Business Studies Stage 6 Syllabus

role of operations management

• Strategic role of operations management – cost leadership, good/service differentiation
Strategic decision: a decision that affects all areas of the business in the long term.
Main strategic decisions involve improving: productivity, efficiency and product quality whilst also
decreasing costs (lower than competitors) [increase market share, increase profitability (profit
maximisation) and efficiency].

Strategies to gain a competitive advantage include:

1. Cost leadership: a business aims to be the lowest cost manufacturer within its industry with low
production costs, often also meaning that they are: basic/no frills, have fewer features, and of lower
quality.
Strategies to achieve cost leadership and lower costs (bogans):
→ Bulk buying: buying in large amounts for discounts ⟶ distribution using dealers who use and have a
lower profit margin (lower mark-up and bulk distribution) outsourcing: access to third party
specialist ⟶ gaining exclusive access to a large source of low-cost inputs.
→ Global sourcing: purchasing resources without the restriction of geographic boundaries ⟶ accessing
cheaper raw materials such as by importing from china and Indonesia.
→ Achieving economies of scale: producing large amounts of product to generate economies of scale
(cost advantages created due to an increase in the scale of operations; the cost savings arise from
being able to purchase lower cost per unit (by buying more). Thus, lower costs to the consumers).
→ Negotiating with suppliers: talking to suppliers to reduce costs.
→ Supply rationalisation or standardising production (mass produced): reducing the number of
suppliers to have the most cost-effective supplier web.
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2. Product differentiation: process of distinguishing a product or service from others, to make it more
attractive to a particular target market.
Product differentiation for goods:
1) Varying the product features: changing the options that are available for your product. For example,
the provision of leather seats for motor vehicles.
2) Varying the product quality (price points strategy): businesses can produce the same products,
however with differing quality levels (tiers of cars.) Obviously, the product that is of higher quality
will also be sold at a premium cost.
3) Varying augmented features: refers to any particular add-ons. For example, when purchasing a SLR
camera, consumers have the options to buy different lenses.

Product differentiation for services:

1) Time and effort spent on perfecting the service
2) Level of expertise brought to a service
3) Qualifications and experience of the service provider

CASE STUDY: Cost leadership, good/service differentiation

Kmart vs Myers, Kmart sells cheap Android vs apple: android phones are cheaper to produce than
clothes and has lower profit apple phones and have differentiated themselves. Thus, higher
margins per clothes. Myers sells prices. Apple phones use more premium materials.
higher end clothes.

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 Business Studies Stage 6 Syllabus

• Goods and/or services in different industries involves analysing outputs in the manufacturing industry
and outputs in the service industry.

Types of goods present in different industries:

1) Standardised goods: mass produced (access to economies of scale), uniform in quality and are
manufactured with a production focus (undifferentiated goods) ⟶ directly linked to the cost
leadership approach.
2) Customised goods: goods that are varied according to the needs of customers. These goods are
manufactured with a marketing focus ⟶ directly linked to the production differentiation approach.
3) Perishable goods: goods that can only be used once and last a short time ⟶ these goods must be of
high standards, quality, safety and cleanliness (lead times e.g. Distribution of producer to supplier to
customer must be short; cold storage is essential).
4) Non-perishable goods: goods that can be used more than once and are more durable (effective
inventory control and management are necessary for the goods).
5) Intermediate goods: goods that are semi-finished or completed, but are inputs for other goods (e.g.
Screws and nails) ⟶ value-chain is emphasised.

Manufacturing industry Service industry

- Physical attributes, tangible, - Intangible, easier to customise
hard to modify once - Can only be used once and involves
manufactured more consultation/interaction with
- Reusable and can be stored the customer
- More capital intensive - More labour intensive
- E.g. Bikes and cars - E.g. Internet subscription

Similarities:
- use technology in the manufacturing process
- both engage with customers and suppliers
- make decisions about the level of inventory and stock that is required

• Interdependence with other key business functions

⎯ Specialisation where the business is separated into different functions, each of which is highly skilled
at its specific task or role.
⎯ Interdependence where the different parts of a business must each rely on each other to perform a
certain task or role.
E.g. Marketing research outlines and discovers the nature of goods consumers desire and the
marketing strategy to encourage purchases, thus telling operations what products must be
produced. Finance will create budgets and allocate funds to for the purchase of inputs to be
transformed to outputs, whilst human resources ensures that there are sufficient employees with
the appropriate skills to assist in the production process.

