cfe higher business management class notes · pdf file03.11.2015 · alness high...

Marketing & Operations

CfE Higher Business Management

Class Notes

Alness High School CfE Higher Business Management 2

Contents

Physical Distribution Decisions...................................................................................................... 32 Factors affecting Distribution ........................................................................................................ 33 Retailers ......................................................................................................................................... 35 Wholesalers ................................................................................................................................... 37

Wholesalers ............................................................................................................................... 37 Direct Selling .................................................................................................................................. 38 Promotion...................................................................................................................................... 39 Methods of Advertising: ................................................................................................................ 42 Controls on Advertising ................................................................................................................. 44 Sales Promotion ............................................................................................................................ 44 Public Relations ............................................................................................................................. 46 The Extended Marketing Mix ........................................................................................................ 47 Ethical Practices ............................................................................................................................. 47 Technology in Marketing ............................................................................................................... 48 The Role and Importance of Operations in Organisations............................................................ 49 Stock Control ................................................................................................................................. 51

Deciding on the quantities of stock held ................................................................................... 51 The Kanban system .................................................................................................................... 54

Distribution and Delivery .............................................................................................................. 56 Warehousing .............................................................................................................................. 56

Transport and Delivery .................................................................................................................. 57 Scheduling .................................................................................................................................. 57

Production Systems ....................................................................................................................... 58 Production systems in manufacturing .......................................................................................... 59 Types of Operation ........................................................................................................................ 61 Labour-intensive v Capital-intensive Production .......................................................................... 64 Factors affecting Quality ............................................................................................................... 65

Quality assurance ...................................................................................................................... 65 Quality control v Quality assurance .......................................................................................... 65 Quality Standards ...................................................................................................................... 66 Quality Management (QM) ....................................................................................................... 67 Introducing and implementing quality assurance or QM systems ........................................... 69 Benchmarking ............................................................................................................................ 70

Payment Systems .......................................................................................................................... 72 Environmental Responsibility ........................................................................................................ 75 Ethical Operations ......................................................................................................................... 77 Technology .................................................................................................................................... 78


The Role of Marketing

What is a market?

A market can be defined as a meeting place for buyers (consumers) and sellers. Markets can be set up in a shop, restaurant, over the telephone/ internet, at a car boot sale, etc.

A market consists of the individuals or organisations who are actual or potential buyers of a product or service. Markets may be classified as consumer markets or industrial markets.

Consumer markets are made up of individuals who purchase goods or services for personal or domestic use. They make most of their purchases from retailers and buy a combination of consumable goods, such as food and durable goods such as cars, televisions, and clothes. Consumable goods are bought more frequently than durable goods.

Industrial markets are made up of organisations that purchase goods or services to use in the production of other goods and services. They buy a combination of consumable goods, such as raw materials and longer-lasting durable goods, such as machinery and equipment.

What is marketing?

Marketing Manager Required

Here is your chance to influence the spending habits of a discerning sector of the population and manage a world-famous cosmetics company. Reporting to Senior Management, you will develop and implement a marketing strategy for a range of brands. You will have responsibility for market research, promotion and advertising, direct mail activity and preparation of publicity material. Additional responsibility will be for new product development and branding in order to expand our market base.

The marketing activities contained in the above job advertisement are italicised in the text.

The Chartered Institute of Marketing defines marketing as ‘the process involved in identifying, anticipating and satisfying consumer requirements profitably’.

The role and importance of marketing in organisations

• Identify

• Anticipate

• Satisfy


1 To identify consumers’ requirements

Businesses must identify what exactly a consumer wants from a product or service. There is little point in providing something that does not meet consumers’ requirements – they simply will not buy it. Marketing departments aim to ensure that consumers buy products or services and that they continue to do so (that is, make repeat purchases).

Firm’s today face a lot of competition and consumers’ expectations are increasing and becoming more sophisticated. Requirements change frequently and the marketing department must make sure the product or service is developed or altered to meet these requirements. The role of marketing is, therefore, an increasingly important one in today’s business world.

Price and quality have always been important factors in whether or not a consumer will buy, but so too have prompt delivery, attractive packaging and after-sales service. Advertising and promotion play a big part in influencing consumers to buy.

2 To anticipate consumers’ requirements

The role of the marketing department is to find out what consumers want today and will want in the future. Consumer trends must be considered in order to anticipate future needs. This is especially important in markets where trends and fashions change rapidly (e.g. clothing, toys), or where technological changes occur frequently (e.g. computers). It may be necessary to develop new products quickly to stay ahead of competitors.

3 To satisfy consumers’ requirements

The consumer is the most important consideration for most businesses today – businesses are often said to be ‘consumer (or customer) focused’. Without consumers the business would fail. Good service and quality products that offer value for money are essential.

Prompt delivery and good after-sales service are also important, as are well presented and packaged goods. It is vital that the product is available at the right price and at the right time.

These three aims, for the majority of businesses, must be achieved profitably. There is little point in spending large amounts of money on marketing if costs are greater than revenue. However, organisations do exist where profitability is not an objective. Schools, hospitals and charities also use marketing techniques in order to become more effective in satisfying consumers’ requirements.

Market Share

The share of the whole market (sales/customers) that one organisation has.

Market Growth

When the amount of sales and customers within a market increases.


Market Segmentation

The Consumer

Why do consumers purchase one product over another similar product? For example, what makes people purchase iPhones, Samsung or Blackberry. Organisations target different products to different consumers, which can be referred to as market segments.

Some of these segments include:

age

gender

disposable income – how much the consumer has available to spend

marital status

taste/fashion

Social class (see table below) – particular jobs tend to have certain life-styles attached. By dividing the market by job classification, appropriate products and services can be targeted towards particular groups.

Socio-economic group

Social ‘class’ Most likely types of occupation

Examples

A upper or upper middle

managerial/professional surgeon/director/lawyers

B middle intermediate managerial/ professional

bank manager/ teachers/nurses

C1 lower middle supervisory/clerical bank clerk/shop assistants

C2 skilled working skilled manual joiner/cooks

D working semi-skilled driver/fitters

E poorest in society

low paid casual worker/state pensioner/long-term unemployed

This classification was updated in 1998 to reflect more accurately the employment conditions such as job security and career prospects. The government table below differs from the ABC classification used by market researchers, which concentrates on income differentials.


Socio-economic group

Description Examples

1 Higher managerial and professional occupations

1.1 employers and managers in large organisations

1.2 higher professionals

1.1 Company director; corporate manager

1.2 Doctor, lawyer

2 Lower managerial and professional occupations

Nurse, journalist, police

3 Intermediate occupations Clerk, secretary, computer operator

4 Small employers and own account workers

Farmer, taxi driver, window cleaner

5 Lower supervisory, craft and related occupations

Plumber, TV engineer, train driver

6 Semi routine occupations Shop assistant, traffic warden, bus driver

7 Routine occupations Waiter, road sweeper, cleaner

8 Never worked/long term unemployed

Why is market segmentation important?

Organisations can better meet the needs of the customers in a specific segment.

Better opportunities for growth – Customers may be encouraged to “trade up” after being introduced to a product at a lower price.

Profits can be increased – By segmenting the market; organisations can sell certain products for higher prices which will increase profits.

Customers can be retained – By marketing products to customers at different ages; organisations may be able to retain customers who may have otherwise moved to competitors.

Marketing activity can be specific to the market segment


Target Marketing

What is target marketing?

This is when the market is broken down into submarkets. For example, magazine publishers such as Conde Nast target specific magazines at different groups of customers – segments.

What segments do you think the above magazines would be marketed to?


Why is target marketing important to a business?

A business can ensure that it:

Provides a product that meets the needs/wants of the consumers

Sells its product in the right place

Sells its product at the right price for the consumers in that segment

Provides appropriate promotions to the group of consumer

Differentiated marketing involves providing different products and services for particular market segments.

Undifferentiated marketing involves aiming products and services at the population as a whole without producing different products for different market segments.

Market-led or Product-led

A business can be market-led or product-led in its approach to marketing. In other words, it might have a market orientation or product orientation.

Product-led (product orientated)

These assume that the product or service being offered is the best on the market and will be very easy to sell. It is felt that there is no need for product change or development as there is no real competition. The organisation conducts little or no market research as the needs and wants of the consumer are not of importance.

This might be the case with a new invention or a highly technical unique product, or even when a very strong advertising campaign can convince a consumer to purchase the product. There is likely to be little or no competition. .

In today’s competitive business world, this approach may be seen as complacent. Organisations operating like this may fail once competitors do enter the market.

Product orientation was predominant in the UK in the 1930s and 1940s when there was less competition, and customers’ expectations were not so sophisticated. Consumers did not have such a large disposable income and their knowledge of products was more limited. Pressure from the media was considerably less.

Market-led

A business which is market-led constantly modifies their products or services in response to changes in the market. They will make an effort to find out what customers want and what influences their purchasing decisions. These organisations realise that their profits and/or success depend on meeting the need of the customer.

These businesses find out what the customer wants through market research. If the business identifies social factors (e.g. trends and fashions) they can be acted upon more easily and modifications can be made to ensure the needs and wants of the consumer continue to be met.

During the 1980s and 1990s, customers became increasingly aware of what is available on the market and the amount of competition had greatly increased. This has led to the customer being seen as the main focus of an organisation’s activities.


Consumers

Consumer Behaviour

Businesses are interested in the behavior of consumers as this helps them make decisions about their products and/or services and how it will be marketed. Studying consumer behavior allows them to attempt to answer several questions.

Question Comments

Why do they buy what they do?

Some products might be bought for status, e.g. designer clothing might be bought as a result of peer pressure or as a status symbol.

What motivates them to buy?

What factors trigger people to want to buy something? Is the purchase necessary or is another factor responsible for making someone want to buy?

What influences buying decisions?

What pressures or stimuli influence where, when and how people buy? Has advertising had an influence, or a point of sale display? Does the store layout have an impact? Does culture have an influence?

What customer buys the product?

Which market segment does the product appeal to?

Where do they choose to buy? why?

Where do they choose to buy the product? Is it online or in a shop? Why? What factors have resulted in this choice, e.g. convenience?

What do they look for when buying?

What criteria have to be satisfied when buying something? What questions have been asked?

Customer behavior is about trying to answer the ‘why’, ‘what’, ‘how’ and ‘where’ questions. It is important to be able to answer these to develop a successful marketing strategy. Consumers have different types of buying behavior depending on what they are buying.

Impulse purchases Buying something without thinking, often in the spur of the moment. It might be because something has influence the customer to buy (e.g. a promotion).

Routine purchases Buying something because it is habit, e.g. going to buy a loaf of bread. These types of purchases will happen without much thought.

Limited decision making purchases

Buying something that requires some thought before a decision is made. For example, thinking about whether or not a piece of clothing is appropriate for a certain purpose.

Extensive decision making purchases

Buying something that requires a high degree of thought before a decision is made. For example, buying a new car or a house. These types of purchases might not be made very often.

Electronic point of sale (EPOS) can gather information about consumer behavior that the organisation can attempt to analyse and then understand. When people make purchases in a


supermarket or shop, the EPOS system is collecting data about them and their buying habits. Promotions, offers and mail shots can then be designed specifically for them.

Market Research

Market research provides organisations with information about what consumers want and need and reasons why they make purchases.

Market research helps to identify:

How consumers feel about products currently on the market

Why consumers purchase certain products

How consumers feel about new products

What consumers want – this will help in the development of new products

Information about the organisations competitors

Why is market research so important?

Indicates the size of the market and potential growth of the market

Provides information about where the best place would be for selling the product

Helps organisations find out why some products are more successful than others, and how to make their product more successful

Help organizations avoid costly mistakes – for example, making products that people don’t wish to buy

Gives organizations ideas about how to promote or advertise their products

Takes some of the risk out of launching new products or redesigning products as organizations are making decisions based on information that they collect and can rely on

Allows organizations to decide on the target market – i.e. the particular segment of consumers a firm wishes to sell to.


Methods of Market Research

There are two basic types of market research:

Primary Research

This is information collected by the organization itself or by a paid market research agency.

Secondary Research

This is information already collected for another purpose, e.g. government statistics.

Each type of market research has its own methods. When deciding on the most suitable method of research the following must be considered:

cost

time available

Alternatives

Primary data

Primary data is gathered by field research. Field Research is:

gathered by observation or asking people questions

up-to-date

collected for the exact purpose required by the organisation

not easily available to competitors

expensive to gather

Secondary data

Secondary data is obtained by desk research i.e. by reading through documents containing data collected for a different purpose and probably by someone else. It may therefore have to be adapted for an organisation’s own purposes. Sometimes it may be insufficient on its own. However, it is much cheaper to collect than primary data.

Sources of secondary information can be split into internal and external.

Secondary data (information from a published source) is used in this type of market research. This type of data is available internally and externally to the organisation:

Kinross High School CfE Higher Business Management 12

Examples Advantages Disadvantages In

tern

al In

form

atio

n

Sales Records

Financial Information

If accurate records have been kept for several years, the amount of information is plentiful.

