HSC Business Studies Course Notes

Topic 1: Operations

1.1 Role of Operations Management

1.1.1 Strategic Role: Cost Leadership & Good/Service Differentiation

- Generally, the overarching goal of a business is to maximise profits by maximising income/revenue or
minimising costs/expenses
- Businesses should identify cost centres and profit centres
- The Ops function is a cost centre of the business ∴ a strategic aspect of Ops
management is the management of costs
- Cost Leadership: Aiming to have the lowest costs or be the most price-competitive in the market
- Types of costs: Input costs, labour costs, processing costs, inventory costs, quality
management costs, etc.
- Possible methods: source cheaper inputs, use technology (long-term benefits, no HR costs),
standardisation / economies of scale (lower per unit input costs)
- Ops managers must strike the balance between cost and quality for maximum profitability
- G/S Differentiation: Distinguishing a businesses products from that of its competitors
- Goods: tangible, ownership can be transferred through sale, can be standardised/customised,
can be perishable, value is objective (based on inputs)
- Services: production and consumption is simultaneous, intangible, cannot be owned, can be
standardised (e.g. customer greeting) / customised (e.g. haircut), value is subjective
- Sometimes G/S are closely aligned e.g. fast-food is a G, but customer service / delivery is S
- Cross Branding: Differentiation can be created from strategic alliances between brands, this
adds value to G/S by offering consumers added benefits

Differentiation of Goods Differentiation of Services

Vary Actual Features Varying Amount of Time spent on a Service

Vary Product Quality Varying Level of Expertise Brought to a Service
Vary Augmented Features (i.e. ‘extras’) Developing Self-Service Options
Varying Quality of Materials / Technology Used
Flexibility

1.1.2 Goods and Services in Different Industries

- Goods can be standardised or customised → customised goods are generally more
expensive
- Perishable/non-perishable → Grocery sector dominated by perishables, requires
high standards of quality and cleanliness, very short lead times, suitable
packaging and storing processes
- Intermediate goods are processed more than once (first for their creation, then as an input)
- Services can be standardised (e.g. fast food service) or customised (e.g. haircut, accountant)
1.1.3 Interdependence with Other Key Business Functions
- All KBF work in synergy (the whole is greater than the sum of all the individual parts)
- Ops and Marketing: Marketing uses customer data to formulate product designs, ops creates these
goods / carries out these services
- Ops and Finance: Finance allocates funds for ops, funding all inputs
- Ops and HR: Employees are a business’s most valuable asset, carry out ops processes

1.2 Influences

1.2.1 Globalisation
- Businesses can access global markets and tap into unmet customer demand
- Significantly affects the operations function which is then structured around a series of global
production facilities
- Product design, choice of location for manufacturing facilities, quality management, logistics,
inventory management must all be altered
- Global consumers seek standardised G/S
- Opens the possibility of off-shoring, outsourcing and economies of scale

1.2.2 Technology
- The introduction of technology revolutionised operations processes
- For a high initial cost, businesses can reduce long-term costs while increasing standardisation and
quality standards
- CAD (Computer-Aided Design), CAM (Computer-aided manufacturing), CIM (Computer-Integrated
manufacturing) are all examples of technology used in operations processes
- Globalisation has been made possible as a result of technological advances

1.2.3 Quality Expectations

- People’s personal levels of satisfaction with their purchase will determine whether or not quality
expectations have been met
- Goods: Quality of Design (nature of materials used, taking into account customer
expectations/needs), Fitness for Purpose (ease of use, effectiveness), Durability (ease of
maintenance, efficiency of after-sales services)
- Services: Professionalism of the service provider (cleanliness + layout of physical facilities, courtesy +
professionalism of staff dialogue/interactions), Reliability of the provider (efficiency of service, overall
levels of competence), Level of customisation

1.2.4 Cost-based Competition

- Opportunities for price increase are limited, so reducing costs is a way to maximise profits
- Cost leadership approach, must strike the balance between cost and quality

1.2.5 Government Policies and Legal Regulation

- WHS, material handling practices, taxation rates, industry training requirements, employment
relations, etc. are all government policies / legal regulations affecting operations
- Other examples: fair work laws, anti-discrimination laws, environmental protection laws
- Compliance = the range of laws with which a business must comply
- Businesses incur compliance costs which can be reduced through outsourcing / off-shoring
1.2.7 Environmental Sustainability (Ecological Sustainability)
- Three main aspects: sustainable use of renewable resources, reduction in the use of non-renewable
assets and the precautionary principle (see glossary)
- E.g. many businesses have moved towards the minimisation of waste (water, plastic, glass, etc.)
- This is a huge factor nowadays because of social interconnectivity and societal awareness

1.2.8 Corporate Social Responsibility (CSR)

- The Triple-Bottom-Line: Financial Returns + Social Responsibility + Environmental Sustainability
- Placing importance on people, profit and place
- Outdoing legal compliance by tapping into ethical responsibility (towards employees)
- E.g. working women and maternity protection, workplace diversity, safe working conditions
- Combining environmental sustainability and social responsibility
- CSR contributes to a business’s reputation, increasing profits in the long-term

1.3 Operations Processes

1.3.1 Inputs
- Transformed Resources: Information, Customers, Materials (incl. Intermediate goods)
- Raw materials are essential substances in their natural (unprocessed) state whereas
intermediate goods have already been processed once and will be used as inputs into
another transformation process
- Information can be external (research from external sources) or internal (KPI information,
quality reports, financial reports, inventory turnover rates, customer feedback, etc.)
- Transforming Resources: Human Resources (Labour), Energy, Time, Facilities (Plant + Machinery)

1.3.2 Transformation Processes

1.3.2.1 Volume, Variety, Variation in Demand and Visibility (Customer Contact)
- High volume, standardised productions allow for efficient, automated production
- Low volume, customised G/S take more time, effort and money to produce
- Mix flexibility = range, variety of choice
- More variety = more deviation of operations processes = more time, effort, money, etc.
- Variation in Demand must be followed as overproduction leads to wastage costs and
underproduction will result in unmet demand and a bad reputation
- Visibility / Customer Contact / Feedback through surveys, interviews, social media posts, warranty
claims, etc. (direct) and review of sales data, observation of customer preferences (indirect) is crucial
to shape transformation processes and maximise profits

1.3.2.2 Sequencing and Scheduling - Gantt Charts and Critical Path Analysis (CPA)
- Gantt charts and CPA are both scheduling tools
- Gantt charts can be used for simple routine tasks or for more complex, larger projects; they can be
used to schedule the work activities of an individual or a team
- Adv. of gantt charts: managers forced to plan steps and specify timeframe for each task, make it easy
to monitor actual progress against planned activities
- Critical Path is the shortest length of time it takes to complete all tasks necessary (longest path)
- CPA Adv: enables managers to identify what needs to be done, how much time it will take, if certain
tasks can be performed simultaneously, the order of tasks, etc.
1.3.2.3 Technology, Task Design and Plant Layout
- Office technology and manufacturing technology (robotics, CAD, CAM, etc.)
- Through CAD, material usage and time required for production can be calculated
- The cost of technology is high in the short-term, but it has cost benefits in the long-term
- Task design involves classifying job activities by grouping skills and
competencies to assist with staff recruitment (Job Description → Person
Specification → Recruitment → Selection)
- Sometimes a skills audit may be required to determine any shortfalls that need to be addressed
- Process Layout: Equipment is grouped by function, suitable high-variety low-volume production
- Product Layout: Assembly-line style production, repetitive tasks for employees, suitable for low-
variety high-volume production
- Fixed-position layout: Product remains in one location due to weight/bulk, e.g. construction
- Office Layout: self-explanatory, consider hot-desking, open plans, etc. (effect of COVID-19)

1.3.2.4 Monitoring, Control and Improvement

- Monitoring: Measuring actual performance against planned performance
- Measuring stuff like lead times, inventory turnover rates, defect rates, warranty claims
- Control: KPOs are assessed against predetermined targets, corrective action is taken if required
- Manager will decide what aspects of the production process to change and how
- Improvement (self-explanatory)

1.3.3 Outputs
- Alongwith G/S, customer service and warranties are also outputs
- Businesses capable of providing superior customer service / satisfaction can charge 10% more for the
same G/S, grow 2x as fast as competitors, increase market share & profits
- Bad customer service: 1 angry customer will tell 11 others, who will tell 5 others (bad reputation)
- The number of warranty claims will indicate problems in processing

1.4 Operations Strategies

1.4.1 Performance Objectives (KPOs)

- Quality of design / conformance / service
- Speed: G/S should reach customers as fast as possible, with short lead times, efficient processes
- Dependability / Reliability: Measured by number of warranty claims, durability, etc.
- Flexibility: How quickly an operations process can adjust to changes in the market
- Customisation: Including mass customisation (mass produced items with customised tweaks)
- Cost: Minimisation of expenses, balancing cheap with quality

