podnikovÁ ekonomika economics 3 boa · best customers would prefer a man. if you appoint a woman...

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PODNIKOVÁ EKONOMIKA ECONOMICS 3 BOA

Učebné texty Ing. Helena Fra ňová

Obchodná akadémia, Akademika Hronca 8,

Rožňava

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1 BUSINESS ETICS

Business etics concerns with the relationship between business goals and practices and

the good for society. Ethics are moral beliefs about what is right or wrong. Ethical behavior

means doing thing that are morally right and ethical lapse is a temporary failure to act in the

correct way.

Each company has responsibilities to employees, customers, shareholders and neighbors.

Sometimes may violate their responsibilities by accident for example when a toy

manufacturer unknowingly sells a hazardous product. Individuals and organizations should

be accountable which means completely open about what they do and able to explain their

action. Business transactions should be transparent which means not hidden or secret and

explainable in a way that can be understood by outsiders.

Companies have code of ethics saying how their managers and employees should behave.

Corporal social responsibility relates to areas:

a) employment and community: they want to pay attention to things that affect the

well-being of everyone, not just their employees, in the areas where the company

has its plants, offices and other activities.

b) environmental protection: they want to conduct business in ways that protect

environment, to ensure that the company does not cause pollution or does not

endanger plant and animal life or contribute to climate change.

c) winning new business: they want to get business without engaging in corruption.

The most common violations are bribery, criminal fraud, illegal political contributions, tax

evasion and criminal antitrust violation (price fixing). In a highly competitive business

atmosphere bribery is very tempting when it seems to hurt no one and when it enables one

to gain a financial edge over a competitor. When companies are caught paying bribes or

fixing prices, penalties are quite low, so there is no doubt that when a large sum of money is

involved the temptation is considerable.

Two „grey areas“ of ethical concern that are not strictly illegal are frequently in use today:

conflict of interest and company secrets.

Conflict of interest is a situation in which a person or business stands to benefit from

a business decision that should be made objectively. (College coaches choosing athletic

shoes for their teams are routinely offered large bonuses of money, free shoes and other

incentives by shoe manufacturers seeking to outfit the team) To avoid conflict-of-interest

problems, individuals and businesses sometimes rule themselves out of situations in which

they may be tempted to make self-enriching decisions.

Company secrets . Many competing businesses try to learn their rival’s secrets by analyzing

or taking apart their products and copying its design – it is called reverse engineering. This

procedure is legal and is apparently widely used by computer manufacturers. Research staff

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members may be asked to sign agreements promising not to reveal secrets if they go to work

elsewhere.

• Credit card companies, magazine publishers and direct-mail marketers routinely sell

names and addresses of their customers to other organizations for their direct-mail

campaigns. Is this practice an invasion or privacy?

• Businesses that provide gifts and free services to public officials often expect political

favors in return. Should public employees accept such offerings?

• Is it ethical to serve on the board of directors of a firm whose business is related to your

own or one with which your company does business?

Businesses have been increasingly aware of the importance of social and environmental

issues for their reputation. There have been trends towards social audits that evaluate

social performance of a firm in relation to their employees and to the society as a whole.

Social audits are part of social reporting when a company regularly gives information about

the social impact of its activities. Social issues are areas of concern (unemployment,

poverty, working conditions, child labor etc.) and social responsibility means that the

companies are concerned about the consequences of their activities.

There is more and more relevant information about ethically run companies that people can

put money into. In the UK – FTSE4Good is an index of ethically managed companies. In the

USA there are Dow Jones Sustainability indexes . Sustainability is the idea that businesses

should be run not for short-term profit, but in a way that takes account of the long-term

interests of society and the environment. These indexes give the overall value of the share

prices of the ethical firms, and we can compare the performance of individual firms against

them. This is part of movement towards socially responsible investment.

☺ Rank the professions according to how ethical you think they are:

Accountant civil servant lawyer police officer

Banker estate agent nurse teacher

Journalist dentist taxi driver car sales executive

☺ Discuss this list of unethical activities. In you r opinion, which are the worst?

Using your influence to get jobs for relatives (nepotism)

• Avoiding paying tax

• using work facilities for private purposes

• ringing in sick when you are not ill

• accepting praise for someone else’s ideas or work

• taking extended lunch breaks

• selling a defective product (second-hand car)

• employ people illegally

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• giving good references to people you want to get rid of

• claiming extra expenses

☺ Say whether these words and phrase are related to honesty or dishonesty:

trustworthy law-abiding crooked

a slush fund a sweetener compensation

industrial espionage disclosure a conman

a whistleblower a swindler a commission

a bribe fraud integrity

☺ Which do you think are the most corrupt countries in the world and which are the least corrupt ones?

☺ Discuss the ethical question:

• You have a shortlist of people for the post of Sales Manager. One of the female

candidates is the best qualified person for the job. However, you know that some of your

best customers would prefer a man. If you appoint a woman you will probably lose some

sales.

• You are a director of a snack manufacturing company. Research has shown that any

price increase causes an immediate dip in sales. You were suggested to maximize profit

by reducing the weight of the product in the packets and keep the price.

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2 ASSETS

Asset is each resource that an enterprise gets, uses, generates and effectively manages in

its work. We can divide assets from many points of view

According the time of use: long-term assets : buildings, equipment, vehicles etc.

short-term/current assets : stocks, money, money

equivalents

According the value criterion: long-term tangible assets (over 1700€)

long-term intangible assets (over 2400€)

In terms of liquidity: which means the time the asset is able to change its form into money.

The most liquid is cash on hand and money on bank account, then short-term commercial

papers and receivables.

2.1 LONG-TERM ASSETS Long-term assets are those resources that can be used in a business longer than one year

and when speaking of value criterion tangible assets have to have the value over 1700€ and

intangible assets have to have a value over 2400€.

A) Among long-term tangible assets we rank:

o Buildings, plants, production halls, warehouses

o Movables: inventory, vehicles, equipment, machinery

o Land

o Livestock

o Permanent cultivation units

o Quarries

o Artworks and collections

B) Among long-term intangible assets we rank:

o Capitalized costs of development (exploitable results of research activity before

production: testing of prototypes, making tools, templates and models)

o Software

o Intellectual property: licenses, know-how, copyrights and brands, patents and

inventions, goodwill

C) Among long-term financial assets we rank:

o Long-term securities: bonds, obligations, shares, commercial papers

o Loans provided to other firms

o Artwork and collections if they are bought for the purpose of favorable investment

with the intention of further sale.

D) Long-term receivables with life span over one year.

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2.2 SHORT-TERM ASSETS (CURRENT ASSETS) Short-term assets are those resources that can be used in a business in one year term or

immediately respectively we rank here also those long-term assets which value is less than

the limits with tangible or intangible assets.

A) Stocks:

o Raw material (crude oil, wood, steel, corn)

o Parts and components

o Work-in-progress

o Finished goods for sale

o Packages

o Animals (duck, goose, dog, fish, bee, hen)

o Merchandise/goods (they are bought to become part of finished goods without any

change)

B) Short-term financial assets:

o Cash on hand

o Money on bank account

o Cash equivalents (stamps, cheques, meal tickets, phone cards, petrol vouchers)

o Short-term securities

C) Short-term receivables - the creditor has the right to ask for payment in one year.

2.3 ASSETS PROCUREMENT AND MEASUREMENT: An enterprise can procure assets by:

• purchase

• donation

• own production

• leasing

• transfer from personal use to business

Each procurement requires a record of receipt, an entry into the inventory card or book.

We distinguish an input price and residual value (means the difference between the input

price and accumulated depreciation).

There are several input prices:

• acquisition cost implies all costs connected with purchase (transport, installation,

duties...) not only the price itself. This price is used when the asset is purchased as

a new one.

• own expenses include all direct and indirect costs of production. This is used when the

asset is manufactured by the business itself.

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• reproductive cost is a price usually specified by an expert. This price is used when the

enterprise buys a real estate or a movable property that is not new. Usually it is

a donated asset or an asset transferred from personal use to business.

� par value is used with money equivalents, receivables and securities

2.4 DETERIORATION (WEAR AND TEAR) AND DEPRECIATION OF ASSETS

Deterioration can be:

physical – caused by active use or passive deterioration by aging or due to weather

conditions

moral – when the asset becomes obsolete under the influence of technical progress or it

becomes cheaper under the influence of labor productivity.

Depreciation means gradual transfer of input price into expenses.

Land and artworks are not written down because their value is not deteriorated over time,

their value increases. Intangible assets must be amortized in five years since procurement.

Each tangible asset is depreciated /written down during all its useful life until the item is

derecognized, totally written off.

Depreciation group Depreciation period

1 4 years

2 6 years

3 12 years

4 20 years

There are two methods of depreciation:

1. straight-line method where the depreciation charge is set as a division of input price

and the depreciation period. (We have a car which belong into the first group, so it has to

be depreciated in 4 years, we divide its price 12000€ by 4 which is 3000€ depreciation

charge each year.)

2. accelerated method – the depreciation charge is the highest at the beginning of

depreciation. This method is usually used by items that can be deteriorated very quickly.

