MANAGEMENT OF BUSINESS

Transcription

1 MANAGEMENT OF BUSINESS FOR CAPE EXAMINATIONS JEROME PITTERSON CAPE is a registered trade mark of the Caribbean Examinations Council (CXC ). MANAGEMENT OF BUSINESS for CAPE EXAMINATIONS is an independent publication and has not been authorised, sponsored, or otherwise approved by CXC.

2 Macmillan Education 4 Crinan Street, London, N1 9XW A division of Macmillan Publishers Limited Companies and representatives throughout the world. ISBN ISBN AER Text Jerome Pitterson, 2014 Design and illustration Macmillan Publishers Limited, 2014 The author has asserted his right to be identified as the author of this work in accordance with the Copyright, Designs and Patents Act First published 2014 All rights reserved; no part of this publication may be reproduced, stored in a retrieval system, transmitted in any form, or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publishers. Designed by Oxford Designers and Illustrators and Macmillan Education Illustrated by JB Illustrations Cover design by Clare Webber Cover photograph by Art Directors and Trip/ Chris Kapolka Picture research by Thomas Bonsu-Dartnall Typeset by CjB Editorial Plus The author and publishers would like to thank Judy Sewsaran for her assistance in preparing this book. Author s acknowledgement: I want to thank God for the knowledge and strength he has bestowed on me to complete this text successfully. Sincere gratitude is also extended to my family, for their support and inspiration throughout this process, and to the students I have taught for their encouraging words and who are waiting to see this publication. Thanks to everyone who had a part to play in the completion of this book. The author and publishers would like to thank the following for permission to reproduce their photographs: Alamy/Rolf Brenner p186, Alamy/Cultura Creative p189, Alamy/Howard Davies p12, Alamy/Martin Floren Emmanuel p16, Alamy/David Kilpatrick p19, Alamy/View Pictures ltd p51: Corbis/Bob Krist p14, Corbis/Roy McMahon p13; Fotolibra/Jana Anderson p33, Fotolibra/Clifford Haroo p21; Getty Images/Mark D Callahan p20; Thinkstock p187. The author and publishers are grateful for permission to reprint the following copyright material: Extract from Functions of the bank by Caribbean Development Bank Caribbean Development Bank. Reprinted by permission of the Bank. Extract from Costing by T. Lucey 2000, Cengage Learning EMEA Ltd. Reproduced by permission of Cengage Learning EMEA Ltd. Extract from with permission of Entrepreneur Media, Inc by Entrepreneur Media, Inc. All rights reserved. Extract from Innovation and Entrepreneurship by Peter F. Drucker Peter F. Drucker. First published in 2007 by Taylor & Francis Ltd. Extract from Organizational Behaviour by Stephen P. Robbins and Timothy A. Judge, 15th Edition, Reprinted by permission of Pearson Education, Inc., Upper Saddle River, NJ. Extract from info@sbaj.org.jm Small Business Association of Jamaica. Reprinted by permission of the organization. These materials may contain links for third party websites. We have no control over, and are not responsible for, the contents of such third party websites. Please use care when accessing them. Although we have tried to trace and contact copyright holders before publication, in some cases this has not been possible. If contacted we will be pleased to rectify any errors or omissions at the earliest opportunity.

3 3 Contents List of figures and tables 7 Introduction 10 UNIT 1 MANAGEMENT PRINCIPLES AND PROCESSES 11 MODULE 1 BUSINESS AND ITS ENVIRONMENT 12 1 Economic and Legal Structures 12 Types of economic activity 12 Economic sectors and legal structures 14 The private sector 15 The public sector 23 Privatisation 26 Multiple Choice Questions 27 Extended Essay Questions 28 2 Business Objectives 29 Nature, role and importance of objectives 29 Business ethics and social responsibility 32 Obligations of the firm to stakeholders 34 Good corporate governance 34 Importance of business ethics and integrity 34 Code of ethics 34 Government s response to social irresponsibility 35 Multiple Choice Questions 35 Extended Essay Questions 36 3 Decision Making 37 Essential features of information 37 Significance of qualitative versus quantitative decision making 37 The stages of decision making 38 Factors affecting decision making 39 Multiple Choice Questions 45 Extended Essay Questions 46 4 Caribbean Business Environment and Globalisation 47 The nature and structure of Caribbean business organisations 47 Caribbean business culture 48 The growth of multinational corporations in the Caribbean 49 The impact of trade liberalisation and globalisation 50 Protectionism 54 Other barriers to trade 55 Multiple Choice Questions 56 Extended Essay Questions 57 MODULE 2 THE MANAGEMENT OF PEOPLE 58 5 The Functions and Theories of Management 58 The need for and nature of organisations 58 The major management theories 58 The functions of management 64 The roles of management 65 Multiple Choice Questions 67 Extended Essay Questions 67 6 The Organisation and its Structure 68 Classification of organisations 68 Factors influencing the classification of organisations 72 Characteristics of the formal organisational structure 73 Centralisation and decentralisation 75 Multiple Choice Questions 76 Extended Essay Questions 76 7 The Theory and Application of Motivation 77 Factors that stimulate and influence motivation 77 Theories of motivation 78 Financial and non-financial motivational strategies 80 Implications for managers 85 Multiple Choice Questions 87 Extended Essay Questions 87 8 Leadership 88 Leadership theories 88 Theory X and Theory Y 88 The Trait Theory 89 Leadership skills 90 Leadership styles 92 Factors influencing the choice of leadership style 94 Leadership roles 95 Informal leadership 95 Multiple Choice Questions 96 Extended Essay Questions 97 9 Team Management and Conflict 98 The nature of teams 98