1.4.2 New Product or Service Design and Development

- New products can be developed by identifying demand through market research or through changes
in technology which enable the production of new products
 - Quality, supply chain management, output and cost (value / product utility) must be considered
- New service designs are generally initiated by clients and are customised
- Explicit (obvious, what you’re paying for) and Implicit (customer service) service are both important

1.4.3 Supply Chain Management

- Logistics: Distribution including transportation, storage (warehouses aka distribution centres) and
materials handling/packaging
Warehousing costs include damage costs, wastage/redundancy costs, theft costs, insurance +
security costs, etc.
- Warehouses and distribution centres are strategically located to minimise transport time
- Materials handling is important for perishable goods and chemicals
- E-commerce: the buying/selling of G/S via the internet
- B2B and B2C e-commerce has grown exponentially, customers+business connected
- Global Sourcing: Sourcing inputs globally based on consumer demand, quality of inputs required,
cost and flexibility/timeliness of supply, timezone differences

1.4.4 Outsourcing
- The use of external providers to perform business activities so as to access their expertise, allow the
business to focus on core operations, or reduce costs
- Types: Business Process Outsourcing (BPO), Finance and Accounting Outsourcing (FAO), Knowledge
Process Outsourcing (KPO), Legal Process Outsourcing (LPO)
- Adv: Simplification, increased process capability, etc. (reduced load on core business), efficiency/cost
savings (can take advantage of cheap overseas rates), access to skills/resources/knowledge lacking
in the business
- Disadv.: communication barriers (if overseas), loss of control standards / information security,
reputation can be hurt if outsourcer has unethical practices, cost (can be expensive in short-term),
organisational change (resistant parties)

1.4.5 Technology
- Leading Edge (most advanced/innovative at a point in time): can be used to get ahead of
competitors, design new products, etc. but also come with risks, untried/untested technology
- Established technology is widely used and accepted, benefits/downfalls are well-known

1.4.6 Inventory Management

- Holding stock Adv.: Immediate revenue stream, ready to meet consumer demand, reduced lead
times, older stock can be sold at reduced prices and initiate positive cashflow, economies of scale
(bulk production reduces costs), stock is an asset
- Holding Stock Disadv.: Spoilage / wastage / theft / obsolescence costs, waste of capital / labour /
energy which can be used elsewhere
- LIFO Method: In times of inflation, will understate gross profits, good to reduce taxable income
- FIFO Method: In times of inflation, will overstate gross profits, good to show shareholders
- Note - FIFO and LIFO are both accounting methods
- JIT: An inventory management approach requiring a responsive operations function with flexible
processing, aiming to reduce costs associated with holding large amounts of stock
1.4.7 Quality Management
- Control: Reactive approach, inspections for defects at various points during production, defined
quality standards must be in place, labour must be appropriately trained to spot and report defects
- Assurance: Proactive approach, refining the processes themselves in accordance with industry
standards to prevent defective products
- (Continuous) Improvement: Changes in production processes to decrease defect rates, improve
efficiency, reduce costs, etc.

1.4.8 Overcoming Resistance to Change

- Financial Costs causing possible resistance to change:
- Purchasing new equipment
- Redundancy payments for employees replaced by technology
- Retraining costs for employees interacting with the new equipment
- Costs associated with reorganising plant layout
- Psychological barriers (inertia) → not wanting change for personal reasons
- To manage: be proactive → prepare employees for the change, try and get
widespread support, manage the change by evaluating it thoroughly, may need to
use change agents (e.g. Kurt Lewin’s unfreeze-change-refreeze model)

1.4.9 Global Factors

- Global Sourcing (see 1.4.3)
- Economies of scale: cost reductions through bulk production, bulk sourcing →
accessing global markets will increase the scale of production and lower per-
unit costs
- Scanning and Learning: Observe the global business environment and implement possible strategies
that are working for other people, also take feedback/ideas from employees who have worked in
other businesses
- R&D: Businesses should invest in R&D to continuously improve operations and come up with new
G/S to retain and attract new customers

Operations Glossary

Term Definition

Business (BS) The organised effort of individuals to produce and sell, for a profit, the products (i.e.
goods and services) that satisfy individuals’ needs and wants

Operations (Ops) The business processes that involve transformation or, more generally, ‘production’

Strategic Long-term broad aims affecting all key business areas, the strategic role of each key
business function (KBF) involves the managers of each function contributing to the
strategic direction / plan of the business

Profit Centres Those aspects of a business that directly derive revenue and profits

Cost Centres Specific areas/departments/sections of a BS to which costs can be directly attributed

Cost Leadership Aiming to have the lowest costs or be the most price-competitive in the market

Globalisation The removal of trade barriers between nations, characterised by an increasing

integration between national economies and a high degree of transfer of capital,
labour, intellectual capital (ideas), financial resources and technology.

Technology The design, construction and/or application of innovative devices, methods and
machinery in operations processes

Quality How well designed, well made and functional goods are, and the degree of
competence with which services are organised and delivered

Cost-Based Derived from determining the breakeven point and applying strategies to create cost
Competition advantages over competitors

Environmental / To shape business operations around practices that consume resources today
Ecological without compromising access to those resources for future generations
Sustainability

Precautionary Where environmental impacts are uncertain, a business undertakes actions that are
Principle most likely to cause the least environmental impact

Corporate Social Open and accountable actions based on respect for people, community/society and
Responsibility the broader environment. It involves businesses doing more than just complying with
(CSR) the laws and regulations.

Inputs The resources used in the transformation (production) process

Capital-Labour Machinery and technology displace people by doing the work they do
Substitution

Transformation The conversion of inputs (resources) into outputs (G/S)

Lead Time The time it takes for an order to be filled from the moment it is made

Sequencing The order in which activities in the operations process occur

Scheduling The length of time activities take within the operations process

Improvement Systematic reduction of inefficiencies and wastage, poor work processes and the
elimination of any bottlenecks

Bottleneck A part of the transformation process that slows down the overall processing speed /
creates an impediment, leading to a backlog of incompletely processed products

Customer Service How well a business meets and exceeds the expectations of customers in all aspects
of its operations

Warranty A promise made by a BS that they will correct any defects in the G/S they provide

Inventory / Stock The amount of raw materials, work-in-progress and finished goods that a business
has on hand at any particular point in time
Topic 2: Marketing

2.1 Role of Marketing

2.1.1 Strategic Role of Marketing Goods and Services

- Maximising profits by maximising sales, increasing brand awareness and improving customer
satisfaction
- A business’s overarching goal is to maximise profits through maximising revenue or minimising costs,
marketing focuses on increasing sales and maximising revenue
- A Marketing Plan is required to detail strategies to sell products. It should identify:
- Who/Where the market is, why they buy the product and how often they will buy it
- Marketing is the revenue generating activity of any business, nothing is achieved until a sale is made
- Satisfying existing customer wants should lead to repeat sales
- Role of the marketing plan: To make sure a customer base is created and maintained

2.1.2 Interdependence with Other Key Business Functions

- Mutual dependence between KBFs, synergy, etc.
- Marketing Concept integrated into marketing plan → integrated into all aspects
of the business
- Mktg & Op.: If the marketing plan requires a G/S to be ready by a certain date, op. will need to make
sure this happens
- Mktg & Finance: Mktg costs money, finances must be available e.g. for a new advertising scheme
- Mktg & HR: The correct staff must be employed and trained to create the designed G/S

2.1.3 Production, Selling, Marketing Approaches

2.1.3.1 Production Approach - 1820s to 1920s

- The Industrial Revolution sparked immense demand for goods, hence businesses in this period
concentrated on production because whatever was made was sold
- Production design was based on mass production techniques rather than customer needs/wants
- No R&D, no marketing, no effort to sell, only production

2.1.3.2 Sales / Selling Approach - 1920s to 1960s

- After WWI, productivity increased, production became more efficient, businesses started to catch up
with consumer demand, competition between businesses increased
 - Businesses increased their spending on advertised in newly developed technology such as radio ad
film, sales representatives were hired and trained to personally reach thousands of people and
convince them to buy the company’s products
- Still no R&D, marketing was secondary to production, not considering customers needs at all

2.1.3.3 Marketing Approach - 1960s to Present

- In the economic boom after WWII, business began using the marketing approach
- Focuses on finding out what customers want through market research, placing them at the centre of
all business activities and goals, aiming to develop long-term relationships with customers
- Characterised by the importance placed on identifying and satisfying customer needs in all parts of
the business
- Customer-oriented approach → relationship starts with the sale, strive for customer
satisfaction
- Relationship Marketing is a key feature, creating customer loyalty with good
customer service, reward programs, etc. → increases reputation too ∴ good for
customer retention and attraction

2.1.3.4 Societal Marketing Approach - 1970s to Present

- Growing public concern over environmental pollution and resource depletion caused a shift in the
emphasis of marketing plans
- To improve their public image, businesses began a more socially responsible,
moral and ethical model of marketing → emphasis on maintaining the wellbeing
of customers and society

2.1.4 Types of Markets

- See ‘Market’ in glossary for 4 key features, six types
- Resource Market: Individuals/groups engaged in all forms of primary production (e.g. mining, fishing)
- 8% of Australia’s economy, 60%+ of Australia’s exports ($264b+), large purchasing power
- Industrial Market: Businesses/industries that purchase products to use in their production processes
- Intermediate Market: Wholesalers/retailers who buy and resell finished products to make a profit
- Consumer Market: Individuals who plan to use/consume the products they buy
- Mass Market: Standardised product, customers’ needs not considered, basic food/electricity/water
- Niche Market: More common than mass, targeting a smaller group of consumers with a shared
interest in a specialised product, segmented demographics (e.g. young women, the elderly, etc.)