(cars, computers)

In the first year of depreciation:

Input price Depreciation charge = –––––––––––––––––––––––– Coefficient in the first year

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In the second and other years of depreciation:

2x residual value Depreciation charge = ––––––––––––––––––––––––––––––––––––––––––––––––––––––––––

Coefficient in the second year – number of years already depreciated

We distinguish:

Accounting depreciation Tax depreciation • - expresses the measure of real

deterioration • - depreciation charge is recognized as

a tax expense

• - the business specifies the depreciation charge alone

• - the asset is written down from the input price until it is totally written off

• - usage method of depreciation is applied

•

• - the asset is written down according the rules of the depreciation group it belongs to

2.5 THE USE AND DISPOSAL OF ASSETS 1. extensive use of assets compares the actual time of use with a usable time fund

2. intensive use of assets compares actual performance with a standard output

The renewal of assets is possible as partial ( by maintenance or repair, reconstruction,

refurbishment) or complete by liquidation.

Disposal of assets is possible by:

• sale

• abandonment (liquidation, demolition)

• donation

• transfer from business to personal use

Each disposal requires a registration form.

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3 SUPPLY MANAGEMENT

3.1 LOGISTICS Procurement means finding and purchasing supplies or equipment, especially things that

are difficult to get. A purchasing manager these days could be called a supply chain manager

and have broader responsibilities for sourcing, logistics etc.

Procurement involves:

1. finding suppliers

2. background research (product quality, installation, maintenance and warranties)

3. negotiation (price, availability, customization possibilities, delivery schedules) and a

contract is drawn up.

4. fulfillment (the supplier prepares, ships and delivers the product. Installation and

training is also carried out.

Logistics implies attempts to coordinate the inbound flow of raw material into the company

and the outbound flow of finished products out from the company as well as getting materials

inside the company from site A to site B at different stages of the business process. Logistics

means physical distribution (transporting, warehousing, and inventory management) and

the flow of related information from point-of-origin to point-of-consumption to satisfy

customer requirements.

Logistics is a very complex activity that includes:

• reverse logistics (when goods are returned to the manufacturer as outdated or

overstocked)

• unloading items from means of transport and loading to another

• material handling inside the factory (goods are placed on pallets and moved around on

fork-lift trucks)

• inventory management at every stage using IT

• choice of means of transport

• decision making whether or not to use a third-party logistics provider

The earlier stage of a supply process where suppliers provide different parts and

components is called upstream end whereas a later stage which consists of distributors and

customer is called downstream end of the supply chain.

Supply chain management makes sure that the right items are in the right place at the right

time and in the right quantities. It answers some strategic questions:

• How many suppliers should there be?

• Where should the warehouses or distribution centres be located?

• What distribution channels should be used?

• Which logistic companies should be used?

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The importance of supply:

• - to overbridge the time and space discrepancies between the phases of reproductive

process

• - to secure smooth manufacturing process

Inventory is defined as goods held on hand for the production process or for sales to final

customers. Every manufacturer needs a system of inventory control – some way of

determining the right quantity of various items to have on hand and keeping track of their

location and use within a plant. The basic choice in purchasing materials for inventory is

whether to buy small amounts frequently or to buy large amounts once in a while.

Modes of supply:

1. storage supplies – firms buy materials, parts and components before they are needed

and store it to secure smooth manufacturing process. Hoarding materials waste cash

reserves, produces added costs in warehousing.

2. random supplies (hand-to-mouth buying) – firms buy materials and components after

they are needed, when they obtain an order (tailors, carpenters..) advantages: it is more

flexible, less money is tied up in storing materials and costs drop when prices fall.

Disadvantages: the plant may run out of needed material at a critical stage of production,

losing discounts of buying in bulk

3. just-in time method – operates with very low inventories and requires very fast, on-time

delivery. Parts for production arrive directly from suppliers neither before nor after they

are needed. JIT concept is used when it is not suitable for inventories to be stored over

significant periods of time. (Method was introduced and successfully applied in Japan)

The challenge facing the inventory-control manager is to find a delicate balance among these

many considerations, so as to maintain an inventory that is large enough to keep production

as high as possible, yet small enough to keep costs as a minimum.

Supply involves: stock planning, purchasing, transportation, storage, stock records.

Object supply:

A. basic material that forms the product e.g. wood in furniture production or cloth in dress

production

B. components and parts necessary for assembling of products such as handles, they

become part of the new product, they complement it e.g. paint on furniture or thread in

dresses

C. technological material does not become a part of product they just secure smooth

production e.g. tools for repair, oil for machines, wrapping paper...

D. commercial goods are not necessary for assembling, they become part of the new

product without any change e.g. radio installed in a car

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Reverse logistics involves the flow of materials back to the distribution or supply stages

where valuable outcomes result from their return.

The European Union directive gives guidance on:

Reuse – involves using of product again.

Repair – involves fixing or replacing broken or non-functioning parts or components for use

by the original or another buyer.

Refurbishment – involves restoring the product back to the original specifications.

Remanufacturing – aims to upgrade the product and improve its quality and performance

with additional features or functions.

Recycling – aims to save for future use as much value as possible from the product. This

involves reusing parts or components of product that has been dismantled by recovering

materials.

Outsourcing and offshoring

Sourcing means finding and evaluating suppliers.

Outsourcing is when organizations pay subcontractors (outside suppliers) to do work that

was previously carried out in-house. These activities can be described as non-core. A key

problem is to decide what is core and what is non-core. A company must undertake

transaction cost analysis of each activity to see whether it would be cheaper to outsource

and benefit form a supplier’s expertise because it does not have enough knowledge and

skills and is unwilling or unable to develop it strategically. The company has to decide which

capabilities are central to its particular corporate culture. Administrative tasks, computer-

based tasks and transport and warehousing can be outsourced. From administrative tasks:

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Back office outsourcing involves business functions such as purchasing (buying materials),

payroll (payment of employees, salaries), invoicing (preparing and chasing invoices)

Front office outsourcing involves customer-facing services such as: technical support

(maintaining products bought by customers, training customers or sellers..), marketing

Knowledge process outsourcing relates to tasks such as research and development in

pharmaceuticals, design and development in the car and aircraft industries, medical services.

This work requires highly qualified employees.

Outsourcing to companies abroad is offshoring.

3.2 STANDARDIZATION Norm is the maximum amount of material that is allowed to use in production of one

particular product.

Norms are set separately for basic material, parts and components and include the share of

material and waste (either technological or other made by workers as malformation).

Stock should be kept on certain level. Their shortage could cause interruption of

manufacturing process, on the other hand too much stock bounds firm’s finance.

There are several methods of planning the necessary amount of stock.

1. Graph method

This method is very summary and used when the product is very complex and consists of

many different parts and components, materials and commercial goods.

2. ABC method : all stock is divided into 3 groups

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Group A involves the most expensive material or components bought in smaller amounts and

their planning requires accuracy (wood in furniture manufacturing)

Group C involves the cheapest components which amount is not planned. Logisticians buy

them once a time in big amount (screws, threads)

3.3 OBJECTIVES OF THE LOGISTICS SYSTEM The objective of the logistic system is to minimize logistic costs while delivering maximum

customer service. Recently, firms have begun to realize that logistics costs are also

dependent on their relationship with suppliers, carriers and customers. This has led to the

practice of forming „strategic alliances“ among buyers, sellers and the transportation system

that connects them. Such strategic alliances are often supported by sophisticated information

systems that involve shared databases of customer information and electronic data

interchange, computers linked in two different firms to transmit documents such as purchase

orders, bills of landing and invoices.

A complete list of decisions that are associated with the flow of materials or products:

• Plant and warehouse site location

• Order processing

• Traffic and transportation

• Warehousing and storage

• Packaging

• Material handling

• Return goods handling

Many of these costs are interrelated so that changes in one will impact the others. As the

number of warehouses increases, inventory costs rise and transportation costs fall.

When choosing a supplier firms have to take in account costs and other criteria related to the

product such as the price of material or product, quality, suppliers goodwill and reliability,

supply conditions (time, means of transportation, distance) and payment conditions (time,

way of pay, supplier loan possibility)

There are 4 key elements in a logistic system: transportation, warehousing and material

handling, order processing and inventory management.

3.4 TRANSPORTATION There are 5 basic modes of transportation: railroads, motor carriers, air carriers, pipelines

and water carriers and modal combinations involving 2 or more modes such s highway

trailers on a rail flatcar.

All modes can be evaluated on six basic service criteria:

Cost – charges for transportation

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Time – speed of transit

Capability – what can be carried with this mode

Dependability – reliability regarding time, loss and damage

Accessibility - convenience of the mode’s routs

Frequency – scheduling

The physical characteristics of the material or product will often dictate what kind of

transportation can be used, the length of time inventory can be accumulated and whether

markets can be served from one or many locations. For example, the distribution of fresh

food requires timely transportation and low inventories to minimize spoilage. Time-related

food materials must be kept fresh on store shelves and these products may require

specialized transport facilities (refrigerated vehicles). Sometimes the size and measures or

way of package decide on the way of transportation.

MODE ADVANTAGES DISADVANTAGES RAIL Full capability

Extensive routes

Low cost

Not complete pick up and delivery

Sometimes slow

Sometimes damage problems

TRUCK Complete pick up and delivery

Extensive routes

Fairly fast

Size and weight restrictions

Higher costs

More weather sensitive

AIR Fast

Low damage

High cost

Limited capabilities

PIPELINE Low cost

Very reliable

Limited routes (accessibility)

slow

WATER Low cost

Huge capacities

Slow

Limited routes and schedules

More weather sensitive

Intermodal transportation involves combining different transportation modes to get the best

features of each. The most popular combination is truck-rail. The other popular use of an

intermodal combination is associated with export/import traffic and uses containers. These

containers can be loaded on ships, trains and truck trailers.

