INTRODUCTION TO

BUSINESS

Lesson Notes

Dr. Verda Gizem OĞUL

1 Introduction
Business management is a science and a study field focusing on the practices of an
organisation in the free market. Business management therefore attends to the
functions of a business as well as the tasks of management and employees within that
business. All of this does not take place in isolation. A business requires people with

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entrepreneurial spirit who are willing to take or develop opportunities in the business
world. These opportunities need to address the needs of consumers while considering
the impact of other market- and macro-environmental factors.

Business management and the business

What is business?
Business is…
• An activity operated for the purpose of earning a Profit by providing a service or
a product.
• It involves a businessperson putting money into the business activity.

Profit-driven vs. non-profit organisations

Businesses in a free market system focus on generating a profit. Therefore the aim is
to ensure that the needs of customers are satisfied when producing goods, retailing
products or providing services. The difference between profit-seeking and non-profit
seeking businesses basically relates to the process of income generation in order to
cover related costs and/or generate an additional profit. Not generating a profit results
in the reality of a business opportunity being perceived as not viable. Consider Chapter
1 of the prescribed textbook to understand the profit-driven organisation functioning in
a free market economy.

Economic principle and factors of production

The economic principle is explained in Chapter 1. This concept refers to the best
possible utilisation of resources in order to create profit for the organisation. This
principle therefore forms one of the fundamental drivers for the existence of a profit-
driven organisation.
The four basic resources required to provide products and services, which aim to
service the multiple needs of customers, are also known as factors of production which
are used by a business in its quest for profitability. Various production factors are
considered such as natural resources, human resources, capital and entrepreneurship.
Establishing a business requires entrepreneurial behaviour. Entrepreneurship is
therefore seen as a key production factor in establishing and developing a business in
the free market economy.

Economic systems
Any business functions within an economic system. Remember that these systems do
not refer to a political system; as people easily confuse economic and political systems.
Generally a business functions within one or a combination of the following four basic
economic systems: capitalism, socialism, communism or a mixed-economy. These
different economic systems are discussed in more detail in Chapter 1 of the prescribed
textbook. Note that as indicated in Figure 1.1, the mixed-economy is a combination of
features of the other three economies.
3.6 Business stakeholders and the changing social contract
Businesses need to consider the importance, role and influence of business
stakeholders. Stakeholders include any internal and external role players that exist in
the environment within which an organisation functions. This includes, for example,

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government, employees, society, media, trade unions and shareholders, to mention a
few. The different primary and secondary stakeholders that are influencing South
African businesses are grouped according to three types of stakeholders, based on
their relation to the organisation and their expectations, namely: business related,
opinion related and public related. Consider Figure 1.2 for typical stakeholders that can
be identified as examples of each of these types of stakeholders.

social responsibility (CPR) is therefore also defined and explained in this section.

Profit is….
• The amount that remains after subtracting the cost of providing the service or
product from what one gets after selling.
• When the production cost is higher than sales, the business makes a loss.

Categories of businesses
Businesses can be categorized according to their activities as follows:
• Manufacturing/ Production - Make or process raw materials into a finished
products
• Service - Provide labor that does not produce a tangible product.
• Retail - Selling goods to consumers in small quantities
• Agriculture – Growing crops or rearing livestock for sale

Business Activities
There are 3 things that are required in all the businesses;
1. Inputs. These are the tangible things that are “put in” for the business to
operate
2. Operational activities. These are the various tasks or activities that must
be carried out for the business to produce results
3. Marketing activities: These are the tasks related to linking the business products
to the consumers or customers.

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 • Business is an activity operated for the purpose of earning a profit by providing
a service or a product
• Profit is the amount that remains after subtracting the cost of giving the service
or product from what one gets after selling.
• Business can be grouped into Manufacturing/Production, Retail, Service and
Agriculture
• Business activities include providing the inputs, operational and marketing
activities.

What is business management

The main duty of the business owner is to ensure all business activities are done as
required and profit is made.
The process of running the business makes the business owner to relate with other
people for different reasons.
These people form the Business relationship web.

Business Relationships Web

For any business to succeed, good management practices are needed. Business
management involves planning and ensuring business activities and
networks are running as expected. For Example;
• Planning business activities
• Buying the right material at the best prices at the right time
• Meeting the customer’s need
• Controlling business transactions and ensuring there is money to meet business
needs
• Keeping record of the business finances, stock and investments
• Ensuring the business is growing and making profit

Qualities of a successful business man

Personal qualities that enhance success in business could be learned while others are
inborn. Business persons need the following qualities to succeeed:

• Willingness to sacrifice time and money for the sake of the business
• Good people skills
• A good leader
• A good organizer
• Can make good judgments and decisions
• A good manager
• Has or is willing to gain experience
• Committed to succeed

Adding value is the improvement of the product/service. A value added product/service

aims at giving more satisfaction to the customers and therefore is willing to pay more
for it. The purpose of value addition to the business is to earn more money while
improving and increasing the customers satisfaction.
Adding value is very important step in any business since the goal is to make the
product/service worth more to customer.

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 • Business management involves managing the expectation of your business
relationship web partners also referred to us business network.
• For successful business management one need to adopt and improve on
interpersonal qualities
• Value addition makes the product/service more satisfying for the customers and
more income to the business.

Key concepts and terms

Make sure that you understand and are able to explain the following key terms:
Business
Business management
Entrepreneurship
Profit-driven organisation
Non-profit organisation
Stakeholders
Corporate social responsibility
Free market economy
Capitalism
Socialism
Communism
Mixed economy.

Marketing
Market is...
- The customer who NEEDS what you are selling.
- The CUSTOMER who is ABLE to buy what you are selling.
- The CUSTOMER who is WILLING to buy what you are selling.

A successful business is the one that seeks information in order to continue

meeting the needs of its customers.

The 4Cs of Market research

Customers
Cost
Commodity
Competition

1. Customers - Your target client

- Who are they? What do they do? How many of them are there? Where are they
located? What will they pay?
2. Cost -Your Costs

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- Operational costs, Administrative costs, Manufacturing costs, Selling Costs
3. Commodity - Your Products for the Market
- What are you offering? What is the gap in the market? What are the benefits of
your commodity? Is it there demand for it?
4. Competition - other business targeting same market
- Who are they? Where are they? What are their prices? How do they promote
their product?

Marketing is;
❖ Finding out what the customer wants
❖ Producing and selling the things that people want
❖ Letting people know about your products/services
❖ Selling your products in the right places
❖ Making your products/services unique and more attractive than of other similar
businesses
❖ Setting the right price so that people will buy your products

The 4Ps of marketing

Marketing is the process used to get customers to buy your product/service.
The goal of marketing is to increase sales. The considerations used in designing
marketing plan are called ‘marketing mix’.
The marketing mix can be summarized as the fours P’s (4Ps)
▪ The PRODUCT itself (that is, its nature, design, brand-name, packaging),
▪ The PRICE at which it is to be sold,
▪ The PLACE at which it is sold,
▪ The PROMOTION (that is, the means and style of advertising and selling).

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Costing
The cost of the product is all the costs related to the product/service. The cost can be
divided into two categories
1. Direct Costs These are costs that are directly related to the products or
services that
business makes or sells. E.g. cost of buying the products or material involved in
producing the
product
▪ The money we pay peoplewho work in making or selling the product
▪ Transport of the materials or product
▪ Consumable bills
2. Indirect Costs These are all other costs for running the business, for example
rent, license, security etc. Indirect costs are also known as overheads.
Overhead cost is paid
whether the business is producing or not

How to calculate costing

Second hand cloth business

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 - A business lady gets second hand skirts from the city and sells them in her rural
shopping centre.
- She buys a bale of 100 second hand skirts at 5000. This skirt takes one
month to sell. She pays herself a monthly salary of 5000.
- She pays 150 to travel to the city and 250 back with a bale of skirts.
- She sells from an open air market and pays 1200 for a one year license.
- Work out her cost of a skirt.

Pricing
When setting a price for a product one needs to consider the following:
- ƒThe total product cost (direct and indirect)
- How much customers are willing to pay
- Competitors prices
- Total costs + Profit = Price

‘Business’ is hard to define for the very reason that there is so much of it around us, in
all sorts of different shapes and sizes. It is clear that, while every business is different,
there are common characteristics that we can use to identify a business. There are
also some academic frameworks available to us to challenge our thinking about what
a business might be. It is important to question what a business is because people
tend to think in terms of large, well-known, successful businesses, whereas business
is, in fact, everywhere. Any typical high street will have banks, florists, hairdressers,
newsagents, estate agents, cafés, and so on. Business is such an integral part of our
lives that we do not normally stop to think about it.

Businesses come in all shapes and sizes, but have three factors in common: people,
objectives and structure. It is the interaction of people to achieve objectives that forms
the basis of a business, and some form of structure is needed within which people’s
interactions and efforts are focused. The direction and control of the interactions form
the role of management. This sounds straightforward, but we have already identified
that those who come together to form businesses, those who work in them and those
who manage them may have different objectives, needs and understandings of the
businesses.

Businesses are often differentiated in terms of the sector of the economy to which they
belong: public or private.
- The private sector comprises those businesses that are not controlled by the
government.

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 - The public sector comprises any part of the nation’s economy that is controlled
and operated by the government.

Unit 2: The business environment

Overview of unit content

This study unit covers the three different environments identified within the internal and
external business environment within which an organisation functions and performs its
duties. In order to acquire a conceptual understanding of the interactive business
environment, the concept of systems thinking by means of the systems approach is
introduced and explained. Then the level of control that management has over the
different organisational environments is presented. This is followed by a classification
and discussion of the internal (organisational) environment and how various
management functions impact on the success of a business, as well as how the
external environment (market and macro environments) impacts upon the business
and its continued existence. Finally we analyse the impact of the business environment
on an organisation using a SWOT analysis.

Topics:
The systems approach
The organisational (internal and external)/business environment
The micro-environment
The market environment
The macro environment
A SWOT analysis.

Table 1: Types of Businesses

In non-profit businesses the primary aims are expressed in terms other than
financial profitability. This does not mean that the intention is to make a loss! Nor does

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it mean that losses can be the normal or predominant financial outcome for the
business. Cash is as important to the survival of non-profit businesses as it is to other
businesses. To survive and grow, the money coming into the business (revenues) must
equal or exceed that going out (expenditure).

In our exploration of ‘what is a business?’ another important point is that people often
have rather stereotyped perceptions of what different businesses are ‘like’, particularly
if they have never worked in one. The popular image of a business, often reinforced
by business study textbooks, is that of a large enterprise, probably in the manufacturing
sector, and maybe in the USA: businesses such as Shell, Ford and Johnson &
Johnson. This is a misleading and somewhat outdated notion, as service industries,
particularly financial services, now usually form the major part of a nation’s economic
activities. Also, small businesses typically make up about 90 per cent of business
activity within any one country. In the UK, for example, out of an estimated 4.3 million
business enterprises at the start of 2004, 99.3 per cent were classified as small (0 to
49 employees).

Stereotypical views of the divisions between different types of businesses are also
common. Businesses in the private sector are usually seen as efficient and solely
profit-driven, while those in the public sector are generally seen as slow to respond to
developments in the external environment and unwilling to change. Charities and
voluntary organisations are often seen as amateurish or innovative, depending on your
point of view. Large businesses are viewed as bureaucratic, small organisations as
unreliable, co-operatives as worthy but difficult to manage, and so on. Another view of
different types of businesses, using the axes of size and goals, is shown in Figure 1.

The boundaries between different types of businesses are complex. Large public-
sector businesses, such as hospitals and county councils, may well contract out parts
of the business to private companies: for example, cleaning, catering and security.
Networking or collaboration with other similar or different businesses, perhaps in other
parts of the world, has become common. The building of the Eurotunnel between
France and the UK, for example, was a collaborative project, funded entirely by private
investors. In the UK, the government-led Private Finance Initiative (PFI) provides a way
for public-sector businesses to raise money for projects in private money markets.

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 Figure 1: Organisations circa 1990, highlighting their diversity

Morgan’s metaphors
In Images of Organization, Gareth Morgan (1986) talks about learning the skill of
‘reading’ situations. He suggests this is particularly important for people dealing with
business situations: ‘skilled readers develop the knack of reading the situations with
various scenarios in mind and of forging actions that seem appropriate to the readings
thus obtained’. The use of
metaphor, he explains, ‘implies a way of thinking and a way of seeing that pervade
how we understand our world generally’. A metaphor is a non-literal way of describing
a thing or an action in terms of something else, something it reminds us of.

Morgan’s intention is not to categorise different types of businesses, but to offer

different ways of looking at them. Looking at a business through a metaphorical ‘lens’
can help people to understand their experiences with them, either as employees,
consumers or citizens. Morgan (1986) invites us to share the ‘images of organization’
offered by the following eight metaphors:

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A machine – businesses are often designed and operated as if they are machines,
with highly visible structures and procedures. They offer continuity and security, but
tend to fit people into jobs rather than allow much creativity.

An organism – this means seeing the business as behaving in similar ways to our
own biological mechanisms. When the environment around us changes, so do our
bodies. Successful businesses are often adaptable and open to change. This may
mean that its structures and procedures will be less fixed.

A brain – seeing a business as a brain means realising it has to be able to respond to

change and also be capable of rational thinking and intelligent change. Being open to
inquiry and self-criticism often produces the ability to innovate; as Morgan puts it,
businesses become ‘learning systems’ that are able to self-organise.

A culture – when we speak of businesses as cultures, we are referring to the fact that
they are made up of sets of values, perspectives and principles, held and sustained by
the people who work there.

A political system – businesses are not only about structures, cultures and
hierarchies, they are also about politics. Politics in this context is about the social
relations between individuals and groups in a business that involve authority or power.
An organisational chart that plots the lines of communications between people will
reveal some of the politics, but not all.

A psychic prison – this more abstract metaphor suggests that some businesses may
be constrained by themselves. Conventional, or usual, ways of organising work and
thinking about the best way to do it can limit change and the adoption of alternative
business strategies. Looking at the business in these terms encourages us to dig
beneath the surface and try to see some of the restrictions, real or otherwise, that might
affect the business and its
ability to operate successfully.

As flux and transformation – the secret of understanding business from this

perspective, suggests Morgan, lies in understanding the constant change shaping our
lives. To truly understand a business, we have to appreciate it as an ever-changing
thing; it develops, it grows and it regenerates in order to survive.

A vehicle for domination – this metaphor introduces us to the idea that businesses
can be, or attempt to be, dominant; that is, they can impose, or try to impose, their will
on others. This perspective again encourages us to dig deeper than surface
appearances and to appreciate how business can exert influence and power. Morgan’s
framework is considered to be useful as one way of understanding businesses. It is
not meant to suggest fixed types of businesses; indeed, businesses are likely to be a
mix of these different metaphors and can change over time, or according to
circumstances. These metaphors, or different ways of thinking about ‘what is a
business?’, can help to highlight the complexities of a business and their potential
impact on our lives.

Management issues

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Tourism businesses in the past were seldom at the forefront of strategic management.
Some of the reasons for this are obvious given their small size, geographical
fragmentation and the general nature of management training that predominated in
some sectors of the industry, which prevented the introduction of new ideas or
experience from areas outside tourism. That tourism is service-based is an important
aspect in terms of management. Few physical products are associated with the
industry and this greatly influences how tourism should be managed. It is often argued
that a good manager should be as skilled in managing services as physical goods.
This requires an appreciation of the characteristics of services as these influence the
way in which services should be managed.

Table 1.1 Differences between services and physical goods

Role of Management in Business

Olsen and Haslett explain that; “Systemic thinking brings together in one discipline the
concepts of connectedness and interdependencies, feedback and feedback processes
and mental models. A systemic approach can aid in the understanding of the strategic
management process as it focuses on a holistic view.”

General management principles are to implement the processes of planning,

organising, leading and controlling. As these are only tasks, it is the responsibility of
management to ensure that they are performed. The levels of management and the
different types of managers will be discussed in this section. Managers must possess
certain skills in order to manage. By exploring the evolution of management theory,
“What is management?”

Theory tells us that “management” consists of four tasks/ activities that are performed
by managers:

Planning;
Organising;
Leading;
Controlling.

But who is supposed to manage? The answer is: Everyone!

“What is an organisation?” Below are some definitions to consider:
“ An organisation consists of people and resources and certain goals, which may differ
from one organisation to the next.” Du Toit, Erasmus & Strydom
“ A group of people that has a structure and strives to achieve a common set of goals.”
Robbins, 2001.
“ Managed system designed and operated to achieve a specific set of objectives.”
Bateman & Snell

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Systems Theory
Management theory has undergone a dramatic change in recent years with the
reintroduction of Systems Theory. In simple terms, Systems Theory argues that an
organisation as a system is influenced by and interrelated with many internal
subsystems and external systems. Today’s organisations are not independent and
isolated islands. Systems Theory attempts to take a comprehensive view of an
organisation's process, a way to more completely understand an organisation.