2.2 Influences On Marketing

2.2.1 Factors Influencing Customer Choice

- Psychological: Perception, Motivation, Attitudes (beliefs), Personality / Self-Image, Learning (past
experience with the product)
- Sociocultural: Social class / socioeconomic status, Culture, Family/Roles, Reference/Peer groups
- Economic: Boom (low unemployment, rising incomes, increased consumer confidence, lots of
marketing potential) & Recession (customers focus on cost-effectiveness, marketing should
emphasise value and durability)
- Government: Laws e.g. Competition & Consumer Act 2010 (Cwlth), Fair Trading Act 1987 (NSW)
2.2.2 Consumer Laws
- The Australian Consumer Law (ACL) was introduced in 2011 and replaced 17 existing national, state
and territory consumer laws. It applies in the same way to all Australian consumers and businesses
- The ACL is enforced by the ACCC/ASIC as a law of the Commonwealth, it is applied & implemented
through the Competition and Consumer Act (2010). Two major purposes:
- To protect consumers against undesirable practices (e.g. misrepresenting the contents of
products or their place of production, misleading and deceptive advertising)
- To regulate certain trade practices that restrict competition, the government wants to ensure
a number of businesses are operating in the same market at the same time to encourage
competition
- A breach of the CCA can result in heavy penalties: $10m, 3x value of the benefit received, 10% of
annual turnover in the past 12 months (whichever is greater) + reputation damage + legal fees
- Deceptive and Misleading Advertising - ILLEGAL:
- Bait advertising: Advertising a product available in limited quantities, then switching
customers to a higher priced item
- Fine print: The small-sized print must not contradict the overall message of the advertisement
- Comparative Advertising: If a comparison is made to competitors’ products, it must be valid,
accurate and factual
- Environmental Claims: Must be factual
- Country of Origin: Must be factual
- Premium / Credence Claims: Must be substantiated and not misleading (e.g. ‘fat free’)
- Prize Giveaways / Competitions: Customers must not be misled about the items on offer or
the chances of receiving them, any catch must be clearly communicated at the outset
- Dishonest Advertising: straight up lies
- Price Discrimination - NOT ILLEGAL: Setting different prices for the same G/S for different buyers
- Based on the seller’s belief that people of a certain demographic can pay more/less
- Illegal only if there is a misuse of market power or it substantially reduces competition
- Implied Conditions: Conditions not needing to be explicitly mentioned in a contract. Products must:
- be of acceptable quality (see definition in glossary) -G
- match the description of the salesperson / promos / packaging -G
- match any sample / demo model you asked for -G
- not carry any hidden costs -G
- meet any extra promises made about performance, quality (e.g. lifetime guarantees) -G
- have spare parts / repair facilities available for a reasonable period after purchase -G
- be fit for the purpose the business said it would be fit for -G/S
- be delivered within a reasonable time frame -S
- provided with acceptable care + skill or technical knowledge, taking all necessary steps to
avoid loss and damage -S
- Warranties: Business-made promise to correct any defects in the G/S they sell
- Use of warranties can be a marketing tool
- Businesses must state clearly and simply the T&C’s of a warranty
- Ensures the customer has confidence in the quality of the product
- False/misleading statements ILLEGAL
- Refunds + Exchanges are allowed if a product is faulty, not if you change your mind

2.2.3 Ethical
2.2.3.1 Ethical Criticisms of Marketing
- Materialism: Companies create needs by trying to convince consumers that they need a product
 - Use of stereotyping: Negative stereotypes can be perpetuated if they are used in advertising
- Use of sex to sell products: Unrealistic body goals are used to attract consumers
- Product Placement: Blurs the line between entertainment and commerciality
- Invasion of Privacy: Collecting data on consumers’ online activity and using this to send targeted ads
or even selling this data to other companies

2.2.3.2 Truth, Accuracy and Good Taste in Advertising

- Concealed Facts: Unethical but not illegal, most customers don’t fully believe ads anyway
- Puffery: Exaggerated claims that no reasonable person would take as factual e.g. ‘best in town’
- Vague Statements: Using ambiguous words to get the consumer to infer the company’s meaning
without explicitly saying it, often done to avoid being classed as ‘misleading’ e.g. “helps …”
- Generally, ‘bad taste’ in advertising is associated with offensive messages or inappropriate ads
- The AANA Code of Ethics must be followed

2.2.3.3 Products That May Damage Health

- Consumer guarantees as part of the ACL give customers the right to a refund if a product is unsafe
- If there is a risk that a product may cause injury, it must be recalled
- If the business is aware of a death, serious injury or illness associated with their product they must
report it in two days
- The marketing of junk food is heavily criticised

2.2.3.4 Engaging in Fair Competition

- The Competition and Consumer Act (2010) requires businesses to compete fairly
- Cartel Conduct: Two or more businesses that would normally be in competition with
one another must not make agreements involving price fixing, bid rigging, etc.
as this may put other companies outside of the cartel out of business ←
Illegal
- Misuse of Market Power: Business takes advantage of its market power to damage/get
rid of a competitor, prevent anyone from competing in or entering the market ←
Illegal
- Exclusive Dealing: When one person/business trades with another but then imposes
restrictions on them (e.g. McDs selling Coke not Pepsi) ← only illegal if the
deal restricts competition
- Resale Price Maintenance: It is legal for a supplier to set a maximum price for retailers to sell at, but
illegal to set a minimum price or prohibit them from selling at discounts
- Mergers and Acquisitions: Any merger/acquisition that would substantially reduce competition in that
particular market is prohibited, businesses must seek permission from the ACCC

2.2.3.5 Sugging
- A sales technique disguised as market research: asking people to complete a survey and then
suggesting a product
- Not illegal but it is unethical because invasion of privacy and deception
- Has negative implications for overall market research because ⅓ of customers now refuse to take
part in any surveys because they are suspicious that it is sugging

2.2.3.6 Why Ethical Behaviour and Government Regulation are Important in Marketing
- Ethical behaviour creates a positive image of the business and encourages
customer loyalty → increased customer retention and attraction → increased
sales → increased profits
 - Ethical behaviour will also make a business more appealing for all stakeholders
- Government regulation is important because it protects consumers and businesses, increases
consumer trust and confidence in business (which is good for the economy), promotes healthy
competition (which is good for the economy)

2.3 Marketing Process (SMEIDI)

2.3.1 Situational Analysis

- First, a SWOT Analysis
- Strengths + Weaknesses (Internal), Opportunities + Threats (External)
- Gives a clear indication of the business's position compared with its competitors
- Next, the Product life cycle
- 4 stages: Introduction, Growth, Maturity and Decline
- Reasons for decline:
- Changing public perception
- Introduction of new technologies / new products reducing demand for older ones
- Fluctuations in the level economic activity / Differing consumer spending habits
- Different Marketing Strategies are required in the different stages
Introduction Growth Maturity Decline

Descrip BS trying to increase BS actively pursues Sales plateau as Sales decline,

tion consumer awareness brand acceptance + market becomes reduced demand
and build a market share growing market share saturated (e.g. with
for the new product competitor products)

Product Brand and reliability are Quality maintained / Features + packaging G/S maintained with
established, good quality improved try to differentiate the some
product from comp.’s improvements /
rejuvenation

Price Often lower than comp. Price per unit maintained Price may need to be Price is reduced to
to gain a market foothold /raised, production costs adjusted downwards sell remaining stock
maintained or decreased to hold off comp. +
(econ. of scale) maintain market share

Place Selective distribution, Distribution channels Incentives may need Distribution channels
lets consumers gradually increased to meet to be offered to reduced, the G/S is
form an acceptance of demand encourage preference offered to a loyal
the G/S over rival products market segment only

Promoti Directed at early buyers Seeks a wider audience Continues to suggest No promotion,
on + users. Comms seek to the product is tried discontinued.
educate potential and true - still the best
customers about the
merits of the G/S

2.3.2 Market Research

- Step 1: Determine Information Needs: Clearly and accurately state the problem to determine what
needs to be measured (what’s relevant) and the issues involved
- Step 2: Data Collection: Collect primary (e.g. surveys, observations, experiments) and secondary
data (e.g. stats from ABS, previous sales reports
 - Step 3: Data Analysis and Interpretation: Visually represent the data (e.g. in a table), note trends,
draw conclusions