3.5 WAREHOUSING AND MATERIAL HANDLING Warehouses may be classified in one of two ways:

1 storage warehouses where the goods are intended to come to rest for some period of

time. Stores can be open (for building material such as sand, gravel), half open ( bricks,

wooden boards) or closed. Closed stores can be universal for storing anything or special for

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storing material that requires special conditions (refrigerators, deep freezers, dryers, rooms

with set humidity...)

2 distribution centres are designed to facilitate the timely movement of items: material,

components, goods and represent an important part of logistics system. The role of

distribution centres are diverse. They can store, blend different ingredients, consolidate

products from different plants and suppliers, label, repack or serve as sales offices and order

processing centres.

Material handling involves moving goods and materials over short distances into, within and

out of warehouses and stores. Characteristic for them are high labor costs and high rates of

loss and damage. They use different equipments such as forklifts, cranes, conveyors, lifts,

multicars, scales ... Recently, material handling has been automated by using computers and

robots to reduce the cost of holding, moving and recording the inventories of stores.

3.6 ORDER PROCESSING Lead time means the time from ordering an item until it is received and ready for use. This is

also referred to as order cycle time or replenishment time and consists of several separated

times:

• order transmission (The process starts with transmitting the order by a variety of means

such as computer or electronic data interchange. This is followed by entering the order in

the appropriate databases and sending the information to those needing it)

• order processing (This is the time during which the supplier can complete on order. If

the item is currently out of stock a backorder is created. Some paperwork associated with

the order must be prepared and a confirmation of the order must be sent)

• transportation (a chosen means of transportation plays role in this phase)

• handling (this time is reserve for orderer to handle, ( check, manipulate, stock and

register) the ordered items.

• standby time reserved for unexpected delays in any phase of supply.

Order processing systems are generally evaluated in terms of speed and accuracy.

3.7 INVENTORY MANAGEMENT The major problem is maintaining the delicate balance between too little and too much. Too

little inventory may result in poor service and stock outs (interruption in production), brand

switching and loss of market share. Too much leads to higher costs because of the money

tied up in inventory and the chance that it may become obsolete.

Inventory costs include:

Capital costs – means tying up funds in inventory instead of using them in other more

profitable investments

Inventory service costs include insurance and taxes

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Storage costs – include warehousing space and material handling

Risk costs – mean possible loss, damage, perishability and obsolescence

3.7.1 INVENTORY RECORD METHODS

A) visual methods such as record books, shelf labels or method of two shelves where it is

enough to record the amount, the items description, suppliers address and the minimum

amount at which it is necessary to order.

B) method of written records

Among these methods a storage card method is used most frequently especially when the

items are expensive and bought in smaller amounts. Each card implies the name and

number of item, turnover (dates, amounts and prices of increase and decrease), final

balance (what remains in store)

There could occur some inventory pricing problems – counting the difference between

purchasing prices in different times. Two methods of pricing can be used:

FIFO (first in first out) each stored item is recorded at price it was purchased which is quite

complicated to follow what amount has already been released from the store at that

particular price.

Average cost means counting average price after each turnover (movement) on the card.

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4 PRODUCTION

4.1 TRANSFORMATION PROCESS Firms and businesses are producers. They use the resources of land, labor and capital

(input) to make goods and services (output). For the economist the value of goods and

services produced is calculated by how much people will pay for them. There are, however,

some things that cannot be valued in this way. For example, when you help to clean your

home, wash dinner plates, grow vegetables in your garden it cannot be measured in terms of

money.

If a company makes mass-produced products, it is generally referred to as a manufacturing

company . If it is responsible for complex projects with a high degree of customization, it is

generally referred to as an engineering company as it involves designing, building and

testing things.

Civil engineering commercial and residential buildings, bridges, roads, dams

Electrical engineering power production and distribution, electronics, control

systems, telecommunications

Industrial engineering making industrial processes more efficient, increasing

productivity

Mechanical engineering automobiles, heating and cooling systems, industrial

equipment and machinery, medical devices

Chemical engineering plastics, paints, pharmaceuticals, agricultural chemicals, food

processing

Environmental engineering land management, water and sewage systems, pollution,

waste disposal, recycling

Software engineering databases and operation systems, computer graphics

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Production involves three processes:

• Transformation process means that different forms of input are changed into

completely new forms of output.

• Combination process means a meaningful organization of factors of production is

required to achieve goals.

• Funding and investment process is a circle where money changes its form.

Production has two main aims:

1. Productivity refers to the amount of output that can be produced from a given input

resources. Any business will attempt to maximize the productivity of its resources in

order to produce as much as it can at the lowest cost possible. In general, productivity in

a firm will increase if more output can be produced with the same input of resources.

2. Economy is connected with the principle of minimum or efficient use of input which

means fewer resources should be used to produce the same amount of output.

Labour productivity can be calculated by dividing total output in a given period of time (day, week, month) by the number of workers employed.

Total output Average product of labour = –––––––––––––––––– Number of employees

However, this measure tells us nothing about the quality of work. If the same amount of

labour, land and capital can produce more output for the same total cost, then the cost of

each unit of output will have fallen. Increasing productivity can therefore lower business costs

and increase profit. Nowadays, in large competition it is vital that firms increase productivity,

lower average costs, and improve product quality in order to compete with overseas

organizations.

A firm can attempt to raise the productivity of its workers through a combination of the

following:

• training workers to improve their skills and learn new skills

• introducing performance-related pay and bonus payment

• encouraging employees to buy shares in their organization

• improving job satisfaction by improving the working environment, making jobs more

interesting, team working, involving workers in decision making and giving regular

feedback on performance

• replacing old plant and machinery with new, more efficient machines and tools

• introducing new production processes to reduce waste and improve quality (robotic

assembly lines and recycling)

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4.2 LAW OF DIMINISHING RETURNS Any business owner or entrepreneur will try to combine the factors of production to obtain the

best possible results from their use. There is an important relationship between the inputs

and outputs.

Farmer Scale has a very large apple orchard full of apple trees. At the end of the summer

ripe fruit is ready for picking and the farmer employed Sam an apple picker who can pick 50

kgs of apples each day. Scale had a ladder which Sam would prop against the apple trees

and reach the fruit on the high branches. The farmer was worried that not all the apples

would be picked in time so hired more units of labour Angus. Sam would climb the ladder

and Angus would pick the apples from the lower branches so the total weigh of picked apples

increased to 80 kgs. The farmer employed another worker Lisa to help them and the total

product increased to 84 kgs a day. By hiring another employee Bob two weeks later the

ladder became so overloaded that it became unsafe and it was difficult for each worker to

reach the apples. The total product is just 45 kgs a day. The total, average and marginal

products of farmer Scale,s workers are presented in the table below.

Units of labour Total product Average product Marginal product 1 (Sam) 50 50 50

2 (Angus) 80 40 30

3 (Lisa) 84 28 4

4 (Bob) 45 15 -39

The law of diminishing returns states that if one factor of production is fixed in supply (land

and/or capital) and extra units of another factor (labour) are added to it, then the extra output

or returns gained from the employment of each extra unit of this factor must, after time, go

down or diminish. At first there are increasing returns to labour. However, if there are too

many workers the capital goods are become shared among too many pairs of hands.

4.3 TYPES OF PRODUCTION According to the production program:

• Primary production is aimed at products that represent the main production program

(furniture manufactures – wall units, dairy – milk)

• Additional production is related to specialization and aims at better use of production

capacity or use o waste (dairy – cheese, yoghurt)

• Associated production is neither related to production program nor specialization. (dairy

produces paper packs for milk of cheese)

According to the production process:

• Main production – main production program products are produced

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• Auxiliary production its products does not become part of main product (furniture

manufactures produces own tools to help them with production or maquettes)

According to the number of products:

• Job production : - one product is made at a time. A highly skilled, well-paid worker

makes a single product. This sometimes comes from a single order. Costs are high, but

so is job satisfaction. Advantages: extreme flexibility, high quality products, job

satisfaction (workers can use their individual skills to produce goods of which they can

be proud) Disadvantages: high costs of labour and goods, possible delays between

orders.

• Batch production – a quantity of one product is made, followed by a quantity of the

same or another product. Factory workers make batches (limited numbers) of the same

kind of product (bread and rolls, chairs and tables, clothes) A whole batch is processed

through a production stage before moving on to the next stage. There are economies of

scale, as the increased scale of production reduces the cost of each item. The workers

need some skills. Advantages: lower wages as workers are less skilled, cheaper as there

are some economies of scale. Disadvantages: difficult to manage it efficiently, workers

may be less motivated, storage costs of unfinished goods.

• Flow or mass production –it is used to produce large quantities of the same product at

high speed. Products move on a conveyor or assembly lines from one group of semi-

skilled workers to another, so that the workers have to keep up with the movement of the

line (televisions, nails, toothpaste). There are high capital costs with the machinery, but

the running costs are low. Division of labour is essential – workers are trained to do

particular tasks. The work can be repetitive and boring. Advantages: great economies of

scale produce low unit costs, low labour costs, little training required. Disadvantages:

high capital costs, one fault in the assembly line can halt all production, breakdowns of

machinery may cause serious problems and lack of worker motivation.

Mass production was made possible by three earlier technological advances:

Mechanization – use of machines to do work previously done by people.

Standardization – the production of uniform goods by making products and their parts of the

same shape, size, weight and quality.

Automation – the process of performing a mechanical operation with either the absolute

minimum of human intervention or complete automatic control. In automated production,

people are necessary to put the machines into operation and sometimes to monitor or

regulate them and inspect their output.