A systems-theory-based management philosophy attempts to integrate many fields of

scientific knowledge. These include behavioural science, physics, economics, social
sciences and philosophy. An organisation is a dynamic and ever-changing system
continuously influenced by its external environment (policies, technology, economy,
competitors, globalisation) and its internal environment (changing organisational
structure, culture, budgets, and systems such as HR management systems,
information and communication, and financial management). Figure 4 demonstrates
the complexity of these external and internal factors. The success of a future leader
will depend on his/ her awareness, knowledge, and ability to manage successfully a
web of these interdependent forces, stakeholders and processes.

Figure 4: Regenesys’ Integrated Management Model

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The module will draw on the Integrated Management Model developed by Regenesys
Management (Pty) Ltd, which demonstrates how the external environment, levels of
an organisation, team and the components of an individual are interrelated in a
dynamic and systemic way.

The degree of synergy and alignment between organisational, team and individual
goals and objectives, determines the success or failure of an organisation. It is
imperative that each organisation ensures the team’s and individual’s goals and
objectives are aligned with the organisation’s strategies (vision, mission, goals and
objectives, etc.); structure (organogram, decision-making structure, etc.); systems
(HR, finance, communication, administration, information, etc.); and culture (values,
work ethic, principles, etc.). Hence, an effective work environment should be
characterised by the organisational systems, strategies, structures and culture being
aligned; together with people who operate synergistically. We must not forget the
impact of each individual who operates within each organisation.

The Organisational Environment

The organisational environment (see Figure 2) consists of the environment external to
the organisation as well as the internal functioning of the organisation.
Figure 2: The Organisational Environment

The manager has direct control over the micro-environment, can influence the market
environment, but has little or no control over the macro-environment.

The Micro-Environment
The micro-environment includes the business functions (operations, logistics, finances,
human resources, marketing and public relations) and the management tasks of
planning, organising, leading and control. Operations are responsible for producing the
product where the logistics focus on obtaining the products to be used in the
manufacturing of the product to be sold. Also included under logistics is the
responsibility to ensure the right quality, quantity, price and distributing the product.
The financial function ensures that there is sufficient capital available in the short and

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long term. This includes debt collection and paying creditors. The human resource
management function must ensure that the right people are employed to perform the
tasks. The marketing function makes potential customers aware of the product and
aims to persuade them to purchase it. Public relations ensure that the organisation
maintains a positive image amongst its customers and society at large.

The Market Environment

This environment is better-described as the environment in which the organisation
conducts its business. In this environment, inputs are obtained from suppliers (who sell
raw materials or
goods) and their intermediaries (they act as “middlemen” between the manufacturer
and the consumer), goods and services are sold to customers (the patrons who buy
the goods or services), and the organisation competes for market share with other
organisations selling similar products or services. It has much to do with competition,
opportunities and threats. It is important to note that, the more parties in the supply
chain, the more expensive the endproduct, as each party will add their “mark-up” to
the product. Figure 3 depicts Porter’s Five Forces Model. An organisation needs to
know in which industry it is competing, what the structure of that industry is, what the
major determinants of competition are, and which
organisations are its competitors.

Figure 3: Porter’s Five Forces Model

The Macro-Environment

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This environment includes all the factors on the national and international levels which
can
impact on the organisation. Organisations have little or no control over this environment
and
must aim to “predict” what will happen in this environment and deal with the
consequences
thereof. The sub-environments include the natural, technological, social, political,
economic, and
international environments:
The natural environment has to do with the availability of the natural resources
required as well as factors like climate, natural disasters, etc.
Within the technological environment, invention and innovation is pivotal. Any
organisation that does not keep up with technological developments will not remain
competitive.
The social environment refers to the characteristics of the society in which the
organisation operates; the society’s demographics (age, education, religion, culture,
language, etc.)
The political environment is the place where competition takes place as
organisations
vie for power within a society. This environment is also influenced by legislation.
The international environment consists of the events that occur around the world
in
other countries that affect the organisation. Factors in the international environment
that
can influence an organisation are, for instance, policy changes in other countries, wars
and terrorist attacks.
“Economics is the science dedicated to the description and analysis of the
production,
distribution and consumption of goods and services and the role played by the
availability of money or lack thereof”

The Economic Environment

The economic environment is one of the most important environments that a manager
needs to be able to predict and with which s/he must deal. A healthy economy is one
in which organisations are opening with an accompanying growth in job creation that
will lead to more spending, a bigger demand, an increase in job creation to keep up
with the demand, and so on.
The average income of an individual determines the spending power of an
organisation’s potential customers; thus, the higher their income, the more a person
will be able to spend. Interest rates affect an organisation because they affect how
much money that organisation can borrow. Productivity is the ratio between the hours
worked and the number of products produced. Labour costs and low productivity
influence an organisations capability to compete nationally and internationally.
Inflation is also a factor managers must take into consideration. Inflation is basically
the decrease in the value of money in relation to the goods it can buy over time. When
a business is operating in the international environment, exchange rates will have an
influence over it. An exchange rate is the principle rate at which two currencies can be
traded. Most of the international trade takes place in US$ (dollars). Before continuing
with a discussion on management, let us first look at the basic economic systems in
which organisations operate.

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The Economic Principle
The economic principle can be described as: “Obtaining the greatest possible benefit
with the limited resources available.” There are four basic resources available to be
used by a business to deliver goods and services. Goods are those things we can feel
and touch, such as cars, furniture, clothing, etc. Services are intangible; the things we
cannot feel or touch. The four basic resources are described in Table 1.

Table 1: Four Basic Resources

The Economic Systems in which Business operates

The business environment is divided into four basic economic systems. On the one
end of the
spectrum is the free market economy or capitalism, which is based on the basic
premise that each individual is free to choose his/her own economic activity, with
minimal government intervention. On the other end of the spectrum there is the
command economy or communism, which is based on the premise that the
government should own almost all of the country’s resources, and government officials
should be able to decide on how to use these.
Between the free market economy and the command economy is the system of
socialism, which states that individuals may own private property and choose their
own form of economic activity, but the government owns many of the country’s
resources.
South Africa is known as a mixed economy (free market economy and socialism)
which simply implies that it is a blend of private enterprise, government ownership of
resources and government planning of the economy.

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Figure 4: Four Basic Economic Systems

The Need-Satisfying Institutions of the Free Market Business Organisations

Business organisations decide which goods and services should be produced (as well
as how and for whom) by meeting the wishes of the consumer. Consumer demand
helps to determine what products and services need to be provided and for whom by
mobilising resources; thus, a demand is created for production factors.

Business organisations pay salaries and wages to the community in exchange for the
production factors, and consumers in turn pay for their products and services with that
money.

In a free market economy, competition arises and this determines how the products
are produced to allow a profit to be created. It is important to note at this point that a
business organisation is not limited to a private enterprise, but can also include non-
profit-seeking organisations as well as state-owned organisations.

Government Organisations
These public corporations are regarded as need-satisfying institutions through which
the state creates and supplies products and services. They are also regarded as
business organisations.

The difference is that they are not owned and controlled by a private entrepreneur; for
example, Eskom, Transnet and SAA.

Non-Profit-Seeking Organisations
Examples of non-profit-seeking organisations are sports clubs, welfare organisations
and associations of organised business. These types of organisations rely on financial
support from those members of the community who require their services. They also
function on the same basis as a business organisation, seeking a surplus of income
over expenditure.

Corporate Social Responsibility

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Corporate social responsibility can be defined as: The concept that organisations have
an obligation to consider the interest of customers, employees, shareholders,
communities and ecological environments in all aspects of their operation.

2.1 THE EXTERNAL ENVIRONMENT

The external environment is literally the world in which the business operates. It is a
large and ever-changing place which is made up of other organisations, employees,
suppliers, customers and other stakeholders. A business cannot operate without being
influenced by, and impacting upon, the external environment.
A key success factor for any type of business is an accurate understanding of the
external environment in which it operates. An ongoing, long-term analysis of what is
happening in all facets of the external environment means that changes which impact
on the business can be monitored, anticipated and dealt with appropriately.

Sociological factors
Sociological factors that are likely to affect businesses include demographic changes
in the age and structure of populations, patterns of work, gender roles, patterns of
consumption and the ways in which the culture of a population or country changes and
develops. In the UK, for example, many households now have the female partner as
the breadwinner due to a decline in traditional industries in some regions. There are
also many more individuals aged 60 and over these days, many of whom may prefer
to continue working.

Technological factors
Every aspect of life has been affected by information and communications technology
(ICT) and it has certainly changed the structure and nature of work and our relationship
with business. Technological developments influence the scale and rate of change that
businesses face. Developments such as the internet place new challenges on the
ability of business to meet customer demands. It is difficult to predict where developing
Technologies will take us next, but it is possible to focus on the process of technological
change and its implications for businesses.

- ICT is lowering the barriers of time and place. While this opens up great global
opportunities for businesses, it also means that they can no longer expect the
protection they have received in the past. The ‘global marketplace’ has become a
reality. Whatever the business sector, there will be increased competition from
other businesses that would once have been unable to enter that market.
- ICT creates new industries. These are not just in the areas of hardware, software
and telecommunications, but include start-ups, or new businesses, that the new
technology makes possible. These include the world of e-commerce, as well as
the many ‘direct’ companies entering traditional areas, such as insurance and
banking, by starting and building their operations solely on the basis of electronic
information and communications.
- Many individual jobs and internal service functions have been transformed and are
now based largely, or solely, on ICT systems. Examples are production planners,
credit controllers and, in some instances, sales people. This can have a major
impact on the structure of the business and the organisation of work. It has also
led to a massive shift in the skills needed for most jobs; some level of computer
literacy is now essential for many jobs.

20
Economic factors
The economic environment is extremely influential and the activity of world money
markets and financial institutions affects businesses in a number of ways. Important
factors include the rate of economic growth, interest rates, inflation, energy prices,
exchange rates and levels of employment. The state of a country’s economy pervades
all aspects of business life. It affects the level of demand for goods and services, the
availability and cost of raw materials, buildings and land and, most importantly, labour.
Both businesses and individuals behave according to their expectations of economic
trends. If they expect growth to be high, businesses are likely to invest and expand and
individuals to spend more. These actions stimulate economic growth and so ensure
that the expectations are met. Of course, the same happens in reverse. If the economy
is expected to contract, businesses invest less and individuals spend less. Again, the
expectation is then fulfilled. Governments use changes in the interest rate to try to
achieve short-term adjustment in the levels of demand and investment and spending.

Another important economic variable that can have a major impact on business is the
exchange rate. This is the price of a particular currency, and is based on the supply
and demand for that currency. Global communication technology has resulted in very
high levels of currency trading, much of it speculative in nature, and this leads to great
volatility in exchange rates. Varying exchange rates cause problems for businesses,
although many try to minimise risk through forms of insurance. If the domestic currency
strengthens (that is, becomes worth more in relation to other currencies), exporting
becomes more difficult because the price of goods exported is higher and foreign
products are more competitive in the home market. If the currency weakens, exports
are easier and opportunities may open up for new markets, while imports become more
expensive.

Environmental factors
Environmental issues are of growing importance as people all around the world are
much more concerned than ever before about the impact of businesses on the natural
environment. Businesses need to consider a number of environmental factors.
• Legislation: in many countries, environmental legislation is increasing. The main
emphasis is on pollution control and waste disposal, but regulation is also
affecting packaging, transport and distribution, and sources of materials.
• Information: in recognition of the interests of the local community and the
broader public, many businesses now report regularly on their environmental
performance. Larger businesses may carry out regular environmental audits
and publish them in their annual reports.
• Employees: increasingly, employees are interested in and concerned about the
environmental credentials of their employers. Businesses may wish to maintain
good communications with their employees, listening to their opinions and
reporting back on a regular basis.
• Shareholders: most shareholders of larger businesses are financial institutions
whose interests are driven by financial performance. In several countries,
however, a category of ethical, or ‘green’, investors is emerging, and businesses
may wish to consider whether they should present themselves as eligible for
such investments.
• Pressure groups: there was a massive growth in pressure groups in the late
twentieth century. Although many of them were established to tackle single
issues, they frequently broadened their membership bases and became a

21
 permanent part of the political scene. One example is how consumer groups
have fought to get the levels of salt and fat in foods lowered.
• Customers: there are opportunities for businesses operating to high
environmental standards to gain market advantage. Some customers are willing
to favour ‘green’ organisations, which may increase the market share of the
business or enable higher prices to be charged for their goods or services.

Political factors
Political influences control or affect most of what we all do. There are political
influences on business in terms of rules and regulations imposed by government (local,
national or global), as well as the influences of such organisations as chambers of
commerce, trade unions and co-operatives. The following list can only hint at the
importance of political factors for
business.
o Legislation affects many aspects of business life, such as health and safety at
work, equal opportunities and employee protection.
o Trading relationships are strongly influenced by political factors. The World
Trade Organization and the European Union are examples of this.
o Government is a major party to many transactions. In all countries, the
government is one of the largest employers and the largest purchaser of goods
and services. In some cases, such as defence, medicines and some social
services, the government is virtually the only customer.
o The level and nature of public services – for example, health services,
education and the police force – are determined on political grounds.
o Governments determine levels of taxation – on the individual, on businesses,
on property and on goods and services.

2.2 Stakeholders

Stakeholders are people, or groups, who have a legitimate interest in the activities of
businesses and other organisations in their society. Employees, customers and
shareholders are all examples of stakeholders. Others include managers, suppliers,
local communities and the State (in the form of institutions, citizens and taxpayers). In
the voluntary sector, for example, stakeholders include funders, sponsors and donors.
In the public sector they include the general public in their capacity as citizens (through
elected representatives), as taxpayers (funders) and as beneficiaries of public services
(customers). A stakeholder framework for a for-profit businessis shown in Table 2.

Table 2: Stakeholders and their expectations

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The concept of stakeholders is important for two reasons. First, it emphasises that
stakeholder groups have different interests; second, it illustrates the relationship
between businesses and their external environments.

There are four important points that you should bear in mind with regard to the
stakeholders of a business.

1- All businesses have internal stakeholders: shareholders, employees,

managers, directors, trustees. They also have stakeholders external to the
business but strongly linked to or affected by it. These include customers/
clients, suppliers, funders and, possibly, competitors. There are also external
stakeholders who are indirectly affected by the business, who might include
members of the community or the general public.
2- Different stakeholders have different interests, and these interests may be in
conflict. We can easily recognise the conflict between the interests of
employees, who want security of employment and increased earnings, and
those of shareholders, who may be seeking short-term cost reductions. A similar
conflict could exist between the interests of taxpayers and of those who receive
public services such as education or
health.
3- The culture, structure and control systems within a business will determine how
these conflicts, or trade-offs, are resolved, and in practice the interests of one
stakeholder group often have a dominant position. Commercial businesses are
conventionally considered to be shareholder-led, although the reality is that
directors and senior managers may have the dominant interests. Some service
industries may be regarded as customer-led. Some public and voluntary
services can be considered staff-led. Co-operatives tend to be member-led.
4- Some stakeholder interests are protected by law, but not all. Owners and
shareholders are protected by property and company law, whereas the interests
of other stakeholders are protected, if at all, only by regulation or management
discretion. In many countries, measures have been taken in recent years to
adjust this imbalance: employment legislation provides increasing protection for
employees; and environmental legislation and regulation limit shareholders’
profits, to the benefit of local communities and the environment in general.

23
All types of businesses have difficulty balancing the interests of their different
stakeholders, particularly when the political reality is that different groups have different
amounts of power. For example:
o Commercial businesses have structures that recognise the dominance of
shareholders: shareholders appoint directors, who appoint managers, who
manage the interests of other stakeholders. However, the legislative and
regulatory environment, over, for example CO2 emissions, is increasingly
imposing constraints to protect the interests of other stakeholder groups.
o Voluntary organisations are usually less rigidly structured, and priorities may
depend on the power of their management committees or trustees. Employees
may exhibit greater dominance than those in the commercial sector.
o Government bodies are accountable to taxpayers and to service users, both
represented by elected representatives (politicians); in some instances, the
reality is that the dominant stakeholder is the employee.

2.3 Business and Society

The role of business is primarily economic. Unless a business performs its economic
functions it will not have the resources to perform other roles, nor will it survive long
enough to be an agent for any form of change. Businesses exist to produce goods and
provide services that society wants and needs, at a profit, and they cannot take on
additional responsibilities unless they perform these tasks successfully. At the same
time, business depends for its survival and long-term prosperity on society providing
the resources – people, raw materials, services and infrastructure – which it needs to
operate profitably.Society also provides other, less tangible, inputs to business. These
include:

o a means of exchange (money);

o a legal system that is effectively policed and enforced;
o defence and trade arrangements.