By looking at past performance, targets can be set.

Easy to access.

There may be significant costs involved in setting up such records, in terms of the cost of software and training staff in using it.

New organisations may not have access to a lot of internal information.

Records are required to be updated regularly.

Exte

rnal

Info

rmat

ion

Newspapers e.g. The Financial Times

Government Statistics

Trade Magazines e.g. Drapers

Journals

Online Databases

Market Research Reports e.g. Mintel

Can provide very useful information on PESTEC factors.

Easy to access.

Cheap to obtain.

Time consuming to gather.

May be out of date.

Information could potentially be biased or unreliable.

Competitors also have access to this information.


Field research

Carried out “in the field” i.e. the researcher goes out and actively obtains the information. Types of field research include:

Description Advantages Disadvantages

Surveys/Questionnaires (including telephone and postal surveys)

Involves specific questions being asked to respondents.

Can be inexpensive - doesn’t require a trained interviewer for phone surveys.

Response for telephone survey is immediate.

A large number of people can be surveyed.

Many people do not like telephone surveys – respondents can be quite hostile.

Questions must be simple and easy to answer.

Response rate of postal surveys may be low therefore respondents may require an incentive i.e. entry into a prize draw for their participation.

Test Marketing Launching a product in one region. The product will be launched to the whole country if the result of the test market is positive.

Customers can indicate areas about the product that they dislike.

If the product fails in the test area, the expense of a national launch is saved.

Customers in the test area may have tastes that are only specific to that area and are not a representation of the whole country.

Personal Interviews Face-to-face interviews which can be held in the street or at the respondent’s home.

Allows for 2-way communication -the researcher can prompt the respondent to answer.

Misunderstandings can be quickly cleared up.

Researchers have to be selected and trained which can be costly.

Home interviews can be unpopular with respondents.

Focus Groups Customers are specially selected to take part in discussions on products. Focus groups are often led by a chairperson who will put forward points for discussion.

Qualitative information can be gained. Qualitative information can be difficult to analyse.


Hall Test Customers are invited to test / look at products and give their opinions.

Qualitative information can be gained. Qualitative information can be difficult to analyse.

Results may be inaccurate as respondents feel obliged to be positive about the product.

EPOS (Electronic point of sale)

Used by retailers when bank cards are used for payment.

Information about the buying habits of the customer can be recorded.

Can give an accurate customer profile.

Retailers can offer promotions that meet the customer’s needs.

Quantitative information gathered and easier to analysis

Large quantities of factual information can be gathered

Can be expensive to set up this system.

No opportunity to gain customer opinion

Consumer Audit Used by large organisations to carry out continuous research to monitor for example the buying habits of customers, influence of advertising

Accurate information can be gained if diaries kept properly.

Information can indicate customer trends as they are completed over a period of time.

Expensive methods to use as participants receive payment.

High turnover of respondents as completing diaries can be seen as a nuisance.

Diaries may be inaccurate or incomplete.

Observations The collection of data through non-verbal means which can stand alone as research on its own or compliment other relevant research. It is the process of recognizing and recording relevant objects and happenings.

Provides accurate quantitative information. Cannot ask questions that explain customer’s actions as there is no direct contact.

Social networking Companies can conduct research via social networking pages

Two way interaction can occur

Large audience can be reached

Questions can be posed quickly

Not all customers may want to join the social networking site

Information not usually private and can be viewed by anyone.


Sampling

When conducting research it is often not possible to question every potential respondent. A sample of respondents has to be selected. They can be selected by various of means:

Random sampling

Random sampling involves producing a random list of individuals to survey. Those picked for inclusion in the sample could be generated randomly, using a computer and the telephone directory or the electoral register. A large sample is required if the sample is to be representative of the whole population.

Advantages

No chance of bias being introduced when selecting individuals for the sample and it is simple to do.

Disadvantages

It may not be focused on any particular market segment.

It assumes that all members of the group are the same, which is not always the case.

The random sample must be maintained – if someone is chosen for the sample then they must be interviewed this can be expensive.

Stratified random sampling

This makes a random group more representative of the population as a whole. The sample is divided up into segments based on how the population is divided up. For example, if the researcher knows that 10% of the population are on socio-economic group AB, 50% in C and 40% in DE, he/she will ensure that 10% of the sample are selected for the AB group, 50% from the C group and 40% of respondents form the DE group.

Quota sampling

The researcher is given instructions as to the number of people to interview and their characteristics (e.g. age, gender, material status and income groups.)

Advantages

It is cheaper to operate than random sampling.

Statistics showing the proportions of different groups within the population are readily available.

Interviewers can substitute someone else in the interviewee is not at home at the time of the visit or phone call.

Disadvantages

Results from quota sampling can be less representative than using the random sampling method.


Desk Research methods

Desk research involves looking at different types of secondary information. Some of this information might be available electronically though, for example, the internet. There are different types of information that might be analysed;

Written – information that is presented as text, e.g. reports, text messages, e-mails, written text on web pages.

Oral – information that is spoken and heard by someone else, e.g. in a meeting or on the telephone or from a TV programme.

Pictorial – information presented through photographs or pictures in reports, newspapers or websites.

Graphical – information presented through a graph or chart.

Numerical – information presented through numbers, e.g. sales figures on websites of companies.

Information might be quantitative in that it is factual and can be measured or counted, or it might be qualitative, in that it is based on the opinion of someone.

Advantages Disadvantages

Written Can be kept for future reference

Facts can be passed on more accurately compared to oral information.

May be unable to obtain clarification.

Requires a degree of literacy skills.

Oral Instant response is given.

Questions can be asked immediately.

Body language can be monitored.

Points might be misinterpreted.

Requires careful listening skills.

Pictorial Information is presented attractively.

Significant points can be highlighted and/or emphasised.

Complex information cannot be communicated.

Factual information cannot be communicated as easily as in written information.

Graphical Comparisons can be made easily.

Complex information can be presented clearly.

Requires numeracy skills to create graphs.

The user needs to be able to interpret graphical information.

Numerical Financial information can be analysed.

Calculations can be carried out.

Requires numeracy skills to handle and interpret numerical information.


The Marketing Mix

For marketing to be successful, an organisation has to combine all the marketing activities to create a combination of benefits considered to be the most suitable to meet the needs of a selected market. These factors can be split into the four Ps:

Product – the goods/service the customer is purchasing

Price – the amount paid by the customer for the good/ service

Place – Where the customer purchases the product

Promotion – the way in which a customer is made aware of a product/service and is encourage to buy it

Each of these factors has as influence on attracting the customer to the product. Each can be varied to suit the needs of the consumer, e.g. place needs to be considered when setting the price of a product – expensive meals can be sold in up-market type restaurants but not in a local cafe.

Organisations are now closely focused on their customers; the extended marketing mix is commonly being used and is made up of 7 Ps. The extended marketing mix consists of the basic marketing mix with an additional 3 Ps:

Process – the different processes and systems used to deliver the service being provided.

People – those involved in providing the service to customers, e.g. staff.

Physical evidence – the location of where the service is being offered and what it looks like, e.g. store layout and design.

Product

The product must meet the needs of the customer and benefit the customer. The product may be a good or a service and ‘product’ includes the packaging, image, guarantee and after sales service. Several competing organisations may sell versions of the same product; however these can vary greatly in terms of quality, style, packaging and price.

Product Research & Development (R&D)

This is the technical research that is carried out with a view to provide a new product or improve a current product. It is not only technological organisations that put their ideas through research and development, but also organisations providing everyday consumer goods such as Gillete who spend a significant sum of money on a yearly basis to develop a more effective shaver. For most organisations, around 5% of their revenue will be spent on research and development.

Product research and development and market research are closely linked as product researchers use the information gained from market research to help them to develop and design products/services. In the latter stages of research and development, prototypes may be produced which can be tested and may be launched in a small geographical area prior to being launched nationwide.


Core, actual and augmented product

Core

This is the basic product or service – this means by which a business provides benefits for its customers. For example the basic function of shampoo is to clean hair.

Actual

The vast majority of products, however, are not purchased to meet a single need; the ownership and use of a product involve a whole range of factors that make up a product concept.

This is the actual product. As its name suggests, it is the product that the business provides for sale. Each actual product will have a number of characteristics including design, brand name, particular features and distinctive packaging.

Augmented

Firms realise that in order to gain a competitive edge they must add to the attractiveness of their product. This can be done by offering additional features, improving aftersales service, reducing delivery times, offering 0% credit terms, extending guarantees, improving style, colour, packaging and quality. Use of a brand name quite often enhances the product image to the consumer.


Branding

"A method of attaching a 'persona' to a product based on an established make."

Brands are products or ranges of products which have a unique and easily recognisable character. It may be a word or symbol that is registered, so can only be used on products produced by the organization. The brand can relate to the company as a whole, or individual products. Such products are marketed so that they are instantly recognisable to the consumer, and are made out to be of better quality than other similar products. Customers will generally have to pay more for a branded item, which can be partly due to the high packaging and advertising costs.

A brand name has such an influence on purchasing decisions that brand names themselves are sold for considerable sums of money. Nestle paid £2.3 Billion for Rowntree Mackintosh when it was valued at £1 Billion. This purchase enabled Nestle to gain the names Kit Kat, Polo and Smarties.

Advantages of Branding Disadvantages of Branding

Money can be saved on marketing as the customer is already aware of the brand.

Brands (in particular clothing and accessories) can be copied or faked, which can be difficult for the organisation to fight.

Higher prices can be charged for brands. In order to remain in the mind’s eye of the customer, brands can require high levels of research and development and advertising.

Customers can become loyal to the brand. Poor brands can affect the whole range that is produced by the manufacturer.

Brand Loyalty

Some consumers are faithful to one particular product. A marketing department must make sure that consumers believe the product to be better than all of its competitors. It is difficult to persuade brand loyal customers to switch products. A branded product may also command a higher price, but despite this brand loyal customers are reluctant to change.

Manufacturers are able to launch new products much more easily If they use an existing brand name. Consumers believe that the new product will meet the same standards as the products they already know and like to buy.


Unique Selling Point

This is a feature that allows a product to stand out from its rivals. It should offer the consumer some unique benefit that may motivate them to switch from the brand they normally purchase. For example, the USP of Dyson was that it was the first bagless vacuum cleaner.

Own brand

We see and interact with own brands in everyday life. These are goods/services that are branded under the name of the retailer. For example, Tesco Finest, Tesco Value, George at ASDA.

Retailers do not normally manufacturer their own brands. For example, McVities manufacture biscuits for Marks & Spencer, who specify that their biscuits be cut from the middle of the batch to ensure they are fresher. Marks & Spencer also manufacture Sainsbury’s own brand pizza. Own brand products are generally of a similar quality to well-known brands, with similar packaging however can be much cheaper than branded goods.

Log on to the Tesco Direct website and compare the price of own brand goods to well-known branded goods.

Compare the following products:

Coca Cola Baked Beans Shampoo A4 Notebook

Generic goods

For example, light bulbs and matches. Very little marketing is carried out by companies who sell generic goods as they are seen by consumers to have no differences between them.

Packaging

Packaging provides:

Protection during transport

Customer appeal

Easy access to the product.

In addition, packaging will also have legally required information printed on it such as ingredients and weight. This is a requirement under laws such as the Trade Descriptions Act and the European Union rules on food additives.


The Product Life-cycle

The product life-cycle shows the different stages a product will pass through in its lifetime and the level of sales that can be expected at each stage.

Stage Description

Development Costs in developing the product may be very high.

There are no sales and therefore no profit.

Introduction

The product is launched onto the market.

Customers become aware of the product.

Stockholding costs, advertising and promotion costs may be significant.

Innovative products will have little competition and can therefore charge a high price.

Sales are low and profit is also low.

Growth

Sales rise quickly and at this stage the product begins to become profitable.

More customers are aware of the product.

Competitors may launch their own versions of the product. For example, Apple launched the iPad and Samsung and Blackberry followed soon after with their own versions.

Maturity

Product is fully established. It is the highest level of sales that the product will achieve without the business taking action. Sales reach their peak and may fall as competitors enter the market. Spending on advertising is much less as the product is established in the market. At this stage development costs have been repaid and the product will be at its most profitable. These profits can then be used in part to fund development of new products. The business will work to keep the product at this stage for as long as possible.

Saturation

Competition becomes fierce and price tumbles.

Consumers are interested in other products – tastes, fashions and technologies have changed.

Sales and profit start to fall.

Decline

At this point the product may be withdrawn from the market.

Sales and profit continue to fall, and the businesses new replacement products should be in the growth stage.


Some products do not reach the decline stage, for example IrnBru and Mars Bars. This is due to the organisation using Extension Strategies in order to keep consumers interested in the product.