4 4 CONTENTS Stages of team development 99 Types of formal group 99 Characteristics of effective teams 99 Team or group cohesiveness 100 Evaluation of team work 101 Benefits of team management to the organisation 101 Conflict management 101 Multiple Choice Questions 106 Extended Essay Questions Management of Change 107 Factors that may cause change in the organisation 107 Differences between leading and managing change 108 Resistance to change 108 Strategies for managing change 110 The importance of communication in the management process 111 Multiple Choice Questions 112 Extended Essay Questions Communication in Business 113 Types of communication 113 The communication process 113 Channels of communication 114 Factors influencing the choice of channel used 116 Lines of communication 117 Barriers to effective communication 119 Reducing barriers to communication 120 Multiple Choice Questions 122 Extended Essay Questions Human Resource Management 124 The role and importance of human resource management 124 The functions of human resource management 124 Labour management relations 131 Laws affecting health and safety in the workplace 134 Multiple Choice Questions 135 Extended Essay Questions 136 MODULE 3 BUSINESS FINANCE AND ACCOUNTING The Need for Capital and Sources of Finance 137 The need for capital 137 Sources of finance 140 Criteria for seeking finance 140 How to choose from these sources of funds? 143 Money and capital markets and international financial institutions 143 The money and capital markets 145 Multiple Choice Questions 147 Extended Essay Questions Accounting Information and Financial Statements 148 Why do we need accounting records? 148 Internal users of accounting information 148 External users of accounting information 149 Getting started with accounting 149 Components of financial statements 152 Multiple Choice Questions Financial Statements Analysis 159 Financial analysis 159 Importance of financial analysis 159 Ratio analysis 159 Types of ratio 160 Multiple Choice Questions 166 Extended Essay Questions Budgetary Accounting 167 Projections 167 The budgeting process 167 Categorisations of budgets 168 Operational budgets 168 Types of budget 168 Budgetary control 170 Multiple Choice Questions Investment Appraisal 173 Investment 173 Investment appraisal 173 Analytical methods of appraisal 173 Limitations of investment appraisal 178 Comparison of methods of appraisal 178 Multiple Choice Questions 179 END OF UNIT ASSESSMENT 180 UNIT 2 APPLICATIONS IN MANAGEMENT 184 MODULE 1 PRODUCTION AND OPERATIONS MANAGEMENT The Nature of Production 185 The production process 185 Factors of production 185 What to produce? 186 Production methods 186 Factors that influence the method of production used 190 When to produce? 191 Location of production 191 Multiple Choice Questions 195 Extended Essay Questions Forecasting Techniques 196 Forecasting techniques 196

