept deposits from the general public and provide funds for loans and, in turn, make investments. Investment banks Investment banks provide specialised advice and services for businesses financial needs. They deal with businesses and governments in raising large amounts of capital by underwriting share issues. Finance companies Finance companies make loans (unsecured and secured) to consumers and businesses. They raise capital through share issues and funds through debenture (company bond) issue. Superannuation funds Provide funds to the corporate sector through investment of funds received from superannuation contributions and fees. Superannuation funds are able to invest the contributions of members into a range of short and long-term investments with the aim of maximising a return. Life insurance companies Insurance companies cover various risks that people and businesses face. To purchase insurance, customers pay a premium to an insurance company. These companies invest in other businesses as a method of spreading their exposure to risk. Unit trusts Unit trusts (mutual funds) take funds from a large number of small investors and invest them in specific types of financial assets. Australian Securities Exchange The Australian Securities Exchange (ASX) is a market that brings together buyers and sellers to exchange shares. Once approved by the ASX businesses can issue shares to the general public on the primary market. Buyers and sellers can exchange shares on the secondary market. Influence of government- Australian Securities and Investments Commission, company taxation The government influences the financial management of businesses through the implementation of economic policies (fiscal-budgets and monetary- interest rates), and through the implementation of current and changing legislation. Australian Securities and Investments Commission The Australian Securities and Investments Commission (ASIC) aims to reduce fraud and unfair practices in financial markets and financial products. Company taxation Companies and corporations in Australia pay company tax on profits. Company tax is paid before profits are distributed to shareholders as dividends. Global market influences- economic outlook, availability of funds, interest rates Financial risks associated with global markets are greater than those encountered domestically, but such risk taking is necessary for a business strategy to be implemented. Globalisation has created more interdependence between economies and businesses. Economic outlook The projected changes to the level of economic growth throughout the world. It may increase the demand for products/services and the interest rates on funds borrowed internationally. Availability of funds Refers to the ease with which a business can access funds (for borrowing) on the international financial markets. The availability of funds depends on the risk, demand and supply and the domestic economic conditions. Interest rates Interest rates are the cost of borrowing money. The higher the level of risk involve in lending to a business, the higher the interest rates. Processes of Financial Management Planning and implementing-financial needs, budgets, record systems, financial risks, financial controls Financial planning is essential if a business is to achieve its goals. The financial planning process begins with long-term or strategic financial plans. The planning process involves the setting of goals and objectives, determining the strategies to achieve those goals and objectives, identifying and evaluating alternative courses of action and choosing the best alternative for the business. Financial needs Financial needs are essential to determine where a business is headed and how it will get there. Important financial information needs to be collected before future plans can be made. A new business will have to determine its start-up costs, e.g. cost of equipment and employees. Once a business has begun operations financial information from balance sheets, incomes statements and cash flow statements need to be analysed to determine if profits can be given to shareholders. Budgets Budgets provide information in quantitative terms (facts and figures) about requirements to achieve a particular purpose. Budgets are often prepared to predict a range of activities relating to short-term and long-term plans and activities. Budgets can be operating, project or financial. Operating budgets- relate to the main activities of a business and may include budgets relating to sales, production, raw materials, direct labour, expenses and cost of goods sold. Project budgets- relate to capital expenditure and, research and development. Financial budgets- relate to financial data of a business and include the budgeted income statement, balance sheet and cash flows. Record systems Record systems are the mechanisms employed by a business to ensure that data is recorded and the information provided by record systems is accurate, reliable, efficient and accessible. Financial risks These are the risks to a business of being unable to cover its financial obligations, such as the debts that a business incurs through borrowings, both short-term and longer term. Financial controls Financial controls are the policies and procedures that ensure that the plans of a business will be achieved in the most efficient way. This enables the manager to determine if the objectives set were achievable or need to be reassessed. -debt and equity financing- advantages and disadvantages of each Debt financing Relates to the short-term and long-term borrowing from external sources by a business. External (debt finance) is a liability as it is owed to sources external to the business. Advantages: Disadvantages: Readily available Costs to a business-establishment costs and ongoing fees and charges Interest payments can be tax deductible Security is required by the business Increased funds lead to increased earnings Regular payments have to be made and profits Loans provide a business with the Increased risk if debt comes from financial opportunity to grow institutions because the interest that the bank charges Profits are