All these, in turn, depend on the members of the society supporting the values and
norms that the business endorses. There is therefore an implied contract between
businesses and the communities in which they operate. A business is expected to
create wealth, supply markets, generate employment, innovate and contribute to the
maintenance of the community in which it is situated. Businesses, including their
shareholders and other stakeholders, depend on the communities in which they
operate for their existence and prosperity. The fundamental role of business is to
provide the means by which the needs of the community are met, in the form of goods
and services, jobs and income from taxes paid by the companies and their employees.

The infrastructure on which industry depends requires long-term commitments

(hospitals, schools and so on), and communities expect that businesses will match this
with long-term investments. Business is also required to act legally and responsibly
with respect to health and safety at work, employment conditions and environmental
issues. So, how do businesses in practice reconcile the demand for greater profit, lower
costs, or ‘more for less’, with the interests of society to secure employment, protection
of the environment and tax income? There is not a simple answer to this question, but
the following points may be of help.

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 ▪ The degree of conflict between maximising profit and serving the interests of
the community will depend on the type of business and its relationship with the
community. If it is a major employer in the area, or a major customer of local
suppliers, then its actions are going to have a substantial impact on the
community. The community is a major stakeholder, and there are
correspondingly serious obligations on the business to consider the interests
and views of the local community when making decisions. This is likely to be in
its interests because it will probably depend on local support for business plans.
However, increasing globalisation can weaken a business’s ties with its local
community. Its headquarters may be in one country, its plant managers from
another, its suppliers from yet another, and its profits accounted for in whichever
country it is most tax efficient to do so.
▪ It is important that there is communication between the business and its
stakeholders. This can be at both the formal and the informal level. Many
businesses, for example, encourage their employees to participate in local
activities. Typically, companies are good at communicating when they want
something, such as planning permission, but allow communication links to lapse
when there are no pressing needs.
▪ Many decisions that may seem quite trivial to a business may be of great
importance to the local community. An example would be the routeing of
delivery trucks. Unnecessary bad feeling can be avoided if the community’s
interests are taken into account.
▪ Environmental issues often create tension. Businesses may seek to operate to
the lowest legally permissible standards, and may thereby create distrust and
suspicion among local residents. On the other hand, local opposition may be
voiced through pressure groups that are overtly anti-industry and whose
arguments are therefore instinctively rejected by companies, even when they
express valid concerns.

THE BASIC ELEMENTS OF PLANNING

Planning provides the organisation with its direction and it determines the actions that
management must take. Planning is important because it provides direction, promotes
coordination between the various departments and people within the organisation and
forces managers to look to the future. Planning also ensures that the organisation stays
in touch with technology and the latest trends; it ensures cohesion in the sense that it
enables top management to see the organisation in a holistic way. Lastly, planning
promotes stability in the organisation by encouraging pro-activeness.

The Planning Process

Planning can be seen as the identification and formulation of the goals and objectives
of an organisation, followed by a choice of the strategy to achieve the goals and then
the actual implementation of the chosen strategy. It is important to note that planning
does not take place in isolation but is closely linked with organising, leading and
control; it is a dynamic process.

25
Without planning, the next step in the management process cannot take place.
Organising cannot take place if there is no plan to direct the allocation of resources.
Effective leadership is not possible as there is no plan according to which people can
be instructed and encouraged to carry out their tasks. Control relates to dealing with
any deviations from the plan; if there is no plan, there is nothing to control.

Organisational Goals
Why is it so important to have goals in an organisation? Well, goals serve the following
purposes:
They provide a shared focus for the entire organisation.
They affect other aspects of planning in the organisation.
They motivate people.
They provide a benchmark for performance measurement and control purposes.

The Formulation of Goals

Goals are based on the mission of the organisation, the environment in which the
organisation operates, the values held by management and the experience of
management.

Two of the most important aspects of planning are the vision and the mission
statement. Below are some definitions to consider.

26
The basic purpose and values of the organisation, as well as its scope and operations.
It is a statement of the organisation’s reason to exist.
The mission is a statement that defines the purpose of the organisation in terms of the
product or service it produces, the market it serves and the technology it applies in
serving the market.

The vision statement, by contrast, provides a perspective on where the organisation is

headed and what the organisation can become. According to de Bruyn (2010: 19), a
vision should meet the following requirements:

It should be idealistic.
It should be philosophical.
It should be future-orientated.
It should not provide any detail.
It should accommodate the aspirations and dreams of top management of the
organisation.
The Different Organisational Goals
Organisations normally have two sets of goals: Organisational goals and personal
goals. The organisational goals include the mission, the long-term strategic goals, and
the tactical and operational goals. Personal goals are of no direct concern to
management, but they have a huge influence on the reaching of organisational goals.
Environmental Analysis
Before deciding on a goal or strategy, it is important to analyse both the internal and
external environment. One of the tools that can be used is called a SWOT (Strengths,
Weaknesses, Opportunities, Threats) analysis. Its main purpose is to isolate key
issues and to facilitate a strategic approach. Strengths and Weaknesses deal with the
internal environment and Opportunities and Threats deal with the external
environment. Possible strengths and weaknesses include: Experience, resources,
customer service, efficiency, leadership, competitive advantage and so on. Possible
opportunities and threats can include: New products or services, increasing market
saturation, locating a new source of revenue, business alliances, and legislation and
so on. Figure 13 provides a SWOT analysis tool.

27
 2.4 SWOT analysis

SWOT stands for strengths, weaknesses, opportunities and threats. An analysis of

these gives the business an overview of its position in relation to its external
environment. The strengths and weaknesses of a business arise from its internal
environment; that is, resources and their use, structure, culture and the different
business functions. Which strengths a business decides to build upon and which it
seeks to minimise depends on the impact of opportunities and threats from the external
environment. Once the external influences on a business have been identified, they
can then be judged to be either a threat or an opportunity and can be dealt with, or
taken advantage of, as appropriate.

28
SWOT analysis relating to business functions
One method of undertaking a SWOT analysis is to consider strengths, weaknesses
opportunities and threats in relation to four key business functions: marketing,
operations, human resources and finance. This type of SWOT analysis is shown in
Table 2.2, which is an example from Capon (2004) based on an analysis of the MPW
restaurant, owned by the chef Marco Pierre White and his joint-venture partner
Granada.

Table 2.2: SWOT analysis for the MPW restaurant using strengths, weaknesses,
opportunities and threats and four functions

29
(Source: Capon, 2004).

It can be seen from Table 2.2 that the main threats arise from other restaurants,
particularly if they develop chains and move into locations in which MPW may be
interested. MPW is, therefore, going to have to act quickly to obtain desirable locations.
MPW is also going to have to seek to retain good staff and prevent them from being
poached by other expanding
chains. It is going to have to ensure a good and stable relationship with its joint-venture
partner, the Granada group.

Capon suggests that the key opportunity for MPW is expansion beyond London, via a
strategy of market penetration and development that involves offering the same type
of reasonably priced food in cities around the UK. The principal weaknesses arise from

30
staff working at top speed during peak periods and not being able to offer a high quality
of service in the quieter
times that directly follow those peak periods. This is likely to influence some customers’
opinions of the business. The fundamental strengths of MPW undoubtedly rest with
both its name and the imaginative and high-quality food offered at reasonable prices.
These strengths are key factors for success in the restaurant business. Therefore
these strengths, supported by a sound joint venture with Granada, put MPW in a
convincing position to pursue an expansion, or ‘rollout’, of MPW restaurants. This
business example should have helped your understanding of what a SWOT analysis
is and how it can be used to assess and plan for business developments.

Strategic Planning

Strategic planning is the process of analysing the organisation’s external and internal
environments; developing a vision and mission; formulating overall goals; identifying
general
strategies to be pursued; and allocating resources to achieve the organisation’s goals.
Strategic planning, also referred to as long-term planning, has the following
characteristics:
Top management is responsible;
It spans a timeframe of three to 10 years or more;
It focuses on the entire organisation;
It is future orientated;
It is not concerned with detail – provides broad general guidelines;
It is used to deploy resources and skills.

Since the 1950s, the business environment has been changing rapidly. Previous
approaches like budgeting and management by objectives were of little use in this new
unstable economy. Due to this instability, long-term planning came into being in an
attempt to survive. Strategic planning was deployed to try and keep on top of changes
in the business environment. Various long-term strategies can be devised; for
example:
A concentration strategy (concentrating all that it has on what it does best to achieve
the
mission);
Market development (existing and new markets are developed);
Product development (development of new products for existing or new markets);
Innovation (constantly changing and improving products);
Horizontal integration (growth strategy in which a similar organisation is taken over
and gives access to new markets);
Vertical integration (when the organisation takes over its suppliers);
Joint venture (two or more organisations take on a project that is too big for one
organisation to handle and this strategy ensures a pooling of resources and skills);
Diversification (an organisation takes over another organisation or sets up a new
organisation that is currently not part of the existing organisation);
Rationalisation (termination of unprofitable products, assets);
Divestiture (selling of parts of the organisation);
Liquidation (the final strategy and implies the discontinuation of the entire business).
How does an organisation decide on a strategy? There are various techniques that
can be used; for example:

31
 PIMS (Profit Impact of Market Share);
BCG portfolio matrix (Boston Consulting Group);
GE matrix (General Electric);
Many more.

Strategic Planning: What is Encompasses

Smit et al. (2011: 84) describe strategic planning as follows:
Strategic planning can be defined as the process of proactively aligning the
organisation’s resources (internal environment) with threats and opportunities caused
in the external environment.
Strategic planning has a future focus. The followings are unique characteristics of
strategic planning:
Strategic planning is an on-going activity (a process).
It requires well-developed conceptual skills and is performed mainly by top
management.
It focuses on the organisation as a whole.
It is future oriented.
It is concerned with the organisations vision, mission, long-term goals and strategies.
It aims at integrating all management functions.
It focuses on opportunities that may be exploited, or threats that may be dealt with,
through the application of the organisations resources.

Figure 27 illustrates the strategic management process

A business strategy determines how best to compete in a particular industry or market;

to ensure that corporate goals are met. Functional strategies, business strategies and
corporate strategies must all be aligned.

The Strategic Planning Process

The strategic planning process starts with developing a vision statement. It is important
to note that in order to formulate this vision, input must be derived from the internal and
external
environment. Once the “dream for the future” has been established, the mission is
developed that will entail the “how will we make the dream a reality”. Long-term
strategic goals will be developed and that will inform the choice of strategy to use to
achieve these goals.

32
The Vision
The vision must be a statement that will be able to lead the organisation to success in
the future and it needs to be inspiring to both the internal and external stakeholders.
Remember, a vision is the “dream”, where the organisation would like to be in the
future. A vision statement serves as an anchor for decision making; it is the end and
not the means of getting to the end.
The way a strategy is developed has an impact on the way it is implemented. When
planning does not take into account the implications of aligning people with strategy,
the effort is doomed to failure. A vision statement is only effective if it is largely shared,
i.e. if there is buy-in from multiple disciplines.

According to Smit et al. (2011: 88), a clear vision is important for the following reasons:
It portrays the dream for the future.
It promotes change; it is a roadmap.
It provides the basis for the strategic plan.
It enhances a wide range of performance measures.
It helps to keep decision making in context as it provides focus and direction.
It motivates individuals and facilitates the recruitment of talent.
If the vision is effectively communicated, there are significantly higher levels of job
satisfaction, commitment, loyalty, pride etc.

The Mission Statement

The mission statement is seen as the vehicle to reach the end destination, the vision.
Formulation of the mission statement is guided by the vision. When formulating the
mission statement, management aligns the organisation to the vision in terms of its
products, market and technology by asking the following questions:
What is our business?
Who is our client?
How will we provide this product or service?

Apart from addressing the above components (product/ service, market and
technology), a mission statement should also address the following:
Concerns for survival/ growth/ profit;
Philosophy (values, ethics, and beliefs of the organisation)
Public image (social responsibility)
Employees and all other stakeholders;
Distinctive competence (how is the organisation different from or better than its
competitors?)
To effectively use a mission statement, it is suggested that it informs the key
performance areas for the whole organisation. It is however important that all levels of
management are involved in the formulation of the mission statement. The key
performance areas are then cascaded down to the performance appraisal of each
individual in the organisation. The next step in the strategic planning process is
assessing the capabilities (internal analysis) and the opportunities and threats
(external analysis).

Strategic Goals
Strategic goals are defined as: Guidelines that explain what you want to achieve in
your community. They are usually long-term and represent global visions.

33
From the definition above goals are what the organisation wants to achieve these goals
are usually long term and sets out the roadmap to the organisations success. Below
are two of Coca Cola’s strategic goals to illustrate how global companies define their
goals:
We aim to make Coca Cola appear healthier and lower risk.
We set as a goal for the world to know why Coke is better than Pepsi and thus strive
to put this in the minds of society so they can purchase our product more often.
(Source: coca-cola.remodel.com, n.d.)

Strategic Objectives
Strategic objectives are:
Unlike goals, objectives are specific, measurable, and have a defined completion date.
They are more specific and outline the “who, what, when, where, and how” of reaching
the goals.’ (Michigan.gov, n.d.) Strategic objectives in an organisation are more short
term and from the definition above more specific. Strategic objectives should be
compiled using the SMART principles. These are discussed in Figure 28 and Table 8
below.

Functional Planning
Functional planning refers to medium-term planning and is normally carried out by
middle management. Refer to Table 3 for the key aspects for each functional
management area.

34
Short-Term Planning
This type of planning is normally done for a period of a year. It is the responsibility of
first-line management based on the company’s functional and tactical goals. It is
normally concerned with the day-to-day performance of tasks and allocation of
resources. Budgeting is the main method used by management in planning the
allocation of resources.

Generic Strategies
It is important to take note of the generic strategies as organisations must choose one
of these. The generic strategies model is based on four basic business-level strategies
that are applicable to any organisation. The four strategies include differentiation
strategy, cost leadership strategy, focussed differentiation strategy and focussed cost
leadership strategy.

Differentiation Strategy
This strategy involves competing by offering products or services that are perceived
as unique by consumers; as, for example, in the motor vehicle industry. This strategy
is only effective for as long as the product or service delivered remains unique – that
means competitors cannot easily copy it.

Focussed Differentiation Strategy

Focussed differentiation strategy can be described as:
This strategy involves competing in a specific niche by serving the unique needs of
certain customers or a specific geographic market.
A niche is a specialised group of customers like heart surgeons, Porsche owners, etc.
In short, organisations try to create a unique image for their products or services that
caters to the specific demands of a specific niche.

Cost Leadership Strategy

This strategy involves providing goods or services at a cost as low as possible (possibly
even lower than that of competitors). Low cost, however, does not mean low price. To
keep costs low, there must be a constant concern for efficiency. This strategy depends

35
on economies of scale – so to keep process low cost, large quantities of the product
or service must be sold.

The requirements for implementing the cost leadership strategy include:

using facilities or equipment that yield high economies of scale;
constantly striving to reduce per-unit cost; and
minimising labour-intensive personal services and sales forces; and avoiding
customers
whose demands would result in high personal selling or service cost.

Focussed Cost Leadership Strategy

The aim of this strategy is to compete in a specific customer or geographic market by
providing a product or service at a cost as low as or lower than that of the competition.

ORGANISATION
A growing organisation must apply specialisation or the division of labour for the
following reasons:
Individual ability;
Reduced transfer time;
Specialised equipment;
Reduced training costs.
Specialisation allows for an increase in productivity. However, the converse is also
true. Workers who perform specialised jobs become bored and demotivated and
productivity decreases. This is where managers should explore the possibilities of job
enrichment, job enlargement and job rotation.

Departmentalisation
This entails the grouping of activities that belong together. The reason for
departmentalisation isinherent in the advantages of specialisation. The various
departments created now constitute
the organisation structure. There are various basic forms of organisation; i.e. functional
organisational structure, product departmentalisation, location departmentalisation,
customer departmentalisation and a matrix organisational structure.

Functional Organisational Structure

This is the most basic type of structure. See Figure 17 below.

Product Departmentalisation
Departments are designed so as to allow for the grouping of all activities related to a
specific product or group of products. An advantage of this type of structure is that the

36
specialised knowledge is used to optimal effect leading to decision being made
quicker, and the performance of each unit can be measured more effectively.
A disadvantage of this structure is its tendency to entrench a “silo mentality” whereby
the managers in the unit concentrate only on their specific product and often do not
see the “bigger picture”. Another disadvantage is the increase in administrative costs.

Location Departmentalisation
If an organisation manufactures and sells their products in different geographical
regions, this is the structure that will be used. The structure provides the area
management with the autonomy necessary to facilitate decentralised decision-making.
Customer Departmentalisation
When a business concentrates on a specific segment of the market or group of
consumers, it will make use of customer departmentalisation. For an illustration on
customer departmentalisation see Figure 18. This type of structure implies that each
department operates like a “small privately owned business” but it remains subject to
the goals and strategies set by top management.