Hard automation is the use of specialized equipment that repeats the same operation over

and over. Involves producing of unchangeable product design in large volume, its application

is limited, the costs are high. Soft automation allows automated machines to perform more

then one function. It involves the use of computer-controlled machines that can adapt

different versions of the same operation. And enables so changing from one product design

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to another and requires only a few different signals from a computer, not a complete refitting

of the machinery. This flexibility allows managers to create different types of products in the

same factory.

Computer-aided design CAD – is the use of computer graphics in the design of products.

Computer-created three-dimensional images and calculations rapidly performed on the

computer allow engineers to test products without building preliminary models.

Computer-aided manufacture CAM – is the use of computers to control production

machines. CAM issues instructions to a machine tool from a computer. It increases output,

speed, accuracy and reduces time, labour. Plants that have incorporated these features are

said to use computer-integrated manufacturing .

When managers choose the site for a plant, they must consider several factors in order to

avoid serious and costly problems. The important considerations are the availability of labour

and low-cost supplies, access to transportation, and the attitude of the surrounding

community. After a decision has been made about what to produce production planner must

deal with the question of how to produce it as efficiently, quickly and cheaply as possible.

There are two basic types of production processes used by manufacturers.

The analytic process involves breaking down a raw material into one or more different

products, which may or may not resemble the original material in form and function. Example

is oil refining. This process takes crude oil pumped from the well and extracts gasoline,

kerosene, lubricating oil and home fuel oil from it. Meat packaging is another analytic

process. The packer divides a steer into bones, steaks and so on. The challenge in every

analytic process is to make full use of a raw material and to use each element as profitably

as possible.

The synthetic process involves combination two or more material to form a single product.

Steel manufacturing is a synthetic process by which iron extracted from ore is combined with

small quantities of minerals at high temperatures to make steel. Likewise glass is made by

heating sand (silica) and an alkali (potash) together. The challenge in synthetic processing is

to use the smallest possible amount of raw materials to produce the finished product.

Clothing makers must carefully plan the way patterns are laid out for cutting, so that as little

cloth as possible becomes useless scrap.

4.4 PRODUCTION CONTROL Production control is a complex coordinating process in which the manager coordinates

labour, materials, and machinery to make the finished product and maintains a smooth work

flow so that orders can be filled efficiently and economically. There is a sequence of steps:

1 Planning. The production manager makes a list of all the resources needed to fill the

order. A bill of materials is prepared listing all parts and materials to be made or

purchased.

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2 Sequencing. A supervisor decides which workstation will carry out which tasks in which

order. Routing means that the production manager specifies the path through the plant

that work will take and the sequence of operations.

3 Scheduling. Next the production manager must incorporate a time element into the

routing plan. (establishes a time for each operation on the route)

4 Dispatching is the issuing of work orders and routing papers to department heads and

supervisors.

5 Follow up and control . Even the best scheduler can misjudge the time needed to

complete an operation and production can be delayed by accidents, mechanical

breakdowns, or supplier failures. Thus the production manager must have a follow up

and control system to handle delays and prevent minor disruption from growing into

chaos. The production manager must set a quality control system through which items

are routinely checked and tested for quality as they are produced. A report is prepared

on all the rejects telling how many there were in a given time period and why they were

thrown out and reworked.

4.4.1 THE CRITICAL PATH METHOD CPM

Is another tool for production control. It breaks down one large project into the many different

steps necessary for its completion and analyzes the time requirements for each step.

In the CPM figure the time needed for each step is given. The total sequence of operations is

what is known as the critical path (the specific sequence of operations whose collections is

essential to the prompt completion of the entire project). What the production manager has

done is to estimate the least possible amount of time in which the whole project can be

completed by organizing the whole process the way when some processes or activities can

be done parallels or simultaneously.

For example recording the songs will take 4 days and making the records another 3 days

thus the album will be ready for packing in 7 days. The total 7 days sequence is the critical

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path. Meanwhile other activities can be done (design album covers, manufacture album

covers)

4.4.2 LEAN PRODUCTION

Refers to an approach which tries to meet demand with perfect quality and no waste. The

most important ideas of lean operations are:

• minimizing inventory kept on the premises – both stock and work-in-progress. So parts,

components, raw materials and other supplies are delivered to the factory just as they

are needed (JIT technique)

• making every effort to eliminate waste

• develop working practices which support “continuous improvement” (Japanese call it

kaizen)

• involving all staff in quality initiatives

• improving the flow of work-in-progress around the plant by rearranging layout and using

machines that are small, simple, robust and flexible.

4.5 OUTPUT Output can be any final product or service designed for sell and which is ready to satisfy

customers needs and wants.

Semi-product can be a final product of one manufacturer but it cannot satisfy needs and

wants and thus it serves as a material for another manufacturer who has to complete it. (flour

can be the final product of mills but a material for bakery)

Unfinished product is in some stage of the production process.

Waster is a product which parameters does not meet requirements and thus dos not satisfy

needs and wants.

New product satisfies new needs or wants or satisfies existing ones but on a higher level.

Products have three main features:

Objective – such as design, quality, colour

Subjective – such as image, status and goodwill

Add-on – such as guarantees, after-sales service, distribution or payment conditions

Brands: producers or seller brand their product to distinguish them from other similar

products made by different producers. (see chapter marketing)

Production capacity represents the maximum quantity of production that a factory can

produce in a particular time period. It can be given as an input quantity which means the

ability of the factory to process certain amount of raw material or as an output quantity

which means the ability of the factory to produce certain amount of products. Each

manufacture works with certain production capacity reserve to be flexible in changing market

conditions. There are several factors that can influence the production capacity: machinery,

labour (number and qualification of workers), production area (halls, workshops)

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5 BUSINESS AND THE ENVIRONMENT

5.1 ENVIRONMENTAL DAMAGE It is often said that we live in a consumer society, we consider it important to buy products

and services. Companies need to be aware of the impact of this on the natural world around

us. Governments in many developed countries have imposed strict environmental

regulations to combat environmental pollution. Companies should not pollute the air with

toxic emissions from chimneys or with effluent – toxic liquids that they discharge into rivers

or the sea. Nuclear power plants are required to monitor levels of radioactivity because

some pollutants are carcinogenic. Debate has been reactivated in context of climate

change . Supporters of nuclear power say that it can help to combat global warming .

Since the beginning of industrial revolution about 250 years ago, emissions from the burning

of fossil fuels such as oil and coal have led to increasing amounts of carbon dioxide and

other greenhouse gases in the atmosphere. This greenhouse effect has led to global

warming. Experts predict serious consequences if this continues, with, among other things,

storms and rising sea levels causing floods and droughts. This will lead to severe effects on

infrastructure (transportation, communication) with large number of people forced to move

from effected area.

Individuals and companies are aware of their carbon footprint – amount of carbon dioxide

that their activities produce and take measures to reduce it. The maximum amount of carbon

that a company is allowed to produce is limited to a particular level. With carbon trading ,

a company can emit more than this by buying carbon credits from another company that

emits less than the permitted amount. With carbon offsets , the carbon dioxide produced by

a company’s activities can be compensated for elsewhere. For example, a car company can

arrange for trees to be planted to absorb the equivalent amount of carbon that its cars

produce. Then the company can claim that its activities are carbon-neutral. Some scientists

say that the above measures will not be enough to reverse climate change. They say that the

greenhouse gases already in the atmosphere need to be removed from it, for example by

capturing it and storing it underground.

5.2 ECO-FRIENDLY PRODUCTS Deep-sea fishing has to be done in a way that maintains fish stocks and avoid overfishing .

Agricultural products should be produced in ways that can be continued and that avoid over

farming . Logging that causes deforestation should have an incentive to maintain future

timber stocks through reforestation. Another aspect of sustainability is renewable

resources , including alternative energy sources such as wind power, solar power from the

sun and tidal power from the natural rises and falls in the sea level. These are together

known as renewables .

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There are some of the environmental or green issues that governments and companies are

facing. Companies may say that their products and activities are eco-friendly . Some

companies produce reports on these issues that give a more favorable impression than is

justified by the facts. This is called green wash by critics.

Products should be made of materials that are recyclable . The European Union has

regulations about the proportion or percentage content of product and packaging that must

be reused and recycled. Households and industrial waste should be also recycled. Some

companies, for example, are recycling their products by reusing parts in new products. All

this is a part of corporal social responsibility .

5.3 SOCIAL COSTS AND BENEFITS Private firms in the market economic system only decide what, how and for whom to produce

simply by looking at their private costs and private benefits .

The Chemix company produces plastic. If it expects €3 million of revenue but only €2 million

costs each year, this would give them €1 million in profit. The problem is that from the

society’s point of view, the building and running of the Chemix plant has caused widespread

pollution (polluted river by dumping poisonous waste from Chemix plant, local fishermen

have lost their livelihood, the polluted river seeping into the ground affected the farmers,

crops and the poisoned river does not attract the tourist anymore) which is total €2 million

and it is called external costs .

If the Chemix company had taken into consideration the cost of cleaning up the waste it had

dumped then the total cost for society of producing plastic would be €4 million (€2 million

private costs and €2 million of external costs).

Some firms can cause external benefits which are free. No payments need to be made for

them by people who receive them. Chemix can afford to train skilled workers. They can later

leave Chemix and work for other companies, which may not be able to afford to train their

workers, so this is an external benefit provided by Chemix company which is worth €250 000.

In the case of Chemix company, private benefits are €3 million, external benefits are

€250 000 so the total benefits are €3,25 million.