CASE STUDY: Interdependence with other key business functions and Apple
Apple cut production of the iWatch and iPhone X due to lower demands. This shows that marketing and
operations are closely linked. If the demand is less, production for it will decrease (otherwise there are too
much stocks of it).

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 Business Studies Stage 6 Syllabus

influences
• Globalisation, technology, quality expectations, cost-based competition, government policies, legal
regulation, environmental sustainability

1 Globalisation refers to the removal of barriers of trade between nations leading to an increasing
integration between national economies and a high degree of transfer of capital, labour, technology and
financial resources.
→ E.g. Australia’s reliance on china’s purchasing of minerals; allows business to buy and sell all around
the world = larger production, target market and supply chain.
→ However also results in increased greater competition, currency fluctuations as well as trade
agreements (which fluctuate the costs of inputs/outputs and allow varying levels and prices of
trade).
→ Product variation is essential as various countries have different tastes, preferences, safety
regulations, cultural values and governmental policies (resulting in adapting to customisation or a
wider variety of products).
→ Operations and production overseas may be cheaper; however, managers must ensure that
materials are of acceptable quality and a reliable supply ⟶ managers are also able to capitalise on
outsourcing of labour as well as factories as it is considerably cheaper.
→ Global consumers: seek global brands and tend to seek standardised products; individual
consumers are increasingly able to access a global market for goods and services which has been
supported by the spread of the internet, tourism, satellite tv, and global branding which has
dramatically expanded consumption opportunities.
→ Global web: refers to the network of suppliers that a business has chosen on the basis of lowest
overall cost, lowest risk, and maximum certainty in quality, when developing a global web, the
business must consider: proximity to suppliers, labour costs, government taxation and government
barriers.
→ Effect on supply chain management: the supply chain refers to the range of suppliers a business
has and the nature of its relationship with those suppliers. For large businesses the integration of
supply chains creates a network called the global web which allows businesses to minimise cost
across the range of its suppliers.
→ Effect on operations management: has led to methods of further reducing costs such as
outsourcing.

CASE STUDY: Globalisation and Qantas

→ Qantas has been increasingly outsourcing some of its functions e.g. Maintenance, and it to lower
operational costs.
→ Qantas has also entered new overseas markets in Asia and recently the strategic alliance with
emirates (agreement will allow Qantas to enter new markets in Europe, by offering daily flights to
London, Rome etc.).
→ However, the disadvantage is that they enter an uneven playing field, whereby 70% of airlines that
fly to and from Australia receive financial assistance from their government which makes it harder
for Qantas to compete.

2 Technology is the design, construction and application of innovative devices, methods and machinery
upon operations processes.
→ At an administrative level: it has provided organisation tools such as Gantt charts, computers,
phones and the interne. These technologies increase efficiency.
→ At a processing level: it has led to the increased use of robotics in manufacturing.

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→ However, the business must consider if the cost of new technology compares with the benefits to be
gained.
→ Development of new methods of production, design, construction as well as the application of
innovative and advanced equipment, which have resulted in greater accuracy, productivity and
efficiency whilst maintaining lower costs e.g. Replacement of human labour with robotics in factories
⟶ technology is important as it allows for better planning, monitoring, controlling and management
of the operations processes.
→ Automation: the replacement of humans by machines ⟶ often a cheaper long-term investment
compared to labour (where labour accounts for 60% of all production costs).
→ Smartphones and the internet: allowed service-based businesses to penetrate global markets with
the international distribution of information.
→ Robotics: increase productivity and reduce costs as: they are more precise, don’t have to be paid
(only maintained) and never fatigue etc.
- CAD (computer-aided design) which allows for one to create, modify and edit 3d design using a
computer such as blueprints.
- CAM (computer-aided manufacture) which allows the design and manufacturing process to be
linked using a computer ⟶ ensuring time saved and fewer mistakes as there are robotics on
production lines.