Matrix Organisational Structure

“The matrix organisation structure is important because no organisational structure,
whether designed according to function, product, location or customer, will necessarily
meet all the organisational needs of a particular business”. See Figure 19 below. This
structure has been created to incorporate the advantages of the other structures. This
structure is suited to ad hoc and complex projects requiring specialised skills and
knowledge. A disadvantage of this structure is the division of authority, thus one
employee can have two managers.

37
3. BUSINESS STRUCTURES
A structure gives a business an identity and provides continuity. It also provides a
framework for the allocation of roles and responsibilities. All businesses will have some
sort of structure, depending on the product or service they provide, but also influenced
by the history, size and culture of that business. Most businesses have some sort of
organisational chart, and that chart will provide clues about the structure of the
business. The chart will show the formal relationships between different individuals and
departments, and provide an outline of the official decision-making structure. Those
positions higher in the chart usually have more power and authority than those lower
down. The shape of the organisational chart can tell us much about the way in which
the business works, and perhaps the values behind this. For example, some
organisational charts are narrow and tall, with many levels of authority, while a wider,
flatter chart might suggest a business where there are fewer levels of authority and the
distance between higher and lower level positions is perhaps less important to how the
business operates. Structure also includes the arrangements by which various
activities are divided between the members of the business and the ways in which their
efforts are
co-ordinated.

3.1 Different types of structure

Issues about structure are recurring matters of debate and dispute in most businesses.
This is because they include matters relating to departmental and sectional groups,
the pattern of reporting relationships, the cycle of meetings, information systems, and
rules and procedures. A business might be structured in various ways: by function, by
product, by service or by geography. These four types are shown in Figure 3.1.

As is the case with most aspects of business, it is unlikely that there is any one ‘best’
model for structure. You would not expect businesses with a professional orientation,
such as a legal or medical practice, or a not-forprofit business such as a church or
theatre company with a strong values base, to have the same business or
management structure as a supermarket or high street bank. The structure of a co-

38
operative would enable the broadbased participation and involvement of its members,
while a legal practice would need a more collectivist or collegiate structure. The
challenge facing all types of businesses is to develop a structure that recognises what
is required while still achieving an efficient use of resources and providing
effective services to customers.

Whatever the business, however, structure is pivotal in the relationship between task
(what the business does) and process (how the business does it). It is through the
medium of its structure that the values, commitments, purposes and aspirations of the
business are implemented. Structure has to translate values and processes into a
practical, working reality – and to do this while delivering profit to its owners and value
to its customers. Functional structures might work best when departments need regular
communication with each other. However, a disadvantage may be that functions and
the people who work in them may become rather insular. Structuring by product or
service can help to achieve better responsiveness to customer needs, although it might
mean professional or functional expertise becomes fragmented. A geographic
structure has advantages for a large international business because there are likely to
be differences between the markets it serves. There are also likely to be language and
cultural differences. However, structuring by location may be problematic in
terms of communication and information flows, and support functions such as finance
and ICT may have to be duplicated.

39
Figure 3.1 Examples of functional, product, service and geographical organisational
structures

3.2 Why have a structure?

Structure is concerned with the most appropriate way to group activities in the business
to be able to achieve desired objectives. Considerable variation is possible in terms of
the types of structure. Structure will be influenced by the size of the business, the
technology it employs, the behaviour of groups within it, management strategy, the
external environment and the history and culture of the business.

Jo Freeman gives an even stronger rationale for the need for formal structure:
Contrary to what we would like to believe, there is no such thing as a ‘structureless’
group. Any group of people of whatever nature, coming together for any length of time,
for any purpose, will inevitably structure itself in some fashion. The structure may be
flexible, it may vary over time, and it may evenly or unevenly distribute tasks, power
and resources over the members of the group. But it will be formed regardless of the
abilities, personalities or intentions of the people involved.

For everyone to have the opportunity to be involved in a given group and to participate
in its activities the structure must be explicit, not implicit. The rules of decision making
must be open and available to everyone, and this can happen only if they are
formalised. This is not to say that formalisation of a group structure will destroy the
informal structure. It usually doesn’t. But it does hinder the informal structure from

40
having predominant control and makes available some means of attacking it.
‘Structurelessness’ is organisationally impossible. We cannot decide whether to have
a structured or a structureless group; only whether or not to have a formally structured
one. By pulling these arguments together, we can identify four advantages for a
business of having a clear and public structure.

1- Enabling participation. The structure of any business will determine how all the
relevant sections and parties join in its activities and influence its decisions. In
other words, the structure underpins how power and accountability, internal and
external, operate within the business. Indeed, the more complex the stakeholder
pattern, and the more contested the control over the business’s purposes, the
more complex the structures. It is no accident that a business such as Unilever,
the European Union, or a university have highly complex structures and
procedures. The rules generally enable people to find their way around, co-
ordinate activity, make decisions and participate. Without them, there might be
anarchy and chaos. Lessons may be drawn here from the plight of some former
communist states in Eastern Europe when the strong structures of the previous
regimes collapsed.

2- Providing a framework for the allocation of responsibilities and authority.

Structure is at the heart of the differentiation and integration of work. More
simply, it is structure that makes it clear who is doing what and helps people to
work together. The more appropriate the structure, the more effective the
working relationships between individuals and departments. Defining the
responsibilities of sections, their staff and their managers, and establishing
patterns of communication and information flows between them, are aspects of
structure that are likely to impinge most immediately and obviously on people’s
work.

3- Establishing an identity for the business. Any business will need to allocate
responsibilities for external contacts. For example, suppliers and customers
need to be able to identify whom to contact within the business. Legal
documents have to be signed and procedures established for the recruitment of
staff. More broadly, the structure of the business and the way people work within
it convey messages to the outside world about the values and character of that
business.

4- Continuity and change. Many businesses deal with change and uncertainty.
Structure can provide continuity. Without a structure, there is a tendency for
people to constantly set up new systems and procedures – to reinvent the wheel
– in response to new situations. There are, of course, disadvantages to well-
established structures. They can, for example, be difficult to change. This
underlines the importance of seeing structure as dynamic, and not static. As in
most aspects of business, there is no such thing as a ‘one size fits all’ model.

The challenge is to develop a structure for the business that meets the requirements
and still achieves an efficient use of resources and the provision of effective services
to customers. People who establish new businesses or projects often pay scant
attention to structure. The strong motivation people feel when they are involved in a
new project can mean that the business functions more by goodwill than by well

41
thought-out structures and procedures. As the business grows, however, problems that
stem from this lack of attention to structure will become apparent. It should by now be
apparent why the structure of a business is fundamental, not only to its effective
functioning and the achievement of its objectives, but also to its meaning and identity.
3.3 Formal and informal structures
The organisational chart of a business, discussed earlier, provides a pictorial and
formal – that is, agreed and written down – explanation of the different parts of the
business and the different jobs within it. A chart will show the distribution of, and
relationship between, the roles in the business rather than say anything about the
individuals who fill them. The other side of the structure of any business is the informal
one, which is less likely to be written down on the organisational chart. The informal
structure is more about the relationships between individuals. This can be complicated
because it involves the ‘human’ elements such as respect, compatibility, motivation
and commitment; in other words, it is about the ‘chemistry’ that exists between people
that always affects both relationships and results. 3.4 Dimensions of structure Some
famous research studies developed at Aston University during the 1970s attempted to
identify the main dimensions of business structure. Pugh and Hickson examined the
following factors, or structural variables, that may be helpful in identifying the type of
structure within a business, and the reasons for it:
➢ . Specialisation The extent to which specialised tasks and roles are allocated to
individuals who work in the business.
➢ . Standardisation The extent to which a business has Standard procedures.
➢ . Formalisation The extent to which rules, procedures, instructions and so on
are written down, or formalised.
➢ . Centralisation The extent to which decision making and authority are located
at the top of the hierarchical structure and/or at the centre of the business if, for
example, there is more than one site.
➢ . Configuration The shape of the role structure, whether the chain of command
is short or long.

Researchers can use these variables to investigate how and why a business is
structured as it is. This is useful for our understanding, but, as stated earlier, explicit,
written down clues, such as those in organisational charts, do not always tell us how
individuals within the business behave in practice. Businesses need to devise ways of
sharing out the work so that it can be done as effectively as possible. Traditionally,
there have been two ways in which jobs have been allocated: first, on the basis of job
specialisation, making use of individual expertise, distinctive knowledge, training, skills
and competences; and second, by breaking down complex tasks and processes into
simpler, routine elements and requiring each worker to concentrate on one or more of
these. Conventionally, allocation through job specialisation has been associated with
professional, expert work and relies on the skills and judgement of individual workers.
In contrast, task breakdown is widely used for production and clerical operations; it
provides little opportunity to develop the skills and judgement of individual workers.

Specialists can be difficult to manage and their perspectives on the business may be
narrow, making it difficult to integrate their contributions with the overall processes of
the business. For example, accountants and nurses may see themselves as
representatives of their profession and only secondarily as members of the business
that employs them. Thus, they may have different loyalties and priorities.

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Factors that influence Organising
Plans can only be successfully carried out if the organisational structure allows for it.
There is no “best” organisational structure; each business must choose the structure
that will best suit its needs. So, which factors influence the decision about an
organisational structure? Firstly, some experts believe the environment in which a
business operates will influence the choice of structure.
Others believe that the size and complexity of business, the competence of employees
and the
nature of the product and the market will influence structure. Organisational climate
and culture also have an influence. Table 5 described the different environments in
which a business operates.

The Relationship between Strategy and Structure

The strategy-structure fit is crucial for any organisation. The strategy provides direct
input into the design of the structure.

The Size of the Business

The more staff and managers that need to be coordinated the greater the need for
specialisation. This leads to the development of more departments and more levels of
management.

Staff Employed by the Organisation

The competence and role of staff will also influence the structure. In top management,
the structure influences both the strategy and the way things are done Organisational
Culture The last factor that plays a part in the organisational structure is the culture of
the organisation. The beliefs or shared values of the people in the organisation
influence what is done and not done in the organisation. The culture is reflected in
things like office décor, dress regulations, and the general way in which things are
done. The structure of an organisation with a formal culture will differ from that of an
organisation with an informal culture. Organising entails the development of a structure
within which tasks are performed, resources allocated and responsibility and authority
assigned.

4 BUSINESS CULTURES

Why are we studying ‘business cultures’? Culture is a metaphor which can be used to
explore the identity of a business. It is about how others see the business, but also

43
how the individuals who work there understand it. Culture offers us a powerful insight
into the business and what it is like to work within it.

4.1 National cultures

In study Session 1 we introduced a series of metaphors (Morgan, 1986) that provided
some perspectives that we might use to achieve a different insight into business. One
of these was the business as a culture, a type of microsociety where people work and
‘live’ together on a daily basis, with certain rules and understandings about what is
acceptable and what is not. The idea of a business having a culture was developed
from the work of Hofstede on national cultures (1980). His research focused on ways
of measuring national culture and how these ‘measures’ might work differently in
different contexts. The cultural values that are important in a national culture, he
suggested, could be reflected in the way businesses within that country are operated
and organised. National cultures that demonstrated what Hofstede called a ‘low power
distance’ are ones in which there is a concern to minimise inequalities. Hofstede
included Sweden and New Zealand as examples of this. In general, Hofstede found
that Latin American and Latin European (France and Spain) countries had higher
power distance scores. The less powerful in these societies tend to look to those with
power to make decisions, and inequalities within society are more acceptable. This is
represented by a tendency for the centralisation of power and the subordination of
those with less power within businesses. Individualism/collectivism In an individualistic
society, people are expected to look after themselves and their families. In the case of
business this is reflected in, for example, employment contracts based on hiring and
firing.
Two examples of countries with high scores on this dimension were Australia and
Canada. In more collective societies, people are more concerned for others and the
culture is based around more cohesive groups, such as the family, which offer
protection in exchange for loyalty. This tendency is reflected in businesses as well as
elsewhere in society. Hofstede cited Ecuador and Indonesia as examples of more
collective societies. Masculinity/femininity This refers to the degree to which gender
roles are distinct and adhered to within a society. In high femininity societies, social
gender roles overlap, with both men and women valuing ‘feminine’ qualities such as
modesty, intuition and quality of life above the more traditionally ‘masculine’ qualities
of aggression and competition. Hofstede’s research suggested that Denmark and the
Netherlands were more feminine cultures, while many other Western countries
exhibited more masculine values. The USA was ranked fifteenth out of 53 nations on
this masculinity score. Japan, the UK and West Germany also scored highly on
masculine values.

4.2 Definitions of organisational culture

The cultural perspective has become popular in business studies because it offers a
way of explaining performance and understanding difference. It is only one way of
analysing business, but it is an interesting one as it focuses particularly on the insider
point of view, or on what it is ‘really’ like to work in an organisation. There have been
many definitions of organisational culture. One definition that is often cited is:

Culture is a pattern of beliefs and expectations shared by the organisational members.

These beliefs and expectations produce norms that powerfully shape the behaviour of
individuals and groups within the organisation. Another central idea about
organisational culture is that it has to be learnt by newcomers and that it takes time to

44
understand. The term socialisation is sometimes used to describe how new employees
learn the less obvious rules about what is acceptable and what is not.

4.3 Factors influencing culture

Where the culture of a business comes from, and how it develops, is the subject of
much discussion within business studies. Every commentator seems to have their own
list of key factors. One example is by Drennan (1992), who proposes 12 key factors
that shape the culture of a business. These are:
1- the influence of a dominant leader – the vision, management style and
personality of the founder or leader in a business often has a significant
influence on the values that the business tries to promote;
2- the history and tradition of the business – how things have always been done
(and why);
3- the type of technology used by the business and the types of goods and/or
services it produces;
4- which industry or sector the business is in, and how much and what type of
competition it faces;
5- the customers of the business – who they are and what they expect;
6- company expectations – based to a large extent on past performance;
7- the types of information and control systems used;
8- the legislation and wider business environment;
9- the procedures and policies within the business – ever-evolving, but often a
good indicator of underlying values;
10- the reward systems and the measurement of performance;
11- how the business is organised and resourced;
12- goals, values and beliefs – reflected in objects, actions and language, that is, in
Trice and Beyer’s symbols.
It could be argued that some of the 12 factors in Drennan’s list are integral parts of the
culture of a business rather than influences that shape it.

5 Business ethics
During recent years, a number of high profile scandals have cast the public gaze firmly
on the way in which businesses conduct their affairs. People in business confront
ethical decisions on a regular basis. The quality of their decision making has a
significant impact on people inside and outside those businesses. Business ethics is
concerned with the study of how we ought to conduct business; the study of what
makes certain actions within the business context
the right, rather than the wrong, thing to do. When we use terms such as ‘ought’, ‘right’
and ‘wrong’ in an ethical sense, we are using them in a particular way.

Ethics and values

First, let us evaluate the actions of these businesses without regard to ethics. In order
to produce their shoes and clothing as cheaply as possible, it can be claimed that
businesses ought to produce them in low-cost locations, using the lowest-cost labour.
Looked at in this way, they were doing nothing wrong. In order to reduce costs and
boost profits, employing cheap labour and spending as little as possible on factory
hygiene and safety were the right things for these clothing companies to do. However,
when we use the terms ‘ought’, ‘wrong’ and ‘right’ in an ethical sense, we arrive at
different conclusions. This is because ethics relate to values. The actions of these
clothing businesses could breach values that are important to some of us. Most of us

45
would agree that employing children, paying very low wages and expecting people to
work very long hours in unpleasant conditions are wrong regardless of economic
considerations. Businesses ought not to do these things, even if they enable cost
savings and greater profits. Ethics, then, is about values.

Ethics and conflicting values

Another feature of ethics is that it tends to concern dilemmas. Issues such as
dishonesty do not represent dilemmas for most people, because we all accept that
they are wrong (but some people do engage in such practices even though they
recognise that they are wrong). However, very few ethical decisions in business are so
clear cut. It is a general feature of business decisions that they concern choices
between alternative courses of action, all of which have advantages and
disadvantages. Business ethics is no exception. Business ethics decisions usually
present choices between competing value-based principles.

Ethics and the law

To a certain extent, the laws of any democratically constituted society define the ethical
standards that are widely accepted within that society. They codify the values that a
society holds dear, and therefore provide minimum standards of ethical conduct.
However, many of the activities undertaken by individuals and businesses fall outside
the scope of the law, yet still present ethical challenges. For example, there is no law
against telling lies to a friend, although most of us would accept that to do so is
unethical. Similarly, although there may be no law requiring businesses to adopt
environmentally friendly policies or to refrain from using live animals for research
purposes, most of us would agree that these are ethically charged subjects.

Business ethics, morality and corporate social responsibility Some other terms are
often used in discussing business ethics: in particular, the terms ‘morality’ and
‘corporate social responsibility’.

