Finance
Role of Financial Management
Definition
Strategic Role of Financial Management
Deals with:
Analysis
Interpretation
Evaluation of Financial Records
Ensures:
Operation
Growth
Achieving Goals and Objectives
Goals include:
Increase dividends to shareholders
Maintain an environmentally friendly business
Become a market leader within five years
Objectives of Financial Management
Profitability
The ability for a business to maximise its profits
⬆ COGS
Growth
The ability for a business to increase its size in the long term
Efficiency
The ability for a business to use its resources effectively in ensuring financial stability and profitability
⬇ costs
⬆ profits with ⬇ level of assets
Liquidity
The extent to which a business can meet its financial commitments in short term
Liquid
Cash or current assets that will soon be cash
Solvency
The extent which the business can meet its financial commitments in the long term
Gearing
Tells you how much debt (or leverage) its operations are compared to the use of equity finance
Short-term and Long-term goals
Short
Includes:
Operational Plans
Tactical Plans
One to two years
Day to day
Reviewed regularly
Long
Strategic Plans
5 years
Examples
⬆ Profits and Market
Reviewed Annually
Interdependence with Other Key Business Functions
Marketing, Operations and HR rely on Financial Management to allocate their adequate funds
Examples
Operations
To purchase Inputs
Pay for Transformation Processes
Marketing
Funds to Undertake Promotion
Human Resources
Funds to Pay Staff
Assesses Effectiveness of Work Force
Influences of Financial Management
Sources
Internal Sources of Finance
Definition
Financial management is the planning and monitoring of a business resource to enable the business to achieve its financial objectives
Owner's Equity
Funds provided by the owners of the business (finance) or from the outcomes of business activities
Retained Profits
Profit from business that is left over after taxation and dividend payments have been made.
Sales of Assets
External Sources of Finance
Debt
Short-term Borrowing
Overdraft
Allows a business to overdraw their account to an agreed limit for a specified time
Commercial Bills
Type of bill exchange (loan) issued by an institute other than banks
30 - 180 Days
Cheapest
Factoring
The selling of accounts receivable for a discounted price to a finance or factoring company
Long-term Borrowing
Mortgage
Loan secured by the property of the borrower (business)
Debenture
Issued by a company for a fixed rate of interest and for a fixed period of time
The property asset becomes the security for the repayment
Usually secured to a specific asset, interest fixed
Debentures can be sold; no rights to a business
Unsecured Notes
A loan for a set period of time but is not back by any collateral or assets
⬆ Interest rates due to ⬆ Risk
Leasing
Money paid for the use of equipment that is owned by another party
Financial Lease
Leasor purchases on behalf of leasee
Life of asset, 3 - 5 years
Examples
Plant, vehicles, furniture
Penalties for breaking agreements
Cheaper than operational lease
Operational Lease
Assets leased for a short period of time
(Shorter than Life of Asset)
Owner Carries Maintenance
Can be cancelled without penalty
Advantages vs Disadvantages
Advantages
Long term financing without ⬇ control/ownership
Repayments and tax deductions fixed
Payments include maintenance, insurance and finance costs
Disadvantages
Cannot use a leased asset as security for other loans
⬆ interest
Equity
Definition
Money raised by issuing shares
Ordinary Shares
Definition
Sold through Australian Stock Exchange (ASX)
Types
New Issues
A security issued and sold for the first time
Examples
Primary Shares
New Offerings
Rights Issues
The privilege granted to shareholders to buy more shares in the same company at a special price
Placements
Involve directly selling shares to a limited number of investors, rather than through public offering
Additional Shares are offered at a discount
Specific Example
NAB recently offered an allotment of shares to existing shareholders at a discount price
Share Purchase Plan
An offer to existing shareholders in a listed (public) company the opportunity to purchase more shares (up to a maximum of $5000) in that company without brokerage (commission) fees
Can be offered at a discount
Private Equity
Definition
Sale of shares to raise finance for a private company
Benefits
Businesses can raise finance without increasing level of debt
Benefits of being a private company including
Limited Liability
Financial Institutions
Banks
Main source of finance for businesses
Since 2008 - 2009 global financial crisis, banks are more cautious; loans only provided with an accepted level of risk
Investment Banks
Banks that specialise in trading money, securities, and others
Financial requirement to large corporations
Arranges long term finance
Advisor on mergers and takeovers
Arranges overseas finance
Examples
Commonwealth Private
JP Morgan
Deutscher
Financial Companies
Non-bank financial institution loans to consumers and businesses
⬆ Interest rates
Less strict criteria for loans than banks
Raises capital through shares issues (debentures)
Credit cards
Leasing
Factoring
Regulated by Australian Prudential Regulation
Superannuation
Growth rapidly over the past 20 years due to tax incentives & compulsory super introduced by the government
Long term securities as company share, government & company debt because of the long term nature of their funds
Life Insurance Companies
Insurance companies provide loans to the corporate sector through receipts of insurance premiums (amount needed to pay for covers) which provide capital funds