CASE STUDY: Technology and Qantas

→ The adoption and continual upgrading of available technology is essential to Qantas maintaining cost
leadership and a competitive advantage; despite labour numbers may be reduced, the required
labour will need to be more skilled, so there will be greater investments in training and providing
higher wages to staff.
→ E.g. Qantas spends $350 million each year on staff training to adopt new technologies and when
Amadeus, was introduced to efficiently manage operations, over 10,000 staff were re-trained.
→ E.g. The new a380 airbus generates half the noise, uses less fuel and carries 40% more passengers
than the Boeing 747, which has contributed to cost leadership (transporting more whilst using less
trips, max profit and min expenses).
→ E.g. Upgrades to inflight entertainment which have contributed to product differentiation through
comfortability and convenience through allowing passengers to operate devices in flight.

CASE STUDY: technology and Coles / Woolworths or Apple Pay / Paypass

→ Coles and Woolworths have introduced the self-checkout. This means that operations can be more
streamlined.
→ Apple pay, Paypass is accepted in many stores now for payments ⟶ faster payments, shorter lines.

3 Quality expectations refers to how well-designed, made and functional good are, and the degree of
competence with which services are organised and delivered; quality and expectations cannot be
separated and satisfaction of the customers will determine whether or not expectations are fully met by
operations (as such, the expectations of a consumer will directly impact the way a product is created,
designed and delivered).
Furthermore, quality expectations processes aim to ensure operations meets the expectations that
consumers place on a good/service such as:
→ Reliability: how long a product functions without needing maintenance.
→ Durability: how long a product last.
→ Fit for purpose: how well the product achieves the characteristics it advertises.

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CASE STUDY: Quality expectations and Qantas

→ The constant pressure on operations at Qantas is to ensure expectations are fully met and exceeded
includes: arriving/departing on time, comfort-based features, online check in and inflight
entertainment as well as meals.
→ Quality in operations performance will encourage customer loyalty whereas poor operations
performance will result in customers moving to a key competitor.

CASE STUDY: Quality expectations and Aldi

→ Customers expect fresher produce and vegetables. Since Aldi has improved the stores to have more
fresh food, market share has increased.

4 Cost-based competition: employs a cost leadership approach in which a firm determines the breakeven
point and then applies strategies to create cost advantages over competitors. Through reducing costs
(e.g. Economies of scale, buying in bulk), the business achieves cost advantages and has a greater degree
of control of the market. It can either reduce prices to increase market share or have an unchanged price
to make more profit per unit.
Stems from cost leadership; the cost or price of competitors products will influence operations as it
means that the business will need to gain a price advantage through such operational strategies
including: lowering the quality of the product (through cheaper inputs) and outsourcing operations,
economies of scale, standardising production, automated production services and systems and
elimination of waste.

CASE STUDY: Cost-based competition and Qantas

→ Qantas face significant competition/competitor growth in all markets which means that in order to
retain its competitive advantage, there must be an ongoing on cost minimisation.
→ Many of Qantas’ competitors have significant cost advantages including:
- lower labour rates
- lower taxation rates
- cheaper financing
- lower airport charges
- favourable depreciation
→ To achieve the lowest competitive costs, Qantas have: introduced new technology, formed new
strategic alliances, outsourced, reformed and restructured human resource practices.
→ However, cost minimisation needs to be pursued with attention and assurance of quality in mind;
Qantas has received recent criticism due to increased safety incidents and the industrial action of
2011.

CASE STUDY: Cost-based competition and Aldi

→ Aldi’s introduction to Australia. Aldi has lower prices than Coles and Woolworth’s due to lower
prices and overheads. Coles and Woolworth’s responded with lower prices too. They have continued
losing market share.