When the social benefits exceed social costs of production the particular use of resources is

worthwhile for all of society. This is not the case of Chemix company, which still makes social

loss of €0,75 million. (€3,25 million benefits - €4 million costs). In other words it would be

better not to have built the Chemix plant, because the business is still not worthwhile from

the society’s point of view.

How can the government help?

1 It is possible to make firms consider the external costs of their actions by taxing

them. (paying extra tax to cover the costs of repair). Many countries have introduced

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a landfill tax for example. However, it is difficult to work out exactly how much pollution

each firm in the area is responsible for.

2 Private sector firms are not interested in producing external benefits for others.

A subsidy is a payment of money given by the government to firms in order to

encourage them to produce goods and services that result in external benefits. (A bus

company may find unprofitable to provide buses after the rush hours because not

enough people use the service then. To provide buses at off-peak times for old people or

schoolchildren the bus company could be given a subsidy.

3 A government can allow nationalized industries to act in the public interest and take

account of any external costs and benefits they cause.

4 A government can pass laws in order to control firms creating external costs.

Antipollution laws state exactly which chemicals can be released into the air and which

cannot. There are also laws on how high factory chimneys can be, where waste can be

disposed of and how it should be done. Firms who break these laws can be fined or their

owners can be imprisoned.

☺ Look at the cartoons and discuss which environmen tal threat each cartoon refer to. Which cartoon is the most effective?

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6 MARKETING

6.1 WHAT IS MARKETING Marketing is the process of planning and executing the conception, pricing, promotion, and

distribution ideas, goods, and services to create exchanges that satisfy individual and

organizational objectives. This definition stresses the importance of beneficial exchanges

that satisfy both the buyers and sellers.

Marketing seeks to discover the needs and wants of prospective customers (individuals

buying for themself and their households and organizations buying for further production or

for resale) and to satisfy them.

The marketing department is responsible for facilitating relationships, partnerships, and

alliances with the customers, shareholders, suppliers and other organizations. Environmental

forces such as social, technological, economic, competitive, and regulatory factors also

shape an organizations marketing activities.

For marketing at least four factors are required:

• two or more parties (individuals or organizations) with unsatisfied needs

• a desire and ability to be satisfied

• a way to communicate

• something to exchange

What is a market? Potential customers make up a market, people who are aware of their

unmet needs may have the desire to buy the product and also must have the ability to buy,

such as authority, time, and money. Since the organization cannot satisfy all customers

needs, it must concentrate its efforts on certain needs of a specific group of potential

customers – this is the target market .

6.2 MARKETING MIX Having selected the target market customers the marketing manager must take action and

develop a marketing program to reach customers by using a combination of four tools,

often called as four Ps :

Product – a good, service or idea to satisfy customers needs

Price – what is exchanged for product

Promotion – a means of communication between the seller and buyer

Place – a means of getting the product into the customers hands

These marketing elements are called marketing mix , and controllable factors, because they

are under the control of the marketing department in an organization.

Today marketers talk about additional four Ps:

people: how your staff is different from those in the competitor’s organization

physical presence : how your shop or website looks

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process: how your product is built and delivered

physical evidence : how your service become tangible (tickets, brochures create something

your customers can touch and hold)

Some marketers have supplemented the four Ps by Cs or As and Os:

4Ps 4Cs 4As 4Os

Pro

duct

Customer needs. The company must identify customers needs so that products that meet these needs can be developed

Acceptability. Is the product socially acceptable, fashionable and attractive?

Objects. How is it produced, what is its quality, how do you sell it?

Pric

e

Cost to user. Does the customer perceive the price of product as fair, or is it too expensive?

Affordability. Does the customer can afford to buy the product?

Objectives. Revenue objectives concern the income you want to generate.

Pla

ce Convenience.

How convenient is it to find your product?

Accessibility. Is the product easy to access?

Organization. Which distribution methods will work best?

Pro

mot

ion

Communication. How should you communicate with your customers?

Awareness. How many people know about, or are aware of the product?

Operations. Which promotions operations will work best for the product?

AIDA is an acronym which represents the steps a marketer takes in order to persuade

customers to buy a product.

ATTENTION Marketing must first attract the customers, attention to the product.

Customers become aware of a product.

INTEREST Marketing must create an interest in the product. Customers develop an interest in the product.

DESIRE Next, marketing must develop a desire to own or have the product so that customers actively want the product.

ACTION Finally, marketing must prompt action to purchase, so that customers take steps to buy the product.

The following factors have a direct impact on the company, consumers, shareholders,

employees and suppliers. The company has an influence over these factors.

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consumers A company must understand consumer needs and meet t hem.

competitors You must differentiate your brand from your competitors,

employees Employing the right people and keeping them motivated is essential. Training and development play key role in service sector.

media Positive or negative media attention can seriously affect an organization.

shareholders It is important to satisfy shareholders, needs without harming the brand in the long term.

suppliers Changes in price and quality of raw materials will affect the marketing mix. Good relations with the suppliers will make business easier.

A STEP analysis looks at sociological, technological, economic and political factors in the

market environment on a MACRO LEVEL. The relationship between the company and these

factors is indirect and can serve as accelerators or brakes on marketing.

Customer value is the unique combination of benefits received by target buyers that include

quality, price, convenience, on-time delivery, and both before-sale and after-sale service.

Marketing creates utility , the benefits. There are four different utilities. The production of

goods and services constitutes form utility. Place utility means having the offering available

where customers need it, time utility means having it available when needed. Possession

utility is getting the product to customers so they can use it. Marketing provides customers

with utilities by making the goods and services available at the right place and right time for

the right customer.

6.3 MARKETING PLAN A company’s marketing strategy describes how it will position itself and the products it sells

in the competitive marketplace. The strategy includes a discussion of target markets, product

and pricing policies and promotional initiatives.

Marketing plan is a road map for the marketing activities of an organization for a specific

future period of time, such as one year or five years. It also examines the resources needed

to achieve marketing objectives such as a new product launch or increase in sales.

The first step in planning phase is situation (SWOT) analysis , which is an effective short-

hand summary describing the organizations internal strengths and weaknesses and its

external opportunities and threats. SWOT table has four cells formed by the combination of

internal versus external factors and favorable and unfavorable factors.

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One way for firms to utilize the SWOT results of their industry, competitors, own firm and

customers is to assess market-product strategies. Four such strategies representing four

combinations.

1 Strategy of market penetration – increasing sales of present products in their existing

markets by better advertising, more retail outlets, lower prices, or more effective

distribution.

2 Market development – selling the same products to new markets

3 Product development – involves selling a new product to existing markets

4 Diversification – involves developing new products and selling them in new markets.

This is a potentially high-risk strategy because the company has neither previous

production nor marketing experience.

6.3.1 THE MARKETING BUDGET

The marketing budget presents the cost of the marketing plan. It can include the cost of

distribution and different marketing actions, such as advertising or market research. The

annual marketing budget shows what the marketing department is planning to spend over

the year. There are several approaches to setting the marketing budget:

• the affordable approach : the company forecasts revenues, deducts costs, and allocates

a part of remaining funds to promotion. Marketing depends on what the company can

afford, that is, how much money it has left.

• the percentage of sales approach : a percentage of current or anticipated sales is

allocated to marketing actions. Typically, 10% of net sales is spent on promotion.

• the objective-and-task approach : the company calculates the cost of researching its

marketing objectives. For example, new products will need large advertising budgets to

build awareness.

• competitive parity . Competitor investment is tracked, or monitored and used as a

guideline to set the promotion budget. The objective is to spend more or the same as the

investment of competitors.

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6.4 MARKET –PRODUCT FOCUS AND GOAL SETTING Market segmentation identifies groups of buyers within a market who share similar needs

and demonstrate similar purchasing behaviour. Market segments are described by

demographics and psychographics.

Demographics: - age group

- sex: male/female

- religion and ethnicity: Hispanic, Asian, Muslim, Jewish..

- income

- life cycle: single, married, with children

Psychographics: - education

- attitudes and opinions about things, brands…

- usage (rate of use: light, medium or heavy user, user states:

nonuser, ex-user, prospect, first-time user, regular user)

- awareness and intention (readiness to buy, brand familiarity)

People can be targeted as individuals or as a family group that lives together and makes up

a household. Marketers use the ABC socio-economic categories to target groups:

Social grade Social status Occupation A Upper middle class Higher managerial, administrative or

professional

B Middle class Intermediate managerial, administrative or professional,

C1 Lower middle class Junior managerial, administrative or professional, clerical

C2 Skilled working class Skilled manual workers

D Working class Semi-skilled and unskilled manual workers

E Those at lowest level of subsistence

State pensioners or widows, casual or lowest grade workers

Then the marketing program budgeting process starts with a sales forecast based on

estimates of units expected to be sold (months, quarter, year). Estimated expenses for the

marketing mix activities comprising the marketing program are estimated and balanced

against expected revenues to estimate the programs profitability. This budget is presented to

the top management to gain approval for the budgeted resources to implement the marketing

program.

6.5 MARKETING RESEARCH Marketing research is the process of defining a marketing problem and opportunity,

systematically collecting and analyzing information, and recommending actions to improve

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an organization,s marketing activities. Marketing research can reduce risk and uncertainty to

increase the likelihood of the success of marketing decisions.

Marketing research methods are approaches that can be used to solve problems. Special

methods vital to marketing are sampling and statistical interference.