5 CONTENTS 5 Qualitative forecasting techniques 196 Quantitative forecasting techniques 199 Multiple Choice Questions 202 Extended Essay Question Production Design Strategies and Capacity Planning 204 Product design planning 204 Product design strategies 204 Capacity planning 206 Capacity utilisation 207 Options available to increase capacity 208 Economies and diseconomies of scale 208 Diseconomies of scale 210 Business layout 210 Multiple Choice Questions 215 Extended Essay Questions Costing 216 Direct costs 216 Indirect costs 216 Fixed costs 216 Variable costs 216 Fixed costs per unit 217 Semi-variable cost 217 Approaches to costing 217 Including stock 219 Application of marginal costing 220 Make or buy decisions 221 Multiple Choice Questions 223 Extended Essay Question Inventory Management 224 Importance of inventory 224 Importance of inventory control 224 Inventory control management 225 Multiple Choice Questions 228 Extended Essay Question Lean Production and Quality Management 230 Importance of quality 230 Dimensions of quality 230 Techniques for improving quality 231 Multiple Choice Questions 239 Extended Essay Questions Productivity 241 Factors that affect productivity 241 Methods of measuring productivity 243 Methods of improving productivity 243 Multiple Choice Questions 246 Extended Essay Questions Project Management 247 Critical Path Analysis (CPA) 247 Decision trees 250 Multiple Choice Questions 253 MODULE 2 FUNDAMENTALS OF MARKETING The Concept of Marketing 254 The core marketing concepts 254 Multiple Choice Questions 260 Extended Essay Question The Marketing Environment 261 The micro-environment 261 The macro-environment 262 Multiple Choice Questions 265 Extended Essay Questions Marketing Research 266 Importance of conducting marketing research 266 Importance of developing a research plan 266 Stages of marketing research 266 Limitations of market research 272 Multiple Choice Questions 274 Extended Essay Questions Principles of Segmentation 276 Market segmentation 276 Criteria for effective segmentation 278 Bases of segmentation 278 Consumer buying behaviour 281 The consumer decision-making process (the buying process) 281 Factors influencing buying behaviour 283 Multiple Choice Questions 284 Extended Essay Questions Product Management 285 The concept of product 285 Dimensions of the product mix 286 Product line and extension 286 The Boston Matrix 286 New product development process 289 The product lifecycle 290 Branding and packaging 292 Characteristics of services 293 Multiple Choice Questions 296 Extended Essay Questions Pricing Decision 298 Introduction to pricing 298 Factors influencing pricing decisions 299 Pricing strategies 302

6 6 CONTENTS Multiple Choice Questions 305 Extended Essay Questions Distribution Management 307 The role of distribution in the organisation 307 Factors influencing distribution decisions 307 Types of distribution channel 308 Introduction to logistics strategy 309 Types of distribution strategy 310 Multiple Choice Questions 311 Extended Essay Questions Promotion Strategy 312 The concept and objectives of promotion 312 Tools of promotion 312 Multiple Choice Questions 318 Extended Essay Questions Internet Marketing 320 Development of internet marketing 320 Opportunities created by internet marketing 321 Challenges associated with internet marketing 322 The importance of e-commerce to business organisations 322 Challenges created by e-commerce 323 Multiple Choice Questions 325 Extended Essay Question 325 MODULE 3 SMALL BUSINESS MANAGEMENT The Nature and Characteristics of Entrepreneurship 326 Corporate entrepreneurship ( intrapreneurship ) 326 Social entrepreneurship 326 Characteristics of successful entrepreneurs 327 Benefits of entrepreneurship 328 Drawbacks of entrepreneurship 329 Multiple Choice Questions 330 Extended Essay Question Economic Systems and Business Growth 331 The economy problem 331 Types of economic system 331 Criteria for measuring size and growth of businesses 334 A comparison of small firms and large firms 335 Strategies for growth 338 Multiple Choice Questions 343 Extended Essay Questions 343 Selection of business types 345 Determining a location 345 Globalisation and trade liberalisation 345 E-commerce 345 Intellectual property 346 Multiple Choice Questions 347 Extended Essay Question Types and Nature of Assistance Available to Small Firms 349 Government agencies 349 Non-government agencies 350 Financial institutions 350 Types of assistance offered to small businesses 351 Extended Essay Question Preparation of a Business Plan for a Small Business 353 Feasibility study 353 The business plan 353 Elements of a business plan 354 Multiple Choice Questions 359 Extended Essay Question 359 END OF UNIT ASSESSMENT Internal Assessment 364 Choosing an appropriate topic or title for your research 364 Introduction 365 Literature review 366 Writing your methodology 367 Presentation of data 368 Analysis of data 369 Interpretation of results 370 Conclusion and recommendation 370 References and citations 370 Appendices 370 Note to teachers 370 Glossary 372 Answers to Multiple Choice Questions 384 Index Major Challenges and Opportunities Faced by Small Businesses 344 Identifying successful business opportunities 344 Sourcing capital (finance) 344