not shared with the lender of the Interest rates can vary over the loan period- loan making it more expensive If it is a secured loan, defaulting on the loan may lead to loss of an asset Equity financing Related to the internal sources of finance in the business. It is the money lent to the business in exchange for ownership, including start-up capital. Advantages: Disadvantages: Remains in the business for an indefinite Requires sufficient profits to be made so that time the business can continue to operate Does not need to be repaid on a set date Lower profits and lower returns for the owner Safer than debt Equity is hard to obtain and can take time to organise and, therefore, may limit growth Cheaper that other sources of finance as Not tax deductible there is no interest There is flexibility in timing of dividend Central ownership is reduced, causing a loss payments of control in decision-making The debt to equity (gearing/leverage) ratio High demand for dividend payments to decreases, lowering the risk to the business shareholders may reduce the level of retained profits -matching the terms and source of finance to business purpose When a business identifies and plans to meet its financial objective, it is necessary to match the terms of finance with its purpose. This requires a business to consider: The terms, flexibility and availability of finance The cost of each source of funding- equity and debt The structure of the business- small business and public company Monitoring and controlling- cash flow statement, income statement, balance sheet Monitoring and controlling is essential for maintaining business viability and affects all aspects all aspects of business operations. The main financial controls used for monitoring include cash flow statements, income statements and balance sheets. To fully analyse and interpret the financial controls a number of basic formulas need to be used including: COGS = Opening Stock + Purchases – Closing Stock (income) Gross Profit = Sales – COGS (income) Net Profit = Gross Profit – Expenses (income) Owners’ Equity = Assets – Liabilities (balance) Total Equity = Owners’ Equity + Net Profit (balance) Cash flow statement A statement that summarises cash transactions that have occurred over a period of time. Its purpose is to provide information about the cash inflows (receipts) and outflows (payments). Users of cash flow statements include creditors (people who a business owes money to) and well as owners and shareholders. In preparing a cash flow statement, the activities of a business are generally divided into: operating activities, investing activities and financing activities. CASH FLOW STATEMENT For Eastern Shores Restaurant (Coffs Harbour) ($ 000's) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Opening Balance 2 8 12 15 8 1 -4 -6 -8 -5 -3 10 Revenue 26 24 20 7 8 6 14 8 15 12 20 27 Expenses 20 20 17 14 15 11 16 10 12 10 7 15 Closing Balance 8 12 15 8 1 -4 -6 -8 -5 -3 10 22 Income statement The income statement outlines the level of revenue (sales), cost of goods sold (opening stock+purchases- closing stock) and operating expenses. It calculates whether a business have made a profit or loss over a particular period of time, usually a year. Income Statement Caroline-Anne's IT Supplies For year ending 30 June 20X2 Sales 360 000 Less Cost of goods sold Inventory 1 July 10 000 (+) Purchases 120 000 (+) Cartage inwards 4 000 (-)Inventory 30 June 8 000 126 000 Gross Profit 234 000 Less Operating Expenses Selling/distribution expenses Advertising 5 000 Depreciation 1 000 Wages 50 000 56 000 General expenses Insurance 4 000 Rent 34 000 Utilities 6 000 44 000 Financial expenses Interest on loan 13 000 Interest on mortgage 3 000 16 000 116 000 Net profit 118 000 Balance sheet The balance sheet is a statement showing the total value of a business on a particular day (snapshot). It is based on the accounting equation: Assets (A) = Liabilities (L) + Owners Equity (E) Balance Sheet El-Café Pty Limited As at 31 December 2000 Current Assets Cash 1 300 Accounts receivable 3 000 Inventory 3 000 7 300 Non-Current Assets Plant and machinery 10 000 Buildings 140 000 Good will 50 000 200 000 Total Assets 207 300 Current Liabilities Accounts payable 14 300 Overdraft 6 000 20 300 Non-Current Liabilities Bank Loan 34 000 Mortgage 70 000 104 000 Total Liabilities 124 300 Owner's Equity Capital 75 000 Retained Earnings 8 000 83 000 Total L & OE 207 300 Financial ratios -liquidity- current ratio (current assets ÷ current liabilities) -gearing- debt to equity ratio (total liabilities ÷ total equity) -profitability- gross profit ratio (gross profit ÷ sales); net profit ratio (net profit ÷ sales); return on equity ratio (net profit ÷ total equity) -efficiency-expense ratio (total expenses ÷ sales), accounts receivable turnover ratio (sales ÷ accounts receivable) -comparative ratio analysis- over different time periods, against standards, with similar businesses Liquidity Liquidity is the extent to which the business can meet its financial commitments in the short-term. The amount of current assets should be higher than debts. Current Ratio (working capital) = Current Assets ÷ Current Liabilities It is generally accepted that a business that has a current ratio of 2:1 is in a good, stable financial position. Gearing Gearing measures the relationship between debt and equity. It is the proportion of debt (external finance) and the proportion of equity (internal finance) that is used to finance the activities of a business. Gearing ratios determine the firm’s solvency (long-term debts). Debt to Equity Ratio = Total Liabilities ÷ Owner’s equity The higher the ratio, the less solvency of the firm/business (rely on debt more). Lower=good. Profitability Profitability is the earning performance of the business and indicated its capacity to use its resources to maximise profits. GROSS PROFIT Gross Profit Ratio = Gross Profit ÷ Sales X 100% The amount of sales that is available to meet expenses. The higher the ratio, the better. NET PROFIT Net Profit Ratio = Net Profit ÷ Sales X 100% The profit or return to the owners. The higher the ratio the better. RETURN ON EQUITY