2.3.3 Establishing Market Objectives

- These objectives should be closely aligned with the overall business goals (long-term) but more
customer-oriented than the goals for the entire business, concerned with products + markets
- Should be SMART (specific, measurable, achievable, realistic, time-bound)
- 3 common goals: Increasing market share, expanding the product mix, maximising customer service

2.3.4 Identifying Target Markets

- Customers within a target market share similar characteristics (the variable characteristic)
- Usually businesses have a primary and a secondary target market, when the primary target market
isn’t making purchases, the secondary one can be tapped into
- Identifying a target market allows businesses to use its marketing resources more efficiently, collect
data to understand the target market’s buying behaviour over time
- Mass Marketing Approach: 1 product (little to no variation), promotional program, price, distribution
- Market Segmentation Approach: self-explanatory
- Niche Market Approach: An extension of the segmentation approach, addresses the needs of
customers whom large stores generally ignore

2.3.5 Developing Market Strategies

- The 4Ps must be adapted to suit marketing goals and overall business goals, take into account the
product life cycle as well
- Product: quality, packaging/labelling, design, brand name, guarantee
- Price: consider cost of production, level of consumer demand, competitor prices
- Promotion: Advertising, personal selling, relationship marketing, publicity / PR, sales promotion
- Place: Distribution networks, generally the more intermediaries the more widely the G/S is distributed

2.3.6 Implementation, Monitoring and Controlling

- Implementation is putting the mktg strategies into operation, it involves the daily/weekly/monthly
decisions that have to be made to ensure the plan is effective
- The implementation stage is quite difficult, unforeseen situations may arise
- Monitoring means checking and observing the actual process of the mktg plan, requires the
gathering of data of actual progress
- Controlling means the comparing of planned performance against actual performance AND taking
corrective action
- Generally uses KPIs e.g. budgets, sales statistics, cost analyses
- When evaluating mktg strategies a BS must develop a financial forecast detailing costs and revenues
(but estimating revenue is difficult because it is heavily influenced by external factors e.g. economy)

2.3.6.1 Comparing Actual and Planned Results

- Sales analysis: Compares actual sales with forecast sales to determine effectiveness of the mktg strat
- Strength: figures are easy to collect and process
- Weakness: data doesn’t reveal exact profit level or take into account external factors
- Market Share Analysis / Ratios: Compare a business’s market share
- A BS’s revenue falls but its market share stayed the same ∴the entire
industry fell
 - Marketing Return on Investment (ROI): % change in sales as a result of a specific mktg strategy

2.3.6.2 Revising the Marketing Strategy

- Develop a new product OR make changes to the 4Ps of the mktg mix OR Delete a product
- Reasons to delete a product: creates an unfavourable image for the BS, outdated, not selling

2.4 Marketing Strategies

2.4.1 Market Segmentation, Product/Service Differentiation and Positioning

- Once the total market is divided into segments, the mktg manager selects one target segment
- This is done based off the segmentation variable
- Demographic = age, gender, occupation / income level, family, religion, culture, etc.
- Psychographic = lifestyle, personality, interests, motives, socioeconomic groups, etc.
- Geographic = urban/rural, climate, landforms, etc.
- Behavioural: purchase occasion, loyalty, usage rate, price sensitivity
- How to differentiate G/S: customer service, environmental concerns, social + ethical issues
- Positioning is very important, it is determined by the brand and its reputation

2.4.2 Products - Goods and/or Services

- The total product concept consists of the tangible and intangible benefits of purchasing a product
- With mass-produced products, the competition is generally over intangible benefits
- Branding helps consumers identify the products they like, evaluate the quality of products, reduce
their level of perceived risk of purchase, gain a psychological reward (if the brand is of prestige)
- Branding helps BSs gain repeat sales, introduce new products, encourage customer loyalty (so they
can charge more), increase efficiency of their mktg efforts (one ad promotes the entire brand range)
- Trademarks signify that the BS has exclusive right of use of a brand name / symbol
- Five types of logos: brandmark, wordmark, lettermark, combination mark, emblem
- Packaging should entice first-time customers, preserve the product, separate it into convenient units,
assist with the display of the products, protect them from damage/tampering, convey info to clients
- Labelling is also important, labels can be used to promote products but they should also contain
information such as ingredients, package size, country of origin, best before / expiration date, etc.

2.4.3 Price
2.4.3.1 Pricing Methods
- BSs should consider its marketing objectives, the amount of competition, government regulations,
location of the product on its life cycle and the level of economic activity when deciding on a method
- Cost-Based: The selling price is a mark-up of the cost (Cost + CostxMark-up% = Price)
- Simple and straightforward BUT
- Determining the mark-up% is difficult. If too high, BS will lose sales. If too low, BS misses profit
- ‘Cost’ is the production/acquisition cost, doesn’t take into account mktg
- Market-Based: Based on levels of supply/demand → constantly fluctuating,
difficult to keep up with
- Competition-Based: Lower than comp to undercut them, equal if following a price leader, above if
the product should be perceived as superior BUT any can backfire
2.4.3.2 Pricing Strategies
- BS should consider its mktg objectives, product life cycle, market, degree of product differentiation,
level of economic activity
- Price Skimming: Product priced high at introduction to recover R&D costs, then reduced
- Price Penetration: Product priced low at introduction to gain market share, then increased
- Loss Leader: Discounted products entice customers to a BS who end up buying more (recover loss)
- Price Points: Set prices which products are categorised into, allows marketers to suggest an upgrade

2.4.3.3 Price and Quality Interaction

- High pricing usually suggests superior quality products (due to high manufacturing costs) and also
provide an aura of prestige / high status so if a BS that uses premium pricing lowered prices
dramatically, it would damage their reputation
- BUT this could backfire because customers may not agree that the product is of superior quality and
hence stop buying it because the cheaper alternative is about the same or better

2.4.4 Promotion
- Elements of the mix: advertising, personal selling, relationship mktg, sales promotions, publicity + PR
- Advertising is paid and non-personal: print, TV, radio, outdoor, telemarketing, window display,
direct mail, internet advertising (type depends on budget, product, target market, etc.)
- Personal selling: Selling through an agent, personalised per customer
- Relationship Marketing: encouraging LT relationships, e.g. loyalty rewards program
- Promotions: limited edition offers, deals, samples, free gifts, refunds, comps, POP displays
- Publicity + PR: free marketing e.g. donations, speeches, etc.
- Communication processes: opinion leaders, word of mouth
- Opinion leaders = influencers, almost 40% of Twitter users said they had made a purchase
based on an influencer’s endorsement (e.g. celebrity endorsement, brand partnerships, etc.)
- Word of Mouth: People influencing each other during conversations, places a newfound
emphasis on customer service as one bad experience will spread more than a good one

2.4.5 Place/Distribution
- Distribution Channels: Producer to agent to wholesaler to retailer to consumer (or part thereof)
- Most services are just producer to consumer
- Bulky/perishable products generally just have a retailer as an intermediary
- Most common method for consumer goods is producer-wholesaler-retailer-consumer
- A BS that doesn’t have sales representatives will also have an agent, who never owns the G/S
- ALSO: E-commerce (internet) and M-Commerce (mobile) are rapidly increasing in popularity
- Channel choice: Intensive (everywhere), Selective (in some places), Exclusive (very limited)
- E.g. milk is intensive, furniture is selective, Louis Vuitton is exclusive

2.4.5.1 Physical Distribution Issues

- Transport: Costs money, must be efficient (customers want deliveries at certain times), must be safe
(product must be retain its quality, in some cases this means refrigerated transport)
- Warehousing: Requires a large facility, employees, extensive product tracking system, security (to
prevent theft), climate control for perishables, equipment to move products (e.g. forklifts), etc.
- Inventory: Hard to forecast demand so inventory may be over/understocked
2.4.6 People, Processes and Physical Evidence
- People → emphasises importance of proper worker recruitment and training to
ensure a good reputation and positive perception among customers
- Processes → must be efficient, convenient to influence the ‘past experience’
factor
- Physical Evidence → e.g. cleanliness of premises, online presence

2.4.7 E-Marketing
- A direct result of globalisation and technology
- Increases convenience, is cost-effective, better reach for audiences
- Web pages, podcasts, electronic messages (email and SMS), blogs, location-based, SM
- SM raises ethical (privacy, accuracy) and legal (age restrictions) issues but is expanding rapidly
- Blogs allow BSs to establish a reputation for expertise (by providing detailed info on products and
services), new ideas can be put out to gain feedback, informal to build trust with customers

2.4.8 Global Marketing

2.4.8.1 Global Branding
- The worldwide use of a name / term / symbol / logo to identify the seller’s products
- Cost effective because one advertisement can be used in a number of locations
- The successful brand name can be linked to new products being introduced into the market

2.4.8.2 Standardisation
- Assumes the way the product is used and the needs it satisfies are consistent globally
- ‘One marketing plan fits all’ → cost savings through economies of scale and
evaluations / modifications are much simpler
- E.g. electrical equipment, music, soft drinks, movies, fast foods, etc.