Extension Strategies

These are the methods employed by businesses to prolong the life of their products and stop them going into the decline stage. The most successful extension strategies will actually lead to periods of sales growth.

Extension strategies may include the following:

Improving the product – new improved versions

Find new uses for the product – for example firelighters now used for barbecues rather than lighting gas heating.

Altering the packaging – to appeal to new consumers, Developing styling changes – slightly different produce e.g. colour, size

Changing the channel of distribution – for example introducing selling on the internet

Altering the price of the product

Using different promotional activities

Altering the use that customers will have for the product -

Rebranding the product – for example a name change Opal fruits to Starburst

Producing line extensions – for example Coca cola produce Diet Coke, Cherry Coke, and Coca Cola Vitamin C.


Product Line/ Diversified Product Portfolio

In practice, there are very few single product organisations. Most offer a range of products or a product line, which is a broad group of products intended for basically similar uses and with similar characteristics.

There is no need for a direct relationship between the items in an organisation’s product mix. In very large organisations a wide spread of product lines can be part of a deliberate strategic plan.

Each product will be at different stages in the product life cycle. This allows the business to reduce risk and spread it over a number of products because if they have only one product and that fails the business will fail.

It does not make sense for a business to wait until a product reaches the decline stage before launching a replacement product. If they did sales and profit would be lost so businesses plan the introduction of new products to replace existing ones before they become unprofitable. The range of products a business produces is known as its product portfolio.

Advantages

A wide range of products can allow the business to meet the needs of a variety of customers

Increase profits and profit levels remain steady

Makes business easier to manage

Profitable products can support the development of launch and new products

Raise profile of the business

Can lead to the company becoming market leaders

Risk spread amongst products. One product may fail but others may be selling well.

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Disadvantages

Products can be spread to wide

Business can lose focus on its key objectives

Product innovation

The development of new products is essential if businesses are to replace those that go into decline. There are a number of stages before a new product is developed:

Generation of idea from research (scientific or market) or brainstorming.

Analyse idea – will the customer buy it? Is it technically possible to produce? Is it cost effective? Are there any legal requirements?

Produce a prototype and test it;

Test market;

Adapt product, solving any problems found when test marketing;

Launch product.

There is, however, an extremely high failure rate – for every fifty new product ideas only one becomes successful. Organisations spend huge sums of money on product research and development over a long period of time.

A Boston Matrix (or Boston Box) is often used to plot the range of products that an organisation offers. It can help the organisation to identify where products might need to be introduced or changed.

An organisation will try to have as many ‘star’ products as possible and will focus its marketing activities to try and achieve this.

There as some advantages of having a varied product portfolio:

Costs of promoting and advertising lots of different products could be high and could result in less profit.


If one product receives a bad reputation or image this might impact on all the products being sold by the business.

Maintaining a varied product portfolio will involve a high cost of research and development.

Cost of purchasing and maintaining machinery for different types of products might be high.

Staff may require training on the features of different products which could be time-consuming and expensive.

Price

The Price is what the customer will pay the organisation in order to purchase the product/service.

Why is price important?

The organisation must ensure that it covers its costs (for example production, advertising) which will allow them to make a profit.

The customer will not purchase the product if they think the price is too high – particularly if a competitor stocks a similar product at a lower price.

Pricing Strategies

The price set will depend on several factors, which may include:

Competitors’ prices

The position of the product in the product life cycle

The cost of manufacture

The time of year

The target market for the product

Government pressure


Pricing Strategy Description Examples

Penetration Pricing

A price lower than that of competitors is set to tempt customers away from competitors.

Once the product becomes popular the price will be raised in line with competitors.

Justification: Encourages customers to buy the product. Once customers are attracted, the price can then be increased.

Chocolate bars, new brands of coffee/tea.

Destroyer Pricing

Prices are lowered in order to force competitors to lower their prices.

Weak competition will not be able to survive for a prolonged period of time and may be forced to leave the market.

Prices will then return to the normal level or even increase to a higher level.

Justification: This forces competitors out of the market so that the business can then charge higher prices at a later date.

Poundland

Promotional Pricing

Prices are reduced for a short period of time.

Consumer interest may increase during this period and stock levels may reduce quickly.

Justification: The product will be bought by customers because it is on special offer and they are getting a ‘deal’.

River Island Boxing day sale.

Premium Pricing

High prices are charged and maintained for a certain product/service.

Justification: The high price gives the product a unique and exclusive image. High profits can be made.

Louis Vuitton, Apple, Ferrari

Loss Leaders A range of products are advertised at a low, unprofitable price which will encourage customers to enter the store over

Scotmid


competitors’ stores.

Customers will often purchase other full priced products whilst in the store, so a profit will be made on the total purchases made.

Justification: Attracts customers to buy. This then encourages customers to buy other products that are priced normally. Profit is made on the total amount of purchase the customer makes.

Competitive Pricing

Organisations set similar prices for similar products.

This can help prevent a price war.

Organisations will compete on non-pricing factors such as promotions (Nectar Card), packaging and advertising instead.

Justification: Attracts customers and allows businesses to compete.

Petrol, CDs, DVDs

Price Discrimination Different prices are charged for the same product/service at different times of the day, month, or year.

BT home phone tariffs

Market Skimming

An initial high price is charged for the product.

As competition in the market increases, the price will fall to be in line with competitors.

Note: think about skimming a stone…it will not stay on the surface (top of the water/high price) for a long time.

Justification: A high price can be charged because little or no competition exists. A large profit can be made.

Video games, home entertainment electrical products i.e. Touch Screen TV’s.

Low price

A business may charge a lower price than competitors. Lower prices result in higher sales as consumers respond to low prices.

Justification: The product will be bought by customers because it is cheaper than competitors.

DVD’s, CD’s, Computer games charge low prices in different supermarkets


High Price

Used by businesses offering high-quality premium products. Can charge higher prices for well-known brands. If there is a lack of competition businesses can charge higher prices.

Justification: The product will be bought by customers because they think it is of a higher quality than competitors.

I-phone

Cost-Plus pricing

The cost of making the product is calculated before a percentage is added on for profit.

Justification: This strategy ensures that the cost of making the product is covered and that a profit is also made.

Psychological pricing

The price charged makes the customer think that the product is cheaper than it actually is, e.g. charging 99p rather than £1.00.

Justification: This method tricks people into thinking the product is cheaper than it actually is and attracts them to buy it. It attracts customers who buy on impulse.

Look at EasyJet’s website and The City of Edinburgh Councils school term dates. Compare the price difference on flights to Spain for term and non-term times. What pricing strategy is being used here?


Place

Where the product is sold and how it gets there. The nature of the product or service will determine where a firm decides to sell this is usually referred to as distribution.

Why is this factor important?

The customer needs to be able to access the product/service in order to make a purchase.

Factors Influencing the Location of a Business Premises

How far the location is from the customer

How far the location is from infrastructure such as roads and public transport

o Products and materials can be delivered to the organization easier

o Easy access for customers

The price of land or premises in the area

o The cost of land, premises and taxes in some areas may be very high whereas in other areas the costs could be significantly lower.

Compare the cost of a shop unit on Princes Street to one on Corstorphine Road.

Whether or not there are car parking facilities for employees and customers

The proximity to raw materials for example, fishing fleets are usually located on coastal areas where the best fish stocks can be found.

The availability of labour in the area

The cost of labour in the area

The level of competition in the area

o An organisation wouldn’t open a shop on a high street which already has 6 similar shops

The level of education in the area

Consider the above factors for the below organisations choosing a location for their businesses. Decide on a suitable area in Edinburgh for these organisations to open their businesses and justify this decision.

Tesco Express Cheynes Hairdressing Topshop Krispy Kreme


How Government Incentives in an Area Influence Location

Different authorities use incentives to encourage organisations to set up businesses in certain areas. This is done in order to increase the levels of business and enterprise, reduce unemployment in the area and ensure that derelict land is being put to use.

Scottish Government Assistance

New Enterprise Scholarships (NECs) for new entrepreneurs in disadvantaged areas (http://nesprogramme.org.uk/).

Regional Selective Assistance

A grant scheme which helps to create and safeguard jobs in Scotland. To qualify organisations must fulfil certain criteria, for example they should be located in areas of high unemployment.

Local Government Assistance

Local authorities are active in providing detailed information to organisations about applications for grants and other forms of financial aid

Providing detailed information to businesses about local available sites and premises

Providing grants for starting up businesses in their area

Providing grants for research and development

http://nesprogramme.org.uk/


Channel of Distribution

The channel of distribution is the route taken by a product as it passes from the producer to the consumer.

Before the Channel of Distribution is chosen, a variety of factors must be taken into account:

The product/service that is being sold

Any products of a highly technical nature would normally be sold directly from the manufacturer. On the other hand chocolate bars would be sold through a wholesaler initially.

How reliable the parties included in the Channel of Distribution are

Manufacturers may take distribution of the product into their own hands if the wholesaler or retailer is unreliable.

Government restrictions on certain items

Certain medicines must, by law, be sold through pharmacies.

The image of the product

For example, Gucci bags are sold in exclusive outlets. The image of the product would be damaged if they were sold in a wholesaler such as Makro.

The stage in the product life cycle

If the product is in the introductory stage, the product may be sold in a more exclusive outlet where a premium price can be charged. As the product moves through the product life cycle, it may be sold in less exclusive outlets to encourage more consumers to purchase.

The product may be sold through:

Producer Producer Producer

Customer Retailer

Customer Retailer Wholesale

r

Customer


For some products or services, e.g. holidays, agents may be involved in the distribution process. Agents provide a link between the buyer and the seller in exchange for commission. Agents are often used by organisations trying to enter a foreign market: a local agent will have knowledge about the laws of the country and its trading practices.

Brokers to provide a link between buyers and sellers in such markets as insurance and share dealing. They are also involved in international commodity markets such as coffee and metals.

Direct marketing (where there are no agents, brokers or middlemen) is becoming increasingly common in the insurance market and in computers, e.g. Direct Line, Dell Computers.

The organisation must decide which channel or channels provide the most effective means of getting the product from the factory to the consumer. The method selected may have an important influence on public perception of the product. A company making soup intended for a wide market would not choose to sell it through exclusive department stores, while an expensive and exclusive perfume would not normally be distributed through a supermarket chain. How best to distribute products is not an easy decision, and failure to choose the most appropriate channel will damage sales of the product.

Physical Distribution Decisions

The organisation must decide on the most cost-effective method of physically moving the product in order to match the perceived needs of its customers. In this respect, the distribution management will need to take into account the projected level of demand for each of the organisation’s products, and the geographical spread of that demand. Seasonal and other likely fluctuations will need to be anticipated. The optimum methods of stock control, warehousing and transportation will be considered and implemented.

Organisations need to consider the relative costs and speed of the different methods of transport available to them. The nature of the product will influence this decision, e.g. if the product is one that will deteriorate quickly, it may well be cost-effective to use air transport instead of road.

New products present particular problems. If they are unlike anything that is on the market, there are no immediate guides to their distribution either from past experience or from competitors’ methods. Products in the introductory stage of their life cycle are frequently distributed through specialist wholesalers and retailers. This helps to maintain greater control over the advertising and promotion that may be crucial to the initial success of the product and allow skimming pricing strategies to be implemented. During the growth and maturity stages, a greater number of intermediaries may be used in order to increase market penetration.


The four main methods of physical distribution are:

Method Advantages Disadvantages

Road Network Cheaper method

Delivery is quick

Product delivered direct to the customers door

24 hours a day

Difficult to transport large goods

Not the most environmentally friendly method

Roadwork’s can cause delays

Restricted by legislation that states number of hours drivers can drive

Rail (train) Large products and quantities can be transported

Not a train station in every location

Not a door to door store

Requires road haulage to final destination

Air Can be transported across the world more quickly than by sea

Large amounts of only small products can be transported

Not a door to door service

Large items cannot be transported

An expensive method as products need to be taken to the airport to be loaded onto the aircraft

Requires road haulage to final destination

Sea (Boats) Can import/export bulky goods

Products can be transported worldwide

Very time consuming process to transport the products

Not a door to door service also requires road haulage


Factors affecting Distribution

Type Channel Example Reason

Large and dispersed

wholesalers, agents and retailers

CDs to ensure wide distribution

Small and local direct farmer selling fresh eggs

dealing with small quantities, so not cost effective to have intermediaries

Segment various various consider location and image of the targeted segment shop, also geographical influence here

The following also affect distribution:

Legal restrictions

Alcohol cannot be sold in UK petrol stations or to the under-18 age group. Certain drugs cannot be sold without a prescription.

Changes in buying habits and life style

Increased car ownership has meant people are willing to travel away from town centres to do their shopping.

Increased ownership of freezers has led to the establishment of specialist frozen-food shops (e.g. Iceland).

Existing buying habits

If people tend to make most purchases of car wax in specialist hardware retailers rather than supermarkets, then the manufacturer will choose to distribute a new car shampoo primarily through specialist retailers, such as Halfords. Market research will also indicate changes taking place in consumer buying habits.