Return on Equity Ratio = Net Profit ÷ Total Equity X 100% How effective the funds contributed by the owners have been in generating profit. The higher the ratio or percentage, the better the return for the owner. Efficiency Efficiency is the ability of the firm to use its resources effectively in ensuring financial stability and profitability of the business. The more efficient the firm, the greater its profits and financial stability. EXPENSE Expense Ratio = Total Expenses ÷ Sales X 100% The amount of sales that are allocated to individual expenses, the lower the better, the more efficient. ACCOUNTS RECEIVABLE TURNOVER Accounts Receivable Turnover Ratio = Sales ÷ Accounts Receivable X 100% The effectiveness of a firm’s credit policy and how efficiently it collects its debts. High turnover ratios indicate that business has efficient debt collection. The bigger the number the worse it is. Comparative ratio analysis Over different time periods: comparing ratios for a business over various periods to identify trends and assist with interpretation of ratio results. Against common standards: such as industry averages and benchmarks to assist a manger’s interpretation and decision-making on the business’s performance. With similar businesses: comparing ratios from businesses in the same industry and of the same size will give further insight into the performance of a business. Limitations of financial reports- normalised earnings, capitalising expenses, valuing assets, timing issues, debt repayments, notes to the financial statements Normalised earnings Earnings on the balance sheet are adjusted to remove unusual or ‘one-off’ events to show the true earnings of a company. Capitalising expenses Process of adding a capital expense to the balance sheet that is regarded as an asset (in that it will add to the value of the company) rather than as an expense. Valuing assets The process of estimating the market value of assets or liabilities. Some assets change value over time due to inflation and the market. Therefore it would have been worth less in the past and would not reflect the true value. Timing issues Financial reports cover activities over a period of time, usually a year. Therefore, the business’s financial position may not be a true representation if the business has experienced financial fluctuations. Debt repayments Financial reports can be limited because they do not have the capacity to disclose specific information about debt repayments, e.g. how long the business has had or has been recovering the debt. Notes to the financial statements These are the details and additional information that are left out of the main reporting documents, such the balance sheet and income statement. Ethical issues related to financial reports Businesses have a legal and ethical responsibility to provide accurate financial records. Ethical issues related to financial reports include: Audits- independent check of the accuracy of financial records and accounting procedures. There are three types of audits: 1. Internal: conducted internally by employees to check accounting procedures and the accuracy of financial records  2. Management: conducted to review the firm’s strategic plan and to determine if changes need to be made 3. External: conducted by independent and specialised audit accountants. Record keeping- all accounting processes depend on how accurate and honest data is recorded in financial reports GST obligations- businesses have an ethical and legal obligation to comply with GST reporting requirements Reporting practices- accurate financial reports are necessary for taxation purposes as well as for other stakeholders. Businesses are to not make the business look better than it actually is by adding revenues that do not exist Businesses should show all liabilities and expenses in the balance sheets and income statements Accountants must display integrity, confidentiality and a high level of professional and technical ability Financial managers and accounts cannot ‘be creative’ when recording transaction and preparing financial reports in order to make the business appear more profitable Managers should not use the business’s credit cards for personal expenses Financial Management Strategies Cash flow management -cash flow statements -distribution of payments, discounts for early payment, factoring Cash Flow Statements Cash flow statements indicate the movement of cash receipts and cash payments resulting from transactions over a period of time. They are also used to show the trends of short-term and long-term cash inflows and outflows. Management Strategies Distribution of Payments: by spreading expenses over the whole year there is more equal cash outflow each month rather than one huge outflow during one month. Discounts for Early Payment: a business may offer discounts to encourage people to pay their payments early to improve cash flow. Factoring: the selling of accounts receivable for a discounted price to a finance or specialist factoring company. Working capital management -control of current assets- cash, receivables, inventories -control of current liabilities- payables, loans, overdrafts -strategies- leasing, sale and lease back Working capital is the funds available for the short-term financial commitments of a business. Working capital management is determining the best mix of current assets and current liabilities needed to achieve the objectives of the business. Current (working capital) ratio = current assets ÷ current liabilities The current ratio of 2:1 or 200% is generally acceptable. Control of Current Assets Cash: it is the most liquid current asset in the business. It is important as it allows the business to be able to pay its debts, loans and accounts in the short-term. Businesses can increase their cash amount by sale and leaseback. However, too much cash can be unproductive. Accounts Receivable: the total amount of money that customers owe to the business. The collection of accounts receivable is important in managing working capital. Managing accounts receivable involves: checking the credit rating of prospective customers, sending customers statements