2.4.8.3 Customisation
- Assumes the way the product is used and the needs it satisfies are different between countries
- Marketing plan must be customised according the economic, political and sociocultural
characteristics of the target country

2.4.8.4 Global Pricing

- Three strategies: customised, market-customised, standard worldwide
- Customised: Different countries are charged different prices for the same product using the cost-plus
method so it covers the added cost of taxes, transportation, tariffs, warehousing, etc.
- Market-customised: Price set according to local market conditions and competition levels
- Standard worldwide: two major risks - a domestic business may undercut the standardised price +
changes in the exchange rate may negatively impact the exported price

2.4.8.5 Competitive Positioning

- How a BS will differentiate its products + carve out a place in the competitive marketing environment
- To develop and maintain a competitive position in an increasingly challenging environment,
businesses must gain a deep understanding of their dynamic environments in which they operate
and form strategies according to evolving conditions
Marketing Glossary

Term Definition

Marketing (Mktg) The process of planning and executing the conception, pricing, promotion and
distribution of ideas, goods and services to create exchanges that satisfy individual
and organisational objectives / A total system of interacting activities designed to
plan, price, promote and distribute products to present and potential customers.

Marketing Concept The business philosophy that all sections of the business are involved in satisfying
customers’ needs and wants while achieving business goals

Customer The process of collecting information from customers and basing marketing
Orientation decisions and practices on customers’ wants and interests

Customer Measures how goods and/or services supplied by a business meet or exceed
Satisfaction customer expectation

Relationship Mktg The development of long-term, cost-effective relationships with individual customers

Market A group of individuals, organisations or both that: need or want products (G/S); have
the money (purchasing power) to purchase them; are willing to spend their money to
obtain them; and are socially+legally authorised to purchase them.

Customer Choice The decisions and actions of customers when they search for, evaluate, select and
Buying Behaviour) purchase goods and services

Implied Conditions The unspoken and unwritten terms of a contract

Consumer Provide consumers with rights to certain remedies from retailers & manufacturers
Guarantees where Gs purchased fail to comply with the consumer guarantee provisions in ACL

Acceptable Quality Products that are safe, lasting, with no faults, look acceptable and are functional

Materialism An individual’s desire to constantly acquire possessions

Product Placement The inclusion of advertising in entertainment

SWOT Analysis Involves the identification and analysis of the internal S+W of the business as well as
the opportunities in + threats from the external environment

Product Life Cycle The stages a product passes through: introduction, growth, maturity and decline

Market Research The process of systematically collecting, recording and analysing information
concerning a specific marketing problem

Market Share The business’s share of the total industry sales for a particular product

Target Market A group of present and potential customers to which a business intends to sell to

Marketing mix The combination of the 4 Ps of marketing - Product, Price, Place, Promotion - that
make up the marketing strategy
Segmentation A characteristic of an individual or group that is used by marketing managers to
Variable divide a total market into segments

Positioning When marketers try to create an image/identity for a product compared with that of
competing products

Brand A name, term, design, symbol or any combination of these that identifies a specific
product / BS and distinguishes it from competitors

Price The amount of money a customer is prepared to offer in exchange for a product

Promotion Methods used by a BS to inform, persuade, remind a target mkt about its products

Advertising A paid, non-personal message communicated through a mass medium

Public Relations Those activities aimed at creating and maintaining favourable relations between a
(PR) BS and its customers

Publicity Any free news story about a business’s products

Place/Distribution Activities that make G/S available to customers when/where they want to buy them

Market Coverage The number of outlets a firm chooses for its products

Inventory Control A system that maintains quantities/varieties of goods appropriate for the target mkt

People Quality of the interaction btwn customer and those within the BS who will deliver S

Processes The flow of activities that a business will follow in its delivery of a service

Physical Evidence Everything the customer sees when interacting with a business

Topic 3: Finance

3.1 Role of Financial Management

3.1.1 Strategic Role of Financial Management

- To plan, manage control and safeguard finances to help the business achieve their strategic and
financial goals whilst managing global financial risks
- Includes: setting financial objectives, sourcing finance, preparing budgets and forecasting future
finances, preparing financial statements, maintaining sufficient cash flow, distributing funds to other
parts of the business

3.1.2 Objectives of Financial Management (PLEGS)

- Profitability (ST/LT): Will satisfy owners/shareholders in the ST and ensure BS sustainability in the LT
- Gross Profit = Sales - COGS
- Net Profit = Gross Profit - Expenses
- Gross Profit Margin = (gross profit ÷ sales) x 100%
- Net Profit Margin = (net profit ÷ sales) x 100%
 - Liquidity (ST): The extent to which a business can meet its financial commitments in the ST, a
measure of how quickly a current asset can be converted to cash to pay current liabilities
- Current Ratio = Current Assets ÷ Current Liabilities
- Working Capital = funds available for ST commitments = Current Assets - Current Liabilities
- Efficiency (ST/LT): The ability of a BS to minimise its costs and manage its assets so that maximum
profit is achieved with the lowest possible level of assets
- In financial mgmt, improved by: monitoring BS assets (e.g. collecting accounts receivable
faster) and monitoring expenses relative to sales generated
- Growth (ST/LT): The ability of a BS to increase its size in the LT (e.g. increase market share or
geographic scope)
- Solvency (LT): The extent to which a BS can meet its financial commitments in the ST and the LT
- Debt to equity ratio (aka gearing, leverage) = Total Liabilities ÷ Total Equity
- Remember: Operational (day-to-day) and Tactical (1-2 years) goals are ST and Strategic (5+yrs) are LT
- Possible Conflicts between ST and LT goals:
- LT growth may increase expenses and hence decrease profitability in the ST
- R&D is expensive in ST but may be rewarding in the LT

3.1.3 Interdependence with other Key Business Functions

- Finance allocates funds to all KBFs (ops for buying inputs, HR to pay staff, mktg for promotions)
- Finances also relies on the KBFs to work together and generate sales (ops produces with help of HR,
mktg promotes), providing income to the finance department

3.2 Influences on Financial Management

3.2.1 Internal Sources of Finance - Retained Profits

- When a business doesn’t distribute all of its profits as dividends and instead keeps some
- Cheap and accessible but requires the business to make a healthy enough profit to support growth

3.2.2 External Sources of Finance

3.2.2.1 Short Term External Sources of Finance (Debt)
- Overdraft: When a bank allows a BS/individual to overdraw their account up to an agreed limit and for
a specified time, to help overcome a temporary cash shortfall
- Interest is generally compounded daily, but only on the amount borrowed
- Commercial Bills: ST loans issued by financial institutions for amounts over $100k for 30-180 days
- Usually secured against business assets and can be rolled over
- Factoring: The selling of accounts receivable for a discounted price to a finance/factoring company
- Without recourse = BS transfers responsibility to the factoring company (expensive)
- With recourse = BS still responsible for the bad debt (cheaper)

3.2.2.2 Long Term External Sources of Finance (Debt)

- Mortgage: A loan secured by the property of the borrower, the property cannot be sold or used as
security for further borrowing until the mortgage is repaid (+ interest, agreed regular repayments)
- Usually low interest rates because it is secured against a property
- Raising a deposit is still substantial, there is also the risk of property depreciation
- Debentures: A promise issued by a company to repay a loan for a fixed rate of interest and for a fixed
period of time (generally 1-5 years), used to raise a large amount of funds
- Only incorporated companies can raise debentures, generally public
 - Requires a prospectus when public companies issue debentures to investors via the ASX
- Unsecured Notes: Loan from investors for a set period of time, higher interest rate bc unsecured
- Similar to debentures, interest rate depends on the creditworthiness of the business
- Leasing: The payment of money for the use of equipment that is owned by another party
- Operating Lease = Assets leased for short periods (usually shorter than the life of the asset),
easy to cancel, owner carries out maintenance
- Financial Lease = lessor purchases the asset on behalf of the lessee (usually for the life of the
asset / 3-5yrs), penalties for cancellation, e.g. plant / vehicles / equipment / furniture / fittings
- Long financial leases are cheaper than long operating leases

*Note: Unincorporated businesses (i.e. sole traders / partnerships) would be best suited to normal ST/LT
loans through banks since debentures, unsecured notes, commercial bills, etc. not suitable

3.2.2.3 Long Term External Sources of Finance (Equity) - Ordinary Shares and Private Equity
- New Issue: Security that has been issued and sold for the first time on a public market e.g. ASX
- Most common form is an IPO (initial public offering) or float = when a private company lists on
a stock exchange for the first time to raise capital by selling shares to the public
- A prospectus must be issued and lodged with ASIC
- Rights Issue: Invitation to existing shareholders to purchase more shares in the same company at a
discount, number of shares offered is proportional to number of shares held
- Prospectus required
- Placements: Creating new shares in return for capital and issuing them to selected investors at a
discounted rate, generally the targeted investors purchase >$500k worth of shares
- Can disadvantage existing shareholders by diluting their ownership / share in earnings
- Share Purchase Plans: Existing shareholders are offered more shares in the same company at a
discounted rate, maximum of $30k per shareholder
- Different from rights issue in that the offered shares are not in proportion to held shares, so
every shareholder is entitled to purchase the same quantity of new shares
- Private Equity: Private companies approach investors for capital in exchange for ownership/control
- Unincorporated Businesses: Sole traders should change legal structure to a partnership, partnerships
should introduce new partners or change legal structure to a public/private company