Larger companies often set up their own distribution networks. They can afford to invest in their own Lorries and warehouses.


Retailers

Retailers are organisations that distribute products to the customer on behalf of the manufacturer for example, independent stores, supermarket, chain store, department store, discount store.

Retailers stock a range of products from a number of manufacturers and wholesalers. The retailer will decide on the price to be charged to the customer and how to display the product to be sold. The manufacturer will decide which retailer to use based on where the customers are and what extra services (e.g. credit and delivery terms) they offer the customer.

Retailers benefit from sourcing products directly from a manufacturer because they can tell them what quantity they want and at what cost; larger retailers (e.g. supermarkets) may be particularly powerful at being able to specify what they want. Sometimes retailers can take advantage of economies of scale (the benefits of buying in bulk). Sometimes manufacturers will decide not to use a retailer as part of the channel of distribution because the product will face competition in store from other manufacturers’ products and because it adds on an extra financial cost to the distribution channel.

Advantages:

Provide a source of market research

Often located close to customer

Provide an after sales service

Retailer may offer credit facilities

Retailer may already have an established customer base

Retailer incurs cost of store, sales staff and retail premises

Selling to a retail is more direct than through a wholesaler

Higher percentage profit for the manufacturer

Bulk buying discount

Disadvantages

May not have specialist product knowledge

Product is more expensive to buy

Most large towns now have retail parks and consumers are choosing out of town shopping centers. This is due to convenience of all shops being under one roof and easy access to free parking facilities, food outlets and facilities for children.

There are a number of different types of retailer:

Independent retailers

An independent retailer operates only one outlet and offers personal service, a convenient location, and close customer contact. Almost 80% of all retailers are independents, including many hairdressers, dry cleaners, furniture stores and corner shops. Groups of independent retailers might join together in order to benefit from bulk purchasing of stock or joint advertising. They are known as voluntary chains, e.g. Spar, Mace. They do so in an attempt to compete with the larger chains.


Multiple chains

A retailing company that operates more than ten branches is known as a multiple chain. Some multiples are classed as specialist stores – concentrating on a narrow range of items such as clothing (e.g. Top Shop, Dorothy Perkins and River Island). Others are variety chains that provide a range of goods, like Marks & Spencer, Dixons and Boots.

Supermarkets

A supermarket is defined as a store with at least 2,000 square feet of selling area and at least three check-out points. Supermarkets have been a key feature of shopping since the 1990s. They offer consumers a very wide range of food and other products at low prices, operating on the principle of low mark-up and rapid turnover.

Large supermarkets are known as hypermarkets or superstores and offer an even wider range of household goods at discount prices. In addition to food and clothing, they stock product lines as diverse as DIY equipment, motoring accessories, cosmetics, toys and gardening equipment. The aim of a hypermarket is to provide cheaply for all the basic shopping requirements of an average household under one roof.

Consumer co-operatives

These stores are owned by ‘members’ rather than shareholders and profits are distributed to customers in the form of dividends instead of being paid to shareholders.

Department stores

Department stores like Jenners in Edinburgh have a large number of different departments and employ more than twenty-five people. They tend to have an up-market image and charge higher prices for goods, many of which are exclusive and not intended for the mass market. This type of store has declined substantially in recent years.

Specialist stores

A number of specialist organisations, such as Comet, concentrate on selling large quantities of specialist products. Often these are consumer durables but they also include DIY products (e.g. B&Q) and furniture (e.g. IKEA). Such stores are typically located on the outskirts of town where overheads are low. The resulting economies together with their ability to buy in bulk ensure that these stores are able to attract consumers by offering lower prices than their city centre rivals.

Franchises

A franchise is a licence to market a product in a specified area. The person taking out the franchise puts up a sum of money as capital and is issued with equipment by the franchise company to sell or manufacture the product in which the company deals. Franchise agreements are very common in the fast-food business (e.g. McDonalds and Perfect Pizza) but there are plenty of examples in other areas of retailing (e.g. Benetton clothing shops; Dyno-Rod plumbing services; Body Shop; British School of Motoring).

E-tailer

Shopping online and having the product delivered to you (e.g. through Amazon). This type of retailer often has a lower overhead cost because they do not have to worry about having stores from which to sell their products. However, they often require large warehouses to store their products. They may rely on different logistic companies to distribute their products.


Wholesalers

Wholesalers buy in bulk from the manufacturer and sell to retailers. For example, Makro, Booker, Costco. Many larger retailers do not use a wholesaler as part of their distribution channel because they have their own warehouses and transport systems.

Advantages

Provide a source of market research

Saves the manufacturer from making small delivers to retailers, saving on transport costs

Saves the manufacturer on high storage costs due to the wholesalers purchasing in bulk

Saves the manufacturer having money tied up in stock and being left with stock if consumer trends change

Its saves the manufacturer from labeling the product for the retailer.

Disadvantage

Control of after sales is handed over to the wholesaler

Wholesalers has limited specialist knowledge


Direct Selling

Many businesses are now selling their products directly to their customers. Organisations can sell their goods at competitive prices. Examples of direct selling are mail –order, direct response advertising, television selling. Increasingly, the internet is becoming a method of selling direct to the consumer.

Method Description Advantages Disadvantages

Internet selling Many organisations now sell their product via the internet, taking payment by credit or debit card.

Allows a business to reach a global market

Customer information is easily collected to target offers and promotions

Can order from the comfort of their own home

Many customers have fear using the internet and purchasing online as some sites are unsecure.

Some products can be more expensive to purchase online due to cost of postage

Mail Order These are goods sold to customers through catalogues e.g. Next

Convenience of shopping from home with credit facilities

Mail order companies save costs as few sales staff required and tend to not require expensive high street premises

Some mail order products are exclusive

Lack of personnel contact

High delivery charge

Companies may incur high advertising and administrative costs

A high level debt is possible

Newspapers/ magazines Place adverts in newspapers and magazine describing and showing the product

Customers respond directly to the advert by filling in the form

Convenience

of shopping from home

Mail order companies save costs as few sales staff required and tend to not require expensive high street premises

Some mail order products are exclusive

Companies may occur high advertising costs

High postage costs

Personnel selling When products are sold door-to-door or by telephone

Allows for the product to be demonstrated and technical details can be explained

Feedback can be received from the customer

Customers may not like sales people going to their doors


Promotion

The way in which the organisation makes the consumer aware of the features and benefits of the product. Promotion plays an important part in gaining new customers and retaining existing ones.

Informing

customers

about the

product

Reminding

customers that

the product

exists

Persuading

customers to

buy the product

Aim of

Promotion


There are two main types of promotion:

Below the Line Above the Line

Directly controlled by the business Makes use of media to allow the organisation to reach a larger audience.

Direct mail, personal selling, and trade fairs. Television, radio, newspapers.

Allows the business to target the customer in a more direct manner.

This method also targets those who have no interest in the product.

The choice of promotional method depends on several factors including:

Cost of media and budget available

Audience to be reached

Advertising methods used by competitors.

Advertising

Advertisements are messages sent via the media and intended to inform or influence the people who receive them. Advertising can be classified into two broad categories: informative and persuasive. Typically an advertisement contains elements of both.

Informative advertising

When a product is first launched, sales are low because very few people know that it exists. The role of advertising here may be to inform the public of the product’s existence and its particular uses. The same applies when a product has been modified or improved. In other cases, e.g. car advertising, the nature of the product may be such that a large amount of technical information has to be given and advertising again may have to be informative. Advertising that informs and educates consumers gives them greater knowledge on which to base their choice of goods and services.

The government uses advertising to inform the public – e.g. health warnings, availability of job training schemes, notification of the need to complete tax forms, etc.

Persuasive advertising

Persuasive advertising is used to persuade consumers to buy a particular product. It is often based on qualitative information and may contain statements of opinion rather than fact, e.g. ‘Carlsberg – probably the best lager in the world’. Persuasive advertising is normally associated with consumer products and is used heavily where differences between products are minor and demand is elastic.


Advertising decisions

An organisation has to make a number of important decisions in relation to advertising.

1. What effect does the advertising have on sales? It can influence a product’s sales but it is difficult to measure the effect precisely.

2. Who is the organisation selling to? The advertiser needs to know who buys the product, why, where and when they buy it and for what purpose.

3. Why do consumers not buy the product or service?

4. Which medium or combination of media will work best?

Market research is the key to providing answers to these questions and determining how best to target consumers.

Advertising media can be categorised under three broad headings:

Print media:

Newspapers, magazines, journals

Broadcast media:

Television, radio, cinema

Outdoor media:

Fixed posters, hoardings, on transport.

The effectiveness of advertising will often depend on selecting the most appropriate media to reach the target segment of the market.


Methods of Advertising:

Method of Advertising Advantages Disadvantages

Radio / Television

Large national audiences can be reached.

Sound and motion can be used which is appealing to consumers.

On television the product can be demonstrated.

The product can maintain a high profile if adverts are regular.

Can be an expensive method of advertising.

The product may be targeted at other market segments.

Message can be short-lived.

A lot of consumers channel surf when adverts are on.

Magazines

Colour adverts can have a big impact.

Particular segments can be targeted by putting adverts in specialist magazines e.g. Vogue.

Consumers may keep magazines for future reference.

Can be an expensive method of advertising.

Sponsored Events Creates good press for the organisation e.g. Virgin sponsoring the London Marathon

Can be an expensive method of advertising

Internet(online advertising)

Can be relatively cheap

If adverts are placed on correct websites, they can target specific market segments

Adverts may be ignored

Viral marketing e.g. social networking

Two way interaction can occur

Large audience can be reached

Questions can be posed quickly

Not all customers may want to join the social networking site

Information not usually private and can be viewed by anyone

Emails

Can sign up to a mailing list so only those interested receive the information

Can be sent at any time of the day

Same email can be sent to more than one person at a time

Documents and files can be attached to an e-mail

Some e-mails may be filtered as spam and user may never see them

Receiving too many emails may lead to frustration

Employees may need training

Viruses can be spread through e-mails


Environmentally friendly compared to printing posters

Text Messages

Message received instantly and directly as mobile as usually always carried by the customer

Large number of customers can be targeted

Cheaper than some other methods of advertising

Can only include a small amount of text

Customers may find the text messages annoying

Need to mobile phone number of the customer to use this method

Apps Can use it on the move

Can often use free Wi-Fi to access the internet

Customers need to buy a smart phone or tablet computer to use which is expensive

Training is needed so the app can be designed for customer easier to use

Internet connection depends on the location

Word of mouth Positive word of mouth can result in increased sales and customer loyalty

Negative word of mouth can result in reduced sales and consumers purchasing from competitors

Newspapers

Technical information can be explained

Through carefully choosing the newspaper, specific market segments can be targeted

Readers can cut out adverts and keep for future reference

People tend not to carefully read daily newspapers

Adverts may be in black and white and no sound or movement is used – not very appealing

May be expensive if nationwide coverage is required

Cinema

There is a captive audience

Adverts can be shown before certain films to appeal to specific market segments

The message may be short-lived

The audience is limited – particularly if the film is not very popular

Outdoor Media (football stadiums, billboards)

A wide audience can be attracted

Often used in busy locations – high exposure

The advert will be seen many times by those passing frequently

Weather could deteriorate the signage

May be vandalised

People may be used to the sign being there so could ignore it

Can be an expensive method of advertising

Direct mail Can target particular market segments

Customers are not happy to receive junk mail

Need to target accurately or little interest will be generated and therefore could be a waste of finances.


The choice of advertising method will be affected by:

Cost

The audience reached

The advertising used by competitors

The impact

The law (restrictions on tobacco advertising)

The marketing mix (may be used along with other promotions).

Controls on Advertising

Advertising Standards Authority (ASA)

This is a voluntary body set up to monitor advertising in the UK. It is responsible for making sure advertisers conform to the British code of advertising and sales promotion practice. Advertisements must be legal, honest, truthful and not cause offence.

Independent Television Commission (ITC)

This is a body which controls advertising on television and radio. Some of their restrictions include current newsreaders not being allowed to endorse products, and actors not being used in commercial breaks during programmes in which they appear.

Pressure groups

Certain pressure groups seek to influence advertising, e.g. FOREST who aims to defend the rights of tobacco firms to advertise. Women’s groups protest against advertisements they consider to be sexist.

Trades Descriptions Act 1968

This law states that the products must match the claims made about them in the advertising.

Sales Promotion

Advertising alone does not sell goods and services. At best it can only stimulate interest. This interest must be converted into a buying decision by means of other marketing tools such as merchandising, distribution channels and packaging appeal.

Special offers can be defined as short term incentives which encourage customers to purchase products/services. Special offers can be categorised into two types, which affect the retailer/wholesaler (Into the Pipeline) or the consumer (Out of the Pipeline).

