Business Management: Management Process and Key Business Functions

Management Process and Key Business Functions

Coordinating Key Business Functions and Resources

  • A business has four main functions:

    • Operations

    • Finance

    • Marketing

    • Human Resources

  • These functions require different skills and knowledge for success.

  • The four key business functions are interdependent, meaning they all overlap and rely on each other.

  • Synergy is often applied to describe the benefits of interdependence, meaning 'the whole is greater than the sum of all the individual parts'.

  • As a business grows, these functions may be divided into separate areas, allowing for specialised staff.

  • This division can specialise areas but requires high levels of coordination for smooth operation.

Operations

  • Operations: Business processes that involve transformation (production processes).

  • Aims to achieve profit maximisation by increasing production efficiency.

Goods and/or Services

  • A manufacturer transforms inputs into goods.

    • Tangibles: Physical products that can be handled and stored before sale (e.g., bread, clothing, cars).

  • A service organisation transforms inputs into services.

    • Intangibles: Services that cannot be touched or stored (e.g., a haircut).

  • Many businesses produce a combination of manufactured goods and services (e.g., a laptop (good) with a warranty (service)).

The Production Process

  • Inputs: Resources used in the production process.

    • Examples for service businesses: Knowledge, skills/expertise, information, specialised work site (shop/clinic) or mobile skills.

    • Examples for manufacturing businesses: People (skills, vision, knowledge), capital (cash flow), enterprise (resources/materials).

  • Transformation/Processes: Activities that convert inputs into outputs.

    • For service businesses: Provision of advice/labour/expertise/experience/time.

    • For manufacturing businesses: Assembly or manufacture via:

      • Capital intensive transformation (mass production, mechanised, automated, robotics).

      • Labour intensive transformation (customised).

  • Outputs: The final goods or services produced.

    • For service businesses: Improved quality of life, may be tangible (something made by a carpenter) or intangible (advice from a teacher).

    • For manufacturing businesses: Tangible product.

Quality Management

  • Quality Management: The strategy a business uses to ensure its product meets customer expectations.

  • A quality product should be reliable, easy to use, durable, well designed, delivered on time, include after-sales service, and have an agreeable appearance.

  • Three quality approaches:

    • Quality Control: Inspections throughout the production process to check for defects, comparing actual performance to established benchmarks.

    • Quality Assurance: A proactive approach involving a system to ensure a business achieves set standards in production.

    • Total Quality Management (TQM): Involves employee empowerment, continuous improvement, and a customer focus to ensure an ongoing, business-wide commitment to excellence applied to every aspect of the business’s operation.

Marketing

  • Marketing: A total system of interacting activities designed to plan, price, promote, and distribute products to present and potential customers.

  • Differs from advertising (a component of promotion) and sales (the result of effective marketing).

Identification of the Target Market

  • Target Market: A group of customers with similar characteristics who presently, or may in the future, purchase the product.

  • Mass Marketing Approach:

    • Seller mass-produces, mass-distributes, and mass-promotes one product to all buyers.

    • Seeks a large range of customers; develops a single marketing mix for the entire market.

    • Rare today, limited to basic commodities (e.g., water, gas, electricity, Model T Ford historically).

  • Market Segmentation Approach:

    • The total market is subdivided into groups of people sharing one or more characteristics.

    • The business then selects one of these segments as its target market.

  • Niche Market Approach:

    • A narrowly selected target market segment; essentially a segment within a segment.

    • Example: Specific magazines appealing to a niche market within the broader magazine market.

Marketing Mix (The 44 Ps)

  • The combination of four elements that make up the marketing strategy.

Product

  • Includes elements such as:

    • Quality

    • Name (Branding)

    • Design

    • Warranty and guarantee

    • Labelling (preserve, inform, protect, promote)

    • Packaging (trend towards environmentally friendly, image of luxury)

    • Customer service (during and after sale)

    • Intangible benefits (feeling of security, prestige, satisfaction, influence)

    • Exclusive features

  • Examples: Connoisseur ice cream, iPhone, BTS McDonald's Meal.