monthly and at the same time each month so debentures know when to expect accounts, following up on accounts that are not paid by the due date and putting policies into place for collecting bad debts. Inventories: the total amount of goods or materials in a store or factory (stock). Inventory control involves a balance between too much and too little stock. Strategies involved in the management of inventory include: regular and ongoing stocktaking, control systems (e.g. JIT), use of sales to convert stock into cash and limiting staff access. In order to remain solvent the business needs to manage their inventories. Control of Current Liabilities Accounts Payable: sums of money owed by the business to its suppliers (creditors). Some strategies include payment on time (to avoid late fee charges), taking advantage of early payment discounts and maintain a good credit rating for continuing access to lines of credit provided by suppliers. Loans: sums of money that are borrowed from financial institutions for the purpose of funding such things as property and equipment. Control of loans involves comparing the cost of the loan to other sources of finance to find that most appropriate and cost efficient source. Overdrafts: a relatively cheap and convenient form of short-term borrowing. Businesses may control overdrafts by ensuring that all cash received is promptly deposited in the business’s account to reduce the amount owing. Strategies Leasing: the hiring of an asset from another person or company. By leasing assets the business maintains more working capital to invest in other assets and opportunities for expansion of the business. Sale and lease-back: involves the selling of assets such as buildings and equipment and leasing them back from the purchaser. This increases a business’s liquidity as the cash that is obtained from the sale is used as working capital. Profitability management -cost controls- fixed and variable, cost centres, expense minimisation -revenue controls- marketing objectives Profitability management: involves the control of both the business’s expenses and its revenue. Cost controls Fixed and Variable costs: fixed costs do not change when the levels of activity changes, e.g. rent, insurance. To minimise fixed costs it is essential to negotiate satisfactory arrangements initially or to take advantage of discounts for early payments. Variable costs change proportionally with the level of operating activity in a business, e.g. advertising, employee wages, overtime payments. Strategies to reduce variable costs include: negotiating discounts with all suppliers, reducing the number of suppliers and/or switching to a cheaper supplier. Cost Centres: the expenses associated with each key business function. Businesses attempt to control costs by allocating a proportion of total costs (direct and indirect) to particular parts of the business. These cost centres are then responsible and held accountable for the costs that they incur. Expense Minimisation: the reduction of costs and expenses in order to maximise the profits and gain a competitive advantage. Strategies include outsourcing, sales and lease-back, replacing labour with technology and improving budget and accountability. This is done to reduce expenses consuming valuable resources within the business. Revenue controls Marketing Objectives: Sales objectives- the link between the marketing plan and the financial plan. Sales targets are to maximise sales, increase the turnover of stock and maximise revenues. Need to set targets to generate maximum revenue. Sales mix- the range of products and services sold by the business. Businesses should control this by maintaining a clear focus on the important customer base when deciding whether to diversify or extend product ranges or ceasing production. Need to review each product’s profit-margin contribution  Pricing policy- is necessary as the setting of prices is a complicated task and staff need to be aware of the business strategy for pricing. The main aim of pricing policy is to balance sales with profits. Pricing decisions should be closely monitored and controlled. Overpricing could fail to attract customers, while under-pricing may bring higher sales but may still result in cash shortfall and low profits. Need to review price penetration, price skimming, price points and discounts. Global financial management -exchange rates -interest rates -methods of international payment- payment in advance, letter of credit, clean payment, bill of exchange -hedging -derivatives Global financial management refers to the strategies implemented by businesses to deal with the export component of the business activities. Exchange Rates The foreign exchange rate is the ratio of one currency to another; it tells us how much a unit of one currency is worth in terms of another. Exchange rates fluctuate over time due to variations in demand and supply. Such fluctuations in the exchange rate create further risk for global businesses. Currency fluctuations will impact on the revenue profitability and production costs. A currency appreciation raises the value of the Australian dollar in terms of foreign currencies. This means that each unit of foreign currency buys fewer Australian dollars. However, one Australian dollar buys more foreign currency. Therefore, an appreciation makes our exports more expensive on international markets but prices for imports will fall. The result of the appreciation reduces the international competitiveness of Australian exporting businesses. A current depreciation lowers the price of Australian dollars in terms of foreign currencies. Therefore, each unit of foreign currency buys more Australian dollars. The result is that our exports become cheaper and the price of imports will rise. An depreciation, therefore, improves the international competitiveness of Australian exporting businesses. Interest Rates Interest rates can have an impact on the willingness and ability of businesses to invest in business activities, and of customers to purchase goods and services. Low interest rates reduce borrowing costs and encourage expansion. High interest rates increase