Sampling. Marketing researchers often select a group of distributors, customers, ask them

questions, and treat their answers as typical. There are 2 ways of selecting representative

elements from a population:

a probability sampling involves using precise rules to select the sample. Each element of

population has a specific known chance of being selected. (If a college wants to know

how its 1000 graduates are doing, put their names in a bowl and randomly select 50

names of graduates to contact)

b nonprobability sampling is used when time and budget are limited. They use some

judgments to select the sample (the college decides to select 50 graduates who live

closest to the college)

Statistical inference involves drawing conclusions about a population from a sample. The

sample elements should be representative. If the sample is not typical, bias can be

introduced, resulting in bad marketing decisions.

6.5.1 SECONDARY DATA

These are facts and figures that have already been recorded before. They can be internal

which already exist inside the firm. They are financial statements such as balance sheet and

income statement, then research reports, customers letters, sales reports... External

secondary data are published from outside the firm.

6.5.2 PRIMARY DATA

These are facts and figures that are newly collected.

a observational data are obtained by watching, either mechanically or in person, how

people behave. National TV ratings are example of mechanical observational data

collected by people meter, which is attached to TV sets in homes. Personal

observational data are collected by having a person watch a marketing activity, which is

useful and flexible but also costly and unreliable when different observers report different

conclusions in watching the same event.

b questionnaire data are obtained by asking people about their attitudes, awareness,

intentions and behaviors. Individual interview means a single researcher asking

questions of one respondent. Focus group is a session of 6-10 customers who are

directed by a moderator to identify what they do and don’t like about the firm’s products

and the competitors, products. The interviews are tape recorded in a special interviewing

room with one-way mirror. Mall intercept interviews are personal interviews of

customers while on visit to shopping centres, The customers are provided by product

samples. Technology has even made possible virtual shopping trip simulations by

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enabling a mall intercept respondent to walk through store aisles and buy products

sitting in front of screen. In questionnaires open questions can be used where

a respondent can answer in his own words or close-end questions which are usually yes

or no questions. When selecting questions into the questionnaire avoid ambiguous or

unanswerable questions as well as two questions in one.

c A panel is a sample of customers or stores from which researchers take a series of

measurements (in this way a customer is switching from one brand to another can be

measured)

d An experiment involves obtaining data by manipulating factors under controlled

conditions to test cause and effect.

6.6 PRODUCT Product is any good, service or idea that satisfies customers needs. Product mix is the list of

all products offered by a manufacturer. Product line is a group of products that are

physically similar or are intended for similar markets. A product line may be broad, narrow,

deep and shallow. A product type is a group of products offered by different companies

which are technically similar.

6.6.1 CONSUMER GOODS

Differ in effort the consumer spends on decision, attributes used in purchase and frequency of purchase. 1 Convenience (fast moving consumer goods) goods are items the customer purchases

frequently, conveniently and with minimum of shopping afford.

2 Shopping goods are items for which the customer compares several alternatives

according the price, quality or style.

3 Specialty goods such as Tiffany silver that a customer makes a special effort to search

out and buy. Brand royalty may also play role.

4 Unsought goods that consumer either does not know about or knows about but does

not initially want.

5 White goods major household electrical goods which are usually white, such as freezer,

washing machines and dishwashers.

6 Brown goods major household electrical goods that are not usually white, such as

camcorders, TV sets, DVD payers.

7 Perishable goods that have limited shelf life and must be consumed relatively quickly,

such as fresh fruit, meat and eggs.

8 Durable (hard) goods that last for long time such as cars, furniture.

9 Nondurable (soft) goods last for less than 3 years such as consumable supplies: CD

ROMs, ink for printer…

10 Green products that are not harmful for environment

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6.6.2 INDUSTRIAL PRODUCTS

May be classified as 1 production goods - used in manufacturing process that become part of final product:

raw material and component parts. Marketers of these products tend to sell directly to

industrial users.

2 support goods – used to assist in producing other goods and services. They include

o installations (buildings and fixed equipment) Industrial buyer deal directly to

construction companies through sales representatives.

o Accessory equipment (tool, Office equipment) are purchased in small-order sizes by

buyers. Sellers of industrial accessories use distributors to contact a large number of

buyers.

o Supplies – similar to consumer convenience goods (stationery, paper clips, brooms)

Purchased with little effort, price and delivery are key factors.

o Services (maintenance, repair, advisory: tax or legal counsel) The reputation of the

seller of services is a major factor.

6.6.3 WHAT IS A NEW PRODUCT?

If a product is functionally different from existing offerings, it can be defined as new.

Innovation can also be a modification of an old product.

Newness from the company’s perspective can be:

• -a product line extension (a new diet cherry coke)

• -a significant jump in the innovation or technology (Sony’s leap from the micro tape

recorder to the Walkman)

• -a truly revolutionary new product (the first Apple computer in 1976).

Product development has several stages:

1 generation of ideas . Market research techniques are used to identify gaps in the

market. Marketers search for ideas to create original products or modify or improve

existing ones.

2 idea screening . Launching new products is a risky business, so new product ideas are

screened to select. A company has to assess which ideas are viable means will survive

in a competitive marketplace, technically feasible means the company has sills and

resources to produce them and profitable means will make money. The company also

considers overall demand – how much they can expect to sell. The concept is tested

among potential customers.

3 concept development and testing . An attractive idea is developed into several

different product concepts. Concept testing measures customer response to a new

product.

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4 marketing strategy and business analysis . The marketing strategy describes how to

penetrate the market, decides which route to market is best for the product. Companies

also estimate the sales volume, the selling price and revenue expectations.

5 product development . Many product concepts exist only as a description – a drawing

or very basic model known as a mock-up. Product modeling creates a prototype – a first

example of the product to test its functionality, to cut costs of production and it allows

market testing. For software, the first stage is alpha test, where the program is tested by

company employees to remove any errors or bugs. Then the software is sent for external

testing which is known as beta testing.

6 test marketing . The next step is to collect information on how the proposed product will

perform in the market place on a small test market before a full launch. This allows the

company to forecast sales, uncover problems and fine-tune or adjust the marketing plan.

The amount and type of testing depends on the costs and risks of introducing the

product.

7 commercialization . It is also known as market introduction – the final stage in a new

product development process. The distribution network and marketing communications

action plan must be ready by the launch date. The company may launch the product

simultaneously in all markets or prepare a step-by-step market rollout in different cities

and countries.

Portfolio analysis examines the comparative strengths and weaknesses of various product

lines. The most widely used portfolio analysis is the fore-cell matrix, where products are

categorized into four groups.

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Stars are products in the growth stage of the life cycle that have already captured

a dominant share of the market. Much of the star’s profit is reinvested to promote further

growth.

Cash cows are often stars that have reached the maturity stage. Their large market share

makes them quite profitable, but they have limited growth potential, so their income can be

used to support other ventures.

Questions have high growth potential, usually because the market itself is expanding, and

yet, their share of the market is disappointing. This may be because they have been targeted

to the wrong segment of the market or perhaps because the product itself is not competitive.

Dogs have neither growth potential nor a strong market share. They are often good

candidates for elimination or replacement with a new product line.

6.6.4 PRODUCT LIFE CYCLE

The product life cycle describes the stages a new product goes through in the market place.

1. Introduction stage – the product is first introduced to its intended target market. Sales

grow slowly as well as the revenue. Heavy spends on advertisements and other

promotion tools are used to build awareness among consumers. There are only

restricted number of product variations at the market. The stage ends when the first

profit is earned.

2. Growth stage – is characterized by rapid increases in sales and the first competitors

appear. The result of more competitors and aggressive pricing is that the profit usually

peaks in this stage. To help differentiate the company’s brand from those of its

competitors, an improved version or new features are added to the original design. In

this stage it is important to gain as much distribution for the product as possible.

3. Maturity stage – is characterized by gradual leveling off of total industry sales or

product class revenue. Marginal competitors begin to leave the market. Most consumers

are both repeat purchasers of the item or have tried and abandoned it. Sales increase at

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a decreasing rate as few new buyers enter the market. Profit declines because the

competition among sellers requires new costs of gaining new buyers. And marketing

expenses are often directed toward holding market share through further product

differentiation and price competition continues through rebates and discounting, also

promotional and distribution efficiency improvement require further costs.

4. Decline stage - occurs when sales and profit stage begin to drop. To handle this stage,

the company may drop the product from the company’s product line or retain it but

reduce marketing support costs. The product continues to be offered to meet customer

request without any marketing support.

There is no exact time that a product takes to move through its life cycle. Consumer goods

have shorter life cycle than industrial goods. Many new consumer food items move from

introduction stage to its maturity in 18 months. The rate of technological change tends to

shorten product life cycle as new product innovation replaces existing products. Not all

products have the same shape of curve. A fashion product is introduced, declines and then

seems to return. A fad product (toe socks) experiences rapid sales on introduction and then

an equally rapid decline. These products are typically novelties.

To modify the product life cycle especially the maturity stage a brand manager can make

these steps:

1 product modification involves altering a product’s characteristics (quality, performance,

appearance) to try to extend its sales. New features, package are used to give a sense

of revised product. (Procter&Gamble revamped Pantene shampoo and conditioner with

a new vitamin formula and relaunched the brand with a new promotional campaign)

2 market modification – the company tries to increase the product’s use among existing

customers, create a new situation, (new uses for an existing product: Woolite not just for

woolen material but for all fine clothing items) or find new customers (wall-to-wall carpet

manufacturers found new users group such as schools and hospitals).