Unit Trusts
Also known as mutual funds, take funds from a large number of small investors and invest them in specific types of financial assets
Short Term Money Market
Shares
Mortgages & Property
Public Securities
Australian Securities Exchange
Definition
Acts as both primary and secondary market for the sale of shares to the public
Created by the merger of ASX & sydney futures in July 2006
Offers products and services:
Shares
Futures
Exchange Traded Options
Warrants
Interest Rate Securities
Contracts for Difference
Exchange Traded Funds
Real Estate Investment Trusts
Listed Investment Commitments
Contracts for assets bought at agreed prices but delivered and pay for later
Securities
Certificate attesting credit, the ownership of stocks on bonds
Examples
BHP Billiton
CBA
Telstra
Rio Tinto
NAB
Have stocks trade on the ASX
Primary Market
Deals with the new issue of debt instruments by the borrower of funds
Secondary Market
Deals with the purchase and sale of existing securities
Influences
Influence of the Government
Australian Securities and Investment Commission (ASIC)
Independent government body that regulates the corporate sector seeking to improve corporate governance and protect consumers and potential investors
Sets rules about information that must be disclosed when issuing shares + info in annual financial reports
Covers issues such as takeovers and insolvency
Failure to comply may result in fines or imprisonment
Enforces legislation which companies have to obey
Company Taxation
The tax a business must pay to the government on the profit which they earn
All businesses pay a flat rate of 30%
Some activities and financial activities can be deducted from the taxable income
E.g. Leasing
Funds contributed by owners or partners to establish and build the business
E.g. The Corporations Act
Global Market Influences
Economic Outlook
Can Cause:
⬆ or ⬇ demand for products
⬆ or ⬇ in the interest rates on funds borrowed internationally
Refers specifically to the projected changes to the level of economy growth throughout the world
Availability of Funds
Refers to the ease with which a business can access funds on the international financial markets
Conditions and rates will depend on: risk, demand and supply, and domestic economic conditions
Interest Rates
The costs associated with borrowing money
The ⬆ risk involved with lending, the ⬆ interest rate
Australian Interest rates are typically ⬆, therefore most businesses borrow overseas
Exchange rates become a problem
Processes of Financial Management
Planning and Implementing
Definition
A business plans out the finance required, the proposed sources of finance and a range of financial statements
Financial planning determines how a business' goals will be achieved
Financial Needs
Determined by the capacity to source finance and the management team skills for assessing financial needs
Used to help seek finance/determine financial needs
Balance Sheets
Budgets
Provide information in facts and figures about requirements to achieve a particular purpose
Preparing a cash budget enables a business to predict cash shortages
Cash required for future plans
Cost of capital expenditure and other expenses in comparison to the revenue and earning capacity of the business
Income Statements
Cash flow statements
Estimated use and cost of inventory
Number and labour hours required for production
Types
Operating
Those related to the main activities of a business
Examples
Sales
Production
Labour
Expenses
Raw Materials
COGS
Project
Relate to capital expenditure and Research and Development
Financial
Relate to the financial data of a business
Include the:
Income Statement
Balance Sheet
Cash Flow
Record Systems
Mechanisms employed by businesses to ensure that data become released and the information provided by the record systems are accurate, reliable, efficient, and accessible
Double entry system; recording all items twice to minimise errors
Financial Risks
Financial risk is the risk to a business of being unable to cover financial obligations, such as debt that a business incurs through borrowings
Financial Controls
The policies and procedures that ensure that the plans of a business will be achieved in the most efficient way
Financial Problems Include:
Theft
Damage/Loss of Assets
Fraud
Errors in Record
Debt to Equity
Debt Finance
Is a liability to a business as it is money owed to external sources
Equity Finance
Relates to the internal sources of finance in the business
Advantages vs Disadvantages
Debt
Advantages
Funds readily available
Increased funds should lead to increased earnings and profits
Be acquired at short notice
Interest payments are tax-deductible
Flexible payments periods and types of debt are available
It will not dilute the current ownership in the business
Disadvantages
There is an increased risk if debt comes from financial institutions because investment bank charges and government charges may increase
Security is required by business
Regular repayments
Lenders have first claim on any money if the business ends in bankruptcy
Equity
Advantages
Disadvantage
Does not have to be repaid unless the owners leaves the business
Cheaper than other sources of finance (no payments)
The owners who have contributed to the equity retain control over how finance is used
Lower profits and lower returns for owners
The expectation that the owner will have about the return on investment
Ownership is diluted
Debt versus Equity
Debt
Lenders have prior claim in the event of liquidation
Debt must be repaid by periodic repayments
Interest payments are tax deductible
Lenders usually require a lower rate of return