borrowing costs and discourage expansion. It is therefore important to find the lowest interest rate, as exchange rate fluctuations can make repayments more costly. Methods of International Payment Payment in advance: the exporter/seller receives payment by the buyer before the products are sent. There is a risk of the goods not being sent. Letter of credit: commitment where the buyer/importer’s bank promises to pay the exporter a specified amount when the documents proving shipment of goods are presented. Clean payment: the goods are shipped before payment is received. This is used when businesses and their exporters have a good relationship and history. Bill of exchange: a document written by the exporter demanding payment from the importer at a specified time. This method of payment allows the exporter to maintain control over the goods until payment is either made or guaranteed. Hedging Hedging is the process of minimising the risk of currency fluctuations. Hedging helps reduce the level of uncertainty involved with international financial transaction. Derivatives Derivatives are financial instruments that support a business’s hedging activities. It is a financial contract that is based on the future market value of an asset such as a commodity, shares or currency. The main purpose is to reduce risk for one party. They include: 1. Forward exchange contracts= the bank will guarantee the exporter a certain exchange rate on a certain rate. 2. Currency option contracts= gives the buyer the right to buy or sell foreign currency at some time in the future. 3. Swap contracts= an agreement to exchange currency in the spot market to reverse the transaction in the future.  Human Resources Role of human resource management The management of the total relationship between employer and employee. Strategic role of human resources Ensures that the business has well trained staff that will benefit the business in the long-term. By being proactive and adopting a long-term approach, managers may seek to improve a diverse range of human resource issues within the business, e.g. policies and practices. The business must also develop appropriate performance review measures to examine the effectiveness and efficiency of their employees. Interdependence with other key business functions Operations: The operations function works closely with human resources to ensure that the business has recruited staff with the relevant skills and experience. Additional workers may be required depending whether finance allows it. Marketing: The human resource is related to marketing as staff must be motivated and skilled to develop products. It is also through marketing that businesses are able to determine the skills required for employees to produce the desired product. Marketing may require additional managers which need to be sourced. Finance: The human resources is related to finance as budgets are often established that allocate funds towards training and workplace education issues. Human resources must also work within these budgets to provide for the needs of its employees. A decline in the hiring of new employees may be present to ensure the business is liquid. Outsourcing -human resource functions -using contractors- domestic, global Outsourcing- when a company takes a part of its business functions and gives it to another company to complete. Human resource functions The human resource function is the second most frequently outsourced after information technology. The most commonly outsourced human resource functions include: recruitment, induction, leadership training, mediation, outplacement and payroll. However, businesses need to realise that outsourcing may not solve the problems that it was supposed to. There are a number of disadvantages involved in outsourcing human resources including: cost saving are not always achieved, employee unrest, problems with outside HR provider, loss of control, and reasons for outsourcing the HR function are not clear. Using contractors A contractor works for many employers as once the contract has been completed they are free to offer their services to any other business. Contractors have independence and are not subject to the regulations and directives of the business. Domestic: domestic subcontracting is very common and avoids the need to employ additional ‘in-house’ staff, along with all the overhead expenses involved. Some risks include: loss of customer contact. Global: using global contractors as an external provider of services allows the Australian business to access the use of labour without having to consider issues such as minimum labour requirements and WH&S. Key influences Stakeholders- employers, employees, employer associations, unions, government organisations, society Each stakeholder seeks to protect and promote its own interests. Employers The individual or organisation that pays others to work for them. They are often the owners and take responsibility in the organisation’s goals. They handle HR management on a daily basis. Employers responsibilities are increasing due to recent legislation requiring them to resolve disputes and negotiate agreements. Employees An individual who provides his or her skills to a business in return for a regular source of income. They are now considered in the decision making process and workers can now work from home to accommodate a work-life balance. Labour shortages are looming due to aging population. Employer associations Organisations that aim to promote the interests of employers within the business environment. They lobby governments to develop policies that enhance the interests of the employer and consult with governments on changes to key policy issues. They provide advice, negotiate agreements and make submissions to safety net wage cases. Unions Are organisations formed by employees in an industry, trade or occupation to represent them in efforts to improve wages and working conditions for members. They provide representation in disputes, free or discounted legal services, superannuation schemes, cheap home loans, training through TAFE, insurance and WH&S advice. Government organisations Government