3 repositioning the product by trading up which involves adding value to the product

through additional features or higher quality materials or by trading down which

involves reducing the number of features, quality or price (airlines have added more

seats and eliminated snack service). Downsizing means reducing the content of

packages without changing the price.

6.6.5 BRANDING

Branding is a process in which an organization uses a name, phrase, design, symbols, or

combination of these to identify its products and distinguish them from those of competitors.

A brand is any word (design, sound, shape or colour). A trademark identifies that a firm has

legally registered its brand name so the firm has its exclusive use and preventing others from

using it. A good trademark can help sell a product, product counterfeiting, which involves

low-cost copies of popular brands not manufactured by original producer. Counterfeit product

can steal sales and hurt company’s reputation. Consumers can benefit from branding, it

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allows them to be more efficient shoppers. Consumers can recognize and avoid products

with which they are dissatisfied, while becoming loyal to other brands.

Licensing is a contractual agreement whereby a company allows another firm to use its

brand name, patent, trade secret for a loyalty or fee. Licensing also assists companies in

entering global markets with minimal risk.

Label is either a separate item attached to a package, or a part of the container that holds

the product. Generally it serves to identify a brand. Sometimes it also gives grading

information about the content, specifies life expires, or contains computer-coded label that

provide pricing and inventory data when scanned by the electronic checkout devices at retail

stores.

Manufacturer branding:

1. Multiproduct branding is when a company uses one name for all its products often

referred as family branding strategy. Customers which have a good experience with the

product will transfer this favorable attitude to other items in a product class with the same

name. This strategy makes possible line extensions, advertising costs are lower and the

brand awareness among customers is raising.

2. Co-branding means pairing of two brand names of two manufactures on a single product.

3. Multibranding involves giving each product a distinct name while each brand is intended

for a different market segment (P&G makes Camay soap for those concern with soft skin and

Safeguard for those who want deodorant protection.) Costs tend to be higher because the

company must generate awareness among customers for each new brand name.

Private branding or reseller branding means that the manufacturers products are sold under

the wholesalers or retail sellers brand name. Foods are often private labeled for

supermarkets.

Generic branding – these are no-brand products such as dog food, green beans. The price

is up to one third less than of branded items.

6.6.6 PACKAGING

The customers first exposure to a product is the package, and it is an expensive and

important part of the marketing strategy. Packaging is essential because packages provide

important benefits for the manufacturer, retailer and ultimate consumer.

1. communication benefits : a major benefit of packaging is the information on it conveyed

to the customer (directions on how to use the product, the composition of the product,

nutritional and dietary information, warranty - a statement indicating the liability of the

manufacturer for product deficiencies).

2. functional benefits : packaging plays roles such as convenience, protection or storage.

Companies commonly use safety seals or pop-tops that reveal previous opening. Packaging

extends storage and shelf life. New technology allows products requiring refrigeration to be

packed in paper-sealed containers, which dramatically increases their shelf life.

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3. Perceptual benefits means perception of the product created in customers mind through

its package.

There are two global trends in packaging:

Environmental sensitivity because of widespread worldwide concern about the growth of

solid waste and the storage of landfill sites. Disposal packaging materials must be collected

reused and recycled and also less packaging materials must be used.

A second trend involves the growing health and safety concerns of packaging materials.

6.7 PRICE Price is the money exchanged for the ownership or use of a good or service. Pricing is also

a critical decision made by a marketing executive because price has a direct effect on a firm’s

profit.

Profit = Total revenue – Total cost

Profit = (Unit price x Quantity sold) – Total cost

6.7.1 IDENTIFYING PRICING CONSTRAINS

1 Demand for the product. If the demand for product is high the price can be higher too.

2 Stage in the product life cycle . The newer a product and the earlier it is in its life cycle,

the higher is the price that can be charged.

3 Cost of producing and marketing the product . A firm’s price must cover all the costs.

Costs set a floor.

4 Type of competitive market . Different price is set in case of pure monopoly, oligopoly

or monopolistic competition

6.7.2 DEMAND-ORIENTED APPROACHES:

A Skimming pricing means setting the highest initial price that customers really desiring

the product are willing to pay. As the demand of these customers is satisfied, the firm

lowers the price to attract another, more price-sensitive segment. This strategy is

effective when there are enough customers willing to buy the product and customers

interpret high price as signifying high quality.

B Penetration pricing means setting a low initial price on a new product to appeal to the

mass market immediately. The strategy works if there are many price-sensitive

segments, a low price discourages competitors from entering the market.

C Prestige pricing – consumers may use price as a measure of the quality or prestige of

an item so that as the price is lowered beyond some point, demand for the item actually

falls. This pricing involves setting a high price so the status-conscious consumers will be

attract to the product a buy it. (Rolls-Royce cars, Swiss watches)

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D Odd-even (psychological) pricing involves setting a price a few euros or cents under

an even number which has a psychological effect (399 € instead of 400€ or 29,95€

instead of 30€)

E Bundle pricing is based on the idea that consumers value the package more than the

individual items (airlines often offer vacation packages that include airfare, car rental and

lodging).

6.7.3 COST-ORIENTED APPROACHES

A Standard markup pricing . Managers of supermarkets and other retail stores have large

number of products so use this method of pricing. It means adding a fixed percentage to

the cost of all items in a specific product class. The percentage markup depends on type

of retail store or volume of products (high volume products have smaller markups). The

markup can increase as the product gets closer to the ultimate customer (e.g. the

manufacturer has 15% markup, the wholesaler 20% and the retailer 40%)

B Cost-plus pricing involves summing the total unit cost of providing a product or service

and adding a specific amount to the cost to arrive at the price. It can be either

percentage-of-cost pricing or fixed-fee pricing.

C Experience curve pricing is based on the learning effect. The unit cost of many

products declines by 10% - 30% each time a firm’s experience at producing and selling

doubles.

6.7.4 COMPETITION-ORIENTED APPROACHES

A Customary pricing is used when there is a tradition or standardized distribution channel

that dictate the price (Swatch watches - $40 customary price for the basic model has not

changed in 10 years)

B Above, at or below-market price . Among watch manufactures Rolex takes pride in

emphasizing that it makes one of the most expensive watches you can buy which is

a clear example of above-market pricing. Large mass-merchandise chains generally use

at-market pricing and manufacturers of all generic products and retailers who offer their

own private brands of products set prices below the prices of nationally branded

products.

C Loss-leader pricing . The purpose is to attract customers in hopes they will buy other

products as well, particularly the discretionary items carrying large markups. (One

supermarket sells rib steaks at $2.29, but other items such as soft beverages, salads are

with high markup)

6.7.5 SPECIAL ADJUSTMENTS TO THE QUOTED PRICE

A Discounts are reductions from list price that a seller gives a buyer as a reward for some

activity of the buyer that is favorable to the seller.

o quantity discounts . To encourage customers to buy larger quantities of a product.

Quantity discount is a reduction in unit costs for a larger order.

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o Seasonal discount . To encourage buyers to stock inventory earlier then their

normal demand would require (e.g. to stock up on lawn movers in February)

o Trade discounts . To reward wholesalers and retailers for marketing functions they

will perform in the future (the quoted price by manufacturer is 100€, 30% of the

suggested price is available to the retailer to cover costs and provide profit.

Wholesalers get 10% of their selling price and 5% for jobbers who are closest to the

manufacturer).

o Cash discounts . To encourage retailers to pay their bills quickly.

B Allowances are reductions from list or quoted prices to buyers for performing some

activities.

o Trade-in allowances is a price reduction given when a used product is part of the

payment on a new product (your old car makes 20% off in your new car price)

o Promotional allowances are free gifts for advertising or selling activities to promote

a product

C Legal and regulatory aspects of pricing . These are specific laws and regulations

affecting pricing decisions.

o Price fixing is a conspiracy among firms to set prices for a product. Sellers are

required not to sell products below a minimum retail price. (the minimum price can

be also stated by the government: cigarettes, petrol, or vice versa it can state the

maximum price: electricity, gas heating)

o Price discrimination – the practice of charging different prices to different buyers.

(monopoly)

o Predatory pricing is the practice of charging a very low price for a product with the

intent of driving competitors out of business. Once the competitors are out, the firm

raises its prices. This practice is illegal.

6.8 DISTRIBUTION Marketing channel consists of individuals and firms that make possible the flow of goods

from a producer, through intermediaries, to a buyer. Intermediaries have different names and

perform various functions.

Middleman any intermediary between manufacturer and end-user

Agent or broker any intermediary with legal authority to act on behalf of

manufacturer

Wholesale r who sells to other intermediaries (usually retailers) to

consumer market

Retailer sells to consumers

Distributor performs a variety of distribution functions in industrial market

Dealer can mean the same as distributor, retailer, wholesaler.

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Intermediaries perform these functions:

Transactional function Buying

Selling

Risk taking (in the ownership of inventory)

Logistical function Assorting (creating product assortment from several sources to serve customers)

Storing (assembling and protecting products at a convenient location)

Sorting (purchasing in large quantities and breaking into smaller amounts)

Transporting

Facilitating function Financing (extending credits to customers)

Grading (inspecting, testing or judging products and assigning them quality grades)

Marketing information and research (providing information to customers and suppliers, including competitive conditions and trends)

6.8.1 DISTRIBUTION CHANNELS

Channel A represents a direct channel where a producer and ultimate consumer deal

directly with each other. (A number of insurance companies sell their services using a direct

channel or encyclopedias are sold door-to-door)

Channel B represents an indirect channel because intermediaries are inserted between the

producer and consumer. In this case i tis a retailer which is large and can buy in large

quantities from a producer (cars are sold this way where local car sellers are retailers)

Channel C has plus a wholesaler between the producer and customer. This channel is most

common for low-cost, low-unit value items that are frequently purchased by consumers

(candy, confectionary items)

Channel D contains plus independent agent as a coordinator that helps coordinate a large

supply od the product because there are many small manufacturers and many small retailers

in the channel.