There are two main types of sales promotion:

Into the Pipeline Promotions

Promotions offered to retailers or wholesalers to entice them to stock the products.


Point of Sale Materials

This may include posters, leaflets or window displays. These are generally provided to the retailer or wholesaler free of charge. For example, when a new film comes out, the film company will provide cinemas with stands advertising the film.

Dealer Loaders

Used to entice the retailer or wholesaler to purchase and stock the item, for example purchase 10 get 1 free.

Sale or Return

The retailer will be able to stock the product without fear that they will be left with unsold stock. In this case the retailer will be able to return any unsold stock to the manufacturer. Newspapers, bread and dressmaking patterns are some products which can be returned should they remain unsold.

Dealer Competitions

Competitions for high sales can be offered to retailers or wholesalers. For example, car manufacturers may offer holidays as prizes for car dealers who meet their sales targets.

Staff Training: Manufacturers may often provide staff training where a product is of a technical nature. For example, car manufacturers may offer car dealers training to cover technical issues, the best methods of promotion and how best to promote customer service.

Credit Facilities: The retailer will purchase goods from the manufacturer and pay for them at a later date.

Out of the Pipeline Promotions

Promotions offered to the customer to entice them to make a purchase.

Free Samples: Perfume or beauty counters will often give free samples of new products to encourage customers to try the product and make a purchase possibly at a later date.

Credit Facilities: These allow customers to purchase products on credit (paying for the product at a later date) which they would not have been able to afford. An example of this is the Topshop store card. Purchases would be made in store and a bill would be sent to the customer requesting payment.

Demonstrations: Involves demonstrating the use of the product to entice the customer to purchase. For example, car dealers will often offer test drives so customers can try out the car before they purchase.

Competitions: Customers will purchase a product which will then allow them to be entered into a competition. For example, newspapers may have ‘Lucky Wallets’ in which the customer can win money if they purchase the newspaper.

Buy One Get One Free (BOGOF): Supermarkets will often use this on selected products.


Bonus Packs: Allows the customer to try more of the product for the same price as the original. For example, toilet roll packs may have 4 free rolls.

Free Offers: Free toys may be included in boxes of breakfast cereal or free CDs may be offered in newspapers or magazines.

Coupons & Vouchers: Provide customers with money off future purchases. For example, Sainsbury’s price match coupon provides customers with money off their next shop if they could have bought the same products cheaper at another supermarket.

In store demonstrations or tastings: Customers are encouraged to try new products, very popular in supermarket.

Public Relations

This is when an organisation tries to communicate with customers, shareholders, employees and the government – all of whom form the organisation’s ‘public’. The aim of public relations is to improve the image of its products and the image of the organisation itself.

PR activities might include:

Charitable donations;

Event sponsorship of sporting and cultural events, e.g. the Lombard RAC Rally.

Product endorsement, e.g. pop stars or sports personalities;

Press conferences and press releases.

Publicity

Public relations cost time and money. Publicity, on the other hand, does not always have to be paid for and can be generated out with the organisation as well as from within.

For example, the mention of a company’s name on a news broadcast or in a magazine article generates publicity. While this indirectly promotes the organisation and its products, the publicity may also present a threat: the media often find disasters (fires, scandals, product side- effects) more newsworthy than routine statements distributed by the organisation.

In summary, PR and publicity together can

provide the public with information about the organisation;

build confidence in the organisation and awareness of its products;

develop goodwill in the community and present the organisation in a positive way;

support and enhance other areas of the promotional mix such as advertising and selling.


The Extended Marketing Mix

People - the employees who work for the company and their skills and knowledge

Physical – is in the form of the service and the atmosphere that is created

Process – the different elements to making a product or service e.g. sourcing raw materials and how customers are handled from the beginning to the end

People

People are an essential part of a business whether it be the customers or the employees. It is vital that organizations have the correct service provisions in place with regards to staff of the organisations. Organisations must recruit and hire the right employees to ensure they provide an adequate product/service. Employees need to have specific skills and qualities as well as the appropriate knowledge to provide the best advice and service to the customer.

Process

The process looks at how to service is provided, from the minute an order is taken to being delivered, for example think of the process taken when in McDonalds’ and you order a Big Mac meal and it is developed in 2 minutes or the process of self-service at any of the major supermarkets. An efficient service well ensure customer satisfaction and loyalty and therefore increased sales and profits. To ensure this all companies must have procedures and process in place.

Physical

The physical element is with regards to where the service is being delivered from. With greater emphasis with regards to retailers operating out of shops. The physical element will help organisations set them apart from competitors. It focuses on providing clean facilities, point of sale displays, logo, payment systems, uniform, seating areas, free wireless, a relaxing ambiance as well as access to an organisations website. Customers will make judgments based on their first impression when they walk into a retailer, if they are clean and friendly environment they are likely to stay. If a restaurant is smelly and dirty they are likely to walk out before even trying the food.

Ethical Practices

Businesses want to be seen as being socially responsible. It is about behaving in such a way that does not harm society. It is about behaving in a way that people find acceptable. Businesses therefore need to be seen in a positive way in order to develop positive customer relations. Businesses must consider carbon foot print, food miles used and their corporate responsibility. They often announce changes in their operations when promoting new products to inform their customer, it is vital that businesses are honest when advertising so that customers can trust the business. Businesses must focus on the behaviour and cultures of their customer. Good customer service skills are a vital part of the service.

For advertising to be ethical it must be:

Not misleading

Do what it says on the tin

Adverts must not be offensive or obscene

Should not offend consumer beliefs


Technology in Marketing

Technology is playing a major part in the business world and can be used for market research, advertising and sales.

Electronic point of Sale (EPOS) can be used for market research as it allows the business to identify what is being purchased in different parts of the country and in different stores. This will allow the business to adapt their marketing techniques and promotions to suit a particular country or store.

Market research is conducted online via online surveys e.g. survey monkey. This allows businesses to gather vast amounts of information. Using online surveys makes it easier for the business to analysis the information using online software.

The internet is now being hugely used for advertising weather it is through email, pop up’s, social networking sites. It is a good way to reach a large audience quietly. It can allows businesses to target specific markets and send different promotional offers to different customers, with recommendations (see p for further information)

Business are also now using the internet to sell their products/ services. This means that they can reach consumers in many different countries and that consumer can shop form the comfort of their own homes. Businesses tend to sell products/services cheaper online as they are cutting out the middleman.


The Role and Importance of Operations in Organisations

Operating Systems

“An operating System is a configuration of resources combined for the

provision of goods and services”

Ray Wild Essentials of Production and Operations Management (2nd Edn.)

Access to raw materials, machines and workers does not guarantee that you will obtain the

outcomes you require – organisation is essential. Procedures must be established which

control and direct what is done, whom it is done by and when. This is known as an Operating

System.

All operating systems have three distinct phases:

INPUTS PROCESS OUTPUTS

Raw Materials Using different amounts The actual goods

Labour of different resources or services for

Machinery in order to produce a sale

Finance different end product

Operations Management

‘Operations Management is concerned with the efficient conversion of an organisations

resources into the goods or services that it has been set up to provide.’

Howard Barnett, Operations Management.

This can be subdivided into three key areas:

(a) The purchase and storage of raw materials;

(b) The production and storage of finished goods;

(c) The distribution of the finished goods.


In manufacturing industries, where large amounts of raw materials or component parts are used to produce the final goods it is very likely that the firm will have a purchasing department and employ a team of specialists. In order to remain competitive this department is responsible for obtaining the best quality materials, at the lowest cost and delivered in the correct quantities at the correct time. This i s known as the purchasing mix.

Factor What does it mean? Why is it important?

Cost of raw materials

The price charged by a supplier to purchase raw materials.

Costs need to be kept as low as possible to make a profit.

Low costs will improve the cash flow of a business

Quality of raw materials

How good the raw materials are. Without high quality raw materials, the finished product will not be of a high quality.

Low quality raw materials will probably result in higher wastage.

Lead Time How long it will take to receive the raw materials from when an order is placed.

Some raw materials need to be used quickly (eh fresh food) or they might go off.

Without raw materials being delivered on time, production might have to stop, which is costly.

Quantity of raw materials

How much raw materials are required.

There needs to be enough raw materials available to allow production to continue, however, not too much otherwise this can be expensive for storage.

Correct quantities of raw materials are required to satisfy customer demand.

Location of supplier Where the supplier is located, e.g. which town or city and how far away it is.

The further away the supplier is, the longer the raw materials will take to be delivered.

The cost of transporting products has to be considered.

Reliability and reputation of supplier

Reliability – will the supplier deliver when they say they will? Reputation – what people think of the supplier.

If the supplier does not deliver on time, this might cause production to stop and customers might not get their order on time.

Suppliers with a good reputation are likely to get more business compared to one that has a poor reputation.

Storage space available

How much space the business has in a warehouse to hold the raw materials until they are needed.

Raw materials might be wasted if they cannot be stored in the correct place.

Storage costs (e.g. insurance) can be expensive.


Stock Control

In any organisation the control of stock is essential. Stock is an expensive item to an organisation – sometimes accounting for as much as 30% of the total assets held. Any stock management system will try to balance the needs of the production department with the costs of holding stocks. The 3 main categories of stock within an organisation are:

raw materials and components for the product or process;

work in progress;

finished stock.

Aspects of stock control are described below.

Issuing stock

This should only be done on the production of an authorised requisition card.

Monitoring stock levels

This can be done in a variety of ways:

(a) by recording (manually, using a bin card system);

(b) by using a database or spreadsheet, changes in stock are recorded as they take place, giving a running balance total which should be accurate at any point in time and reduces the need for physical stock counting prior to re-ordering. Many such systems now allow automatic re-ordering when re-order level is reached, with no need for operator input.

A physical stock count (stock taking) MUST be carried out at least once per year in order to provide closing stock figures for the Final Accounts.

Deciding on the quantities of stock held

Having the correct quantities of materials at any one time is essential. If stock levels are too low, production might be delayed, or even stop. If stocks are too high, the firm has unproductive money, tying up funds that could more profitably be used e lsewhere. One method of calculating stock levels is given below.

When manufacturing and storing goods there are different factors to consider:

The quantity of the product that is required.

The volume of products that can be manufactured at any one time.

Working practices, procedures and health and safety requirements.

The storage available in a warehouse.

Procedures for maintaining and managing quality.

Organisations need to calculate the optimum or economic stock level. This is the most

suitable quantity of stock at any one time. This ensures that costs are kept to a

minimum as well as having enough stock to meet production requirements. The

purpose of a stock management system is to:


Ensure stock is readily available at any one time.

Ensure production continues.

Avoid delays to customer orders.

Ensure over-stocking does not take place, which results in higher costs.

Avoid stock deteriorating (e.g. fresh food) and/or becoming obsolete.

There are consequences of holding too little or too much stock;

Consequences of too little stock Consequences of too much stock

Production could stop and therefore employees and machines sit idle.

Customers might not receive their orders on time, which could result in complaints.

The business could gain a poor reputation and image.

Increased financial costs (e.g. storage, security and insurance).

Stock could go to waste or deteriorate, resulting in stock that needs to be discarded.

Higher risk of stock being stolen.

Organisations need to have in place a stock management system to manage stock

levels. A stock management system has the following features:

Maximum stock level – the highest amount of stock that can be stored at one time. At this level stock costs will be at the minimum per unit because the organisation is at full capacity.

Example:

To ensure that production continues without interruption for a 20 -day period where 100 units are used daily, the ESL would be:

ESL = 20 days x 100 units = 2,000 units

Minimum stock level – the lowest amount of stock that should be stored at one time. At this level there is a danger that stock levels could fall too low and production would stop.

Example:

(a) Usage = 100 units per day

(b) Orders take 5 days to be delivered

(c) Add a reserve of 3 days’ stock to cover for unforeseen delays, weekends, etc.

MSL = 5 + 3 days x 100 units = 800 units


Re-order level – the quantity at which more stock is ordered.

Example

(a) Minimum stock level = 800 units

(b) Lead time = 5 days

(c) Average usage = 100 units per day

R-OL = Minimum stock + lead time = 800 units + (100 units x 5 days)

= 800 + 500 = 1,300 units

Re-order quantity – the quantity of stock that has to be ordered to bring levels back to the maximum stock level.

Example

(a) Economic stock level = 2,000 units

(b) Minimum stock level = 800 units

R-OQ = Economic S L – Minimum S L = 2,000 – 800 units = 1,200 units

Lead time – the time that passes between ordering stock and it arriving.

Traditionally there are two ways of storing stocks – either in one central area (centralised storage) or in different locations throughout the organisation depending on where the items are to be used (decentralised storage).

A number of companies are moving away from these traditional methods to the Japanese production process Just-in-time which uses the Kanban system. Raw materials intake, work in progress and goods dispatch are kept to a minimum to match exactly the quantities demanded by customers. This stock control system uses cards to inform operators how much is to be produced at each stage in the process and the precise quantity of stock each process should withdraw from the previous stage. The previous stage may be another process, a stores area or even a supplier.