5 Government policies have a significant influence on business operations as they can either encourage or
discourage aspects of the transformation process. For example, carbon pricing, encourages
environmentally sustainable processes, however, it can increase a business' overall expenses (e.g. Fossil
fuel dependant companies like Qantas).

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Political decisions affect a business rules and regulations which affect the management of operations;
such methods including WHS, taxation, environmental policies and discrimination laws are all used by
the government to encourage operations to be more innovative and competitive as:
→ Competition policy: monetary and non-monetary incentives for businesses to become more efficient
e.g. Reduction of protection on industries (abolition of tariffs to ensure Australian based products
reach a better level of quality at a cheaper price compared to foreign products through productivity).
→ Monetary policy: influence on interest rates through the RBA ⟶ lower interest rates create a
greater demand for goods and loans in the economy.
→ Fiscal policy: influence on injections such as government spending and leakages such as taxation.

CASE STUDY: Government policies and Qantas

→ Economic policies such as monetary and fiscal policy are derived from the federal government and
has a direct impact on the level of economic activity and therefore the demand of Qantas’ services.
→ Recent federal govt. Easing off of restrictions has enabled access to protected international routes
for virgin and emirates etc.

Bans coming in place for plastic bags. Stores must stop using them or they will be fined $5000. Maximum
fines of $20,000.

Introduction of the fair work act = increase in Qantas’ operating costs

→ 1996: Australian workplace agreements (AWA’s) under the workplace relations act 1996 encouraged
individual contracts.
→ 2004: introduction of the Workchoices act which made every employee contract an AWA and
removed unfair dismissal laws for small businesses.
→ 2007: Rudd govt. Introduced the fair work act.
→ 2008: Australia and USA signed the ‘open skies agreement.’
→ Under the emissions trading scheme, Qantas will be charged $20 per tonne of co2 produced.

6 Legal regulation: all aspects of business must abide by the laws of business ensuring the promotion of
safety and ethically correct business practices. These laws:
- workplace safety (occupational health and safety act 1991).
- hazardous material usage/disposal (occupational health and safety act 1991).
- environmental protection (environmental protection & biodiversity conservation act 1999).
Influence how processes and practices are conducted by complying with them at different levels of local,
state and federal regulation.
Compliance costs are the expenses associated with meeting the requirement of legal regulations.

CASE STUDY: Legal regulations and Qantas

→ Civil aviation authority is a regulatory body where Qantas is required to hold operating licences
→ Qantas sales act 1992: the federal government restricted foreign investment to 49% (restricted access to
equity capital).
→ Federal government random alcohol and drug testing for safety sensitive roles as well as new safety
regulations against terrorism.
→ ACCC: knocked Qantas back on alliance with air NZ and fined them $20 million for illegally increasing
their freight charges.
→ State government regulations on labour including ohs, anti-discrimination etc.

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CASE STUDY: Legal regulations and Uber

→ Uber operated in Australia and was illegal in many states. Drivers were fined. The government
introduced new laws and regulations which uber drivers must abide by. As driving records were checked
to pass background checks.

7 Environmental sustainability means that business operations use practices that consume resources
today without compromising access to those resources for future generations. The two main aspects of
it are: use of renewable resources and reduction in the use of non-renewable resources.
This has arisen due to climate change awareness. It can be used as brand image strategy.
Development and use of methods of production that allow resources to be used again without
compromise for future generations; although they may result in increased costs, they will produce a
positive social impact through stewardship, which may include increased sales e.g. Ethanol e10 fuel and
recyclable packaging.
CASE STUDY: Environmental sustainability and Qantas
→ Public expectation: e.g. Businesses like Qantas should support and participate in environmental
protection and renewal practices.
→ The new Boeing 787 and airbus a380; significantly more fuel efficient than prior models which are
being phased out (allows for conservation of non-renewable fuel).
→ The Qantas foundation supports: environmental initiatives e.g. Clean up Australia day and the great
barrier reef foundation.
→ Introduction of the internal Qantas excel environment awards - given to employees who
demonstrate proactive leadership to implement environmental awareness and sustainable projects
and practices within Qantas.