Interest payments are fixed
Debt provided have no voting rights
Equity
Shareholders have a residual claim on assets
Equity has no maturity date
Dividends are not tax deductible
Shareholders require higher return due to higher risk
Dividend payments are not fixed and may be reduced through
lack of funds
Equity holders have voting rights
Matching the Terms and Source of Finance to Purpose
Terms, flexibility and availability of finance
Cost of each source of funding
Structure of the business
Level of control maintained by the business
Monitoring and controlling
Definition
Business uses accounting information to monitor and control the business functions
Cash Flow Statement
Income Statement + Balance Sheet
Predict a business' status
Show whether a firm can generate a suitable cash flow, pay financial commitments, have sufficient funds for future expansion
Records
Records movement of cash receipts and payments
Cash receipts
Credit sales
Cash payments
Payments for stock
Expenses
Non-operation expenses
Cash sales
Other income (return on investments)
Income Statement (Revenue Statement)
Operating income such as sales of inventory and services plus other earning from interest and dividends
Operating income such as the:
Purchase of Inventory
Payment of Services
Other Expenses
Rent
Advertising
Insurance
Sales
COGS
Opening Stock + Purchases
Closing Stock
Gross Profit
Expenses
Net Profit
Balance
Assets
Current Assets
Cash
Accounts Receivables
Inventory
Non-current Assets
Plants
Equipments
Buildings
Liabilities
Current Liabilities
Accounts Payable
Overdraft
Short Term Loans
Non-current Liabilities
Mortgages
Long Term Loans
Debentures
Owner's Equity
Retained Profits
Financial Ratios
Liquidity
Current Ratio
2:1
Gearing
Debt to Equity
60%
Profitability
Gross Profit
30%
Net Profit
Return on Equity
Efficiency
Expense Ratio
Accounts
Receivable Turnover
20%
< 14
Comparative Ratio Analysis
Identifies areas for improvements, while financial ratios are useful for financial management when used comparatively
Over Different Time Periods
Compare current results with past perfromance
Against Standards
Against standards
Example
Benchmarks (Australian or Global Standards)
With Similar Business
Limitations to Financial Reports
Normalised Earnings
Process of removing one time influence from the balance sheet to show the true earnings of a company
Example
Removal of a land site
Capitalised Expenses
Process of adding capital expense to the balance sheet that is regarded as an asset rather than an expense
Examples
Research and Development
it would achieve ⬆ capital gain
Development Expenditure
Valuing Assets
Process of estimating the market value of assets or liabilities. These valuations can be used in a variety of contexts for a business
including:
Investment Analysis
Mergers
Acquisitions
Financial Reporting
Historical Value
Value of Intangibles
Timing Issues
A record over one year may not be a true representation due to fluctuation issues actual accounting (order), cash based accounting
Debt Repayments
Financial reports do not have the capacity to disclose specific information about debt repayments
May provide a more favourable outcome to the business at that time than is accurate
Notes to the Financial Statements
Report details and additional information that are left out of the main reporting documents
Ethical Issues Related to Financial Reports
Auditors
By auditing financial reports, an independent person is checking the accuracy of your account
Businesses have an ethical and legal obligation to comply with GST reporting requirements
Accuracy is for taxation and stakeholder purposes
Inappropriate asset valuations, hidden expenses and liabilities, fictitious revenues
Financial Management Strategies
Cash Flow Management
Definition
The movement of cash in and out of the business over a period of time
Identifies patterns/potential problems can be used to construct a cash flow projection - future cash forecasts
Cash Flow Statements
Definition
Record actual cash inflows and outflows over a period of time
Determines a firm's ability to pay its debt on time + identifies trends that can be used to predict change
People with interest
Creditors
Owners
Lenders
Shareholders
Distribution of Payments
Definition
Involves the business spreading expense payments throughout the year so cash shortfalls do not occur
Types
Instalments
Paying on due date
Prepay expenses
Discounts for Early Payments
Involves offering creditors a discount for making payments before due date
Factoring
Definition
Factoring is the selling of accounts receivable for a discounted price to a factoring (or finance) company
Immediate funds but won't receive full amount
Working Capital Management
Definition
Working capital refers to funds available for the short-term financial commitments of a business
Equation
Working Capital
Current Assets - Current Liabilities
The control of these is called working capital management
Control of Current Assets
Cash
Definition
Money in the hands of the company and ensures the business can repay its debts, loans, and accounts in the short term
Cash surplus (excess) should be avoided, they should be used to grow the business or invested to earn interests
Receivables
Definition
Work that has not been payed for yet by customers
Sending customer's statements monthly by debtors know when to expect accounts
Following up on unpaid accounts
Specifying a pay period
Inventories
Too much inventory/ slow-moving inventory will lead to cash shortage
Insufficient inventory on popular items may lead to a loss of customers
Inventory is a cost of the business if it remains unsold
Too much, unnecessary expenses