departments oversee legislation relating to employment relations. They establish the legal framework by which employers, employees and trade unions coexist and operate within the employment relationship. Society Workplace practices are reflective of behaviours that are upheld within society. Issues such as discrimination and harassment are becoming publicised. Businesses must act consistent with the views of society. Legal- the current legal framework -the employment contract- common law (rights and obligations of employers and employees), minimum employment standards, minimum wage rates, awards, enterprise agreements, other employment contracts -occupational health and safety workers compensation -anti discrimination and equal employment opportunity The employment contract Is a legally binding formal agreement between employer and an employee. A written contract is more protective than verbal. Common Law (rights and obligations of employers and employees) Common law is developed by courts and tribunals. Under common law employers and employees have basic obligations in any employment relationship. Employer obligations= providing work, payment of income and expenses, meeting requirements of industrial relations legislation and duty of care. Employee obligations= obey lawful and reasonable commands by the employer, use care and skill in the performance of their work activities and act in good faith. Minimum employment standards The standards cover basic rates of pay and casual loading, maximum ordinary hours of work, annual leave, personal leave and parental leave. The employment standards are implemented to provide safety for employees. Minimum wage rates The employees’ base rate of pay is determined by: - The award or agreement that overs the employee - The national wage minimum. Awards Awards are legally binding documents containing minimum terms and conditions of employment in addition to any legislated minimum terms for an industry or occupation. They may include minimum wages, penalty rates, types of employment, flexible working arrangements, hours of work, rest breaks, classifications, allowances, leave and leave loading, superannuation, redundancy entitlements and procedures for consultation. They are established through negotiations between employers and associations. Enterprise agreements Enterprise agreements are collective arrangements made at workplace level between an employer and a group of employees about terms and conditions of employment. Other employment contracts As the nature of work changes, greater variety is occurring in the types and features of employment contracts available. Individual common law employment contracts= exist when an employer and an individual employee negotiate a contract covering pay and conditions. Independent contracts= known as consultants, undertake work for others; however, they do not have the same legal status as an employee. Contracts for casual work= receive no holiday or sick leave entitlements. Occupational health and safety WHS legislation is the process of being made uniform around Australia to improve business productivity. Employers must provide a safe system of work, ensure employees are trained and supervised in their work. Workers compensation Provides a range of benefits to an employee suffering from an injury or disease sustained by their work. Anti-discrimination Involves reducing harassment and vilification. All employers must implement anti-discrimination legislation to avoid large fines, legal orders and damages, and loss of reputation. Equal employment opportunity Refers to equitable policies and practices in recruitment, selection, training and promotion to eliminate direct and indirect discrimination. Economic Economic factors impact on the demand for labour and the pressure of wage growth. It involves the economic cycle, inflation and globalisation. Globalisation has increased competitive pressures on businesses with many increasingly recruiting or outsourcing functions offshore. Technological Changes in technology require employees to be trained in new technology. It can lead to: increased levels of productivity, lower costs and improved profitability. It can however lead to job losses and employees can lead to feeling less valued. Social- changing work patterns, living standards Today there are more multicultural workplaces and more working women. Many employees also want to achieve a balance between work and family. Changing work patterns The workforce is increasingly more flexible in working arrangements, with a recent dramatic increase in part-time and casual work. Living standards Australia’s high living standards include: WH&S, regular wage increases, performance bonuses, fringe benefits and leave and superannuation benefits. There is pressure from global competition and conflict for desire of high living standards and work-life balance. Ethics and corporate social responsibility Ethical business practices are those practices that are socially responsible, morally right, honourable and fair. CSR is the commitment by companies to behave ethically and to contribute to economic development, while improving the quality of life of the workforce and their families, as well as the local community and society at large. Processes of human resource management Employment Relations: the function that deals specifically with the relationships between the employer and the employees of the business. The role of employment relations is to provide the business with the workforce it requires. They also aim to find, attract, develop and motivate the people who can provide services the business requires. The human resource cycle involves acquisition, development, maintenance and separation of employees. It involves acquiring people with skills for the job and the continued development of employees’ knowledge and capabilities. The cycle also involves providing incentives for effective, reliable employees to remain motivated and to stay within the business. Acquisition Acquisition is the obtaining of employees. It requires the manager responsible for employment relations to make decisions about and take action on