Morality
Some commentators make a distinction between the terms ‘ethics’ and ‘morality’.
However, everyday language, along with most of the business ethics literature, uses
these terms interchangeably. In this session, for the purpose of clarity, only the terms
‘ethics’ and ‘ethical’ are used. However, in most cases the words ‘morality’ and ‘moral’
would serve the same purpose.

Corporate social responsibility

The term ‘corporate social responsibility’ (or CSR) is often used when discussing
business ethics, particularly in the USA. Although CSR has a particular meaning when
discussing the relationship between business and society, it is also often used to
denote the subject of business ethics.

Ethics for all types of business

The realm of business is sometimes understood as the activities of profitseeking,
private enterprises. However, for the purpose of studying business ethics, such a
definition of business seems too narrow. Many of the ethical challenges presented by
business ethics, such as the treatment of people and interaction with the natural
environment, are as important for public sector and non-profit making organisations,
such as charities, as they are for commercial enterprises.

46
Business ethics: a definition
Business ethics, then, can be described as the study of how we ought to conduct
business; the study of what makes certain actions within the business context the right,
rather than the wrong, thing to do, from a valuebased perspective. It often involves
making choices between conflicting values. It is about more than obeying the law. And
it is the concern of all types of organisation, not just profit-seeking, private companies.

5.2 Why is business ethics important?

Ethics is an often under-represented but crucially important subject for business people
for a number of reasons. These include the following.
Businesses need to conform to the expectations of key stakeholders. Business
success depends on the support of a number of key stakeholders. These include
investors, customers, employees and suppliers. All of these stakeholder groups are
becoming increasingly interested in the ethical performance of the businesses that they
support. For example, many private investors will only purchase shares in businesses
that meet certain ethical criteria. Customers are also becoming increasingly interested
in ethical aspects of the sourcing and manufacture of goods. Businesses that have
their own ethical codes will sometimes only do business with partners who observe
similar standards. Furthermore, many people only wish to work for employers who
conform to certain ethical principles. Therefore, in order to be successful, businesses
must meet the ethical expectations of these key stakeholders. It is a task of business
ethics to help business people to understand and respond to those expectations.

Business depends on society, so it must respond to the needs of society. Business

and society are linked in a symbiotic relationship, which means that each depends
upon the other. In our capitalist economy, business depends on society for its success
and society depends on business success to ensure the affluence and material
comforts that make life pleasurable. Business does not operate in a vacuum and
business values cannot be separated from social values. It is a task of business ethics
to help business people identify and respond to those societal needs.

Business can only operate effectively if certain norms are respected. Businesses can
only operate effectively if those who take part in it follow certain common norms – or
usual ways of doing things – and procedures.
Businesses, and some individuals within them, may derive short-term gain from going
against commonly accepted norms. In the longer term, however, businesses and those
who work within them will only be successful if they observe shared standards of
honesty, trustworthiness and co-operation. It is a task of business ethics to help
business people define and understand these shared norms. Business exercises
considerable power over the lives of people. Business activity has a substantial impact
on every person’s life. For example, the way that products are made affects
communities and the natural environment. The way in which products are marketed
has a significant impact on how we think and behave. Furthermore, most of us spend
a substantial part of our lives at work. The work environment has a massive impact on
our quality of life, as do the financial and non-financial rewards that work provides.
Therefore businesses, and business managers in particular, exercise considerable
power over everyone’s quality of life. It is reasonable to expect businesses to exercise
that power in a responsible manner. It is a task of business ethics to consider what
constitutes responsible use of the power that business wields.

47
5.3 In what ways do ethics relate to business?
Ethical issues pervade all types of business in many different ways. Broadly speaking,
ethics is relevant to business at three different levels:

1- The relationship between ethics and business at a macro level.At a macro

(wide, strategic) level business ethics considers the overall framework within
which business operates. A key question at this level concernswhether
government should intervene in business activity in order to pursue certain
social objectives, or whether businesses should be left to run their own
affairs.
2- The relationship between ethics and the social and environmental impact of
business. Ethical considerations at this level relate to the impact of business
activity on people, communities and the natural environment.

Key issues include: . Should businesses promote employment in local communities, or

should
they transfer production to cheaper overseas locations in order to make more money
for shareholders and offer cheaper products to customers?
• Should businesses promote potentially harmful products, such as alcohol,
tobacco and foods with high fat and sugar content, to vulnerable groups such
as children?
• Should businesses actively promote environmental practices, such as using
recycled raw materials or reducing environmentally damaging waste, or should
they only focus on maximising profits and thus promoting shareholder wealth?
• The relationship between ethics and the personal conduct of business people
At this level, business ethics considers the personal conduct of individuals in
business. It asks how we should behave towards other people, be they
colleagues, customers, partners or the general public. It focuses on issues such
as treating people fairly, behaving in an honest and trustworthy manner and
respecting people’s dignity. In this respect, it has been claimed that the words
‘business’ and ‘ethics’ are mutually contradictory (Collins, 1994).

Those who propose this view suggest that business is an inherently unethical
enterprise, where lying, cheating and exploitation are all accepted parts of the game.
However, few people nowadays would support this view. Most people inside and
outside business accept that business people should conform to certain standards of
ethical conduct and that the study of business ethics is a worthwhile activity that helps
people to consider and define those standards.

5.4 What are the responsibilities of business?

Four broad perspectives have been adopted towards the role, or the purpose, of
business in society. These are as follows:
1- The responsibility of business is to build shareholder value. The first
perspective is that businesses exist for the purpose of maximising the wealth of
shareholders. Therefore, business managers have a duty to maximise profits in
order to maximise the wealth of owners. Nothing else counts.
2- The responsibility of business is to build long-term shareholder value. This
perspective takes a more enlightened, longer-term approach than perspective

48
 1 above. For example, it suggests that businesses will be more successful if
they treat employees fairly, because employees will thus be more committed to
the business and will work more productively. Similarly, businesses should build
enduring, mutually supportive relationships with suppliers because this will be
in the long-term interests of commercial success. Furthermore, businesses
should adopt ethical policies that conform to the expectations of customers and
other stakeholder groups because, without the support of these stakeholder
groups, business would not be profitable in the long term. Although this
perspective encourages business managers to consider wider ethical
considerations than the short-term shareholder value approach, the overriding
principle is the same: that businesses exist for the purpose of maximising
shareholder wealth. Business managers are expected to consider wider ethical
issues insofar as these are consistent with building shareholder wealth in the
long term. However, in the event of a conflict between long-term shareholder
wealth and any other ethical considerations, the former should take precedence.
3- The responsibility of business is to respect the rights of a range of stakeholders.
This perspective proposes that businesses have a responsibility to a wide range
of stakeholders. These stakeholders include employees, customers, suppliers,
local communities and, of course, shareholders. The multistakeholder approach
also recognises the responsibilities that businesses have to conserve the
natural environment. The difference between this rationale and perspectives 1
and 2 is that the multi-stakeholder approach holds that shareholders are only
one of a number of groups to whom businesses have ethical responsibilities.
- Employees, for example, may develop firm-specific skills and forego
other employment opportunities in the service of a particular business.
Therefore, their interests are deserving of consideration by the managers of
that business.
- Businesses benefit from special privileges, such as tax relief and
government subsidies. They also make use of the resources of society.
Therefore, businesses have a responsibility to respect the interests of society
in general, not just the interests of shareholders.
4- The responsibility of business is to help to shape society. This perspective goes
one stage further than perspective 3, the multistakeholder approach. It proposes
that businesses should be proactive in supporting good causes. The argument
is that business occupies an influential position in society. Therefore, in
conducting its relationships with employees and communities and in marketing
its products, a business should consider the positive and negative impact that it
may have on society and should respond accordingly.

The Nature of Leadership

Leadership has been a topic of discussion for many years. To put it simply, leadership,
from a management point of view, can be described as the process of influencing
people to work willingly towards achieving the goals of the organisation. Managers
must understand what motivates people's behaviour and create working environments
to enable employees to perform their tasks. In contemporary organisations, managers
must build their teams to perform a variety of tasks. What do managers do? They
communicate the organisation's vision, mission, goals and strategies, plans, problems
and expectations to the employees but they also listen to the employees’ problems and
aspirations. In this context, the importance of effective communication becomes

49
abundantly clear. They are required to transform plans into reality by influencing
employees.

Leadership and Management

Leadership is not the same as management. The functions of management include
planning, organising, leading and control. Leadership is only one part of management.
Leaders have the
ability to influence people. Influencing is about the relationship between leaders and
followers. The existing body of knowledge on leadership is used worldwide by
organisations to improve the effectiveness of managers.

The Components of the Leading Function

The components are of the leading function are listed below:
Authority: The right to give instructions and demand actions.
Power: Ability to influence the behaviour of subordinates.
Responsibility: Obligation to achieve goals by doing the allocated tasks.
Delegation: Assigning responsibility and authority for achieving the goals.
Accountability: The evaluation of how well individuals meet their responsibilities.

These are further discussed in Figure 21.

Authority
Managers need authority to ensure that employees work together to reach the set
goals. It revolves around the right to decide who does what, to demand the completion
of tasks and to discipline those not complying. Final authority lies with the owners or

50
shareholders of an organisation who then delegate authority down the line of
command. Authority and leadership are closely related.

Power
There are different types of power. Some managers are also leaders who can influence
employees and can then exercise authority fully. Leaders have two types of power:
position power and personal power. Managers have personal power when
subordinates bestow it upon them. Managers, who possess all five types of power, are
regarded as strong leaders. Effective
managers use their power in such a way as to maintain a healthy balance between
their own power and that of employees.

Leadership Theories
The major theories that will be dealt with in this section are: Trait theory, behavioural
theory and contingency theory. First to emerge was trait theory, which was based on
the identification and analysis of the traits of good leaders. Research has been fairly
inconclusive as traits vary from one leader to the next. This then lead to the behavioural
theory that was based on how leaders behave. They tried to identify what good leaders
do with regard to delegation, communication and motivating employees. Three basic
styles were identified namely autocratic, democratic and laissez-faire. The democratic
leadership style was found to be the most effective. Researchers from Ohio State
University identified two leadership styles, namely: Initiating structure and
consideration. Researchers at the University of Michigan distinguished between
production-orientated leaders and employee-orientated leaders. Blake and Mouton
developed the managerial grid where “concern for people” and “concern for production”
is measured on a scale of one to nine.
The contingency or situational leadership approach states that leadership success is
more complex. The leadership style best suited to a specific situation is the basis of
the contingency
theory. Du Toit, Erasmus and Strydom (2010:191) reveal that “Fiedler’s contingency
theory proposes that effective group performance depends on the proper match
between a leader’s style on interaction with employees, and the degree to which the
situation gives control and influence to the leader”. Fiedler states that a person’s
leadership style is fixed, which means that if the person is very task orientated and the
situation requires someone that is people orientated, the organisation must either
change the situation or move that person. The central tenet of Robert House’s path-
goal model is that leaders must provide the necessary direction and support to ensure
that employees’ goals are in line with the organisations goals and objectives.

House’s model identifies four styles:

Directive style;
Supportive style;
Participative style;
Achievement-orientated style.
Another model to consider is Hersey and Blanchard’s situational leadership model
states that
the work maturity of employees determines the best leadership style where the
manager will

51
use one of four leadership styles (telling, selling, participating and delegating). Hersey
and Hersey have designed a useful grid to assist you in determining your leadership
style.

Contemporary Issues in leadership

In today’s business world, trust is becoming crucial to effective leadership. Trust has
five dimensions:
Integrity;
Competence;
Consistency;
Loyalty;
Openness.
Leaders at all management levels must be able to communicate the vision of the
organisation to all employees. Visionary leaders, charismatic leaders and
transformation leaders will be discussed next.

Charismatic Leadership
This type of leader possesses traits like self-confidence, vision, the ability to articulate
the vision, strong convictions, and unconventional behaviour and is sensitive to the
environment. This type of leadership style is best suited to situations in which the
employees’ tasks have an
ideological component.

Visionary Leadership
This type of leader has the ability to create and articulate a realistic, credible and
attractive vision for the future. Types of skills for visionary leaders include the following:
The ability to explain the vision to others; the ability to express the vision through
behaviour; and the ability to extend the vision to different leadership contexts.

Transactional and Transformational Leadership

This type of style appeals to the employees’ self-interest:
Transactional leadership is viewed as an exchange of rewards for employee
compliance’ compliance.

Transformational leadership has the effect of followers coming to trust, admire and
respect the leader. Research has indicated that transformational leadership promotes
greater organisational performance.

The scope, scale and significance of tourism

Tourism is an economic activity of immense global significance. However, the precise

measurement of travel and tourism has not always been easy. This stems in part from
different definitions and methods of accounting adopted by different countries. Efforts
by the World Tourism Organisation (WTO) and the Organisation for Economic Co-
operation and Development (OECD) have helped in this respect. Travel and tourism is
therefore a major activity by any standard. It is also an activity that impacts on many
other areas, as the following discussion illustrates. Demand for travel and tourism has
grown at a faster rate than demand for most areas of economic activity. Tourism
experienced sustained growth towards the end of the last century and this continues
at the start of the new millennium.

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6 An introduction to business functions
Why are we studying ‘an introduction to business functions’? The different parts of, or
functions, of a business create synergy, that is, a condition in which the sum of the
parts is greater than the whole. Different functions are responsible for making different
aspects of the business happen, but have to work together so that overall objectives
can be achieved.

Business functions deal with different aspects of keeping the business profitable and
sustainable and achieving business goals. Human resource management, marketing
and distribution, for example, are separate functions, or parts of a business, but the
activities and decisions in each will affect all the others, and there needs to be close
collaboration and communication between the different functions. In this study session
we present a brief description of each function, but it is important to always bear in
mind that a business function cannot operate in isolation.

6.1 Human resource management

The human resource management (HRM) function is responsible for all the activities
concerned with the employment of the people within a business. It was, and is
sometimes still, called Personnel, a name often associated with a very administrative
and bureaucratic image. Despite this image, Personnel departments had their roots in
a real concern for people at work and brought about some of the important changes in
working conditions following the Industrial Revolution. The change to HRM was more
than a change of name; it involved a wide, ongoing debate about different approaches
to the management of people. However, many people object to the idea of people
being just another ‘resource’ that a business uses to achieve its objectives.
The management of human resources does not, of course, happen solely within the
HRM function; many individuals have to manage and deal with other people within a
business.
Activities within the HRM function

The HRM function is concerned with all aspects of managing people within a business.
When someone joins a business, they enter into an employment contract, offering
certain skills for agreed rewards and conditions. HRM deals with all parts of this
employment contract, from the time it begins (recruitment and selection), through its
ongoing maintenance and control (socialisation, performance management, job
design, rewards, motivation), to the time either party terminates the contract
(redundancy, resignation, dismissal, retirement).

We drew up the following list of examples:

- staffing policy and planning, drawing up contracts, and deciding how
- many and what type of people and skills are needed to help the business
- start/run/grow
- job design – who does what and how
- recruitment and selection
- induction and socialisation
- performance management – job appraisal
- motivation
- health and safety
- industrial relations

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 - training and development
- downsizing, redundancy, dismissal
- discipline.

Different businesses will give different prominence to the HR function, perhaps

depending on their size and structure and organisational culture. Small businesses do
not necessarily have a distinct HR function, but the value of having a separate HR
department, or representative, lies mainly in the objectivity they can bring to business
processes such as selection and performance appraisal; that is, decision making that
is not influenced by emotion or prejudice.

‘We need to focus on diversity. Your goal is to hire people who all
look different, but think just like me.’
6.2 Marketing
Marketing is the term given to the activities that occur at the interface between the
business and its customers. The name comes from the concept of a marketplace, and
marketing is concerned with matching what customers want to buy with what products
or services the business is offering. The aim of marketing as a function is to ensure
that customers will conduct exchanges with your business rather than with someone
else’s. Marketing is often associated with the negative image of getting people to buy
things they do not want. Marketing practitioners, however, would argue that they have
responsibility for ensuring that the customer comes first in the business’s thinking.

Blythe (2005) suggests that the development of the concept of marketing was
preceded by other business approaches, or philosophies. These were:
- Production orientation During the nineteenth century it was believed that
efficiency in the production process was the main way to succeed
- Product orientation Rising affluence in the twentieth century meant people were
not as prepared to accept standardised products. Businesses started to
develop better and more specified products
- Sales orientation As manufacturing capacity rose in the 1920s and 1930s, the
supply of products could outstrip demand and so the activity of actively selling
became more important. This is the view that customers will not ordinarily buy
enough of a product without an aggressive selling and advertising campaign
- Consumer orientation Modern marketers take the view that customers know
what they want and recognise value for money. They will not buy from the

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 business if they feel that are not getting what they want. This is the basis of the
marketing concept; putting the customer at the centre of the business.
A more recent development is societal marketing, which means that marketers should
take some responsibility for the needs of society at large and for the sustainability of
their production activities. Customers are increasingly concerned about the ethical and
environmental factors associated with business and
their products.