7 7 List of figures and tables Figures Figure 1.1 An example of industry in the primary sector 12 Figure 1.2 An example of industry in the secondary sector 13 Figure 1.3 An example of industry in the tertiary sector 14 Figure 1.4 Private-sector organisations 15 Figure 1.5 A sole-trader business 16 Figure 1.6 A public limited company 19 Figure 1.7 A cooperative business 20 Figure 1.8 A franchise 21 Figure 1.9 Public-sector organisations 24 Figure 2.1 The hierarchy of objectives 31 Figure 2.2 Scotiabank 33 Figure 3.1 The stages of decision making 38 Figure 4.1 Business culture factors 48 Figure 4.2 Digicel headquarters, Kingston 51 Figure 5.1 A basic system 62 Figure 5.2 The three levels of management 64 Figure 6.1 Functional organisational structure 68 Figure 6.2 Product organisational structure 69 Figure 6.3 Geographical organisational structure 69 Figure 6.4 Matrix organisational structure 70 Figure 6.5 Team organisational structure 71 Figure 6.6 Network organisational structure 71 Figure 6.7 Virtual organisational structure 71 Figure 6.8 Narrow span of control 73 Figure 6.9 Wide span of control 74 Figure 7.1 Maslow s Hierarchy of Needs 78 Figure 10.1 Managing change 110 Figure 11.1 The communication process 113 Figure 11.2 The flow of communication 118 Figure 12.1 The recruitment plan 125 Figure 14.1 The double entry system 150 Figure 16.1 The budgetary process 168 Figure 17.1 NPV graph 178 Figure 18.1 The production process 185 Figure 18.2 An example of job production 186 Figure 18.3 An example of batch production 187 Figure 18.4 An example of flow production 189 Figure 19.1 Examples of common trends 199 Figure 19.2 A scatter diagram 201 Figure 20.1 Diseconomies of scale 210 Figure 20.2 Process layout 211 Figure 20.3 Product layout 212 Figure 20.4 Fixed-position layout 213 Figure 20.5 Cellular layout 214 Figure 21.1 Fixed costs 217 Figure 21.2 Variable costs 217 Figure 21.3 Fixed costs per unit 217 Figure 21.4 Semi-variable costs 217 Figure 21.5 A breakeven chart 221 Figure 22.1 Stock control levels 225 Figure 22.2 Simpson Lumber Yard stock control graph 226 Figure 22.3 A typical economic order quantity graph 227 Figure 22.4 Economic order quantity graph for Questions Figure 25.1 The sections of a node 247 Figure 25.2 Lines representing activity 247 Figure 25.3 Network diagram 248 Figure 25.4 New network diagram 248 Figure 25.5 Three possible situations in CPA 249 Figure 25.6 New diagram, using dummy activity 249 Figure 25.7 Network diagram 249 Figure 25.8 A decision tree 250 Figure 25.9 The revised decision tree 251 Figure A more complex decision tree 252 Figure Network diagram for Questions Figure 26.1 Core marketing concepts 254 Figure 28.1 Stages in developing a research plan 267 Figure 29.1 Market coverage strategies 277 Figure 29.2 The consumer decision-making process 282

8 8 LIST OF FIGURES AND TABLES Figure 30.1 The Four Ps 285 Figure 30.2 Attributes of the product 285 Figure 30.3 Dimensions of the product mix 286 Figure 30.4 The Boston Matrix 287 Figure 30.5 New product development process 289 Figure 30.6 The four-stage product lifecycle 290 Figure 30.7 The five-stage product lifecycle 291 Figure 30.8 Extending the product lifecycle 291 Figure 30.9 Secondary packaging 293 Figure 31.1 Price ceiling 301 Figure 31.2 Price flooring 301 Figure 31.3 Penetration pricing and price skimming compared 304 Figure 32.1 Types of distribution channel 308 Figure 32.2 One-channel intermediary 309 Figure 32.3 Two-channel intermediary 309 Figure 36.1 Market share illustrated in a pie chart 335 Figure 36.2 Diseconomies of scale 337 Figure 36.3 An example of conglomerate integration 339 Figure 40.1 Examples of statistical tools 369 Tables Table 1.1 Benefits and problems associated with a change in legal structure 23 Table 2.1 The firm s social responsibilities to stakeholders 34 Table 3.1 The decision-making process 39 Table 3.2 Possible impact of factors on a firm s decision making 44 Table 5.1 Contributions of classical theories to modern organisations 61 Table 5.2 Contributions of modern theories to modern organisations 63 Table 5.3 Mintzberg s ten roles for top management 65 Table 8.1 An evaluation of different leadership styles 93 Table 9.1 An evaluation of conflict management strategies 104 Table 11.1 An evaluation of communication methods 117 Table 11.2 Methods of overcoming barriers to communication 121 Table 13.1 Advantages and disadvantages of sources of capital 141 Table 14.1 Transactions illustrating the double entry system 151 Table 14.2 Cash inflows and outflows 156 Table 15.1 Net profit figures for analysis 159 Table 15.2 Data for calculating investment or shareholders ratios 162 Table 15.3 Data for calculating efficiency and activity ratios 163 Table 17.1 KEP Industry initial capital outlays and annual cash inflows 174 Table 17.2 initial capital outlays and annual cash inflows for three projects 174 Table 17.3 Initial capital outlays and annual cash inflows for two projects 175 Table 17.4 Forecasted data for Projects A and B 175 Table 17.5 An extract of discount factors for $1 176 Table 17.6 Investment information for DGF Company Ltd 177 Table 17.7 Information for NPV/DCF analysis 177 Table 17.8 Comparison of methods of appraisal 178