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Just-in-time aims to get the highest volume of output at the lowest unit cost. As the name suggest, stock arrives just in time for it to be used in the production process and goods are only manufactured when a customer order is received. It is really a method of production control. Using a ‘pull- through’ approach the advantages claimed for this system include:

a smoothing out of production flows;

a reduction in inventory levels;

a reduction in unit costs of production;

much easier production planning for management;

ease in meeting delivery deadlines;

elimination of waste;

no over-production.

The concept is very simple. If there is no demand for the product there is no

production. It is the anticipated or planned consumer demand – often initiated by the

sales or marketing department – that triggers the production process. Finished goods

are produced just in time to be sold to the customer. Component parts are assembled

just in time to become finished goods. Materials are purchased just in time to make

component parts. Each system of stock control has both advantages and

disadvantages. And, as with all management decisions, each organisation must choose

the storage system most appropriate to its needs.

The costs of a Just in time system are:

Suppliers who are reliable are required so that stock is delivered on time.

Production can stop if stock is not delivered when required.

Less environmentally friendly as more journeys with less stock will be made.

Delivery costs might be higher due to more journeys.

Discounts for bulk buying (economies of scale) might be lost.

The Kanban system

Advantages:

stock usage exactly matches production requirements

savings are made on both purchase and storage costs of unused stocks

production delays are prevented

close ties with suppliers are established

Disadvantages:

there is a high dependency on suppliers and their ability to conform to your requirements

suppliers must be willing to participate.

Stock can be stored in a centralised or decentralised location.


Centralised storage – storing stock in one place.

Advantages:

improved security

supervised by specialist staff

agreed procedures for issue/receipt

agreed procedures for ordering

bulk ordering/storage may be cheaper

increased efficiency in distribution

Disadvantages:

time wasting going to and from stores

cost of specialist staff

cost of dedicated storage area

Decentralised storage – storing stock in more than one place.

Advantages:

stock always ‘on hand’ when required

orders of stock will reflect actual usage

faster turnover of smaller amounts of stock reduces likelihood of deterioration/decay

Disadvantages:

less rigid control – theft and loss more likely

takes up space in production areas


Distribution and Delivery

Warehousing

Despite the efforts of management to relate the production output of a product to its forecast sales figure, under normal circumstances it is impossible to match output to demand exactly. At different times, sales will exceed those forecast or fall below it. However, since sales occur after the finished product is produced; any response to changes in sales tends to be too late to influence output. Consequently, it is necessary to store stocks of finished goods in a location that offers security and a suitable environment (for example, dry not damp).

Most production units store finished goods in warehouses that may be centrally situated or decentralised. A warehouse is the name given to the place where finished products are held until they are ready to be distributed to the customer. Warehouses need to be designed to ensure the most efficient movement and flow of stock. The exact size and layout of a warehouse depends on the size of the organization, the product being manufactured and the organisations policy for logistics and distribution.

The main aspects of warehouse planning and organisation are:

(a) Design and layout

The design and layout of the warehouse is of major importance if stock is to be handled efficiently. Ideally, the warehouse should be on ground level only as this speeds up handling time. Those goods that are ‘moved’ most frequently should be located in a readily accessible area, and a stock rotation system should operate to avoid deterioration in quality.

(b) Mechanical handling

Although specialist stock handling equipment can be very costly to purchase, benefits from its use can be substantial in terms of use of space, time required to ‘move’ stocks, and costs.

Pallets offer benefits in that they are easily moved with the aid of a forklift truck and help to avoid deterioration by keeping items off the floor.

(c) Transportation

Organisations may own or hire transport or use public transport. It is essential for an organisation to consider carefully their needs prior to determining their transportation policy. Owning its own transport offers an organisation complete control of its vehicles and drivers, but incurs high capital and running costs, and requires careful route planning if under- or over-utilisation is to be avoided.

Reliance on outside transport avoids any capital out lay and offers the potential for increasing or reducing transport requirements at short notice (hence saving costs), but control of the system and reliability may be reduced.

Warehousing facilities, transportation and stocks of finished goods are all essen tial elements in an organisation’s distribution practices.


Transport and Delivery

Goods can be transported in many ways - air, sea, rail, road, pipeline.

The most common methods of transporting goods in Britain shown below in graph form.

(Source: based on CSO Annual Abstract of Statistics, 1995)

In the UK over 80% of all goods are delivered by road. Motorways make it easy to deliver raw materials, component parts and finished goods from door to door, even in the most remote locations. Until recently the great majority of freight going to the Continent also went by road transport, although the railways have increased their levels of freight carrying since the opening of the Channel Tunnel. Improved transport links have given organisations much more freedom in decision-making about the location of factories, offices and retail outlets.

Organisations have to assess the costs and benefits of each method of transport. If you have to have fresh strawberries at Wimbledon each morning, and the strawberries are being picked in Blairgowrie, you may have to consider refrigerated airfreight – despite its high cost. If you are transporting fish from Peterhead to the London fish markets, the most cost-effective method is by refrigerated lorry.

Scheduling

It doesn’t matter what goods you are producing or what service you are offering your customers, it is essential that all of the factors of production and distribution are working in a co-ordinated fashion. The bringing together of raw materials, components, workers, machinery, transport systems and sales outlets has to be organised in such a way as to make sure that the work flows through the stages of production and delays and redundant resources are avoided. This means that the operations function of an organisation, be it in manufacturing or service industries, a multinational corporation or a sole trader business, will have a central role to play and will have to maintain close relationships with other departments.


Production Systems

Although many of the examples used here are of manufacturing production, similar principles apply to the production of services, for instance the provision of insurance .

An example of manufacturing production

Before looking at each of the stages in more detail, let us consider the fol lowing example that describes the production process of a large biscuit manufacturing company.

The product: Chocolate-covered crunch biscuits

Stage 1

Raw materials

flour, sugar, fat, syrup, water, raising agents, flavours.

Input issues

The purchasing mix considerations include:

• best price

• dependence on suppliers (reliability, etc.)

• delivery time

• availability of quality

• usage (quantity required each day)

• storage space available

Stage 2

Stages of production

blending, rolling, cutting, baking, enrobing (covering with chocolate), cooling.

Process issues

Production considerations include:

• average demand per week

• production capacity available

• working procedures (health/safety/hygiene)

• storage available for finished product

• efficiency/productivity

• payment systems

• quality issues

• stock control

Stage 3

Stages of distribution

boxing, wrapping, storing, despatching.

Output issues

Distribution considerations include:

• packaging individual items and groups of items

• nature/size of containers

• storage space available before despatch

• organising customer orders

• transporting (to further storage or to customers)

• customer requirements


Throughout the operations process of an organisation decisions have to be made about the nature of that process. An organisation will have to decide what production system to use, how to establish and assure quality, what stock to buy, in what quantities and from whom, what quality standards are to be met, who is responsible for purchasing, and what methods of payment will be used.

Production systems in manufacturing

The organisation must decide on the system that most suits its needs. This decision will then affect every other operations decision made by the organisation. Both practical and economic implications will be considered before selecting the system that offers the greatest benefit to the organisation.

The main factors taken into consideration in deciding which production system to use are:

1. The nature of the product: producing washing machines, bread, a house or an atlas are all likely to require different production systems as the finished goods are very different.

2. The quantity to be produced: the production of large numbers of standardised products will be best suited to one type of production process, whereas producing a unique stained glass window for a church will need a different one.

3. The resources available: the choice of production system will depend on the availability of:

materials;

people;

buildings and equipment;

finance;

time.

4. Labour: a labour-intensive system is one where the organisation relies more heavily on its workforce than on machinery to complete production. Examples include strawberry picking and clothing promotion. A labour-intensive system is most common in organisations where:

labour is cheap relative to the cost of machinery;

production requires skilled craftsmen and women;

the use of machinery is impractical due to the working environment, lack of mobility or lack of flexibility of use;

high quality production depends on the ability to think, reason, act on initiative and make decisions;

production requires flexibility.


5. Capital: where the production system places more emphasis on machinery and other capital equipment than it does on labour, then it is said to be capital-intensive. Many durable consumer goods are made in this way, for example, family cars, washing machines and televisions. A capital -intensive system is most common where:

the supply of labour is limited;

production processes benefit from machine efficiency and consistency of output

the use of equipment offers cost benefits;

the use of equipment offers higher quality or improved accuracy in production;

the production process is routine and repetitive.

There are a number of other factors, all of which have to be taken into account when deciding

on the system to be used in an organisation.

These include:

Methods of production system;

Quality assurance

– standards

– methods of application;

Stock control;

Purchase of materials;

Payment systems;

distribution and delivery

– warehousing

– transport systems;

Scheduling.

Only once all of the factors affecting production have been assessed and considered can the organisation make a decision on the best system for them at any particu lar point in time.


Types of Operation

Job production

Here each ‘job’ is completed in its entirety before another job is completed. Thus, a single product is made at a time.

Examples: boat building

house building

individually designed wedding gowns, road construction, etc.

The emphasis is on individuality. Frequently found in smaller business units where product differentiation is easily maintained.

Batch production

All stages in the production process are completed at the same time. Products will have a marked degree of similarity, although different ingredients may be used for different products.

Examples: tinned foods (Baxter’s soups, Heinz spaghetti)

bakery goods (bread – white, French, wholemeal), etc.

In this case a number of products (i.e. a batch) are produced at once. Each product in each batch is the same, but products may vary from batch to batch.

Batch production occurs most frequently in food production businesses, but it is becoming more common in industries such as the building trade, where a row of new houses will all have their foundations dug at the same time.

Flow production

This process uses the production line and the product passes through various stages along the line with component parts being added at each stage. This is mos t frequently seen in large mass production businesses where standardisation of products is essential.

Examples: motor cars

white goods (washing machine, fridges, etc.)

newspapers.

In flow production there is continuous output of products, all of which are much the same.


Each of the three types of operation has advantages and disadvantages. They are summarised in the following tables:

Job Production

Advantages

• organisation of production is relatively simple

• suitable for ‘one-off ’ orders which can be designed specifically for the requirements of a particular customer

• specifications can sometimes be changed during production

• workers are likely to be involved in the whole process – they can see the results of their efforts and may be more motivated

Disadvantages

• production costs may be high – there are a few, if any, economies of scale; wages may be higher as workers may require highly developed skills

• production may take some time, e.g. each job will have to be set up separately, may require individual design, etc.

• producers require versatile equipment in order to produce a range of different outputs

Batch Production

Advantages

• flexibility – individual batches can be designed to meet the requirements of particular customers

• some scope for specialisation which can reduce costs, e.g. workers can concentrate on one stage in the process; more specialist machinery can be utilised

• stocks of partly finished good can be built up – this can help firms respond quickly to new orders

Disadvantages

• small batches can mean higher costs of production per unit

• if batches differ from each other, delays may occur in changing machinery, etc.

• production of different batches has to be co-ordinated which may be a difficult and time-consuming task


Flow Production

Advantages

• economies of scale can be gained through specialisation of machinery, workers, etc. which can lead to lower costs

• automation becomes easier, e.g. use of robots on production line

• costs of stockholding, etc. can be reduced through systems like just-in-time, etc.

• quality systems can be built into the process and standard product specifications can be maintained

Disadvantages

• standardised product which may not meet requirements of all customers

• start-up costs are high

• mass production requires mass consumption – if demand falls the whole system may be threatened

• if part of the system fails, the whole system may not be able to function

• work on production lines tends to be repetitive and boring

These advantages and disadvantages may not apply in any particular case and they change over time. For example, the development of modern computer controlled machinery makes it much easier to vary output in flow production systems so that changes can be ma de in standardised products. Computer controlled machinery is often more versatile than traditional equipment which makes it easier for firms using job production to produce a greater range of products.


Labour-intensive v Capital-intensive Production

Most manufacturing companies use a mix of labour-intensive and capital-intensive (machine-intensive) production. The actual mix used determines the degree of automation. The greater the reliance of machines, the greater the automation.

Automation means that capital has replaced the need for humans to carry out the work required because machines, equipment and technology can do it instead.

Mechanisation means that there is some capital as well as some labour involved in production. E.g. people working the machines.

Labour-intensive production

Some manufacturers rely more heavily on their workforce when:

Labour supply is cheap and readily available

The product requires craftsmanship or special expertise to produce

The business is small and does not have the finance to purchase expensive machinery

Being labour-intensive is not without its costs:

A skilled labour force can be expensive to pay and train

It may be limited to small scale production – cannot take advantage of economies of scale

If staff are ill or absent then production may halt

The quality of products has to be monitored closely to ensure consistency

Capital-intensive production

Other manufacturers rely more heavily on machinery when:

A standard product is being produced with standard operations

Labour supply is scarce or expensive

Consistency of product and quality is required

Economies of scale is desirable

Continuous production is required

Being capital-intensive has a number of costs:

Set-up costs of machinery can be very high

Lost production time during breakdowns is very costly

Individual customer requirements cannot be met

Worker motivation can be low due to repetitive nature of tasks


Factors affecting Quality

Quality assurance

Quality control

Quality standards

Total Quality management

In today’s highly competitive global market quality has become one of the key decision areas in operations. Quality is an extremely difficult term to define as it can mean different things to different people. Quality standards are awarded to an organisation when it meets a particular specification or set of criteria. However, it can be a time-consuming process to achieve and involves a series of checks and/or audits to be carried out. Being awarded a quality standard (or symbol) has benefits to the organisation and the customer.