Inventory turnover must be sufficient to generate cash to pay for purcahses and pay suppliers on time so that they will be willing to give credit in the future
Control of Current Liabilities
Definition
Minimising the costs related to a firm's current liabilities is an important part of the management of working capital
Being able to convert current assets into cash to ensure business' creditors are paid
Types
Payables
Holding back accounts payable until due date
Cheap means to improve a firm's position
Result of some suppliers allowing a period of interest free trade credit before requiring payment for purchased goods
Take advantage of discounts offered by creditors
Loans
Costs for establishment, interest rates, and ongoing charges must be investigated and monitored to minimise costs
Alterative sources of funds from different banks and financial institutions
Overdrafts
Require regular payments - keeping fees, establishment fees and interest
Businesses should have a policy for using and managing bank overdrafts and monitor budgets on a daily or weekly basis so that cash suppliers can be controlled
Strategies
Leasing
Definition
The hiring of an asset from another person or company who has purchased the asset and retains ownership of it
Frees up cash (opposed to buying)
Regular fixed payments
Sale and Lease Back
Selling of an owned asset to a lessor and leasing the asset back through fixed payments for a specified number of years
⬆ working capital
⬆ liquidity
Cash is then used as working capital
Profitability Management
Equation
Profit = Total Revenue - Total Costs
Cost Control
Fixed and Variable
Fixed
Costs of production that stays the same regardless of the level of output
Examples
Salaries
Rent
Lease Payments
Insurance Premiums
Interest Payments on Loans
Variable
Costs of production that varies depending on the level of output
Examples
Advertising Expenses
Warehousing Storage Costs
Transportation Costs
Phone Bills
Cost Centres
Departments of a business to which costs can be directly attributed
Managers of cost centres are then given budgets and are held accountable for costs that they incur
Expense Minimisation
Process of reducing costs in an effort to increase profitability
Revenue Control
Marketing Objectives
Increasing Market Share
Expanding the Product Mix
Improving Customer Service
Geographical Expansion
Ways of Doing So
Goal Setting
Reporting System
Discounting fares
Global Financial Management
Exchange Rates
Definition
Foreign rate is the ratio of one currency to another
Appreciation vs Depreciation
Appreciation
Exporters
Reduced the international competitiveness of Australian businesses who exports
Due to exports becoming more expensive to overseas buyers
Importers
$Foreign < $Aus
$AUS > $Foreign
Australian businesses have improved buying
Depreciation
Exporters
$Foreign > $AUS
⬆ international competitiveness of business who exports
Due to exports becoming less expensive to overseas buyers
Importers
$AUS < $Foreign
Australian businesses have less power as prices of imports ⬆
Interest Rates
Advantages vs Disadvantages
Advantages
Cheaper
Repayments ⬇
Appreciation makes interest on repayments cheaper
Fewer Restrictions
Disadvantages
Interest could ⬆ making repayments for expensive
Depreciation of AUD makes interest repayments more expensive
Repayments are affected by overseas economic management and cycle
Methods of International Payment
1 being lowest risk and 4 being highest
- Payment in Advance
- Letter of Credit
- Bill of Exchange
- Clean Payment
Payment in Advance
International payment whereby the seller does not ship the product until it is received payment from the buyer
Advantage vs Disadvantage
Advantage
No risk to server
Disadvantage
Very few buyers will agree
Letter of Credit
Definition
A method whereby the bank gurantees payment on behalf of a buyer as long as seller meets conditions laid out in the letter
Requires payment prior to sending the good
Advantage vs Disadvantage
Advantage
⬇ Risk of non-payment for sellers
⬇ Risk of non-delivery to buyer
Disadvantage
Buyer's bank will take a commission
Clean Payments (Open Accounts)
When buyers buys a product on credit (from server)
The buyer does not pay the seller until after product has been received
Advantage vs Disadvantage
Advantage
No risk to buyer
Sellers can't take out insurance to protect themselves from:
Non-payment
Damage
Transit
Theft
Disadvantage
⬆ risk for seller potential of no payment
Need to be trustworthy
Bill of Exchange
Involves acting as an intermediary for buyer and seller
A document issued by the seller to the buyer, ordering that the buyer pays a specified amount at a specified time to the bank
When bank is satisfied that the seller has shipped the goods (sighting shipping documentation_ it transfers that money toe the seller
Advantages vs Disadvantages
Advantage
Disadvantage
Guaranteed Payment
Guaranteed Receival of Goods
Bank as an intermediary costs both seller and the buyer
Hedging
Definition
Process of minimising risk of currency fluctuations
Establish Offshore Subsidiaries
Arrange import payments and export receipts denominated in the same foreign currency -> losses from exchange rates will be offset by gains from the other
Put money in the other country
Derivatives
Simple financial instruments that can be used to lessen the exporting risks associated with currency fluctuation
Forward Exchange Contract
Contract to exchange one currency for another at an agreed exchange rate on a future date after 30, 70, 180 days
Options
Gives the buyer the right -not obligation- to buy/sell foreign currency in the future
Currency Swap