• Corporate social responsibility Or CSR refers to the open and accountable actions of a business based on
respect for the environment, employees, consumers and the community (involves doing more than just
complying with the laws and regulations but also covers topics of ethical responsibility such as: human
rights, corruption/collusion and labour standards).
Triple bottom line: places values on financial returns (profits) as well as social and environmental
sustainability.
⎯ The difference between legal compliance and ethical responsibility
All businesses must comply with relevant laws, otherwise they may face penalties and sanctions for any
breaches.
CASE STUDY: the difference between legal compliance and ethical responsibility and Nike Sweatshops
Legal compliance Ethical responsibility
Laws will impact Making legally and morally correct expectations and decisions such
operations strategies used as: minimising harm to the environment (waste, pollution etc.)
such as: maximum Through recycling etc.
amounts of pollution, must Sees businesses meeting their legal obligations and taking it further
meet quality and safety by following the ‘spirit of the law’ (positively enhances business
standards, must perform image).
what it advertises and
employees must have safe Some reluctance and hesitation to demonstrate ethical responsibility
working environments. due to the costs associated (impacts profit maximisation).
Mandatory Optional

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⎯ Environmental sustainability and social responsibility

Environmental sustainability occurs when there is a balance between economic concerns and environmental
concerns, whereas social responsibility occurs when there is a balance between social concerns and
economic concerns (fulfilling the triple bottom line ⟶ growing customer expectation that businesses fulfil
this).
→ Thus, legal compliance and ethical responsibility contributes to a better quality of life for society such as
through the ‘Australian SAM sustainability index’ which determines the performance of Australian
companies in terms of sustainability (provides an indication that the business is more effective and more
committed to fulfilling the aforementioned obligations).
→ Ecological sustainability requires businesses to evaluate the full environmental effects of their
operations (e.g. Paper billing, non-renewable resources).
→ Social responsibility is positive for a business as customers react in a positive manner to support this (e.g.
Paying a premium if a business uses recyclable packaging).

CASE STUDY: environmental sustainability and social responsibility and Woolworths

→ Woolworths stops offering single use disposal plastic bags (which get blown around and found in the
ocean). Society has changed to value the environment more.
→ Woolworths, reverse vending machines for plastic bottle and can recycling. Reducing the impact of their
operations and looking more socially responsible.

operations processes
• Inputs are tangible and often include materials such as parts, power, energy, raw materials as well as
people such as labour, managers and specialists which are performed using physical inputs such as land,
machinery etc. (can also be intangible such as time and money).
1 Labour: human effort in production (either intellectual or manual); jobs that require labour are in
the areas of sourcing, supply chain, technical support, maintenance, inventory management,
logistics and distribution ⟶ crucial to the operations process.
2 Energy: in the form of electricity or fuels; required to bring inputs into the business.
3 Raw materials: basic components of the manufactured goods e.g. Wood, agricultural products,
minerals, water etc. ⟶ volume of raw materials is determined by the demand.
4 Machinery and technology: used to process raw materials as well as design and manufacture
products; there has been a concern that machinery has led to ‘capital labour specialisation’: a
situation where labour has been displaced.

⎯ Transformed resources (materials, information, customers)

Inputs that are changed or converted in the operations process.

Materials:
→ BASIC elements of production including raw materials and intermediate goods, and in service-based
industries include: stationary, office, etc which are essential for the delivery of the product.

Information:
→ Gained from research which leads to increased understanding - can be from external sources
(market reports, statistics, media reports) or internal sources (financial reports, quality reports,
production data and inventory turnover rates).

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CASE STUDY: Information and Westpac

Westpac’s information is transformed into services via people in a bank. Information such as your
details, requirements and your needs are the transformed resources. Transforming resources would be
the people who talk to you, the computers that are used.