planning the organisations human resources needs, recruiting staff and selecting staff. Acquisition involves analysing the internal environment (business’s goals and culture, focus on cost containment, growth, downsizing, improved customer service or quality) and the external environment (economic condition, competition, technology, and the legal, political and social factors). Recruitment: the process of locating and attracting the right quantity of staff to apply for employment vacancies or anticipated vacancies at the right cost. Selection: involves gathering information about each applicant and using that information to choose the most appropriate applicant. Placement: involves locating the employee in a position that best utilises the skills of the individual to meet the needs of the business. Development Development is concerned with improving employee’s skills and knowledge to improve performance and productivity. It involves induction, training, organisational development, mentoring and coaching, and performance appraisals. Induction: Gives employees a positive attitude to the job and the business Builds a new employee’s confidence in the job Stresses the major safety policies and procedures, and explains their application Helps establish good working relationships with co-workers and supervisors Training: The aim of training is to seek a long-term change in employees’ skills, knowledge, attitudes and behaviour on order to improve work performance in the business. It is essential in overcoming business weaknesses, building on strengths and maintaining staff commitment. It involves educating an employee in the skills and processes of the job they currently have. Organisational development: Businesses are using flatter structures to improve efficiency and competiveness by creating more opportunities for employees to innovate and participate in solving business problems. Strategies to help motivate and retain talented staff include: job enlargement, job rotation, job enrichment, job sharing, self-managing teams and mentoring and coaching. Mentoring and coaching: Used to motivate and develop staff with leadership potential. Mentoring= mutually agreed role, focused on building a personal relationship that encompasses the life experience of both parties Coaching= focused on improving skills and performance and on helping individuals manage specific work roles more effectively. Performance appraisals: Is a systematic process of accessing the performance of en employee, generally against a set of criteria or standards. Is used to evaluate employee performance, and identify areas for mentoring, coaching, leadership development or performance management to enable the employee to contribute most effectively to a business’s success. Maintenance Maintenance is concerned with building a long-term relationship with the employee and focuses on the processes needed to retain staff and manage their wellbeing at work. Communication and workplace culture: Effective workplace relations depend heavily on the strength of a business’s communications systems. Poor communication is often reflected in workplace conflict and high turnover rates. Strategies to improve communication and workplace culture involve: changing the layout of offices to increase communication, being interactive and walking around, and implementing various team building activities. Employee participation: Businesses encourage employee participation to improve communication, empower employees and develop their commitment to improving quality and efficiency. Regular team meeting/briefings to discuss customer feedback, company trends and issues helps to build a sense of shared purpose and company identity. Benefits: Benefits may be monetary (money) in value or non-monetary. Typical benefits include: flexible working arrangements, paid training opportunities, travel allowances, health insurance, subsidised gym memberships, housing and company car. Employers are responding to employees’ desires for a work-life balance with more flexible working arrangements. Legal compliance and corporate social responsibility: Anti-discrimination Equal Employment Opportunities Work, Health and Safety  Taxation Social justice legislation Bullying and sexual harassment Separation Separation is the ending of an employment relationship and can be either voluntary or involuntary. Voluntary separation may take the form of resignation, relocation, voluntary redundancy or retirement. Involuntary separation may take the form of contract expiry, retrenchment or dismissal. Dismissal: Occurs when the employer terminates an employee’s employment contract due to unacceptable conduct or behaviour of the employee. It can also be based on poor performance or redundancy due to organisational restructuring, a downturn in business or technological change. Unfair Dismissal: Unfair dismissal occurs when an employee is dismissed by their employer and they believe that action is harsh, unreasonable or unjust. Strategies in human resource management Leadership styles Authoritarian: Long chain of command Managers lead Employees cannot contribute to the decision-making process Decisions made quickly Participative/Democratic: Involves employees in the decision-making process Encourages employees to become empowered Delegative: Allows the employees to make decisions Employers trust employees to make the right decisions Job design- general or specific tasks General or Specific Tasks: Job Design: the process of developing the content of the job and how it will interact with other jobs and employees, so as to motivate and retain employees and to achieve the business objectives. Several methods used to design for better jobs: Job enrichment- employees are provided with challenging tasks, responsibility, autonomy and decision-making power. Job rotation- employees move around to perform a number of varied tasks during a day or week- reduces boredom Job enlargement- employees are given additional tasks to increase the variety and challenge involved in a position. Semi-autonomous work groups-increases skills and team work Cross functional, team based matrix structures Flexible work