From the consumer’s point of view quality may be:

quantity provided for the price paid;

reliability or lifetime of the product;

the extent to which the product or service satisfies a customer’s particular requirements, for example, technical features, appearance, and how well the product/service compares with its marketing description.

From the producer’s point of view quality may be:

meeting exact specifications;

a highly skilled workforce;

no customer complaints.

Quality assurance

Quality assurance is an attempt to make sure that quality standards are set, agreed and met throughout the organisation. The aim is to ensure customer satisfaction and reduce the return of faulty goods..

Quality control v Quality assurance

Often thought to mean the same thing, these terms in fact describe different approaches to managing quality. Quality assurance methods look at the prevention of poor quality ensuring minimal waste. Quality control inspects completed products and therefore higher waste as poor quality items are disregarded.

Quality control is historic, reactive and based on power. Consequently it often leads to waste, and the scrapping and re-working of products. This approach has some significant psychological implications. It works by failure, by denying the possibility of getting things right.


‘Control’ assumes that there will be wastage and scrap as inevitable parts of the

production process. Up to 25% of output can be wasted in a company that practises a

system of ‘control’ in which quality is checked at the end of the manufacturing

process. This has led to the ‘Friday car syndrome’, which can result in heavy costs in

raw materials and manpower.

An example of a quality control system was found in Kellogg’s, where samples of breakfast cereal are removed from the production line every half-hour, around fifty samples per day, and tested for quality. The cereals are graded from 1 to 10 by a small group of trained staff. A grade of 10 is perfect. A grade between 9.8 and 7 means that there is no visible reduction in quality as far as the customer would notice. The cereals all also undergo a series of other tests – looking at nutritional values, texture, taste, colour, etc.

Quality assurance is based on prevention. Requirements are determined in advance, thereby minimising the risk of error, or non-conformity to specifications. It aims to create a situation in which ‘right first time, every time’ becomes a real possibility. This system, in which quality is checked at every stage of the manufacturing process, has been known to reduce wastage and scrap to 5% or less. As a result, in most organisations there is less and less dependence placed on quality control and far more placed on quality assurance systems.

In today’s highly competitive market place, the resulting increase in profits, the reduction in costs, and, above all, the improvement in customer satisfaction are all vital.

Factors that the organisation will consider when assessing if they can provide quality in their operating systems include:

the time, effort and technological input into the design process;

the quality of supplies of materials and components;

the commitment and skill of the workforce;

the system of monitoring and controlling the operating process;

the ability to meet delivery deadlines;

the after-sales service provided.

Quality Standards

From much that we read about recent business organisations and their operations we might think that the concept of quality has dominated the thoughts of all management teams, regardless of the type or size of the organisation. From schools finding themselves on league tables, and general practice doctors’ surgeries having to fulfil a Patient’s Charter in their performance, to all types of consumer goods being branded as ‘quality’ products, all producers and service providers seem to be involved with ‘Total Quality Management’.

The traditional view of quality is that there is some conformity with specifications of standards. However, modern thinking now broadens this view to emphasise the importance of the perspective of the customer in the setting of quality definitions. In this way, quality is seen more as fitness for purpose or intended use. This might


include measures of appearance, safety, availability, value for money, ease of use, consumer after sales support, the reputation of the product and the organisation, and even the way staff deal with customers.

In recent years the government, through the British Standards Institute, has defined quality assurance as an all-embracing concept involving all stages and all people in the production process. This is a significant move away from the previously held notion of quality control, where the emphasis was on detection and the remedial treatment of faults.

The government further pushes organisations to adopt Quality Standards such as BS5750 by stating that they will only award contracts to those organisations that hold the certificate.

There has to be general agreement within the organisation about the quality standards that it is to aim for in its operations. Quality manuals have to set out policy and procedures on quality assurance and identify the quality standards set down by the organisation. Inspections will be made into current procedures and working practices to ensure that what is laid down in the manual is being put into practice. If these are of a sufficiently high standard there is a recognised quality standard award certificate that can be made to manufacturing industries, allowing them to incorporate the standard into their marketing literature.

British Standard 5750 is the standard that has been developed as a benchmark for quality in the United Kingdom. Consequently BS5750 and its international equivalent, the International Organisation for Standardisation’s ISO9000, are recognised as the mark of quality in over ninety countries worldwide. Other award schemes also exist whereby TQM can be recognised, for example, through the European Foundation for Quality Management (EFQM).

Other organisations award their own quality assurance marks. These include the British Standards Institution Kite Mark, the Association of British Travel Agents (ABTA) symbol, and the pure new wool symbol of the Wool Marketing Board.

Investors In People (IIP) is another recognised quality standard that can be achieved by organisations that provide training and other development opportunities for all staff.

Quality Management (QM)

The main aim of Quality Management is to produce a perfect product or service every time in order to meet customer requirements. In the UK the system was first seen more than twenty years ago when the Ministry of Defence set out the specifications or standards that their suppliers had to meet before the Ministry would buy from them. Gradually over the years similar standards have evolved to cover a wide range of industries.

Quality Management uses the principles of ‘Quality Assurance’ but takes a fundamentally different view of quality. The principle upon which this system operates is that in order to achieve ‘quality’, the requirements, specifi cations, and needs of the customer or client come above everything else. The culture shift must be made from ‘we know what quality is’ to ‘You tell us what you want and that will be our definition of quality’.


In practical terms QM assumes that the next person with ‘ownership’ of the good, or the next person to use the good, are customers or clients – not simply the person who ends up purchasing the good for his/her own use.

Quality is therefore essential at each and every step in the production of a good , or, for that matter, in the provision of a service, to which the same principles apply.

For example, on the production line in a factory, the next person down the line from you is your customer or client. You must therefore ensure that when the part-assembled car leaves you to move on to the next worker, any work you have done on it is of the highest standard and quality – just as you will expect to receive the car parts from the worker in front of you.

It is felt that, although it is initially costly to establish, QM can achieve savings in the long run by reducing wastage to around 3%. This can make a considerable difference to an organisation.

QM requires:

the understanding that this is a core corporate philosophy focusing on the needs of the consumer;

a commitment by top management, and therefore the provision of the necessary resources;

that every member of the organisation be consulted and involved in setting standards (every member of the organisation means just that, from the receptionist, office cleaner and store-man to top management);

a focus on teamwork and creative thinking to identify future improvements;

that it be viewed as a long-term concept;

a quality plan to be established which offers a structured, disciplined approach to quality;

emphasis to be placed on the collection and analysis of information;

employee training to be treated as essential;

a constant checking of performance (quality standards) by individuals;

a constant search for improvement;

focus on the total quality of output, in which case cost savings can be considerable.


Introducing and implementing quality assurance or QM systems

Quality assurance requires four elements to be managed:

1. The definition of ‘quality’ at each and every stage of the process;

2. The commitment of all;

3. A system in which this quality can be assured;

4. A measure of the ability to meet quality requirements.

The definition of quality

Ultimately this lies with the customer in terms of defining a specification of the desired product/service and may include specific reference to, for example:

intended usage,

required outcomes,

standards of safety,

efficiency,

quality of the finished product,

cost.

It is up to the supplier to clarify the customer’s definition and confirm his ability to supply to these requirements.

Suppliers must take responsibility for helping their customers to articulate precise requirements. Vague definitions of ideas will be impossible to implement, as these lead to misunderstandings and errors that, by the nature of the system, mu st be eradicated.

Only if instructions are specific at every stage of the process can quality be assured, and for this specifications must also be precise.

The commitment of all

a clear commitment to quality in the mission statement of the organisation,

a quality manual/handbook which outlines the specific components of each job within the organisation,

a clear definition of the responsibility of every individual within the organisation to deliver quality on every occasion to every customer,

the drawing up and implementation of a ‘contract’ to confirm the mutual obligation of the supplier and the customer,

the establishment of ‘standard operating procedures’ (schemes of work, checking procedures, etc.) to help ensure consistency,

the use of quality audits to establish the integrity of provision against the set specifications,

the use of quality circles,

the use of benchmarking.


A system in which this quality can be assured

Effective management for quality assurance will require organisations to set up systems and processes that will include:

systems to help in the definition and specification of products/services,

systems for checking and monitoring the process and quality at all stages in production/provision,

using appropriate documentation to set out requirements and to record progress and quality achieved,

keeping records,

designating individual responsibility for ensuring quality throughout the organisation,

reviewing, monitoring and feedback from operatives,

staff appraisal,

settings of specific targets of achievement,

providing comprehensive job descriptions,

providing comprehensive and clearly understood instructions and information at all times.

A measure of the ability to meet quality requirements

This can be carried out in a number of ways, both qual itatively and quantitatively. It may be made on customer’s perceptions, or on objective measurements – both are valid indicators of conformity.

Benchmarking

This is a process of quality assurance that sets performance standards against which work can be measured. These standards are set using the achievements of the most efficient producers in a particular market place or industry. The benefit of this is that production managers assess the performance of their operations against that of the market leaders in a truly competitive environment. The ‘best industry standard’ organisation can be identified by asking several sources, for example customers, industrialists, business analysts or journalists.

One drawback is that there may be resistance from the market leaders to providing their performance figures to be used by competitors. A second is that organisations must continue to benchmark their processes – even when they become industry leaders – as competitors will also be trying to produce better quality goods and thereby increase their market share.

Benchmarking is seen as a vital element in the success of an organisation in a global and highly competitive market.


Quality circles

There are two principles behind the concept of quality circles in the wor k place:

no one in the production process knows more about the problems that might arise than shop floor workers;

workers will appreciate and be motivated by the opportunity to use their knowledge and talents alongside management in a problem-solving environment.

A quality circle is a group that meets regularly to identify and resolve problems about quality in the production process. Their remit includes the consideration and recommendation of suitable alternative practices that are then put to management. The members of the quality circle will largely consist of shop-floor workers, but may also include engineers, quality inspectors and members of the sales team who are there to present the customer’s angle.

Like a number of successful modern management techniques, the idea of quality circles originated in the Japanese manufacturing industries. Toyota Motor Company was the first to establish quality circles in the 1950s.

The inclusion of quality circles in the workplace is seen as a successful way of bringi ng both consultation and job enrichment onto the shop floor.

Mystery Shopping

Some organisations, often in retail, employ mystery shoppers to visit their store to make a purchase. Feedback is then given to the organisation on how the shopper found their experience and the service they received. Staff in the organisation will not normally know in advance that a mystery shopper will be visiting, in an attempt to provide an accurate representation of the shop and the service experienced.

Summary of factors affecting quality

‘Quality, reliability and cost are all interconnected. With enough expenditure anything can be endowed with high quality . . . and with adequate expenditure almost anything can be made to be very reliable. It follows, then, that a company can provide a product or service at different quality levels, each of which necessitates a different price. There is no simple level of quality; nor is there an absolute quality level. Nothing will be perfect, no matter how much it costs. In general, costs rise steeply for increasing quality, but beyond a certain level, value to the customer increases more slowly.’

Ray Wild, Essentials of Production and Operations Management , 2nd edn.

From the above we can develop simple definitions as follows:

Quality: The quality of a product or service is the degree to which it satisfies customers’ requirements. This is influenced by:

Design quality: The degree to which the specification of the product or service satisfies customers’ design requirements; and

Manufactured quality: The degree to which the product or service, when made available to the customer, conforms to specification.


Payment Systems

The search for a way to motivate, reward and even control labour has led managers to devise a variety of payment systems.

Time-rate payment systems

These are simple payment systems where the workforce receives a basic wage or salary. Workers are rewarded for the amount of time they spend at work, and for most workers in Britain this is the average working week of thirty -six hours. In addition, holidays with pay are usually included. The system is very common in many jobs from teachers to bank workers and shopkeepers. It provides a simple method of calculating payment for employees, whether they are paid hourly, weekly, or monthly. It also overcomes difficulties that might arise when trying to work out the exact value of an employee’s work, for example a doctor. From the employee’s point of view such a system guarantees income.

Overtime

There are instances where employers operate a time rate system, but also offer overtime payments when individuals work for more than their normal number of hours per week. Overtime payment systems are common in the construction industry, for example.