Agreement to exchange currency in the sport market with an agreement to reverse transaction in future
Marketing
Definition
Process of planning and executing the the conception, pricing, promotion and distribution of:
Ideas
Goods
Services
Creates exchanges that satisfy individual and organisational objectives
Role of Marketing
Strategic Role of Marketing
Overall goal is profit maximisation
Interdependence w/ Other Key Business Function
Marketing concept
Philosophy that states all sections of the business are involved w/ satisfying a customer's needs and wants while achieving the business' goals
Marketing (Selling)
Operations (Product
Finance ($)
Human Resource (Employees)
Production, Selling, Marketing Approaches
Production Approach
1820s-1920s
Focused on producing goods and services
Sales Approach
1920s - 1980s
Emphasised selling because
⬆ competition = ⬆ spending on advertising
Marketing Approach
1960s - 1980s
Focus on customer want
Stage 2
1980s - Present
Corporate Social Responsibility (CSR)
External pressure from:
Customers
Environmental Organisations
Political Forces
Customer Orientation
Collecting information about customers and basing marketing on them
Relationship Markeitng
Customer loyalty repeat sales achieved through loyalty programs
Types of Markets
A group/individual/organisation that need/want a product with enough $ to do it
Types
Resource Market
Primary Production
Mining
Agriculture
Forests
Fishing
Industrial Market
Industries and businesses that purchase products to use in production of other products/operations
Consumer Market
Household members who use/consume products they buy
Mass Market
Mass produces, distributes, promotes on product to all buyers
Niche Market
Concentrated/micro market
Consists of buyers who have specific needs/lifestyles
Intermediate Market
Wholesalers and retailers who purchase products and sell them again to make a profit
Influences on Marketing
Factors Influencing Customer Choice
Psychological
Influences within an individual that affects his/her buying behaviour
Motives
Attitudes
Personality
Self-image
Learning
Sociocultural
Forces exerted by people and groups that customer that affect customer behaviour
Social Class/ Socioeconomic Status/ Person's rank in society
Culture and Subculture
Family and Roles
Reference (other groups)
Economic
Boom
:arrow_down; employment = ⬇ income
Customers optimistic about future ⬆ consumer spending
Recession
⬆ unemployment = ⬇ income
Consumer pessimistic about future
⬇ consumer spending
Government
Government policies used to influence the level of economic activity
Example
Competition and Consumer Act of 2010
Fair Trade Act 1987
Perception
Consumer Laws
Deceptive and Misleading Advertising
Can be very serious because of the influential nature of advertising
Examples
Fine Print
Before and After
Test and Surveys
Country of origin
Packaging
Special Offer
Types
Bait and Switch
⬇ stock on ⬇ priced goods to attract consumers
Dishonest
False Claims
Deceptive Words
Price Discrimination
Setting different prices for a product in different markets
Implied Conditions
The unspoken and unwritten terms of a contract
Warranties
Protection to the customer if the good is faulty or if the service is not carried out with due care
Ethical Influences
Definition
Refers to conduct that goes beyond the legal agreements
Criticisms
Materialism
Sterotyping
Use of Sex
Product Placement
Invasion of Privacy
Types
Truth and Accuracy in Advertising
Using words to mislead consumers
Good Taste in Advertising
Example
False Myth busting Coke:
Claiming it doesn't rot teeth
Isn't highly caffeinated
Untruths, exaggerated claims, vague statements
Products that may Damage Health
Mostly junk-food
Engaging in Fair Competition
Lessening competition is illegal
Sugging
Selling under the guise of a survey
Marketing Process
Situational Analysis
SWOT
Internal
Strengths
Weaknesses
External
Opportunities
Threats
Product Life Cycle
Introduction
Tries ⬆ consumer awareness
Growth
Brand ✅ market share pursued
Maturity
Sales ↔market beccomes saturated
Decline
⬇ sales
Market Research
Process of systematically collecting, recording and analysing information concerning a specific problem
Two Types of Data
Primary
Facts and figures form original sources for the specific purposes o fhte porble
Secondary
Information that has already been collected by some person or organisation
Internal
Eeternal
Statistical Interpretation Analysis
Focusing on data that represents the average, typical/deviations from typical patterns
Establishing Marketing Objectives
Realistic and measurable goals to be achieved through the marketing plan
Goals
Increase Market Share
Maximising Customer Service
Expanding Product Range
Identifying Target Markets
Target Market
Groups of present and potentila customers to which a business intends to sell its product
Approaches
Mass Marketing
Seeks large range of customers
Market/segmentation
When the total market is subdivided into group of people who share one or more common characteristics
Niche Market
Narrowly selected market segment
Developing Marketing Strategies
Product
Place
Promotion
Price
People
Processes
Physical Evidence
Implementation Monitoring and Controlling
Definition
Implementation
Monitoring
Means checking and observing the actual progress of the marketing plan
Controlling
Involves the comparison of planned performance against actual performance and taking corrective action to make sure the objectives are attained
Process of putting the marketing strategies into operation
Developing a Financial Forecast
Predictions about the future
Cost Estimates
How much is it going to cost
Revenue estimates
How much is it going to gain?