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6.9 PROMOTION To communicate with customers, a company can use one or more of four promotional

alternatives: advertising, personal selling, sales promotion and public relations. Promotion is

defined as persuasive communication designed to sell products, services, ideas, persons or

organizations to potential customers.

6.9.1 ADVERTISING

Is any paid form of nonpersonal communication about an organization, good, service or idea by an identified sponsor. The paid aspect is important because the space for the advertising message must be bought. The nonpersonal component of advertising is also important. Advertising involves mass media (TV, radio, magazines) which are nonpersonal and do not have an immediate feedback loop as does personal selling. Advantages: it can be attention getting very quickly and can communicate

specific product benefits. A company can control what it wants

to say and to some extent to whom the message is sent, when

to send it and how often.

Disadvantages: the costs to produce and place a message are significant and

the lack of feedback makes it difficult to know how well the

message was received.

Above-the-line (ATL) is a form of media advertising where a commission or fee is paid to an

agency working for its clients.

Below-the-line (BTL) refers to any non-media advertising or promotion such as direct mail,

exhibitions, point-of-sale or street marketing

Through-the-line (TTL) also known as full service where a marketing agency offers both

ATL and BTL in blended marketing. TTL is also referred to as holistic marketing or 360

degree branding. It uses multi-channel marketing to build brands

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Product advertisement takes three forms:

A pioneering advertisement tells people what a product is, what it can do, and where it

can be found. The key objective is to inform the target market. Ads have been found to

be interesting, convincing and effective.

B competitive advertisement has to promote a specific brands features and benefits. The

objective is to persuade the target market to select the firm’s brand rather than that of

a competitor. It can have a form of comparative advertisement which shows one brand

strengths relative to those of competitors.

C reminder advertisement is used to reinforce previous knowledge of a product usually in

maturity stage of a product. Another type of reminder ad is reinforcement used to assure

current users they made the right choice.

Different media alternatives

Television is a valuable medium because it communicates with sight, sound and motion.

Print advertisement alone could never give the sense of a sports car cornering at high speed.

Network television is the only medium that can reach 95% of the homes. Its main

disadvantage is cost and so it restricts the amount of information and emotion that can be

conveyed. A relatively new and popular form of television advertising is the infomercial.

These are program-length (30-minute) advertisements that take an educational approach to

communication with potential customers.

Radio. The major advantage is that it is a segmented medium. The disadvantage is that it

has limited use of products that must be seen. Radio is a medium that competes for peoples

attention as they do other activities such as driving, working or relaxing.

Magazines are becoming very specialized medium, but they appeal only to the sense of

sight and thus are not gripping.

Outdoor advertisement really grabs your attention. It has several forms:

Roadside panels: billboards, giant banners or wallscapes are hung on the front of buildings.

Lightboxes are illuminated panels, tri-face billboards have rotating sections allowing three

different advertisements to be displayed in sequence, scrollers display a number of posters

one after the other.

Street furniture: such as bus shelters.

Transit advertising: ads are positioned inside or on the side of a vehicle.

Ambient media: adverts are displayed on non-traditional media such as the back of a receipt

from a shop or a travel ticket. The use of floor graphics is common in supermarkets.

Digital video billboards show short advertising spots.

Other media represent nontraditional advertising options called place-based media. (neon

signs, electronic scoreboards, hot air balloons. Messages are placed in locations that attract

a specific target audience such as airports, doctors, offices, health clubs etc. Street

marketing uses a variety of guerilla or unconventional marketing activities to attract the

attention.

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• product sampling – street teamers give out (hand out) free samples

• hand-to-hand distribution of flyers (usually advertises an event), postcards, leaflets

(advertises a product or service) and small gifts also called give aways or goodies

• costumed actors and wrapped vehicles to create a brand experience.

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6.9.1.1 Merchandising

Merchandising is a marketing activity in which a brand image of one product is used to sell

another product. Merchandising is a range of activities designed to promote in-store sales

(POS: point of sale) POS uses displays:

a dump bin, a totem, a shelf talker, a wall-mounted literature holder, a godola, a floor-

standing display, a tent card etc.

in-pack offers – items inside the packaging, such as a toy in a box of breakfast cereals

on-pack offers – gifts, including money-off offers and competitions, which are on packaging

and can be obtained by following the instructions given

freebies or goodies – promotional items which are given away, such as free perfume

samples or sun hats with a company logo

corporate gifts – luxury items with a company logo, given to special clients or VIPs.

Sports clubs can develop additional revenues by selling team product, such as shirts and

memorabilia at a premium price. They can also sign merchandising deals or licensing deals

with sponsors or other commercial partners. The club authorizes the partner to use the club’s

logo on their products. (LEGO bought the right to use the NBA league logo on their figurines.

6.9.1.2 Trade shows

A trade show (exhibition or fair) is an industry specific business event. Companies attend the

events so that they can showcase or display the best of their products, services or expertise.

Trade shows help to create opportunities for future business, to socialize with attendees and

other exhibitors. A vertical trade show specializes in everything in a specific sector

(cosmetics showcase fragrances, packaging etc.) A horizontal trade show is for a certain

industry (building, packaging technology, beauty, travelling, cars) Seminars, conferences or

congresses are business events where talks or presentations are given.

A seminar is a class on a particular subject, usually given as a form of training.

A conference is a larger event where there are numbers of talks on a particular subject.

A congress is a large formal meeting of different groups to discuss ideas and exchange

information.

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6.9.1.3 Telemarketing

Outbound telemarketing means that marketers call prospects (potential customers) from a

list that can be bought from list brokers. Calling the people from the list for the first time is

called cold calling. Follow up calls can take place after a mail shot or a trade show.

Telemarketers try to convert these leads into sales. This is called lead conversation.

Inbound telemarketing means that clients call the telemarketing firm, perhaps as a

response to an advert, to place an order, make a reservation or contact customer service.

6.9.2 PERSONAL SELLING

Is defined as the two-way flow of communication between a buyer and seller, designed to

influence a person’s purchase decision and build long-term relationships. Personal selling is

usually face-to-face communication between the sender and receiver. The sales force can

include inside salespeople and travelling or field salespeople who call on customers. Each

salesperson has an exclusive territory where he makes his sales calls or visits. Salespeople

receive incentives such as financial bonuses or gifts if they reach their target or sales quota.

Salespeople can inform customers and demonstrate technical products, at the same time

customizing the sales messages to what that specific customer needs to hear. The sales kit

contains sales aids such as product samples, price lists, order forms, sales literature to be

able to inform about the product features, benefits and unique selling points.

Advantages: A salesperson can control to whom the presentation is made, can see

and hear the potential buyer’s reaction. If the feedback is unfavorable,

the salesperson can modify the message.

Disadvantages: Different salespeople can change the message so that no consistent

communication is given to all customers. Very high cost is the biggest

disadvantage.

6.9.3 PUBLIC RELATIONS

Is a form of communication to influence the feelings, opinions or beliefs held by customers,

shareholders, employees and other publics about a company and its products. Many tools

such as special events, lobbying efforts, annual reports and image management may be

used, although publicity often pays the most important role. Publicity is a nonpersonal,

indirectly paid presentation of an organization. It can take a form of a news story, editorial,

product announcement, news conference, donation to charities, volunteer activities. Public

relations personnel usually focus on communicating positive aspects of the business, they

may also be called on to minimize the negative impact of a problem or crisis.

Advantages: credibility of the message and a company does not pay for space in

medium.

Disadvantages: lack of the users control over it. A company can invite a news team to

preview its innovative exercise equipment and hope for a favorable

mention on the newscast, but there is no guarantee of any mention.

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6.9.4 SALES PROMOTION

A short-term inducement of value offered to arouse interest in buying a good or service. They

stimulate customer purchasing and dealer to be more effective.

Coupons usually offer a discounted price to the consumer, through redeemable coupons.

Premiums consist of merchandise offered free or at a significant savings over retail.

Contests are where consumers apply their analytical or creative thinking to try to win a prize.

Samples are free or at reduced price smaller size products. If consumers like the sample, i

tis hope, they will remember and buy the product.

Point-of-purchase displays take the form of advertising signs, which hold or display the

product and are often located in high-traffic areas near the cash register or the end of an

aisle.

Product placement involves the use of a brand name product in a movie, television show,

video or a commercial for another product.

Advantage: the short-term nature of these programs often stimulates sales for their duration.

Loyalty programmes . Marketers implement loyalty programmes to maximize customer

loyalty and to reward them with discounts and special offers. Most supermarkets have a

royalty programme in form of store card which rewards customers with points, vouchers or

coupons when purchasing and those can be used to get gifts or money off future purchases.

6.9.4.1 Motivation marketing

Staff is the key to success and they can be motivated to promote their company products.

Motivation marketing engages staff and gets them interested by using events or incentives,

offering prizes or rewards for good performance. These incentives can boost morale,

improve productivity, encourage behavior changes, reduce absenteeism, fewer people leave

the company. In order to motivate staff, a company may choose to use cash substitutes or

noncash awards such as short trips or holidays, events such as parties, weekends away,

games and competitions which are also very successful in team building.

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