9 LIST OF FIGURES AND TABLES 9 Table 19.1 Data for calculating simple moving averages 200 Table 19.2 Data for Future Sales Ltd sales forecasts 200 Table 19.3 Data for least squares regression calculation 201 Table 19.4 Data for Questions 5 and Table 21.1 Calculating operating profit under marginal costing 218 Table 21.2 Calculating operating profit under absorption costing 218 Table 21.3 Production costs for Great Juices Ltd 222 Table 25.1 Getting ready for school 248 Table 25.2 Getting ready for school (revised timings) 248 Table 25.3 Information for critical path exercise 249 Table 25.4 Information for critical path example 249 Table 25.5 Activities by A Fisher Ltd 250 Table 25.6 Expected values 251 Table 25.7 Data from James Duncan s market research 252 Table 26.1 Overview of business concepts 259 Table 28.1 An evaluation of marketing research techniques 272 Table 30.1 Possible responses from marketers to characteristics of services 295 Table 31.1 Information for calculating price elasticity of demand 299 Table 31.2 Degrees of elasticity 300 Table 33.1 Overview of types of advertising media 314 Table 36.1 The impact of economic systems on business decision making 333 Table 40.1 Module content related to SBA topics 365

10 10 Introduction This textbook is geared towards students studying CAPE Management of Business Units 1 and 2, including private candidates. The text is divided into two units and gives comprehensive coverage of the CAPE Management of Business syllabus, providing students with a wide knowledge base of business concepts. Students will be furnished with the information needed to do well in their CAPE examinations and the book forms a basis for higher studies. The text also incorporates some hard to find and explain concepts and so it is also an excellent resource for teachers. The text breaks down accounting information so that students without accounting knowledge from CSEC level will be able to understand the concepts of Module 3, Unit 1. However, it also offers challenging exercises for those with a strong accounting background. The book gives a number of definitions, examples from different territories and practice exercises to assess students understanding of the concepts. Each chapter is summarised at the end and also incorporates multiple choice questions, case studies which help students to think critically, and extended essay-type questions. The text also contains photographs, artwork and diagrams to cater for visual learners, as well as worked examples of accounting questions and tables to break down information for ease of understanding, studying and remembering.

11 11 Unit 1 MANAGEMENT PRINCIPLES AND PROCESSES

12 12 1 Module 1 Business and its Environment Economic and Legal Structures LEARNING OBJECTIVES: At the end of this chapter students should be able to: Identify the different types of business activity Distinguish among the different types of business activity Distinguish between the private and public sectors Describe the different private- and public-sector businesses Outline how each of the businesses is formed Discuss the benefits and drawbacks of each type of business Identify examples of each type of business Types of economic activity The Caribbean business environment can be divided into three types of economic or business activity. These are discussed below. Primary sector The primary sector incorporates all the extractive industries, including mining (for example, bauxite), fishing, forestry and farming. In most cases, the products of the primary sector are the raw materials that are used for secondary production. For example, bauxite is used for manufacturing aluminium and lumber is used in the building of furniture and houses. The primary sector also includes the fishing and agricultural industries. Some Caribbean countries are heavily dependent on the primary level of activity in order to earn foreign exchange. Currently, some countries export large amounts of our raw materials in their natural state instead of exploring the products that could be produced by using those same resources. This means that the secondary level of activity is perhaps not explored as much as it could be. Dependence on the primary sector presents the country with the following advantages and disadvantages: Figure 1.1: An example of industry in the primary sector