Activities within the marketing function

Effective marketing is based on a good understanding of how consumers behave and
make decisions. There is a need to identify gaps in the market and anticipate
opportunities. One way of describing what employees in the marketing function do is
to say that they deal with the ‘marketing mix’, first introduced by McCarthy (1987).
McCarthy described this mix as the four Ps of marketing: product, place, promotion,
price.
Product The product should be what the customer wants and expects to get.
Place The product should be available from wherever the target group of customers
finds it easiest to shop, whether that is a high street shop, door-to-door delivery, a
catalogue, or online shopping.
Promotion All communications about the product should be put across in a way that
will appeal to target customers.
Price The product should always be seen as representing good value for money.
Customers are usually prepared to pay a bit more for products of better value.
The growing importance of the provision of services prompted an extension of the
model.

Blooms and Bitner (1981) added another three Ps, to make the 7-P framework. People
Virtually all services are dependant on the people who perform them, so people are, in
a sense, an integral part of the product the business is offering. Process Services are
usually carried out with the customer present, so the process by which the service is
delivered becomes part of the product.

Physical evidence Almost all services contain some physical evidence:

the hairdressing salon produces a haircut, the fast food chain produces a burger, the
accident and emergency department in a hospital produces a prescription or plaster
cast.
It is important to think of the 7-Ps as a mix. One ingredient cannot be substituted for
another; each must be added in the right form and quantity.
As well as understanding their local or national market, marketing people need to be
aware of international and cultural differences in factors such as customers’
preferences and how goods and services are promoted.

6.3 Accounting and finance

Finance, or money, is an important resource for all businesses. The financial aims of
a private-sector business will include making a profit. In the public sector, the main
objective will be to make the best use of financial resources. The accounting and
finance (A&F) function is responsible for communicating appropriate financial
information to internal and external stakeholders, many of whom will not be financial
experts.

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Activities within the accounting and finance function The detailed activities of the A&F
function will vary in nature from the operational to the strategic, that is, from costing
future plans to calculating actual income and expenditure, and will be influenced by the
external environment of the business. The nature and purpose of the accounting and
finance activities carried out within a business fall into two main categories,
management accounting and financial accounting, although there is overlap between
the two. A description of each is provided below.

Management accounting information is produced for internal consumption. It is

financial information for the managers of a business for such purposes as:

. planning and budgeting

. management control and operational control
. performance evaluation
. making decisions about particular activities, tasks and functions
. making decisions about investment and disinvestment.

Financial accounting provides information for people outside of the business: for
example, external stakeholders such as shareholders, investors, suppliers, providers
of loan capital, government, electors, competitors.

The purposes of financial accounting include:

- . external reporting
- . providing information to allow resource providers to make choices about
- investing in the reporting organisation
- . disclosures about stewardship (how resources entrusted by a person(s)
- have been managed on their behalf by the person(s) making the
- disclosure)
- . disclosures that facilitate public accountability
- . encouraging competition by making information available to competitors.

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Financial management involves the raising and spending of capital finance by a
business. The financial reports and accounts produced by the A&F function contain
essential information about profit and loss, balance sheets and cash flow. The annual
report and accounts of a business provide financial stakeholders with information about
the business in which they have invested. Ongoing internal communication about the
financial position of the business is essential to managers, decision makers and,
indirectly, all employees.

6.3 Operations
The operations part of a business can best be thought of as the activities that produce
the goods and/or deliver the services required by its customers. This function is often
seen as a transformation process, changing inputs into outputs. The success of any
business is related to its ability to manage its operations efficiently, to make the best
use of resources, and to meet the requirements of its customers effectively. As the
‘doing’ part of the business, operations is central to achieving the business’s aims. It is
responsible for producing the goods, or delivering the services.

There is often a misconception that operations management is concerned only with

manufacturing activities. Although much of the academic study of operations
management does have its origins in the manufacturing industries, many of the key
concepts are equally applicable to services. The distinction between manufacturing
and services is, in many respects, artificial and increasingly irrelevant. Service
transactions do have distinctive characteristics. They may, for example, be intangible:
you cannot store a haircut. But, from the point of view of operations management, even
the most basic product will have some element of service accompanying it. Conversely,
most services have some tangible product as an integral part of what is delivered to
the customer. A hairdresser stocks and sells hair products, for example.
In business studies, operations is often given less attention than other functions, yet
operational activities are a major component of business. The next activity, based on
an essential reading from Capon (2004), conveys some key learning points about
operations.

6.4 Information management

There are three important points to note about information management (IM). First, IM
is a conscious process; it does not just happen, but should be based on planning.
Second, the purpose of IM is to assist in decision making. Information is gathered to
be used in the business and, therefore, is most useful when the starting point is the
decision to be made, with
information following from that. Third, the definition highlights that IM is for the benefit
of all levels of a business, and should be about aiding decision making for all, not just
those in senior management positions.

The IM function is concerned with all aspects of managing information within

businesses. As the business changes over time, business processes and information
systems need to be built and maintained. Every business function has a role in these
activities, but the information management function has a more active role because
many of the processes and systems incorporate information and communications
technology (ICT). People often confuse information management (IM) with the
management of ICT. While ICT is one of the central tools of the information
management function, it tells only part of the story. Activities within the information

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management function Information management has the capacity to bring about change
in almost all business processes and is critical to much of the innovation that takes
place. This is because information and communication technologies can manipulate,
analyse and transport information in a host of new and creative ways. The increasing
use of ICT by the customers of a business – for example, searching for information
and products, online banking and shopping – means that the IM function has to think
about both internal and external communication and information systems. The security
of both business and
customer information then becomes a major concern.

6.4 Cross-functional issues

Dividing business functions, and businesses themselves, into separate categories can
help us to analyse them, but it can be misleading. We need to understand not only the
purpose and main activities of each business function, but also the interdependence
between them. No business function exists in isolation, and people who work in one
functional role will have ‘customers’ in other functions, as well as in other businesses.
For example, a maintenance engineer in a factory will have the production team as his
customers.
7 Small business and entrepreneurship
Why are we studying ‘small business and entrepreneurship’? Small businesses make
up about 98 per cent of all business activity within the UK, with similar figures across
the European Union. It is the entrepreneurial skills and spirit of individuals that create
businesses and make them a success.
The arena of the small business is often understated, or even completely ignored, in
business studies courses. This is a serious oversight, as in many countries most of the
workforce is employed in the small to medium sized enterprise (SME) sector. SMEs
make an important contribution to the wider business environment and to the lives of
their employees and consumers. In the UK, for example, of 2.3 million jobs created by
new businesses between 1995 and 1998, 85 per cent were in small businesses (Kirby,
2003).

7.1 The benefits of the small business

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The SME sector plays a major role in creating employment, and new jobs ultimately
impact on business activity through increasing spending power. Other benefits to the
wider economic and social life of a society include the following:

- SMEs can offer specialised services to customers that larger businesses may
not regard as cost effective to provide. Small businesses often work as sub-
contractors on big projects being managed by larger companies.
- SMEs are likely to have specialised knowledge of the local business
environment nd can tailor their products and services appropriately.
- In contributing to the local infrastructure, SMEs assist in regional and local
growth and rejuvenation.
- Smaller businesses may be able to innovate in ways that larger ones would find
difficult. They tend to be less bureaucratic and more flexible in their response
to customer demands.

7.2 Where do small businesses come from?

One of the obvious starting points for a small business would be the individual who
comes up with an idea for a product or service for which he/she believes there is a
market. This might be a completely new product, such as James Dyson and his bag-
less cyclotron cleaner, or it might involve taking an established product or service and
doing it better or differently, such as EasyJet in the case of low cost flying. The impulse
might come from someone who is made redundant from their job and who decides to
use this opportunity to try self-employment. This is referred to as a ‘push factor’:
someone is pushed by circumstances into trying something new. Or there could be a
‘pull factor’ at work. Here, the personality of the individual makes it difficult for them to
work for someone else. They don’t like to be given orders, and the bureaucratic
hierarchy of big business cannot contain their need for independence. In other words,
they are pulled along by their drive and personality. There could, of course, be a
combination of push and pull factors. In the deep recession of the 1980s, for example,
many individuals in the UK were made redundant from traditional industries such as
mining and sought to start up their own small businesses. The fact that they were
pushed does not mean there was no pull.

There is also the possibility of a management buy-out, starting on a small scale, leading
to the creation of a new small business. This might arise because the owners decide
to sell a part of an existing business. Or individuals might move into small business
ownership through the purchase of a franchise, buying a local outlet of an existing and,
often, proven idea for a product or service. This reduces some of the risks connected
with a small business start-up: market research has already been undertaken, training
is provided, and the product or service is already known and has a track record.
However, there is still the problem of finding the personal capital to fund the purchase.
The more established and successful the franchise, the more expensive it will be; for
example, some of the McDonalds or Body Shop outlets.
Influencing factors on the creation of a small business are likely to be: The perceived
opportunity and availability of assistance; and the perceived attributes and resources
of the individuals concerned (Bridge et al, 2003).

Other motives for starting up a small business could include:

- an individual’s prior experience: strong interests or hobbies and/or work
experience;

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 - being a member of a minority ethnic group: a small business can be a way of
‘entering’ mainstream society on one’s own terms and breaking through barriers
to employment;
- level of education: self-employment may be the way forward for those who left
formal education at the earliest opportunity (perhaps because they could not fit
into the hierarchy and constraints of school life), or, indeed, for very well
educated people with particular skills or knowledge;
- exposure to role models: in many cases the entrepreneur has come from a
family where entrepreneurial activity is present. Founder of the Body Shop Anita
Roddick’s parents ran their own business.

7.3 The risks involved

The risk of personal loss often acts as a barrier to those who wish to start up in
business. There is usually no guarantee that your product or service will capture a
share in the marketplace; market share has to be won in a competitive business
environment. First, you must find start-up capital from somewhere – savings,
redundancy money, family or friends – and this may be lost if the business fails. Even
if you have a little personal capital, you may need to borrow on top of this, and the
lender will normally require security, that is, a guarantee that if things go wrong with
the business there will be a way of repaying the loan by the sale of assets. Would you
be prepared to use your house as security on a loan for a business idea that has not
yet been proven? Many do, and that is perhaps what contributes to them being
considered entrepreneurial; they are risk-takers. Then, in the early stages of the new
business income may be low, or even non-existent, as you meet start-up costs such
as paying for your stock and employing others.
Other barriers that may hinder the creation of a new business are:
➢ a lack of knowledge about the opportunities and support for entering
selfemployment;
➢ a lack of role models within the society and/or within the family of those
who have set up their own businesses.

Capon suggests the following advantages and disadvantages of private

family ownership of a business.

7.5 Entrepreneurship

Entrepreneurship is the activity of entrepreneurs, people who create new products,

processes, services and markets. Entrepreneurs often develop new ways of working
and doing business. Research carried out in the UK proposed some key motivational
aspects for would-be entrepreneurs. In order of significance, these were:
❖ . more freedom
❖ . make money

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 ❖ . be my own boss
❖ . gain more respect dissatisfied with job
❖ . need a job
❖ . more of a challenge
❖ . lead and motivate others
❖ . family tradition
❖ . being at the forefront of technology
❖ . been made redundant
❖ . implement an idea or innovation
These results were based on responses from 1,746 entrepreneurs, or would be
entrepreneurs. A great deal of research activity has taken place to try to determine why
some individuals are more entrepreneurial than others. This includes trying to answer
questions about why some people are more comfortable about taking risks. Results
suggest that certain characteristics underpin entrepreneurial behaviours and that these
often arise from a combination of psychological and socio-economic factors. Work in
the 1960s by McClelland (1961) and others has since been critiqued and built upon,
but some of the key ideas are still important in a consideration of the nature of the
entrepreneur.

McClelland suggested that an entrepreneurial individual has:

➢ a high need for achievement, a drive to excel. This is often reflected in strong
commitment to a work ethic, where the individual is prepared to work the long
hours often necessary in starting and running a business in its early days, and
is able to persevere when the going gets tough;
➢ the tendency to be a risk-taker. This does not necessarily mean that they will
rush into something, but rather will show the ability to calculate the degree of
the risk;
➢ the ability to cope with and tolerate ambiguous situations, where decisions have
to be made but the information may not be complete;
➢ the need for personal autonomy: they want to be in charge of the business. They
do not fit well within rigid hierarchal structures;
➢ a high internal locus of control. In other words, they have a high belief in
themselves, believing that they are in control of their destiny;
➢ an ability to be open to and spot opportunities as they arise.
➢ Entrepreneurs are said to be opportunistic. In this sense, they may be
➢ outward-looking and creative in non-conventional ways. They may have
➢ an approach that would challenge acceptable norms of business
➢ behaviour.

Definitions, concepts and structure of tourism

Mass tourism is therefore a relatively young phenomenon and, despite exceptional
growth rates, is still characterised as immature, or only just reaching maturity,
especially as a field of academic study. There have been definitional problems in
relation to tourism and these in turn have led to measurement difficulties. There is no
universally agreed definition of the tourism industry. Indeed, there is no agreement that
tourism can be described as an industry.

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Tourism is an activity. It is an activity that takes place when, in international terms,
people cross borders for leisure or business and stay at least 24 hours but less than
one year.

Tourism is the activities of a person outside his or her usual environment for less than
a specified period of time and whose main purpose of travel is other than exercise of
an activity remunerated from the place visited.

It is now commonly accepted that a tourist, as opposed to a day visitor, is someone

who spends at least 24 hours away from home even though both categories of visitor
might engage in similar activities. Although there is no generally accepted maximum
time-limit for a tourist visit, it is normally accepted that a tourist is away from home for
a relatively short period.

Three basic forms of tourism:

_ domestic – travel by residents within their own country;
_ inbound – travel by residents from overseas into a country; and
_ outbound – travel from the generating country to another country.

The impacts of travel and tourism

Travel and tourism has many positive benefits, including that it is, for some countries,
the main source of job creation and revenue. However, there are many negative
consequences of tourism, including the often-cited destruction of both the environment
and the traditions of local populations. International tourism is ‘undeniably one of the
most influential phenomena (possibly even the most influential) in the economic and
social development of our society’.

The economic impacts of tourism for tourist-receiving areas can be hugely significant.
Indeed, some destinations depend on tourism for their income. Such income is
generated from a number of sources, including wages and salaries of those in tourism
related employment. A well-recognised phenomenon in tourism is the tourism income
multiplier (TIM), whereby tourists’ expenditure in an area is re-spent by recipients, so
augmenting the total. The factor by which tourist expenditure is increased in this
process is the multiplier. Tourism can greatly influence a country’s balance of
payments. Money spent by tourists overseas acts as an invisible on the balance of
payments account of the country visited and a debit against the home country account.
Any money spent overseas is an import to the generating country and an export to the
receiving country. The impacts of travel and tourism are effected from;

Globalisation
Tourism, for obvious reasons, is generally thought of as an international business
despite the fact that much of it takes a domestic form. Indeed, there are strong factors
in favour of some of the larger tourism organisations becoming global businesses. This
does not merely require organisations to operate across national frontiers.
Transportation companies doing business across national frontiers are operating
internationally but, in order to be classified as ‘global’ organisations, businesses need
to be operating in all four hemispheres. Further, simply operating globally does not
mean that a company has a global strategy. Research into global strategy for service
businesses in general is still at an early stage. Tourism, however, is now frequently
described as a global industry The importance of globalisation to many tourism

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businesses (e.g., large international hotel chains) cannot be overstated, while at the
other end of the spectrum it can be meaningless to many small, locally-based tourism
businesses. Even for some of the larger tourism organisations, barriers to globalisation
exist. International airlines, despite the large part they play in facilitating global
business for so many different types of organisation, are currently prevented from
operating globally themselves.

Globalisation is a recurring theme throughout this text. The increasing power of

organisations
that follow strategies of global expansion is evident in the industry, yet the tourism
industry remains one characterised by small businesses (some of the implications of
this small business environment in terms of human resource management (HRM).
Indeed, the legacy of small-business thinking can often be seen in the management of
tourism businesses. This, in itself, is unsurprising given that the industry is
characterised by a proliferation of small companies. The way in which the tourism
system has evolved has only compounded this aspect of the industry.

Information and communication technologies

The impact of information and communications technologies (ICTs) on travel and
tourism has been huge in the last few decades. Most areas of management have been
greatly affected by developments in ICTs and some aspects of tourism have been
completely changed as a result. Several chapters in this book concentrate on different
aspects of these developments.