Comparing Actual and Planned Results
Comparing sales, market share and marketing profitability to planned results; analysis
Reversing the Marketing Strategy
Changing the Marketing Mix
New Product Development
Product Depletion
Marketing Strategies
Market Segmentation
Dividing market into total segments
Demographic
Particular features of population
Age
Sex
Income
Geographic
Location
Region
Urban
Climate
Psychographic
Characteristics
Motives
Opinion s
Socioeconomic Group
Behavioural
Customer's relations to a product
Purchase Occasion
Loyalty
Price Sensitivity
Product/Service Differentiated and Positioning
Differentiation
Process of developing and promotion differences between the business' products or services and those of the competitors
Customer Service
Environmental Conversn
Convenience
Social and Ethical Issues
Positioning
Technique in which marketers try to create an image or identity for a product
Products Goods and/or Services
Total Product Concept
Tangible and intangible benefits product posesses
Branding
A name, term, symbol, design or etc, that identifies a specific product
Manufacturer's/national brand
Owned by manufacturer
Private/House Brand
Owned by retailer/wholesaler
Generic Brand
No brand name at all
Packaging
Development of container and the graphic design for a product
Labelling
Presentation of information on a product/package
Price Including Pricing Methods
Price refers to the amount of money a customer is prepared to offer in exchange for a product
Pricing Methods
Cost-based Pricing
Cost + (Cost x Percentage Mark-Up) = Price
Market-based Pricing
Competition Based Pricing
Whatever the market is prepared to pay
Covering all cost but competing with others price
Pricing Strategies
Price Skimming
⬆ during introduction of product life cycle
Price Penetration
⬇ lowest price possible
Loss Leader
Below Cost Price
Price Points
Selling prices at predetermined prcies
Price and Quality Interaction
"You get what you pay for"
Promotion
Describes the methods used by a business to inform, people and remind a target market about its products
Elements of the Promotional Mix
Advertising
Non-personal message communicated to a mass medium
Mass-marketing
Direct Marketing
QUANTUS spends $10m on:
Marketing Catalogues
Telemarketing
E-marketing
Billboards
Social Media
Personal Selling
Sales consultant directed to customer
Public Relations + Publicity
Relationship Marketing
Long-term
Cost Effective
Strong Relationships w/ individual customers
Sales Promotion
Offering direct inducement to customers in an attempt to sell more of its product
Extra Gift
Refunds
The Communication Process
Opinion Leader
A person who influences others
Word of Mouth
When people influence others due to conversations
Place/Distribution
Distribution Channels
Roles taken to get the product form the business to customer
Producer -> Customer
Producer -> Retailer -> Customer
Produce -> Wholesaler -> Retailer - > Customer
Producer -> Agent - > Wholesaler - > Retailer - > Customer
Channel Choice
Intensive
Everywhere
Saturated Market
Selective
Moderate amount of outlets
Exclusive
One retail outlet
Expensive
Physical Distribution Issues
Transport
Warehousing
Inventory
People
Quality of interaction between customer and those within the business who will deliver the srvice
Processes
Refers to flow of activities that a business will follow in its delivery of service
Physical Evidence
Refers to the environment in which the service will be delivered
E-marketing
Practice of using the internet to perform marketing activities
Global Marketing
Global Branding
Worldwide use of a name, term, symbol or logo to identify the seller's products
Standardisation
Global marketing strategy that assumes the way the product is used and the needs it satisfies are the same the world over
Customisation
A global marketing strategy that assumes the way the product is used and the needs it satisfies are different between countries
Global Pricing
How to coordinate their pricing policy across different countries
Customised Pricing
Consumers in different countries charged different
Due to:
Transport
Taxes
Warehousing
Tariff
Tax on imported product
Direct-customised Pricing
According to the local market condition
Standardised Pricing
Same price for product around the world
Competitive Positioning
How a business will differentiate its produccts
Developing an image of the product in the consumer's mind that makes that product superior to its competitors
Operations
Refers to the business processes that involve transformation of inputs into outputs
Value Adding
Extra/added value as inputs are transformed into outputs
Customer Focus
Strategic Role of Operations Management
Definition
Focused on:
Revenue or income
Cost or expenses
Cost Leadership
The competitive advantage a business holds over its rivals by having the lowest production cost
Overarching goal is to maximise profits
Economies of Scale
Cost advantage that can be created as a result of an increase in scale of business operations
Being able to purchase ⬇ cost per unit
Good/Service Differentiation
Varying the product (good or service) from its competitors
Goods