Price

  • Price decisions are critical: a high price might lose sales, a low price might imply poor quality.

  • Three methods for calculating price:

    • Cost-based: Calculate total cost of producing/purchasing, then add a mark-up for profit.

    • Market-based: Set prices according to the interaction of supply and demand.

    • Competition-based: Choose a price below, equal to, or above competitors'.

  • Examples show how pricing creates perception (e.g., Ben & Jerry's vs. generic ice cream, Adidas vs. Golden Goose).

Promotion

  • Promotion: Methods used by a business to inform, persuade, and remind customers about its products.

  • Types of promotion:

    • Personal selling: Activities of a sales representative directed to a customer to make a sale.

    • Relationship marketing: Development of long-term, cost-effective, and strong relationships with individual customers.

    • Sales promotion: Free samples, coupons, point-of-purchase displays.

    • Publicity: Free news stories about a business’s products.

    • Public relations: Activities aimed at creating and maintaining favourable relations between a business and its customers (e.g., speeches, donations).

    • Advertising: Print or electronic mass media used to communicate a message about the product.

Place (Distribution)

  • Place/Distribution: Activities that make products available to customers when and where they want to purchase them.

  • Distribution Channel: A way of getting the product to the customer, often involving intermediaries.

  • Three main types of distribution channels:

    • Producer to customer: Most common for services (e.g., a haircut directly from the barber).

    • Producer to retailer to customer: Common for bulky or perishable products (e.g., a bakery selling bread to a grocery store which then sells to customers).

    • Producer to wholesaler to retailer to customer: Most common method (e.g., a beverage company selling to a wholesaler, who sells to supermarkets, who sell to customers).

Finance

  • Every financial transaction is recorded (delivery docket, sales receipt, invoice, e-payment) and summarised into financial reports.

Cash Flow Statement

  • Cash Flow Statement: A financial statement indicating the movement of cash receipts (inflows) and cash payments (outflows) over time.

  • Liquidity: The amount of cash a business has access to and how readily it can convert assets into cash to pay debts.

  • A business is liquid if it can meet payments as they are due.

  • Vital for information on the timing of payments and receipt of income.

  • Cash Inflows: Cash sales, credit sales (when paid), other income (e.g., interest from investments, non-operating income).

  • Cash Outflows: Payments for stock, payments for expenses (wages, insurance), payments for non-operating expenses.

  • Opening Cash Balance: Cash at the start of a period.

  • Closing Cash Balance: Opening Cash Balance ++ Inflows −- Outflows.

  • Classification of Cash Flows:

    • Operating activities: Cash inflows and outflows relating to the provision of goods and services (main business activity).

    • Investing activities: Cash flows related to the purchase and sale of non-current assets and investments.

    • Financing activities: Cash flows related to the acquisition and repayment of both debt and equity finance.

  • Case Study Insights:

    • Xero research showed about 50%50 \% of Australian small businesses are cash flow negative monthly.

    • Main factor contributing to negative cash flow: Late payments (average 44.944.9 days).

    • Small businesses often forced to take loans or use credit for expenses due to late payments.

    • Strategies for managing cash flow: Reducing payment terms (e.g., from 3030 to 1414 days), proactively chasing overdue payments.

  • Example calculation: If Opening Cash Balance for January is $5000\$5000, Cash in $6000\$6000, Cash out $3000\$3000:

    • Closing Cash Balance for January =$5000+$6000−$3000=$8000= \$5000 + \$6000 - \$3000 = \$8000.

    • Opening Cash Balance for February =$8000= \$8000.

Income Statement

  • Income Statement (also known as Revenue Statement or Profit or Loss Statement): A summary of income earned and expenses incurred over a period of trading.

  • Five main categories:

    • Revenue/Income from Sales: Total money earned from selling goods/services.

    • Cost of Goods Sold (COGS): Direct costs attributable to the production of goods sold by a company.