3.2.3 Financial Institutions

- Banks: Receive savings as deposits from individuals, BSs and govts at a low
interest rate → make investments/loans to borrowers at a higher interest rate
(to make a profit through interest)
- Investment Banks: Provide borrowing and lending services primarily to the BS sector
- Finance Companies: Mainly provide short/medium term loans to BSs, raise money through
debentures, some specialise in factoring or cash flow financing
- Superannuation Funds: Invest money received from super contributions in things like company
shares, property and managed funds so that their members will earn investment returns
- Life Insurance Companies: Policy holders pay regular premiums and the insurer guarantees to pay
the designated beneficiary a sum of money upon circumstances specified in a contract, life insurance
companies use premiums to provide equity/loans to the corporate sector which provides funds for
investments
- Unit Trusts / Mutual Funds: Take funds from a large number of small investors, manage portfolio,
invest money, distribute capital gains
 - The ASX: Acts as a primary and secondary market (see glossary) → the secondary
market increases liquidity of financial assets and therefore influences the
primary market for securities

3.2.4 Influence of Government

- ASIC: An independent statutory commission accountable to the Commonwealth parliament
- Enforces and administers the Corporations Act 2001
- Protects consumers in the areas of investments, life/general insurance, super, banking
- Aim is to assist in reducing fraud / unfair practices in financial markets and products
- Company Tax: Paid by incorporated BSs before profits are distributed as dividends, levied at a flat
rate (i.e. 25% for BSs with an annual turnover of <$50m, otherwise 30%)

3.2.5 Global Market Influences

- Economic Outlook: Positive means ↑ demand (↑production ∴need funds to purchase
equipment, employ/train staff, expand BS, etc.) or ↓interest rates (expenses
↓, profits ↑). Negative outlook will have the opposite effect e.g. COVID-19
recession
- Availability of Funds: How easily a BS can borrow funds on international financial markets
- The Australian economy has become more integrated with the global
financial system since its deregulation in the 1970-80s → Australians can
borrow/invest in financial assets overseas and foreigners can do the same
in Australian markets
- Interest Rates: The cost of borrowing money, proportional to risk
- Australian interest rates are generally higher than other countries so people may be tempted
to borrow from overseas but then the risk lies in adverse changes to conversion rates

3.3 Processes of Financial Management

3.3.1 Planning and Implementing

3.3.1.1 Determining Financial Needs
- Collect financial information such as balance sheets, income statements, cash flow statements, bank
statements, budgets, break-even analysis, sales/price forecasts, weekly department reports, etc.
- Financial needs are determined by BS size, life cycle phase, growth plans, capacity to source finance

3.3.1.2 Developing Budgets

- Help managers allocate resources, evaluate performance and formulate plans towards BS goals
- In preparation, consider: past figures/trends, potential market trends/fluctuations, foreseeable internal
changes, current orders + plant capacity, potential external changes (e.g. availability of inputs)
- Operating Budgets: Sales, production, raw materials, direct labour, expenses, COGS
- Project Budgets: Capital expenditure, R&D
- Financial Budgets: Income statement, balance sheet, cash flow statement (liquidity)

3.3.1.3 Maintaining Record Systems

- Management bases its decisions on the information in BS records, so it must be accurate + reliable
- Obligation by law: BSs must keep records of their financial transactions for at least 5 years (for tax)

3.3.1.4 Identifying Financial Risks

 - Credit Risk: Risk associated with borrowing money and having sufficient funds to meet repayments
- Market Risk: Changing conditions in a specific marketplace e.g. ↑ competition, ↓
demand
- Liquidity Risk: If the cash flow is strong enough to keep the BS afloat, meeting liabilities, etc.
- Operational Risk: Dangers in day-to-day BS mgmt e.g. legal problems, HR issues, BS model risk

3.3.1.5 Establishing Financial Controls

- The BS monitors and controls the allocation + usage of its resources through financial control policies
- Some policy examples: Asset protection (e.g. locking buildings, surveillance on inventory), Control of
Cash (e.g. not keeping money on premises overnight), Separation of duties, clear authorisation +
responsibility for specific business tasks, qualification restrictions in staff

3.3.2 Monitoring and Controlling

3.3.2.1 Cash Flow Statement
- Indicates the movement of cash receipts/payments resulting from transactions over a period of time
- BS activities are divided into Operating, Investing (purchase/sale of non-current assets and
investments) and Financing (debt/equity sourcing, repayments, etc.)
- Brackets are usually used to delineate cash outflow / payments

3.3.2.2 Income Statement

- Summary of the income earned and expenses incurred over a period of trading
- Steps: Record income/revenue, record COGS, calculate gross profit (revenue - COGS), calculate net
profit by subtracting all other expenses (i.e. Selling, Administrative, Financial)

3.3.2.3 Balance Sheet

- Represents a business’s assets and liabilities at a particular point in time and shows net worth
- Usually prepared at the end of an accounting period
- Includes assets (current and noncurrent), liabilities (current and noncurrent and owners’ equity
- Accounting Equation: Assets = Liabilities + Owners Equity

3.3.3 Financial Ratios

- Vertical analysis = comparing figures within one financial year
- Horizontal analysis = comparing figures from different financial years
- Trend analysis = comparing figures for periods of 3-5 years
- Liquidity: Current Ratio = Current Assets ÷ Current Liabilities (2:1 is generally a good ratio)
- Gearing (solvency): Debt to Equity Ratio = Total Liabilities ÷ Total Equity
- Higher ratio → less solvent → higher risk with regard to LT financial
stability (keep it <1)
- Profitability: Net profit ratio, gross profit ratio (not for service BSs - no COGS) as normal
- Return on equity ratio = Net profit ÷ Total Equity → ROI for shareholders
∴ higher the better
 - Efficiency: Expense Ratio = Total Expenses ÷ Sales → lower the better
- Accounts Receivable Turnover Ratio = Sales ÷ Accounts Receivable →
measures the effectiveness of a firm’s credit policy and how quickly it
collects its debts
- (365 ÷ AccRec Ratio) gives average length of time it takes a BS to convert balance into cash
- Comparative Ratio Analysis: Compare these ratios to previous results, benchmarks set by budgets,
other businesses / the industry average, etc.

3.3.4 Limitations of Financial Reports

- Normalised Earnings: One-off or unusual items that affect probability are
adjusted on the financial report so it can more accurately reflect the true
earnings of the business ← strategy
- Capitalising Expenses: A BS can choose to list a cost as an asset, usually happens when the cost has
not been used up / has future economic value, depreciation will be shown on the financial reports
- Valuing Assets: Depreciation rates are an estimate, sometimes historical cost is used but that is
inaccurate, intangible assets (e.g. goodwill, trademarks, patents, etc.) are hard to value
- Timing Issues: Expenses and revenue that are related should be recorded in the same accounting
period’s financial reports (matching principle)
- Debt Repayments: Some BSs have a separate account called ‘Provision for doubtful debts’ on their
balance sheet which reduces the accounts receivable value, BSs can manipulate their debts to
provide a more favourable overview in their financial reports
- Notes to the financial statement: Contain important information not in the main reporting documents
e.g. accounting methods used to record/report transactions, how certain figures were calculated, etc.

3.3.5 Ethical Issues Related to Financial Reports

- Legislations are in place to prevent unethical practices but often they are not enough
- Audited Accounts: An independent check of the accuracy of financial records and accounting
procedures, purpose is to ensure the reports are accurate and fairly presented.
- Internal Audit: Conducted internally by employees
- Management Audit: Conducted to review the firm’s strategic plan
- External Audit: Independent specialised accountants review the records. By law, ‘large’
businesses must have their annual financial report audited (Corporations Act Cth 2001)
- Auditors verify records physically e.g. count cash, check inventory + condition, etc.
- Record Keeping: Temptation to do cash transactions and not record them as revenue, reducing tax
- Reporting Practices: Similar to record keeping but heavier focus on the info sent to stakeholders

3.4 Financial Management Strategies

3.4.1 Cash Flow Management

- Cash flow statements help owners anticipate and prepare for future highs and lows, 3 strategies:
- Distributing payments across the year to avoid large outflows in particular months
- Offering debtors a discount for early payments can stimulate cashflow
- Factoring (see 3.2.2.1)

3.4.2 Working Capital Management (Current Assets - Current Liabilities)

- BSs try to keep cash balances at a minimum and hold marketable securities as reserves of liquidity
 - BSs must ensure they collect receivables in a timely manner e.g. late fees, early discounts, reminders
- Inventory must be carefully managed, too much or too little can negatively affect profits, see 1.4.6
- Payables should be timed to maximise liquidity e.g. holding back, early discounts, avoiding late fees
- Loan repayments + interest must be managed, avoid short-term loans because they’re expensive
- Monitor bank charges for overdrafts and monitor budgets regularly to manage cash supplies
- Strategies to manage working capital:
- Leasing: Affordable, easy to forecast repayments, tax deductible, easy to upgrade
- Sale and lease-back: selling an owned asset to a lessor and then leasing it back. This
improves a BS’s liquidity since it gives the BS a large cash injection + lets them use equipment