The good
Quality
Additional Features
Services
Time Spent
Amount of Expertise
Qualifications
Goods and/or Services in Different industries
Goods
Standardised Goods
Customised Goods
Varied according to customers
Perishable Goods (eatable)
Non-Perishable (non-edible)
Intermediate Goods
Used for more transformation
Mass produced, usually in assembly line
Service
Standardised Service
Fast food
Customised Service
Doctor
Influences
Globalisation
Removal of Barriers between trade nations
Transfer of:
Capital (facilities or/and machinery
Labour
Intellectual Capital
Ideas
Financial Resources
Technology
Global Web
Processes located in different geographical areas
Supply Chain
Refers to the range of suppliers a business has and the nature of its relationships with those suppliers
Technology
Design, construction and/or application of innovative design and machinery upon operations processes
⬇ labour
⬆ training costs
⬆ wages for theme
Quality Expectations
How well-designed and functional goods are
The overall competence with which services are organised and delivered
Goods vs Services
Goods
Quality of Design
Fitness for Purpose
Services
Professionalism of the service provider
Reliability of the service provider
Level of Customisation
Cost-Based Competition
Derived from determining break-even point and then applying strategies to create cost advantages over competitors
Government Policies
A policy outlives what a government ministry hopes to achieve and the methods and principles it will use to achieve them
Legal Regulation
Laws set out standards that business procedures and principles must follow
Compliance Cost
Expenses due to meeting legal requirements
Environmental Sustainability
Having operation's processes that will consume resources but not compromise resources for future generations done by recycling resources or by limiting use of them
Corporate Social Responsibility
Business' actions based on the respect for people, community, society, and the broader environment
Difference between Legal Compliance and Ethical Responsibility
Legal Compliance
Obeying Laws
Ethical Responsibility
Socially and Morally Responsible Decisions
Legal vs Ethical
Legal
Taxation
Labour Law
Ethical
Social Concerns
Environmental Concerns
Onshore Sourcing
Domestic Outsourcing
Offshore Sourcing
Overseas outsourcing with there is ⬇ taxation
Labour and cheaper
Environmental Sustainability and Social Responsibility
Environmental Sustainability
Conserving resource for future generations
Social Responsibility
Management of:
Social
Environmental
Political
Human Consequences of its actions
Operations Processes
Inputs
Transformed Resources
Definition
Inputs that are changed or converted
Materials
Raw
Natural State
Intermediate
Materials used in further processing
Information
Definition
Knowledge gained from:
Research
Investigation
Instruction
External Info
Market Reports
Statistics from Industry Observers
Industry Bodies
Government Stats from ABS
Internal Info
Within Financial Reports
Quality Reports
Key Performance Indicators
Customers
Due to customers orientation, production process uses customer's preferences and interests, therefore their designs and preference act as a transformed resource
Transforming Resource
Definition
Resources that cause the change in transformed resource
Human Resource
Employees that combine the resources
Facilities
Plant
Factory
Office
Machinery
Transformation Processes
Conversion of inputs into outputs
Value Adding
The Influence of:
Volume
Refers to how much of a product is made
Lead times is the time it takes for an order to be fulfilled from the amount it is made
Variety
Or mix flexibility is known by consumers as product range or variety of choice
Variation in Demand
How processes can respond to changing demand
⬆ demand may be hard to meet
Supplies cannot supply
Labour is not flexible
Machinery cannot adjust
Visibility
Customer Contact/ Feedback
Surveys
Interviews
Warranty Claims
Letters
Wikis
Blogs
Verbal Contact
Sequencing and Scheduling
Definition
Sequencing refers to the length of time activities take within the operations processes
Sequencing refers to the order in which activities in the operations processes occur
Gantt Charts
A bar chart showing both scheduled and completed work over a period of time
Planning and Tracking
Critical Path Analysis
CPA lists all the key tasks in operations porcess as a sequence
Includes time needed and task
Technology
Business technology involves the use of machinery and systems that enable businesses to undertake the transformation process more effectively
Task Design
Breaking down the work into a series of jobs in which contributes to the final goal
Process Layout
Arrangement of transforming resources such that they are grouped by the function
Monitoring (measuring)
Measuring actual performance against planned performance
Measure KPIs
Control
Occurs when KPI's are assessed against predetermined targets and corrective action taken if required
Improvement
Systematic reduction of inefficiencies and wastage
Work processes and the elimination of any bottlenecks (setbacks)
Outputs
Definition
Final Good of Service
Customer Service