Crises and disasters

The tourism industry has a history of being highly reactive to short-term local and
international events. It is nevertheless an extremely resilient industry. A further hugely
significant influence on tourism is therefore the occurrence of disasters and crises.
Very recent examples were the outbreak of Foot and Mouth disease in the UK, the
SARS outbreak and the war in Iraq. A number of themes can thus be seen to be
significant to the current-day management of tourism.

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Definition of Management
Management can be defined as a process that is followed by managers in order to
ensure the achievement of a business's goals and objectives. It therefore implies that
management is a process whereby human, financial, physical and information
resources are used to reach the goals of the organisation.

Planning
This task determines where the organisation wants to go in the future; i.e. long-term
and shortterm goals. This includes the vision and/ or mission (the way in which the
goals are to be reached) and what resources are needed. This includes deciding what
is to be done, how it is to be done, when it has to be done and by whom.
Organising
Once the goals and objectives have been established, the human, financial and
physical resources of the organisation have to be allocated. This includes aligning the
organisational structure to the long- and short-term plans. Organising involves all the
preparations that must be done before the plan is implemented.
Leading
This task entails the directing of the human resources of the organisation and
motivating them
to achieve the goals. Influencing members of the organisation is crucial in making sure
the overall goals are met.

Controlling
This task forces management to ensure that activities and performance conforms to
the plans. It involves guiding the organisation in the right direction.

Different Levels of Management

Three basic levels of management are illustrated in Figure 6 that follows.

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Top Management
Top management normally consists of a relatively small group of executives who
control the organisation and who takes ultimate responsibility for executing the
strategy. Top management normally focuses on long-term planning and they manage
the strategic planning process. Top managers develop the goals, policies and
strategies for the organisation.
Middle Management
Middle managers coordinate employee activities, including that of the first-line
managers. They are responsible for carrying out top management’s directives by
delegating authority and responsibility. This means they are responsible for certain
functional areas of the business and are primarily accountable for executing the
policies, plans and strategies determined by top management. They are responsible
for medium- and long-term planning and organising, translating the general strategies
from top management into specific goals and plans for first- line managers to
implement. Middle management is also concerned with managing group performance
and allocating resources. This group of managers is required to develop its
subordinates and ensure open lines of communication.
First-Line Management
First-line managers are responsible for the production of goods or services. They are
technical
experts who are able to teach and supervise employees in their day-to-day tasks. First-
line managers, sometimes referred to as lower management, are responsible for
smaller segments of the organisation. They supervise the finer details of organising.
It is important to state that, depending on the size of the organisation, there may be
more or lesslevels of management.
There are also different types of managers in an organisation, namely: Functional
management and general management. Functional management refers to specialised
managers that are in charge of specific functions in the organisation, i.e. financial

65
management, human resource management, marketing management, etc. These
functional managers plan, organise, lead and control their units/ departments. General
management is different from other specialised functions in that it integrates all the
others. Having pointed out the different management levels, it is important to note that,
Managerial Skills
There are three key skills that are critical for sound management which is discussed in
Table 2.

The skills required depend on the manager’s level, responsibilities and functions. Not
only do
managers have to possess specific skills, but they must also fulfil different roles
irrespective of the managerial level or area they occupy. Management is found at all
levels and in all functions of an organisation, but the personal skills needed to do the
job are different at each level. Figure 7 indicates the different skills.

Structuring Organizations
Organizing Levels of Management: How Managers Are Organized
A typical organization has several layers of management. Think of these layers as
forming a pyramid like the one in Figure 8.1, with top managers occupying the narrow
space at the peak, first-line managers the broad base, and middle-managers the levels
in between. As

66
you move up the pyramid, management positions get more demanding, but they carry
more authority and responsibility (along with more power, prestige, and pay). Top
managers spend most of their time in planning and decision making, while first-line
managers focus on day-to-day operations. For obvious reasons, there are far more
people with positions at the base of the pyramid than there are at the other two levels.
Let’s look at each management level in more detail.
Top Managers
Top managers are responsible for the health and performance of the organization.
They set the objectives, or performance targets, designed to direct all the activities that
must be performed if the company is going to fulfill its mission. Top-level executives
routinely scan the external environment for opportunities and threats, and they redirect
company efforts when needed. They spend a considerable portion of their time
planning and making major decisions. They represent the company in important
dealings with other businesses and government agencies, and they promote it to the
public. Job titles at this level typically include chief executive officer (CEO), chief
financial officer (CFO), chief operating officer (COO), president, and vice president.
Middle Managers
Middle managers are in the center of the management hierarchy: they report to top
management and oversee Let’s take a quick survey of the management hierarchy at
Notes-4-You. As president, you are a member of top management, and you’re
responsible for the overall performance of your company. You spend much of your
time setting performance targets, to ensure that the company meets the goals you’ve
set for it— increased sales, higher-quality notes, and timely distribution.
Several middle managers report to you, including your operations manager. As a
middle manager, this individual focuses on implementing two of your objectives:
producing high-quality notes and distributing them to customers in a timely manner. To
accomplish this task, the operations manager oversees the work of two first-line
managers—the note-taking supervisor and the copying supervisor. Each first-line

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manager supervises several non-managerial employees to make sure that their work
is consistent with the plans devised by top and middle management. the activities of
first-line managers. They’re responsible for developing and implementing activities and
allocating the resources needed to achieve the objectives set by top management.
Common job titles include operations manager, division manager, plant manager, and
branch manager.
First-Line Managers
First-line managers supervise employees and coordinate their activities to make sure
that the work performed throughout the company is consistent with the plans of both
top and middle management. It’s at this level that most people acquire their first
managerial experience. The job titles vary considerably but include such designations
as manager, group leader, office manager, foreman, and supervisor.
Let’s take a quick survey of the management hierarchy at Notes-4-You. As president,
you are a member of top management, and you’re responsible for the overall
performance of your company. You spend much of your time setting performance
targets, to ensure that the company meets the goals you’ve set for it— increased sales,
higher-quality notes, and timely distribution.
Several middle managers report to you, including your operations manager. As a
middle manager, this individual focuses on implementing two of your objectives:
producing high-quality notes and distributing them to customers in a timely manner. To
accomplish this task, the operations manager oversees the work of two first-line
managers—the note-taking supervisor and the copying supervisor. Each first-line
manager supervises several non-managerial employees to make sure that their work
is consistent with the plans devised by top and middle management.

Building an organizational structure engages managers in two activities: job

specialization (dividing tasks into jobs) and departmentalization (grouping jobs into
units). An organizational structure outlines the various roles within an organizational,
which positions report to which, and how an organization will departmentalize its work.
Take note than an organizational structure is an arrangement of positions that’s most
appropriate for your company at a specific point in time. Given the rapidly changing
environment in which businesses operate, a structure that works today might be
outdated tomorrow. That’s why you hear so often about companies restructuring—
altering existing organizational structures to become more competitive once conditions
have changed. Let’s now look at how the processes of specialization and
departmentalization are accomplished.
Specialization
Organizing activities into clusters of related tasks that can be handled by certain
individuals or groups is called specialization. This aspect of designing an
organizational structure is twofold:
1) Identify the activities that need to be performed in order to achieve organizational
goals.
2) Break down these activities into tasks that can be performed by individuals or groups
of employees.

Specialization has several advantages. First and foremost, it leads to efficiency.

Imagine a situation in which each department was responsible for paying its own
invoices; a person handling this function a few times a week would likely be far less

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efficient than someone whose job was to pay the bills. In addition to increasing
efficiency, specialization results in jobs that are easier to learn and roles that are
clearer to employees. But the approach has disadvantages, too. Doing the same thing
over and over sometimes leads to boredom and may eventually leave employees
dissatisfied with their jobs. Before long, companies may notice decreased performance
and increased absenteeism and turnover (the percentage of workers who leave an
organization and must be replaced).
Departmentalization
The next step in designing an organizational structure is departmentalization—
grouping specialized jobs into meaningful units. Depending on the organization and
the size of the work units, they may be called divisions, departments, or just plain
groups.
Traditional groupings of jobs result in different organizational structures, and for the
sake of simplicity, we’ll focus on two types—functional and divisional organizations.

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Figure 8.3: An organizational chart

ORGANISATION
A growing organisation must apply specialisation or the division of labour for the
following reasons:
Individual ability;
Reduced transfer time;
Specialised equipment;
Reduced training costs.
Specialisation allows for an increase in productivity. However, the converse is also
true. Workers who perform specialised jobs become bored and demotivated and
productivity decreases. This is where managers should explore the possibilities of job
enrichment, job enlargement and job rotation.

Departmentalisation
This entails the grouping of activities that belong together. The reason for
departmentalisation isinherent in the advantages of specialisation. The various
departments created now constitute
the organisation structure. There are various basic forms of organisation; i.e. functional
organisational structure, product departmentalisation, location departmentalisation,
customer departmentalisation and a matrix organisational structure.
Operations Management
.Every organization—whether it produces goods or provides services— sees Job 1 as
furnishing customers with quality products. Thus, to compete with other organizations,
a company must convert resources (materials, labor, money, information) into goods
or services as efficiently as possible. The upper-level manager who directs this
transformation process is called an operations manager. The job of operations
management (OM) consists of all the activities involved in transforming a product idea
into a finished product. In addition, operations managers are involved in planning and
controlling the systems that produce goods and services. In other words, operations

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managers manage the process that transforms inputs into outputs. Figure 9.2
illustrates these traditional functions of operations management.
All manufacturers set out to perform the same basic function: to transform resources
into finished goods. To perform this function in today’s business environment,
manufacturers must continually strive to improve operational efficiency. They must
fine-tune their production processes to focus on quality, to hold down the costs of

The Transformation Process

Materials and labor, and to eliminate all costs that add no value to the finished product.
Making the decisions involved in the effort to attain these goals is another job of
operations managers. Their responsibilities can be grouped as follows:
Production planning. During production planning, managers determine how goods
will be produced, where production will take place, and how manufacturing facilities
will be laid out.
Production control. Once the production process is under way, managers must
continually schedule and monitor the activities that make up that process. They must
solicit and respond to feedback and make adjustments where needed. At this stage,
they also oversee the purchasing of raw materials and the handling of inventories.
Quality control. The operations manager is directly involved in efforts to ensure that
goods are produced according to specifications and that quality standards are
maintained.

Planning the Production Process

The decisions made in the planning stage have long-range implications and are crucial
to a firm’s success. Before making decisions about the operations process, managers

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must consider the goals set by marketing managers. Does the company intend to be
a low-cost producer and to compete on the basis of price? Or does it plan to focus on
quality and go after the high end of the market? Many decisions involve trade-offs. For
example, low cost doesn’t normally go hand in hand with high quality. All functions of
the company must be aligned with the overall strategy to ensure success.
With these thoughts in mind, let’s look at the specific types of decisions that have to
be made in the production planning process. We’ve divided these decisions into those
dealing with production methods, site selection, facility layout, and components and
materials management.
Production-Method Decisions
The first step in production planning is deciding which type of production process is
best for making the goods that your company intends to manufacture. In reaching this
decision, you should answer such questions as:
Am I making a one-of-a-kind good based solely on customer specifications, or am I
producing high-volume standardized goods to be sold later?
Do I offer customers the option of “customizing” an otherwise standardized good to
meet their specific needs?

One way to appreciate the nature of this decision is by comparing three basic types of
processes or methods: make-to-order, mass production, and mass customization. The
task of the operations manager is to work with other managers, particularly marketers,
to select the process that best serves the needs of the company’s customers.
Make-to-Order
At one time, most consumer goods, such as furniture and clothing, were made by
individuals practicing various crafts. By their very nature, products were customized to
meet the needs of the buyers who ordered them. This process, which is called a make-
to-order strategy, is still commonly used by such businesses as print or sign shops
that produce low-volume, high-variety goods according to customer specifications.
This level of customization often results in a longer production and delivery cycle than
other approaches.

Mass Production
By the early twentieth century, a new concept of producing goods had been introduced:
mass production (or make-to-stock strategy), the practice of producing high volumes
of identical goods at a cost low enough to price them for large numbers of customers.
Goods are made in anticipation of future demand (based on forecasts) and kept in
inventory for later sale. This approach is particularly appropriate for standardized
goods ranging from processed foods to electronic appliances and generally result in
shorter cycle times than a make-to-order process.
Mass Customization
There is at least one big disadvantage to mass production: customers, as one old
advertising slogan put it, can’t “have it their way.” They have to accept standardized
products as they come off assembly lines. Increasingly, however, customers are
looking for products that are designed to accommodate individual tastes or needs but
can still be bought at reasonable prices. To meet the demands of these consumers,
many companies have turned to an approach called mass customization, which
combines the advantages of customized products with those of mass production.
This approach requires that a company interact with the customer to find out exactly
what the customer wants and then manufacture the good, using efficient production
methods to hold down costs. One efficient method is to mass-produce a product up to

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a certain cut-off point and then to customize it to satisfy different customers. One of
the best-known mass customizers is Nike, which has achieved success by allowing
customers to configure their own athletic shoes, apparel, and equipment through
Nike’s iD program. The Web has a lot to do with the growth of mass customization.
Levi’s, for instance, lets customers find a pair of perfect fitting jeans by going through
an online fitting process. Oakley offers customized sunglasses, goggles, watches, and
backpacks, while Mars, Inc. can make M&M’s in any color the customer wants (say,
school colors) as well as add text and even pictures to the candy.
Naturally, mass customization doesn’t work for all types of goods. Most people don’t
care about customized detergents or paper products. And while many of us like the
idea of customized clothes, footwear, or sunglasses, we often aren’t willing to pay the
higher prices they command.
Facilities Decisions
After selecting the best production process, operations managers must then decide
where the goods will be manufactured, how large the manufacturing facilities will be,
and how those facilities will be laid out.
Site Selection
In site selection (choosing a location for the business), managers must consider
several factors:
To minimize shipping costs, managers often want to locate plants close to suppliers,
customers, or both.
They generally want to locate in areas with ample numbers of skilled workers.
They naturally prefer locations where they and their families will enjoy living.
They want locations where costs for resources and other expenses—land, labor,
construction, utilities, and taxes—are low.
They look for locations with a favorable business climate—one in which, for example,
local governments might offer financial incentives (such as tax breaks) to entice them
to do business in their locales. For example, an enterprise zone is an area in which
incentives are used to attract investments from private companies.

Managers rarely find locations that meet all these criteria. As a rule, they identify the
most important criteria and aim at satisfying them. In deciding to locate in San
Clemente, California, for instance, PowerSki was able to satisfy three important
criteria: (1) proximity to the firm’s suppliers, (2) availability of skilled engineers and
technicians, and (3) favorable living conditions. These factors were more important
than operating in a low-cost region or getting financial incentives from local
government. Because PowerSki distributes its products throughout the world, proximity
to customers was also unimportant.
Capacity Planning
Now that you know where you’re going to locate, you have to decide on the quantity of
products that you’ll produce. You begin by forecasting demand for your product, which
isn’t easy. To estimate the number of units that you’re likely to sell over a given period,
you have to understand the industry that you’re in and estimate your likely share of the
market by reviewing industry data and conducting other forms of research.
Once you’ve forecasted the demand for your product, you can calculate the capacity
requirements of your production facility—the maximum number of goods that it can
produce over a given time under normal working conditions. In turn, having calculated
your capacity requirements, you’re ready to determine how much investment in plant

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and equipment you’ll have to make, as well as the number of labor hours required for
the plant to produce at capacity.
Like forecasting, capacity planning is difficult. Unfortunately, failing to balance capacity
and projected demand can be seriously detrimental to your bottom line. If you set
capacity too low (and so produce less than you should), you won’t be able to meet
demand, and you’ll lose sales and customers. If you set capacity too high (and turn out
more units than you should), you’ll waste resources and inflate operating costs.

Motivating Employees
Motivation
Motivation refers to an internally generated drive to achieve a goal or follow a
particular course of action. Highly motivated employees focus their efforts on achieving
specific goals. It’s the manager’s job, therefore, to motivate employees—to get them
to try to do the best job they can. Motivated employees call in sick less frequently, are
more productive, and are less likely to convey bad attitudes to customers and co-
workers. They also tend to stay in their jobs longer, reducing turnover and the cost of
hiring and training employees. But what motivates employees to do well? How does a
manager encourage employees to show up for work each day and do a good job?
Paying them helps, but many other factors influence a person’s desire (or lack of it) to
excel in the workplace. What are these factors, are they the same for everybody, and
do they change over time? To address these questions, we’ll examine four of the most
influential theories of motivation: hierarchy-of-needs theory, two-factor theory,
expectancy theory, and equity theory.
Extrinsic and Intrinsic Motivation
Before we begin our discussion of the various theories of motivation, it is important to
establish the distinction between intrinsic and extrinsic motivation. Simply put, intrinsic
motivation comes from within: the enjoyment of a task, the satisfaction of a job well
done, and the desire to achieve are all sources of intrinsic motivation. On the other
hand, extrinsic motivation comes about because of external factors such as a bonus
or another form of reward. Avoiding punishment or a bad outcome can also be a source
of extrinsic motivation; fear, it is said, can be a great motivator.
Hierarchy of Needs Theory
Psychologist Abraham Maslow’s hierarchy of needs theory proposed that we are
motivated by the five initially unmet needs, arranged in the hierarchical order shown in
Figure 10.1, which also lists specific examples of each type of need in both the
personal and work spheres of life. Look, for instance, at the list of personal needs in
the middle column. At the bottom are physiological needs (such life-sustaining needs
as food and shelter). Working up the hierarchy we experience safety needs (financial
stability, freedom from physical harm), social needs (the need to belong and have
friends), esteem needs (the need for self-respect and status), and self-actualization
needs (the need to reach one’s full potential or achieve some creative success). There
are two key things to remember about Maslow’s model:
1) We must satisfy lower-level needs before we seek to satisfy higher-level needs.
2) Once we’ve satisfied a need, it no longer motivates us; the next higher need takes
its place.