      • Formula: COGS=Opening Stock+Purchases−Closing StockCOGS = \text{Opening Stock} + \text{Purchases} - \text{Closing Stock}

    • Gross Profit: Revenue minus COGS; indicates mark-up on cost price.

      • Formula: Gross Profit=Sales−COGS\text{Gross Profit} = \text{Sales} - \text{COGS}

    • Expenses: Costs incurred in running the business.

      • Selling expenses: Related to selling (e.g., commission, advertising, delivery, sales staff salaries).

      • Administrative expenses: Related to general running of the business (e.g., stationery, office salaries, rent, telephone).

      • Financial expenses: Related to borrowing money or minimising business risk (e.g., interest, dividends, lease payments).

    • Net Profit: Gross profit minus total expenses.

      • Formula: Net Profit=Gross Profit−Expenses\text{Net Profit} = \text{Gross Profit} - \text{Expenses}

  • Analysis of the income statement reveals:

    • Effectiveness of pricing, sales, discounts, and stock valuation policies.

    • How effective owner's funds have been in generating profit.

Balance Sheet

  • Balance Sheet: Represents a business’s assets and liabilities at a particular point in time, expressed in money terms, and shows the net worth of the business.

  • Shows the overall financial stability of the business.

  • Accounting Equation: Assets=Liabilities+Owner’s Equity\text{Assets} = \text{Liabilities} + \text{Owner's Equity}

Assets

  • Assets: Items of value owned by the business that can be given a monetary value.

    • Current Assets: Assets expected to be used up or turned over within 1212 months (e.g., cash, accounts receivable/debtors, inventory/stock).

    • Non-current Assets: Assets with an expected life of longer than 1212 months (e.g., buildings, land, machinery, technology, vehicles, furniture, intangibles like goodwill, trademarks, patents).

Liabilities

  • Liabilities: Items of debt owed to outside parties or organisations (e.g., loans, accounts payable/creditors, mortgages, credit card debt, accumulated expenses).

    • Current Liabilities: Debt expected to be repaid in the next 1212 months (e.g., bank overdrafts, credit card debts, accounts payable/creditors, accrued expenses).

    • Non-current Liabilities: Long-term debt items (e.g., mortgages, leases, debentures, retirement benefit funds).

Owner's Equity

  • Owner's Equity: Funds contributed by the owners to establish and build the business.

    • Components: Capital, Retained Earnings (or Drawings, which reduce equity).

Role in Describing Financial Performance

  • Analysis of the balance sheet can indicate:

    • Whether the business has enough assets to cover debts.

    • If borrowed money can be repaid.

    • If assets are being used to maximise profits.

    • If owners are making a good return on their investment.

Human Resources

  • Human Resource Management (HRM): The effective management of the formal relationship between the employer and employees.

The Human Resource Cycle/Staffing Process
1. Acquisition (Hiring New Employees)

  • Planning: Identifying staffing needs, job analysis (determining exact nature of position).

  • Recruitment: Attracting people to apply for positions (advertisements, agencies, word of mouth), includes internal and external recruitment.

  • Selection: Choosing and hiring the most qualified (testing, interviewing, background checks).

  • Job Analysis: Examines actual job activities, equipment used, specific job behaviors, working conditions, degree of supervision.

    • Job Description: Written statement of employee's duties, tasks, and responsibilities.

    • Job Specification: List of key qualifications (education, skills, experience).

2. Training and Development (Improving Employees' Skills and Abilities)

  • Induction and Training: Teaching new skills and tasks.

  • Development: Improving staff skills, abilities, and knowledge.

  • Types of Training:

    • Formal off-the-job training (classroom, simulations).

    • Informal on-the-job training (coaching, job rotation).

    • Action learning: Learning by experience solving real workplace problems (e.g., NAB, IBM).

    • Competency-based training: Identifies skill strengths and areas for further training (e.g., medical education).

    • Corporate universities: Partnerships with academic institutions for training (e.g., Coles, Qantas).

    • Training technologies (computer-based, multimedia, web-based).