3.4.3 Profitability Management (Cost + Revenue Controls)

- Fixed and Variable costs must be managed
- Cost centres must be accounted for and monitored for greater control of total costs
- Expense Minimisation is also crucial, must be balanced with quality though (see cost leadership)
- Marketing Objectives must be pitched at a level of sales that will cover costs and result in a profit,
pricing should also be managed to maximise revenue

3.4.4 Global Financial Management

- Exchange Rates fluctuate: If AUD appreciates relative to foreign currency, the intl competitiveness of
Australian exporting businesses will fall, but imports will be cheaper. Opposite for depreciation
- Natural Hedging: e.g. establishing offshore subsidiaries, arrange for import payments and
export receipts to be denominated in the same foreign currency (so losses from one will be
offset by gains from the other), import/export contracts all in AUD (transfers risk to the
external party), implement mktg strategies to reduce the price sensitivity of exported products
- Since Australian interest rates are generally higher than US, Japan, etc. BSs may choose to borrow
from overseas, but this might end up being more expensive (ties in with exchange rate fluctuations)
- Derivatives (aka Financial Instrument Hedging): Forward Exchange Contract (fixed future rate),
Options Contract (forward exchange but with the option to get out of it), Swap Contract (swap
loan obligations with an intl business)
- Methods of Payment: in order of level of risk for exporter
- Payment in Advance: Exporter receives payment and then arranges for goods to be sent.
Very few importers agree to this bc there is no guarantee they will receive what they ordered.
- Letter of Credit: Very popular with exporters, requires a letter from a secure bank assuring the
exporter that the funds will be paid once certain conditions are met. If the buyer doesn’t pay,
the bank will have to so these letters are only given out if the bank trusts the importer
- Bill of Exchange: Most popular. Exporter draws up a BoE with their Australian bank, sends to
importer’s bank with documents allowing importer to collect the goods, importer’s bank hands
over documents after a payment (D/P) or agreement (D/A) is made.
- D/P = Document against Payment; D/A = Document against Agreement (more risky)
- Clean Payment: Importer pays after they receive the goods in an agreed credit term

Marketing Glossary

Term Definition

Financial The planning and monitoring of a business’s financial resources to enable the
Management business to achieve its financial objectives
Short Term (ST) Less than 12 months, also ‘Current’ (so Current Liabilities are to be paid in 12mo.)

Long Term (LT) More than 12 months, also ‘Non-Current’

Internal Finance Funds generated from within the business

External Finance Funds provided by sources outside the business

Debt Finance The ST and LT borrowing from external sources by a business

Superannuation A scheme set up by the federal govt which requires all employers to make a financial
contribution to a fund that will provide benefits to an employee when they retire

Primary Market Deals with the issue of debt instruments by the borrower of funds

Secondary Market Deals with the purchase and sale of existing securities

Global Economic The projected changes to the level of economic growth around the world
Outlook

Budget Financial doc used to estimate future revenue and expenses over a period of time

Record Systems The mechanisms used by a BS to ensure that data is recorded and the information
provided is accurate, reliable, efficient and accessible

Assets Items of value owned by a BS

Liabilities Items of debt owed to outside parties

Liquidity The extent to which a BS can meet its financial commitments in the ST (<12 months)

Solvency The extent to which a BS can meet its financial commitments in the LT (>12 months)

Cost Centre A particular department / section of a BS to which costs can be directly attributed

Hedging The process of minimising the risk of currency fluctuations

Topic 4: Human Resources

4.1 Role of Human Resource Management

4.1.1 Strategic Role of Human Resources

- Effective HRM sees the employee as an asset rather than a cost, encouraging open communication
and goal orientation. It accepts that legitimate differences exist in workplaces but aims to reduce
conflict through appropriate procedures and relationships
- BSs should focus on the use of specific HRM strategies to retain, reward + motivate good employees

4.1.2 Interdependence with other Key Business Functions

- Effective management will result in employees contributing better + more efficiently to the production
of G/S (Ops), stronger relationship between BS and customers (Mktg), all this will overall increase
profitability / share prices etc. (Finance)
4.1.3 Outsourcing
- Reasons: Reduce costs, focus on core, improve quality, increase speed to market, foster innovation
- HR functions such as recruitment, induction, training, mediation, etc. are commonly outsourced
- Contractors are used to reduce costs or access greater expertise to improve competitiveness, mainly
for processing functions (repetitive and easily measured) that are non-core
- Can be domestic or global ← see 1.4.4 for advantages and disadvantages

4.2 Key Influences

4.2.1 Stakeholders
- Employers exercise control over employees; responsible for wage/salary payment, have the power to
dismiss employees, must comply with legal regulations
- Business seeking to manage the trade off between not overpaying workers and attracting /
retaining quality staff (i.e. efficient, effective, innovative, productive)
- Employees work under employers (where, when and how they decide); seek to maximise benefit
from pay, conditions, respect, promotion / development / training opportunities, culture, etc.
- A strategic HR manager will use these influences to secure ↑
productivity, ↓ turnover, etc.
- Employer associations provide advice on awards / unfair dismissals / discrimination issues, negotiate
agreements (e.g. serve counter-logs to processed LoCs), educate on employment laws
- Trade Unions (currently 14% of the workforce, down from 51% in 1976, largest industry is E&T at 37%)
represent employees in an effort to improve wages / working conditions of their members.
- Government Laws at Federal and State levels impose legal compliance obligations
- Federal: Fair Work Act (Fair Work Commission), Age / Disability / Sex / Racial Discrimination
Act (Human Rights Commission)
- NSW: Anti-Discrimination Act 1977, WHS Act 2011, Workers Compensation Act 1987
- Society: Work is important to people’s lives, people working is important to society

4.2.2 Legal - The Current Legal Framework

4.2.2.1 The Employment Contract

- Employers are obligated to provide work, a safe work environment and pay income
- Employees are obligated to obey lawful orders, use care and skill, act
honestly and not breach confidentiality (rights work vice versa) ← these arise
from common law
- 11 National Employment Standards (NES): ← contained in the Fair Work Act 2009
(statute law)
1. Maximum weekly hours (38)
 2. Right to request flexible working arrangements
3. Parental leave and related entitlements - upto 12 months unpaid leave, right to ask for 12 more
4. Annual Leave - 4 weeks paid leave per year
5. Personal/carer’s leave (10 days paid, 2 days unpaid), Compassionate leave (2 days),
Family/Domestic Violence Leave (5 days unpaid)
6. Community Service Leave - e.g. up to 10 days paid leave for jury service
7. Long Service Leave - paid leave depending on the employee’s service
8. Public Holidays - paid day off (unpaid for casuals)
9. Notice of Termination + Redundancy Pay - upto 5 weeks notice of termination, upto 16 weeks
redundancy pay (based on employee’s service length)
10. Provision of a Fair Work Information Statement
11. Provision of a Casual Employment Information Statement
- Minimum Wage: An employee’s base rate of pay for the number of ordinary hours
they have worked, generally determined by a modern award or national minimum
wage → reviewed + set annually by the Fair Work Commission each financial year
- Award: A determination that explains the legally enforceable minimum Ts+Cs that apply to a business
or industry, there are currently 122 e.g. Air Pilots Award (2020), Real Estate Industry Award (2020)
- Enterprise Agreement (aka collective agreement): Offer broader Ts+Cs than a modern award, must
be approved by the Fair Work Commission and satisfactorily pass the BOOT (‘better off overall test’)
- Common Law Employment Contracts: when an employer and an individual employee negotiate a
contract covering pay/conditions, generally for higher income employees in the private sector

4.2.2.2 Work Health and Safety and Workers Compensation

- State governments enacts and enforces WHS Act 2011 (NSW)
Responsibilities of Employers Responsibilities of Employees

- Ensure the health, safety and welfare at work of all employees - Cooperate with
- Ensure that plant and substances are used, handled, stored and employers in ensuring
transported safely health and safety of
- Give employees the necessary info, training and supervision to others
carry out their job safely - Take reasonable care for
- Ensure the business’s outputs are not a health risk to others health and safety of
- Report any deaths or serious injuries in the workplace others
- Notify SafeWork NSW of any plans to carry out dangerous work
- Employers are required to take out workers compensation insurance → supports
injured employees in their recovery and return to work
- Read up more on this before exams

4.2.2.3 Anti-Discrimination and Equal Employment Opportunity (EEO)

- No person/group should be disadvantaged based on a personal characteristic irrelevant to the
performance of the work
- Legislation enforcing this:
- Affirmative Action (EEO for Women) Act 1986 (Cwlth)
- Sex Discrimination Act 1984 (Cwlth) and Anti-Discrimination Act 1977 (Cwlth)