Figure 10.1: Maslow’s Hierarchy of needs with examples

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Let’s say, for example, that for a variety of reasons that aren’t your fault, you’re broke,
hungry, and homeless. Because you’ll probably take almost any job that will pay for
food and housing (physiological needs), you go to work repossessing cars.
Fortunately, your student loan finally comes through, and with enough money to feed
yourself, you can go back to school and look for a job that’s not so risky (a safety need).
You find a job as a night janitor in the library, and though you feel secure, you start to
feel cut off from your friends, who are active during daylight hours. You want to work
among people, not books (a social need). So now you join several of your friends
selling pizza in the student center. This job improves your social life, but even though
you’re very good at making pizzas, it’s not terribly satisfying. You’d like something that
your friends will respect enough to stop teasing you about the pizza job (an esteem
need). So you study hard and land a job as an intern in the governor’s office. On
graduation, you move up through a series of government appointments and eventually
run for state senator. As you’re sworn into office, you realize that you’ve reached your
full potential (a self-actualization need) and you comment to yourself, “It doesn’t get
any better than this.”
Needs Theory and the Workplace
What implications does Maslow’s theory have for business managers? There are two
key points: (1) Not all employees are driven by the same needs, and (2) the needs that
motivate individuals can change over time. Managers should consider which needs
different employees are trying to satisfy and should structure rewards and other forms
of recognition accordingly. For example, when you got your first job repossessing cars,
you were motivated by the need for money to buy food. If you’d been given a choice
between a raise or a plaque recognizing your accomplishments, you’d undoubtedly
have opted for the money. As a state senator, by contrast, you may prefer public
recognition of work well done (say, election to higher office) to a pay raise.
Two-Factor Theory
Another psychologist, Frederick Herzberg, set out to determine which work factors
(such as wages, job security, or advancement) made people feel good about their jobs
and which factors made them feel bad about their jobs. He surveyed workers, analyzed
the results, and concluded that to understand employee satisfaction (or
dissatisfaction), he had to divide work factors into two categories:
Motivation factors. Those factors that are strong contributors to job satisfaction
Hygiene factors. Those factors that are not strong contributors to satisfaction but
that must be present to meet a worker’s expectations and prevent job dissatisfaction

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Figure 10.2: Herzberg’s Two-Factor theory: Poor hygiene factors will increase job
dissatisfaction, while good motivators will increase satisfaction.

Figure 10.2 illustrates Herzberg’s two-factor theory. Note that motivation factors (such
as promotion opportunities) relate to the nature of the work itself and the way the
employee performs it. Hygiene factors (such as physical working conditions) relate to
the environment in which it’s performed.

Two-Factor Theory and the Workplace

We’ll ask the same question about Herzberg’s model as we did about Maslow’s: What
does it mean for managers? Suppose you’re a senior manager in an accounting firm,
where you supervise a team of accountants, each of whom has been with the firm for
five years. How would you use Herzberg’s model to motivate the employees who report
to you? Let’s start with hygiene factors. Are salaries reasonable? What about working
conditions? Does each accountant have his or her own workspace, or are they
crammed into tiny workrooms? Are they being properly supervised or are they left on
their own to sink or swim? If hygiene factors like these don’t meet employees’
expectations, they may be dissatisfied with their jobs.
Fixing problems related to hygiene factors may alleviate job dissatisfaction, but it won’t
necessarily improve anyone’s job satisfaction. To increase satisfaction (and motivate
someone to perform better), you must address motivation factors. Is the work itself
challenging and stimulating? Do employees receive recognition for jobs well done? Will
the work that an accountant has been assigned help him or her to advance in the firm?
According to Herzberg, motivation requires a twofold approach: eliminating
“dissatisfiers” and enhancing satisfiers.
Expectancy Theory
If you were a manager, wouldn’t you like to know how your employees decide whether
to work hard or goof off? Wouldn’t it be nice to know whether a planned rewards
program will have the desired effect—namely, motivating them to perform better in their
jobs? These are the issues considered by psychologist Victor Vroom in his expectancy
theory, which proposes that employees will work hard to earn rewards that they value
and that they consider “attainable”.
As you can see from Figure 10.3, Vroom argues that an employee will be motivated to
exert a high level of effort to obtain a reward under three conditions – the employee:
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1) believes that his or her efforts will result in acceptable performance.
2) believes that acceptable performance will lead to the desired reward.
3) values the reward.

Expectancy Theory and the Workplace

To apply expectancy theory to a real-world situation, let’s analyze an automobile-
insurance company with one hundred agents who work from a call center. Assume that
the firm pays a base salary of $2,000 a month, plus a $200 commission on each policy
sold above ten policies a month. In terms of expectancy theory, under what conditions
would an agent be motivated to sell more than ten policies a month?
1) The agent would have to believe that his or her efforts would result in policy sales
(that, in other words, there’s a positive link between effort and performance).
2) The agent would have to be confident that if he or she sold more than ten policies
in a given month, there would indeed be a bonus (a positive link between performance
and reward).
3) The bonus per policy—$200—would have to be of value to the agent.

Figure 10.3: Expectancy Theory

Now let’s alter the scenario slightly. Say that the company raises prices, thus making
it harder to sell the policies. How will agents’ motivation be affected? According to
expectancy theory, motivation will suffer. Why? Because agents may be less confident
that their efforts will lead to satisfactory performance. What if the company introduces
a policy whereby agents get bonuses only if buyers don’t cancel policies within ninety
days? Now agents may be less confident that they’ll get bonuses even if they do sell
more than ten policies. Motivation will decrease because the link between performance
and reward has been weakened. Finally, what will happen if bonuses are cut from $200
to $25? Obviously, the reward would be of less value to agents, and, again, motivation
will suffer. The message of expectancy theory, then, is fairly clear: managers should
offer rewards that employees value, set performance levels that they can reach, and
ensure a strong link between performance and reward.

Equity Theory
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What if you spent thirty hours working on a class report, did everything you were
supposed to do, and handed in an excellent assignment (in your opinion). Your
roommate, on the other hand, spent about five hours and put everything together at
the last minute. You Figure 10.4: Equity Theory: Inputs should balance with outcomes
know, moreover, that he ignored half the requirements and never even ran his
assignment through a spell-checker. A week later, your teacher returns the reports.
You get a C and your roommate gets a B+. In all likelihood, you’ll feel that you’ve been
treated unfairly relative to your roommate.
Your reaction makes sense according to the equity theory of motivation, which
focuses on our perceptions of how fairly we’re treated relative to others. Applied to the
work environment, this theory proposes that employees analyze their contributions or
job inputs (hours worked, education, experience, work performance) and their
rewards or job outcomes (salary, bonus, promotion, recognition). Then they create a
contributions/rewards ratio and compare it to those of other people. The basis of
comparison can be any one of the following:
Someone in a similar position
Someone holding a different position in the same organization
Someone with a similar occupation
Someone who shares certain characteristics (such as age, education, or level of
experience)
Oneself at another point in time
Figure 10.4: Equity Theory: Inputs should balance with outcomes

When individuals perceive that the ratio of their contributions to rewards is comparable
to that of others, they perceive that they’re being treated fairly or equitably; when they
perceive that the ratio is out of balance, they perceive inequity. Occasionally, people
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will perceive that they’re being treated better than others. More often, however, they
conclude that others are being treated better (and that they themselves are being
treated worse). This is what you concluded when you saw your grade in the previous
example. You’ve calculated your ratio of contributions (hours worked, research and
writing skills) to rewards (project grade), compared it to your roommate’s ratio, and
concluded that the two ratios are out of balance.
What will an employee do if he or she perceives an inequity? The individual might try
to bring the ratio into balance, either by decreasing inputs (working fewer hours, not
taking on additional tasks) or by increasing outputs (asking for a raise). If this strategy
fails, an employee might complain to a supervisor, transfer to another job, leave the
organization, or rationalize the situation (e.g., deciding that the situation isn’t so bad
after all). Equity theory advises managers to focus on treating workers fairly, especially
in determining compensation, which is, naturally, a common basis of comparison.

Pricing Strategy
Pricing a Product
one of the four Ps in the marketing mix is price. Pricing is such an important aspect of
marketing that it merits its own chapter. Pricing a product involves a certain amount of
trial and error because there are so many factors to consider. If a product or service is
priced too high, many people simply won’t buy it. Or your company might even find
itself facing competition from some other supplier that thinks it can beat your price. On
the other hand, if you price too low, you might not make enough profit to stay in
business. Let’s look at several pricing options that were available to those marketers
at Wow Wee who were responsible for pricing Robosapien, an example we introduced
earlier. We’ll begin by discussing two strategies that are particularly applicable to
products that are being newly introduced.
New Product Pricing Strategies
When Robosapien was introduced to the market, it had little direct competition in its
product category. True, there were some “toy” robots available, but they were not
nearly as sophisticated. Sony offered a pet dog robot called Aibo, but its price tag of
$1,800 was really high. Even higher up the price-point scale was the $3,600 iRobi robot
made by the Korean company Yujin Robotics to entertain kids and even teach them
foreign languages. Parents could also monitor kids’ interactions with the robot through
its video-camera eyes; in fact, they could even use the robot to relay video messages
telling kids to shut it off and go to sleep.357
Skimming and Penetration Pricing
Because Wow Wee was introducing an innovative product in an emerging market with
few direct competitors, it considered one of two pricing strategies:

1) With a skimming strategy, Wow Wee would start off with the highest price that
keenly interested customers would pay. This approach would generate early profits,
but when competition enters—and it will, because at high prices, healthy profits can be
made in the market—Wow Wee would have to lower its price. Even without
competition, they would likely lower prices gradually to bring in another group of
consumers not willing to pay the initial high price.
2) Using penetration pricing, Wow Wee would initially charge a low price, both to
discourage competition and to grab a sizable share of the market. This strategy might
give the company some competitive breathing room (potential competitors won’t be
attracted to low prices and modest profits). Over time, as its dominating market share
discourages competition, Wow Wee could push up its prices.
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Other Pricing Strategies
In their search for the best price level, Wow Wee’s marketing managers could consider
a variety of other approaches, such as cost-based pricing, demand-based pricing,
prestige pricing, and odd-even pricing. Any of these methods could be used not only
to set an initial price but also to establish long-term pricing levels.
Before we examine these strategies, let’s pause for a moment to think about the pricing
decisions that you have to make if you’re selling goods for resale by retailers. Most of
us think of price as the amount that we—consumers—pay for a product. But when a
manufacturer (such as Wow Wee) sells goods to retailers, the price it gets is not what
we the consumers will pay for the product. In fact, it’s a lot less.
Here’s an example. Say you buy a shirt at the mall for $40 and that the shirt was sold
to the retailer by the manufacturer for $20. In this case, the retailer would have applied
a mark-up of 100 percent to this shirt, or in other words $20 mark-up is added to the
$20 cost to arrive at its price (hence a 100% markup) resulting in a $40 sales price to
the consumer. Mark-up allows the retailer to cover its costs and make a profit.
Cost-Based Pricing
Using cost-based pricing, Wow Wee’s accountants would figure out how much it
costs to make Robosapien and then set a price by adding a profit to the cost. If, for
example, it cost $40 to make the robot, Wow Wee could add on $10 for profit and
charge retailers $50. Cost-based pricing has a fundamental flaw – it ignores the value
that consumers would place on the product. As a result, it is typically only employed in
cases where something new or customized is being developed where the cost and
value cannot easily be determined before the product is developed. A defense
contractor might use cost-based pricing for a new missile system, for example. The
military might agree to pay costs plus some agreed amount of profit to create the
needed incentives for the contractor to develop the system. Building contractors might
also use cost-based pricing to protect themselves from unforeseen changes in a
project: the client wanting a home addition would get an estimate of the cost and have
an agreement for administrative fees or profit, but if the client changes what they want,
or the contractor has unexpected complications in the project, the client will pay for the
additional costs.
Demand-Based Pricing
Let’s say that Wow Wee learns through market research how much people are willing
to pay for Robosapien. Following a demand-based pricing approach, it would use
this information to set the price that it charges retailers. If consumers are willing to pay
$120 retail, Wow Wee would charge retailers a price that would allow retailers to sell
the product for $120. What would that price be? If the 100% mark-up example applied
in this case, here’s how we would arrive at it: $120 consumer selling price minus a $60
markup by retailers means that Wow Wee could charge retailers $60. Retailer markup
varies by product category and by retailer, so this example is just to illustrate the
concept.
Dynamic Pricing
In the hospitality industry, the supply of available rooms or seats is fixed; it cannot be
changed easily. Moreover, once the night is over or the flight has departed, you can
no longer sell that room or seat. This fact combined with the variation in demand for
rooms or flights on certain days or times (think holidays or special events), has led to
dynamic pricing. Revenue management, and the growth of online travel agencies
(OTA’s) like Hotwire, Expedia, and Priceline are methods of maximizing revenue for a
given night or flight. Hotels and airlines use sophisticated revenue management tools
to forecast demand and adjust the availability of various price points. Online travel

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agents like Hotwire publicize last-minute availability with special rates so that unsold
rooms or flights can attract customers and still earn revenue. This approach allows
hotels and airlines to maximize revenue opportunities for high demand times such as
university graduations and holidays, and also for special events like the Super Bowl or
the Olympics. Losses are minimized during low-demand times because unused
capacity is offered at a discount, attracting customers who might not have considered
travelling at off peak times.
Prestige Pricing
Some people associate a high price with high quality—and, in fact, there generally is
a correlation. Thus, some companies adopt a prestige-pricing approach—setting
prices artificially high to foster the impression that they’re offering a high-quality
product.
Competitors are reluctant to lower their prices because it would suggest that they’re
lower-quality products. Let’s say that Wow Wee finds some amazing production
method that allows it to produce Robosapien at a fraction of its current cost. It could
pass the savings on by cutting the price, but it might be reluctant to do so: what if
consumers equate low cost with poor quality?
Odd-Even Pricing
Do you think $9.99 sounds cheaper than $10? If you do, you’re part of the reason that
companies sometimes use odd-even pricing—pricing products a few cents (or
dollars) under an even number. Retailers, for example, might price Robosapien at $99
(or even $99.99) if they thought consumers would perceive it as less than $100.
Loss Leaders
Have you ever seen items in stores that were priced so low that you wondered how
the store could make any money? There’s a good chance they weren’t – the store may
have been using a loss leader strategy – pricing an item at a loss to draw customers
into the store. Once there, store managers hope that the customer will either buy
accessories to go along with the new purchase or actually select a different item not
priced at a loss. You might have visited the store to buy a specially-priced laptop and
ended up leaving with a more expensive one that had a faster processor. Or perhaps
you bought the HDTV that was advertised, but then also bought a new surge protector
and a streaming player. In either case, you did exactly what the store hoped when they
priced the advertised item at a loss.
Bundling
Perhaps you are one of the many customers of a cable television provider that also
buys their high-speed internet and/or their phone service. Or when you stop by your
favorite fast-food outlet for lunch, maybe you sometimes buy the combo of burger,
fries, and a drink. If you do, you’ve experienced the common practice of a bundling
strategy – pricing items as a group, or bundle, at a discount to the cost of buying the
items separately. Bundling has significant advantages to both buyers and sellers.
Obviously, buyers receive the discount. Sellers, on the other hand, can sell more goods
and services with this approach. Perhaps you would have settled for a water instead
of a soft drink, but the combo price made the soft drink just a few cents more. Without
bundling, that soft drink might not have been sold.
If the sale involves some kind of recurring service – like the previously-mentioned
example of cable – bundling can also result in higher levels of customer retention. If
you decided one day that you wanted to replace your cable with satellite TV, for
example, you might well find that the discount from moving to satellite was far less than
you expected, because unbundled from cable TV, the price for your internet service
could take a substantial jump. If so, like many others who have likely considered

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making this move, you might find it in your best interests to stick with the original
bundled package, no matter how trapped or frustrated you might feel as a result.

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