  • Benefits for the employee:

    • Opportunity for promotion and self-improvement.

    • Improved job satisfaction, challenge, adaptability to change.

    • Improved future employability, keeping up with technology.

  • Benefits for the employer:

    • Higher productivity, better job performance, efficient use of HR.

    • Goals and objectives effectively met.

    • Reduced costs (less turnover, errors, accidents, absenteeism).

    • More capable, mobile, and easily retrained workforce.

    • Less disruption during staff turnover, 'insurance policy' for crises.

3. Maintenance (Motivating Employees to Remain with the Business)

  • Monetary benefits: Financial compensation, pay rates.

  • Non-monetary benefits: Rewards like conditions, fringe benefits.

4. Separation (Employees Leaving the Business)

  • Employment Contract: Legally binding formal agreement between employer and employee.

    • Employer obligations: Provide work, reasonable care for safety, payment of income, meet industrial relations legislation.

    • Employee obligations: Obey lawful/reasonable commands, act in good faith, use care and skill.

  • Minimum Employment Standards (National Employment Standards - NES): Apply to all full-time and part-time employees (not casual).

    • Hours of work (35−3835-38 hours/week for full-time).

    • Requests for flexible working arrangements.

    • Parental leave (1212 months unpaid).

    • Annual leave (44 weeks for full-time).

    • Personal/carer's leave and compassionate leave (1010 days per year for full-time).

    • Community service leave (jury duty, emergency service).

    • Public holidays.

    • Long service leave.

    • Notice of termination and redundancy (or pay in lieu).

    • Fair Work Information Statement.

  • Awards: Legal documents setting out minimum terms and conditions of employment.

  • Enterprise Agreements: Collective agreements made directly between employers and employees (or their representatives) at the enterprise level.

  • Voluntary Separation: Employee chooses to leave.

    • Retirement: Employee gives up work voluntarily.

    • Resignation: Employee voluntarily ends employment.

    • Voluntary Redundancy: Job is no longer required, and employee volunteers to leave, often with a redundancy package.

  • Involuntary Separation: Employee is asked to leave.

    • Retrenchment: Employee termination due to lack of sufficient work, sometimes synonymous with redundancy but specifically implies job elimination due to lack of need for particular skills or organisational change.

    • Dismissal: Employee termination due to misconduct or unsatisfactory performance.

      • Summary dismissal: No notice required (e.g., drunk at work, criminal activity).

      • Dismissal on notice: For unsatisfactory performance.

      • Unfair dismissal: Dismissal for discriminatory reasons (e.g., illness, union membership, race, gender, age, disability, pregnancy, political opinions). Employees can lodge a claim with an industrial tribunal.

      • Case Example (Natashia Frazer): Dismissal was potentially unfair if no prior written warnings or awareness of other complaints were given.

Ethical Business Behaviour

  • Ethics: Standards that define acceptable and unacceptable behavior, concerned with morally right or wrong actions, not just legal obligations.

  • Ethical vs. Legal Behaviour: Not all legal actions are ethical, and not all ethical actions are codified in law.

  • Triple Bottom Line: Businesses are concerned with reporting on economic, environmental, and social performance.

  • Codes of Conduct/Core Values: Documented guidelines provided to internal stakeholders for ethical workplace behavior and practices.

  • Ethical Dilemmas - Scenarios:

    • Overcharging a customer without their knowledge (inform and return money or keep it?).

    • Boss instructing to not record cash payments to reduce tax (comply or refuse? What are the implications for the employee?).

    • Accepting confidential marketing information from a competitor's disgruntled employee.

    • Dealing with a high-performing salesperson suspected of internet misuse.

    • Loyal, long-serving employee unable to adapt to new technology.

    • Competitor engaging in unethical tactics to offer cheaper products.

    • Inability to follow through with a promised promotion plan for an employee.

  • Key Ethical Issues:

    • Fairness and honesty

    • Respect for people

    • Conflict of interest

    • Financial management

    • Truthful communication