Customers:
→ Become inputs when their choices transform and shape the outputs; influences the transformation
as their choices/ideas/feedback are transformed into outputs, rather than assisting in the
transformation process (customer orientation is essential).

⎯ Transforming resources (human resources, facilities)

Inputs that carry out or assist in the transformation process.

Human resources:
→ Well qualified, disciplined and hardworking staff can impact productivity and efficiency within a
business; determines the effectiveness of the transformation process
→ E.g. All the people involved in the operations process who are assisted by extensive training
programs, flexible work practices and good communication.

Facilities:
→ Refer to the plant/factory and machinery used in the production process.
→ Must consider: location/layout of the facility, local govt. Zoning, energy and water requirements ⟶
these have a considerable impact on the capacity of the transformation processes e.g. Factory and
equipment and the process technology of the operation.

Transformed resources Transforming resources

Refers to inputs that are going to be Refers to the inputs that actually assist/carry
transformed, manipulated or converted such out in doing the transforming such as human
as materials, information and customers in resources and facilities (which manipulate
the operations process. the transformed resources) within the
operations process.

• Transformation processes
Conversion of inputs to outputs with ‘value added’ based on the intricacy of the transformation.
→ A manufacturer transforms inputs into tangible products whereas.
→ A service-based business transforms inputs into intangible products.
⎯ The influence of volume, variety, variation in demand and visibility (customer contact)
a) Volume refers to how much of a product is made.
→ The actual number of products or services used by operations (how much is made) ⟶ mass
market (high volume e.g. Maybe through conveyor belts) vs niche market (low volume or
customised.
→ E.g. Food industry and restaurants: McDonald’s produces high volume, whereas fine dining
produces low volume.
→ Volume flexibility refers to how quickly the transformation process can adjust to changes in
demand.
→ Refers to the ability of the transformation process to adjust to increases/decreases in demand
⟶ important in managing lead times (time it takes for an order to be fulfilled from the moment
it is made).

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→ If a business cannot satisfy orders, it will lead to lost sales.

→ Responsiveness to change in volume is crucial to effectively manage lead times (time it takes for
an order to be fulfilled from the moment it is made).

Unresponsiveness can lead to:

overproduction = wastage and storage costs.
Underproduction = lost in sales.

Low volume, high variety = Ferrari (takes lots of people hours).

high volume, low variety = normal cars (capital intensive).
it really depends on the type of manufacturing.

b) Variety refers to the number of different types of goods or services produced by the business. A
business with high variety will have higher costs compared to standardisation.
→ However, business which offer greater variety are able to cater to individual customer needs,
increasing customer satisfaction.
→ The number of different models offered in a business goods and services e.g. A fine dining
restaurant would produce low volume with high variety whereas McDonald’s would produce
high volume with little variation.
→ The influence of variety on transformation processes is that the: greater the variety made; the
more operations will need to allow for variation.

c) Variation refers to how much the level of demand changes over time. Products not affected by
seasonal changes such as furniture tend to have more predictable demand than products affected by
seasonal changes such as home heating which will have a higher variation in demand. To minimise
costs, businesses need to accurately predict demand so adjustments can be foreseen and changes
made.
→ Changes in the amount, type or level of a product according to and dependent on: time of day,
season, holidays, time of year. E.g. High variation products may include seasonal options such as
Christmas decorations, whereas low variation products include tissues etc.
→ The variety/mix of products made/delivered through the transformation process called MF or
Mix Flexibility: known by consumers as product range e.g. If there is one product, there is
limited mix flexibility (standardised product) or if there are multiple products, there is greater
mix flexibility (outsourcing/customisation).
→ Changes in demand will significantly impact the transformation process.
→ Increased demand will be hard to meet if: labour is not flexible or the supply chain is ineffective.

d) Visibility is the nature and amount of customer contact or 'feedback' and can directly affect
transformation processes, customers and their preferences shape what businesses make.
Service = high visibility
Manufacturing business = low visibility
→ Customer feedback can influence the transformation process; making problems within the
production process or product visible or aware.
→ Businesses must aim to ensure that their production is meeting the needs of consumers through;
A) direct customer contact: in the form of feedback from consumers.
B) indirect customer contact: in the form of review of sales data.