4.2.3 Economic
- In a downturn/trough/recession: businesses may downsize
 - In an upturn/peak/boom: employers may need to offer more benefits to retain
employees, unions have a higher bargaining power ← pay increase may result in
inflation
- Structural Change has led to rapid growth in the services sector

4.2.4 Technological
- For employees: can make life easier (e.g. WFH) BUT can also steal their jobs (e.g. robotics)
- For employers: can reduce costs (e.g. robotics, online acquisition) BUT also pose risks (e.g. leading
edge tech) and increase costs (i.e. redundancy payouts, initial investment)

4.2.5 Social
- Changing Work Patterns: Dramatic growth in part-time (PT) work, need for career flexibility, increased
participation rates for women and older workers
- Adv of PT work: cheaper for employers (no sick/annual leave costs), more
flexible for employees → lets them decide their own work-life balance
- Disadv of PT: higher staff turnover results in loss of corporate memory and increased training
costs, employees don’t get full time pay, employees don’t get sick/annual leaves
- Australian living standards are much higher than other countries (e.g. compare to US)
- Also consider an ageing workforce, increased participation rates for women and older workers

4.2.6 Ethics and Corporate Social Responsibility

- Ethical framework such as a code of conduct or a code of ethics may be in place
- Benefits of ethical practices: ↑ staff retention, ↓ absenteeism, ↑ business
performance, ↑ reputation (positive publicity), ↓ costs (recruitment and
training)
- Safe and fair working conditions that improve employee welfare (incl challenging, interesting, etc.)
- CSR triple bottom line (see 1.2.8)

4.3 Processes of Human Resource Management

4.3.1 Acquisition
- Identifying Staffing Needs: Analyse internal (e.g. goals, culture) and external
(e.g. economic conditions, technological advancements) environments → forecast
demand/supply → identify shortages → job analysis + job design
- Recruitment and Selection

4.3.2 Development
- Keeps employees motivated by facilitating career growth, retains talented staff, upskilling benefits
business productivity and reduces long-term costs
- Induction: introduces new employees to their job, co-workers, business, culture
→ fosters a positive attitude, builds confidence, establishes positive working
relationships with co-workers/supervisors
- Training: Activities designed to give employees the skills/knowledge req. to do their CURRENT job
 - Individual Development: Same as training but for FUTURE roles in the business (e.g.
↑ responsibility)
- Organisational Development: Developing strategies to ↑ employee
participation/motivation/retention
- Job enlargement, job rotation, job enrichment, job sharing
- Mentoring and Coaching: Mentoring = mutually beneficial (suits experienced staff keen to transfer
knowledge); Coaching = improving skills/performance (helps individuals manage specific work roles
more effectively)
- Performance Appraisal: assessing employee performance against set criteria/standards

4.3.3 Maintenance
- Workplace communication + culture: e.g. suggestion boxes, social events, staff surveys, team mtgs
- Anti-discrimination, anti-bullying, WHS compliance, physical + emotional
wellbeing ← legal + CSR
- Rewards (monetary and non-monetary)
- Flexible and family-friendly arrangements: e.g. WFH, job sharing, paid leaves, etc.
For development + maintenance: interest/skills → motivation → productivity/retention
→ profits

4.3.4 Separation
- Voluntary: Resignation, Retirement (a form of resignation), voluntary redundancy (accepts a package)
- Involuntary: involuntary redundancy (retrenchment), contract expiry, dismissal
- Unfair dismissal: Harsh/unreasonable/unjust → remedy application with FWC
- Business should keep documentation to justify a dismissal e.g. poor performance records

4.4 Strategies in Human Resource Management

4.4.1 Leadership Style

- Autocratic / Authoritarian: Manager makes decisions and tells employees (e.g. military)
- ↓ decision making time , ↑ efficiency, ↓ employee satisfaction, ↑ staff
turnover
- Use for consistent output or when staff are less experienced
- Delegative: Manager delegates initiative to team members (best of both worlds)
- Democratic / Participative: Team members involved in decision making process (opp. of auth.)
- Good if the team members are knowledgeable and skilled, otherwise not really

4.4.2 Job Design

- Should encompass: task, challenge, variety, social interaction, flexibility, autonomy, opportunity for
ongoing learning and development, resources, opportunity for achievement
- A poorly designed job will give rise to maintenance, separation and recruitment issues/costs
- Specific task = low autonomy, general task = high autonomy
- Can achieve good job design through: simplification, rotation, enlargement, enrichment
4.4.3 Recruitment
- Internal recruitment: cheaper, builds loyalty, motivational for staff (see growth), little value added (no
new skills), unsuccessful applicants may be demotivated
- External recruitment: new ideas/perspectives/skills, diversity, publicity for BS, induction / association
with culture takes time, loss of productivity in orientation period
- General skills = soft skills (not measurable); Specific skills = qualifications (measurable)

4.4.4 Training and Development

- Training → superior work performance (current) → courses, coaching
- Development → enhance employee skills in line with BS future needs → career
transition

4.4.5 Performance Management

- Developmental = individual employee performance; administrative = collective BS performance
- Uses: assess performance against organisational standards, identify opportunities for productivity
improvement, assess legal compliance, justify staffing decisions (feedback to HRM about acquisition),
identify training/development needs, provide feedback and recognition
- BSs must document performance management, will be useful for dismissal in separation

4.4.6 Rewards
- Monetary: pay, bonuses, commissions, etc.; Non-monetary: awards, recognition, feedback,
advancement, interesting work / challenge, career security
- Group rewards are used when the team is directly working together
- Performance Pay (when employees equal or exceed a set of predetermined criteria): commission,
share plan, bonus, profit sharing, gainsharing
- When coming up with a remuneration system, consider: business goals, union power, BS viability /
profitability, competitors’ remuneration, economic conditions

4.4.7 Global
- Costs differ by country (e.g. legal compliance costs), increased access to skills, consider supply
- Polycentric (hire/appoint locals to foreign mgmt roles), Ethnocentric (send Australians overseas to
perform foreign mgmt roles), Geocentric (hire/appoint people regardless of background)

4.4.8 Workplace Disputes

- Industrial dispute = ceased work e.g. strike, lockout
- Common issues: remuneration, failure to comply with awards, employment conditions
- Negotiation (formal/informal compromise) → Mediation (neutral 3rd party) →
Grievance procedures (formal process written into award/agreement e.g. work
your way up to FWC)
- Courts/Tribunals: Conciliation (mediation undertaken by FWC) → Arbitration
(legally binding outcome)
4.5 Effectiveness of Human Resource Management - Indicators
- Corporate Culture: see →
- Benchmarking key variables (self-
explanatory) e.g. number of applicants
per position, recruitment costs, revenue
per employee, gender equity
benchmarks, etc.
- Changes in staff turnover: high turnover
is costly
- Absenteeism: high absenteeism
indicates poor business culture and is
costly
- Accidents: Helps identify skill gaps that
can be filled with training
- Levels of Disputation: e.g.
number/type/resolution of unfair
dismissal/bullying/discrimination claims
- Worker Satisfaction: take employee feedback (confidentially), qualitative + quantitative

Human Resources Glossary

Term Definition

Human Resource The management of the total relationship between an employer and an employee
Mgmt (HRM) in order to achieve the strategic goals of the business

Outsourcing Contracting out BS functions involving the use of third-party specialist BSs, aiming to
take advantage of the specialist skills provided by them and achieve a reduction in
labour costs

Contractor An external provider of services to a business

Employer Assn An organisation that represents and assists employer groups, usually respondents to
the awards covering their members’ employees and cover employers in the
same/similar industries

Log of Claims (LoC) List of demands made by workers (often through a union) against their employers
covering specific wages and conditions

Common Law Law developed by courts and tribunals, based on the outcome of previous cases

Statute Law Law developed by parliament

Enterprise A collective agreement made at a workplace level between an employer and an

Agreement employee about terms and conditions of employment

Workers’ A range of benefits to an employee suffering from a work-related injury or disease.

Compensation Also given to families of injured employees.

Affirmative Action Measures taken to eliminate discrimination and to implement positive steps to
 overcome the current and historical causes of lack of equal EEO for women

Structural Change A change in the nature + pattern of the production of G/S within an economy

Recruitment The process of finding and attracting the right quantity and quality of applicants for
an employment vacancy or anticipated vacancy at the right cost

Acquisition The process of attracting and recruiting the right staff for roles in a business

Development Enhancing employee skills in line with the changing and future needs of the BS

Maintenance The process of managing staff needs for health and safety, industrial relations and
legal responsibilities, including compensation and benefits, of all staff

Separation Process of employees leaving voluntarily/through dismissal/retrenchment processes

Redundancy When a person’s job no longer exists, usually due to technological changes, an
organisational restructure or a merger or acquisition

Retrenchment When a business dismisses an employee because there is not enough work to justify
paying them

Job Design The number, kind and variety of tasks that a worker is expected to carry out for a job

Corporate Culture The values, ideas, expectations and beliefs shared by members of a business