Piece-rate payment systems

In manufacturing industries the most common method of payment is some form of payment by results, or a productivity related scheme. In some instances this can simply be payment to the worker for each item he or she makes/produces. This system was very common in the soft fruit industry where workers would be paid by the weight of each basket of strawberries or raspberries they picked. It is also felt to offer the greatest incentives to employees to maximise their output – the more they produce the more they get paid. However, a system that only offers piece-rate payments may result in little or no income for employees, because of breakdowns in machinery or other unplanned stoppages.

Piece rates plus a basic or fixed pay element

To avoid the problems mentioned above, some employers calculate pay using a system made up of two elements. Firstly, they will pay a basic or fixed-rate wage calculated on a time rate basis, and then to this they will add a variable, piece -rate element, calculated on output.

Commission payments

When looking to establish payment systems for a sales force, it is very common to base this too on a flat-rate wage supplemented by some form of commission based on sales volume or value achieved. In some organisations the greatest part of the wage received by the sales force comes in the form of commission paid. This has led to complaints that such workers may use pressure tactics in order to achieve sales – and maintain their own income levels.


Fringe benefits and non-financial payments

This covers any payments other than wages and salaries that an employer might make. They include private medical insurance, subsidised meals, company cars or loan and mortgage facilities. Since the 1960s fringe benefits have increased in importance, particularly in the managerial and professional sectors.

Bonuses

Another common production payment system is one that operates with a flat rate of pay that is then supplemented by a bonus directly related to the output each worker, or group of workers, achieves. Such bonuses might be related to setting targets for:

• volume of output,

• quality standards achieved,

• reductions of wastage,

• improved machine use,

• reduction in the loss of working days through workplace accidents. (This last example is very common in the North Sea oil industry.)

Incentives to professionals

It is generally accepted that professional employees, for example dentists, doctors and other health service specialists, receive a basic salary from their employing health authority, but can enhance this by undertaking private patient work for which they receive payment on an individual case basis. There has also been an increase in ‘no win no fee’ legal cases in recent years. Based on a system devised in the USA, and particularly common in civil law suits for damage claims, the client only pays the lawyer a fee if the outcome of the case is in his favour. The percentage rate of the fee will be set out and agreed before the legal action is started.

Contract employment

It is becoming more and more common for employers to hire staff on a contract basis. This may be for the completion of a job or project, for example the building of a new stretch of dual carriageway, or may be for a fixed time period of, say, one university academic year. The employer can make substantial savings using a contract basis for employment – it is unlikely that he will offer paid holidays, pay for days lost through sickness, maternity pay or a company pension scheme. From the employee’s point of view the rate of pay is often higher than for those on permanent contracts. But there is a high degree of uncertainty and risk of loss of income when the contract ends.

Profit-sharing schemes

Although not widespread in Britain, there has been a move in recent years for employers to use systems that include a share of pre-tax profits as part of the payment made to the workforce. Some employers feel that this system is likely to increase the commitment from the workforce, not only in terms of output, but also in overall terms to the organisation itself. However, others are less enthusiastic and feel that the relationship between daily output and annual profit -share payments is too remote to be an effective motivator.


Employers will have several objectives that they want to achieve when devising payment systems for their employees. These include:

Motivation

Many people believe that workers are motivated by money, and this is reflected in the number of employers who use performance related payment systems.

Cost

As one of the objectives of the employer is to maximise profits he will wish to keep the cost of labour as low as possible. The procedures for calculating, recording and making payments to employees should also be cost effective.

Prestige

Employers may want to have the reputation of being ‘good payers’ rather than ‘poor payers’. This improves their ability to recruit and retain workers, which, in the long term, is cost effective for the organisation.

Employees will also have a number of objectives that they want to be able to meet from the payment they receive.

Purchasing power

The higher the wage the employee gets the more he can buy and the higher his standard of living will be. Workers will always try to win wage increases higher than the present (or expected) level of inflation – as this means that they will continue to be able to raise their standard of living.

Recognition and fairness

Most employees like to have the value of their work recognised. Many see the level of their wage or salary as the main indicator of such recognit ion. They also want to see fairness between payments they receive and payments made to other workers doing similar work or holding similar qualifications. For example, the pay of nurses is often compared to that of teachers or the police.

How payments are made up

Many workers are interested in the way in which their total remuneration is made up. For example, they might be very happy to settle for a lower annual salary provided that the employer is making a contribution into a pension fund on their behalf. Benefits such as a fully funded company car may be worth as much as £4,000 or £5,000 per year to the employee, although he/she will almost certainly have to pay more in tax.


Environmental Responsibility

All businesses have to consider environmental and ethical issues. The government has put in place strict policies and laws that dictate some of the ways businesses have to consider the environment.

Businesses can:

Try to minimise wastage by ensuring employees are trained, ensuring machinery is kept in good condition and by not overstocking. However, providing training and maintaining machinery could be expensive. This would reduce the company’s profitability. It is important in maintaining a good reputation that businesses do not simply ‘dump’ waste material that could harm the environment, or send their waste to landfill. They have to make sure that they reduce the amount of waste that is produces as well as ensuring they dispose of it in an environmentally friendly way. Sometimes a business might call on the services of a specialist waste disposal company to dispose of certain types of waste.

Recycle as much as possible by encouraging employees to put rubbish in appropriately coloured bins and by re-using materials in the production process as much as possible. Initially buying the different coloured recycling bins could be expensive, but would hopefully encourage people to recycle as much as they can. Recycling can help reduce the company’s energy bill by re-using materials rather than using new ones. Recycling will also help to reduce greenhouse gases by not having to extract raw materials and by reducing materials that need to be transported.

Try to minimise packaging by only using the amount of packaging needed to maintain the product’s quality. Not only will this cut down on costs, it is good for the environment. They also need to try and use as much environmentally friendly packaging that can be reduced as possible; however, it might be more expensive than non-recyclable packaging. Many products that previously had significant amounts of packaging (eh Easter eggs) now contain much less.

Prevent pollution and emissions by watching the material used in production (e.g. fuel and chemicals) and by disposing of any potentially harmful chemicals or products in the most environmentally friendly way. Careful disposable of waste can be expensive, but businesses that don’t consider this properly can be prosecuted. Businesses also need to be aware of traffic congestion/pollution getting to and from the business, as well as the noise and light that it emits from its premises.

Be sustainable by replacing raw materials that they have used with new ones. For example, toilet paper manufactures might plant a new tree for every one that they use to make their product. They might have a sustainable development policy that details what the organisation will do to replace materials that it consumes.

Operate a fair trade policy This is a trading partnership that seeks greater equality in international trade. It contributes to sustainable development by offering better trading conditions to, and securing the rights of marginalized producers and workers. Fair Trade Organisations support producers, help raise awareness, and campaign for changes in the rules and practice of conventional international trade.


Fair Trade Benefits

The 5 Fair Trade benefits are:

Product Price – The farmers receive a fair and stable price for their products. This enables them to plan more easily and to invest back into the operation of the business.

Extra Income – More money for the farmers and estate workers which helps to improve their lives. They can afford to buy additional items for the home, or send their children to school which helps improve the lives of future generations.

Environment – Fair Trade encourages organic farming and the avoidance of agrochemicals. Fair Trade farmers also have to learn to apply sustainable irrigation practices such as crop rotation & sustainable water sourcing.

Strength in numbers – Instead of struggling on their own, small farms can join to become part of a cooperative and therefore are stronger together than if they were all on their own.

Consumer power – Fair Trade brings closer links between consumers and producers. Consumers know they power they have to improve the lives of the farmers when they buy Fair Trade products.

The Fair Trade costs are:

The minimum price is only guaranteed to the co-operative, and not the small scale farmer or the workers at the end of the chain.

The prices are fixed without adapting to the context of the various countries involved.

There are certain rules the farmers have to follow to become Fair Trade certified, and this can be expensive. An example is the move away from using agrochemicals, to organic farming.

With coffee, a major Fair Trade product, the roasters can end up bearing the cost of marketing the Fair Trade brand, through the payment of a licence fee to the Fairtrade foundation as a percentage of sales.

Benefits to an organisation of environmental responsibility

Awards – Businesses may be given awards in recognition of their environmental friendly actions.

These can be awarded by councils or various other bodies.

Customer Loyalty – A lot of consumers nowadays are becoming more aware of environmental issues and are willing to spend their money with businesses who try to minimise any negative impact on the earth.

Recruiting employees – As well as consumers, job applicants may also think about the impact businesses have on the environment. If a business is known to be good to nature through

recycling or using renewable energies, then they may attract more applicants than those that don’t show as much regard for the earth. This could help them employee the highest quality workers.

Extra investment – Investors are becoming more aware of the importance of businesses acting sustainably and are increasingly investing in those businesses that demonstrate environmental responsibility. This enables the businesses to use this investment to generate higher profits and strengthen their position in the market.


Costs to an organisation of environmental responsibility

Conversion costs – It can be expensive for businesses to install equipment such as waste management systems, solar panels or wind turbines. The energy savings made can take a long time to recoup.

Costlier products – Due to the conversion costs, and the sourcing of environmentally friendly materials, the end product can become more expensive. This results in a higher price having to be charged to consumers with a resultant lowering of sales and profits.

Paperless office – Businesses may try to reduce the amount of paper they use in the office. This could result in a greater reliance on technology to store information, which may cause problems if it breaks down.

Legislation changes – as environmental laws change, ensuring that you comply with them could involve spending

Ethical Operations

Ethical operations are about the behaviour of organisations when dealing with various stakeholders such as staff, suppliers and customers. This may mean paying staff more than the minimum wage requirements, or paying the suppliers a fair price for the goods they have supplied.

Benefits

Customer Loyalty – More and more consumers take an interest in how businesses act towards their stakeholders, and are willing to withdraw their custom if they don’t like what they are doing.

Recruiting employees – Job applicants may also think about the ethical behaviour of businesses. If a business is known to be treating its employees and suppliers well, then potential workers may be keen to work for them. This could help them employee the highest quality workers.

Motivation – Staff morale will be higher if they are treated well, and so they are likely to be more motivated. This should lead to higher productivity/better customer service/higher quality etc.

Costs

Costlier products – Due to the costs of paying more to suppliers, or awarding staff with above

minimum wages, the end product can become more expensive.

Less competitive – Applying ethical principles can result in a higher cost base for the business. This could result in having to charge customers more for their products than their competitors, and therefore their market share could fall.


Technology

Technology can be used in a number of different ways in the operations function.

Computer-aided design (CAD)

CAD refers to any use of computer software that supports the design process. CAD is commonly used for circuit design, as well as the design of products using 3D modelling. It is very useful for architects, designers and engineers in their working lives.

The advantage of CAD is that designs can be created and adapted much more easily than if being done by hand.

The disadvantages are that CAD can be expensive to purchase initially, and staff need to be trained how to use it properly.

Computer-aided manufacturing (CAM)

CAM is the use of computers to control machinery. The machinery has a program in it which controls the movement very precisely.

Advantages of CAM over regular machines are that they operate faster, more accurately and consistently, and can create more intricate products.

Disadvantages of CAM are they can be more expensive than manual machines. Also due to their complicated nature, they can be more difficult to fix if they breakdown.

CAD and CAM used together can assist in lowering production costs due to:

Packaging – Can design and manufacture packaging which uses less materials

Products – Can design a product which can be made using less materials. Another example would be using them to cut more templates out of sheet material than if done by hand.

Waste - This is reduced as CAM makes less mistakes/no mistakes so not as many materials need to be ordered to cover for production errors.

Electronic Point of Sale (EPOS)

This software is used by retailers to track what items are sold, and then updates the stock levels automatically. It helps manage stock control more easily as you don’t always need to do manual stock counts.

This can link up with software which automatically places orders from the suppliers when the stocks fall to a certain level.

Internet

The internet has had many effects on business including:

Sales – By creating an internet site with e-commerce capabilities, a business can potentially sell to a global audience, rather than the traditional local geographical area.

Purchasing – Businesses can order from the suppliers online, saving them the time it would normally take to visit the supplier, or having to phone during working hours.

Advertising – Due to the increasing use of the internet, there is a large audience to advertise products to. This can be through a company’s own website, or in ads on blogs, search engines or other websites.


Research – There are vast amounts of information on the internet, which the business can make use of. This includes government statistics, news, competitor websites, even social networking.

Laptops/Smartphones

Laptops and smartphones are vital to modern day businesses as they help them to:

offer homeworking which keeps staff motivated as they can have a good work-life balance

take work to clients due the portability of the technology

Make phone calls and send/receive e-mails when travelling

Saves money on office space as not all staff need a permanent desk

In addition;

E-Mail can be used to confirm an order has been received and to let the customer know about the progress and status of the order (e.g. when it has been dispatched).

Websites can be used to compare the prices of different suppliers before deciding which one to purchase.

Deliveries can be tracked and traced via the websites or logistical companies.

Computer programs (e.g. database or spreadsheet) can be used to store stock levels.

Social networking e.g. Facebook/Twitter to attract a wider audience and keep in touch with customers.