Refers to how well a business meets and exceeds customer expectations in all aspects of its operations
Warranties
Promises to correct any defects in their product or in the services they deliver
Can then adjust transformation process
controlling
Operations Strategies
Performance Objectives
Quality
Speed
Time between ordering and being received by the customer
Dependability
Meeting customer demands
Flexibility
How quickly operations processes adjust to change in the market
Customisation
Creation of individualised products to meet customer's specific needs
Mass customisation
Process that allows a a standard mass produced item to be personally modified to specific customer requirements
Cost
Refers to the minimisation of expenses so that operation processes are conducted as cheaply as possible
New Product/ Service Design and Development
Often businesses will create a new product/service design and develop to gain a competitive advantage
Supply Chain Management
Integrating and managing the flow of supplies through the inputs, transformation processes and outputs to meet the needs of customers
Logistics
Transportation
Use of Storage (warehousing(
Materials handling
Packaging
E-commerce
Business conducted on the internet
Transaction of goods and services through transfer of funds
Global Sourcing
Operations strategy where a business will acquires inputs it needs for production across the boarders of number of countries
Outsourcing
Involves use of external providers to perform business activities
Advantage
Simplification
Efficiency and Cost Savings
Increase Process Capability
Increased Accountability
Access to skills and resources lacking within the business
Able to focus on core business
Disadvantage
Disadvantage
Payback period and cost
Communication and Language
Loss of control of standards and information security
Loss of Domestic Employment
Loss of Corporate Memory
Technology
An operation tactic if it helps the business to create a competitive advantage
Leading Edge
Most advanced or innovative at any point of time
Risks:
Competent technical support might not be readily available
Technology may not be fully developed
Established
Technology that is developed and widely used
Simply accepted without question
Inventory Management
Inventory or stock refers to the amount of raw materials, work-in-progress and finished goods at any point of time
Advantages and Disadvantages of Holding Stock
Advantage
Consumers demands can be met
Alternatives can be offered
Buying products in bulk can reduce costs
Disadvantages
Cost of holding stock
Invested capital, labour and energy can't be used elsewehre
Cost of Obsolescence
Last in First Out
Since last inventories are more expensive
LIFO makes profit seem lower
First in First Out
FIFO normal cheaper, shows higher profit
Just in Time
Exact amount of inputs will arrive only as they are needed in the operations process
Quality Management
Definition
Processes which a business undertakes to ensure:
Reliability
Safety
Fitness of purpose
Consistency
Quality Control
Use of inspections of various points in the production process
Set standards -> Test/Assess Quality -> Quality control
Quality Assurance
Taking series of measurements -> assessing against pre-determined standards
Globalisation has affected standards
ISO are voluntarily abided by businesses to compete internationally
Quality Improvement
Continuous Improvement
Ongoing Commitment to improve business goods/services
Inclusion of staff
Suggestions
Initiatives
Total Quality Management
Managing total business to deliver quality to customers
Commitment + responsibility of every employee of the business
Overcoming Resistance to Change
Changes influence by:
Internal
Staff
Application of Technology
Innovation
External
Legislative/regulation change
Economic Changes
Social Changes
Technological Changes
Financial Costs
Purchasing New Equipment
Redundancy Payouts
Retraining Costs
Reorganising the plant layout
Inertia
Definition
Since change is needed
New skills are needed
Giving insecurity and inadequacy to senior citizens
Psychological resistance to change
Change Agents
Respected workers who can motivate change
Kurt Lewin's model
Unfreezing -> change - > freezing
Global Factors
Acquiring inputs from the Low Cost Regions to reduce costs
Global Web Strategy
Manufacturing at the cheapest
Financing from low interest rate costs
Distributing to demanding nations
Global Sourcing
Sourcing of any operations that gives a business a cost advantage
Benefit vs Challenges
Benefits
Cost
New Technology
Expertise/Labour Specialisation
Operate over extended hours
Challenges
⬆ costs of logistics and storage and distribution
Managing different regulations
⬆ complexity
Financing
Contracting
Economies of Scale
Definition
Cost advantage by producing on a large scale
Effects
⬆ volumes
⬇ cost
⬆ use of technology
Global branding and global advertising
⬆ cost of duplication (marketing)
HR
Training and Development Strategies Globally
Scanning and Learning
Scanning global environment and learning form the best practice of business
Research and Development
Innovation
Quality + Competitive advantage