structures Recruitment- internal or external, general or specific skills Recruitment: the process of locating and attracting the right quantity and quality of staff to apply for employment vacancies or anticipated vacancies at the right cost. Internal or External Recruitment: Internal: involves filling job vacancies with people from within the business. Advantages- incentive for staff to improve their performance, promotions seen as a reward for hard work, cheaper than external Disadvantages- staff overlooked may lose motivation, can reinforce negative culture External: involved filling job vacancies with people from outside the business. Advantages- wider applicant pool, business is encouraging new ideas, more diversity in employment, get specific skills needed Disadvantages- risk of unknown staff, may take time to settle in, takes a lot of effort and time General or Specific Skills: Can be recruited for general or specific skills. General= attitudes and behaviours that are a good cultural fit for the business, job customised to suit individual, flexibility, social confidence, positive attitude, motivation, ability to work as a team, etc. Specific= recruiting overseas or outsourcing, employee poaching (the practice of enticing employees to work for another business) is commonly used. Training and development- current or future skills Current or Future Skills: - The means by which a business is able to provide its employees with an avenue to develop and enhance their knowledge, skills and understanding of various activities related to the operations of a business. - Training aims to develop skills, knowledge and attitudes that lead to superior work performance.  - Development is focused on enhancing the skills of the employee in line with the changing and future needs of the business. - Businesses need to consider the mix of skills they can develop internally and those for which they need to recruit. Performance management- developmental or administrative Performance Management: a systematic process of evaluating and managing employee performance in order to achieve the best outcomes for a business. Objectives: Evaluate an individual’s performance Use that information to develop the individual Benefits: The employee has an improved understanding of their role and what needs to be done. The employer is able to identify and problems Allows the employee to be aware of their personal goals Developmental: Focused on using data to develop the individual skills and abilities of employees, so they improve their effectiveness in their role, overcome weaknesses and are prepared for promotion. Year round periodic feedback and shared discussion that is both emphatic and goal focused Administrative: Provides information often following an annual appraisal, which can be used by management for planning in human resource functions such as training, development, rewards, pay levels, benefits and performance improvements. Focus on collecting data to manage human resource management function more efficiently. Rewards- monetary and non-monetary, individual or group, performance pay Rewards motivate all employees to work to their potential and cooperate with each other to achieve the goals of the business. Monetary or non-monetary: Monetary: those reflected in pay or having financial value. Non-monetary: those that do not have a financial value, e.g. social activities, retirement planning Intrinsic: those that the individual derives from the task or job itself, e.g. sense of achievement Extrinsic: those given or provided outside the job itself. Individual or group: Individual rewards can lead to conflict and rivalry High quality work is achieved by an individual with the reliance on other and other systems therefore the induction of group awards A fair rewards system can encourage a greater sense of team work Employees can become more motivated Performance pay: The process of linking part of an employee’s income to their performance at work This concept recognises that employee motivation comes from financial benefits Advantages= performance may improve, it encourages unmotivated staff and inefficient individuals Disadvantages= the performance of employees may be difficult to measure for some jobs, some employees may seek non-financial rewards. Global- costs, skills, supply Costs, Skills, Supply: More companies are entering international markets by exporting their products overseas Access to a cheaper workforce that possesses the required skills will be a key consideration for a business The ability of labour to learn new skills will be affected by the country’s education system. Polycentric Staffing Approach: - Uses host-country staffing with parent-country staff in corporate management at its headquarters. - Helps the company access good market knowledge - Often cost effective - Satisfies local pressure for employment opportunities - May limit management experience for host-country staff Geocentric Staffing Approach: - Uses the staff with the most appropriate skills for a particular role and location - Builds a pool of managers with global experience - Can be complex and expensive- local employment regulations, relocation and retraining costs. Ethnocentric Staffing Approach: - Uses parent-country staff in its business - May limit ability to interact with customers and learn from overseas markets Workplace disputes -resolution- negotiation, mediation, grievance procedures, involvement of courts and tribunals Disputes: conflicts, disagreements or dissatisfaction between individuals and/or groups. Industrial Dispute: a disagreement over an issue or group of issues between an employer and its employees which results in employees ceasing work. Resolution of Disputes: Negotiation- a method of resolving disputes when discussions between the parties result in a compromise and a formal or informal agreement Mediation- the confidential discussion of issues in a non-threatening environment, in the presence of an objective third party. Grievance Procedures- formal procedures generally written into an award or agreement that state agreed processes to resolve disputes in the workplace. Involvement of Cou