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 Business Studies Stage 6 Syllabus

⎯ Sequencing and scheduling – Gantt charts, critical path analysis

Scheduling and sequencing: forms of task analysis (break down how exactly a manufacture of a product
is to be achieved); tools used to identify all steps in the operation process, organising them into the most
efficient and productive order on the basis of:
1) What activities are used?
2) When activities will occur?
3) Which activities are related?

CASE STUDY: Sequencing and scheduling – Gantt charts, critical path analysis and Microsoft
Software is often used to plan out processes and work flows. This is usually done on Microsoft project.

Gantt chart Critical path analysis (CPA)

Bar chart which shows both the Scheduling tool used in operations which shows what
scheduled and completed work tasks need to be done, how long they take and what
over a period of time by recording order is necessary to complete the tasks.
the number of tasks involved in Flow diagram (shows a relationship between tasks) ⟶
each project. which must be completed simultaneously ensuring there
Disadvantage: doesn’t show the are enough days to satisfy all tasks.
relationship between the tasks. Critical path time period: the longest path
Advantage: dates and time can be taken to complete the project in the shortest time.
set for the completion of tasks advantages: allow the timing of tasks to be
and allows comparison and considered, highlights the tasks that need to be
monitoring of progress from completed simultaneously and gives direction and
current operations progress to organisation to the process.
expected progress (prioritisation).

⎯ Technology, task design and process layout

Technology:
→ Business technology involves the use of machinery and systems which enable the business to undertake
a more efficient and productive operations process
→ Must be flexible as it allows the business to respond to changes in the markets e.g. Any change to the 4
v’s as well as the implementation of software, the internet and wireless communication to the process
(improves speed and efficiency)
a) Process technology: machines and devices used to transform inputs into outputs
b) Product technology: the innovation or product that a business produces
→ Businesses may be reluctant to implement new technologies due to the high initial costs involved and
will usually opt for lease options includes:

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 Business Studies Stage 6 Syllabus

a) Robotics (automation): used in engineering and specialised areas of research as well as assembly lines
where a programmable machine is capable of completing several required tasks.
Advantages: very high quality, accurate, efficient, don’t fatigue.
Disadvantages: very costly especially for SMES to implement.
b) CAD: design tool that allows businesses to create product possibilities from a series of input parameters,
can calculate the material usage and the time needed for task completion (enabling the quantification of
the cost of a product).
c) CAM: software that allows the manufacturing process to be computer controlled ⟶ benefit of cam is
that the software can store existing purchasing records to assist with future purchasing decisions.

CASE STUDY: Technology, task design, process layout and Zara

product technology = finger print scanner on iPhone, face id
e.g. Zara have automated factories, robots do the work nonstop, 24/7

Task design:
→ Concerns how the task will be completed and involves breaking down each individual task into smaller
steps and involves allocating: the transformed and transforming resources of a business, appropriate
skills, knowledge and capability to each step in the task design.
→ Allows the business to continually analyse and adjust each activity to ensure continuous improvement in
productivity
→ Task design is directly linked with employment relation (human resources; job analysis and description)
⟶ which allows the business to find the right candidate for the task through the individual’s
specification and recruitment

Process layout:
→ The process layout is the arrangement of machines such that the machines and equipment of the
production process are grouped together by the function they perform
→ All machinery is arranged by what it does and functions are used to make the good or service (improves
efficiency)

Includes:
a) Process layout for intermittent production: type of production is linked to high variety, low volume
production; called intermittent because it moves around departments ⟶ the machinery is arranged
according to sequence and parts are manufactured in smaller quantities
b) Product layout: this is based on manufacturing high volume and high-quality goods (usually an assembly
line), equipment arrangement is based on the sequence of tasks performed ⟶ work stations are
arranged to match the sequence of flows e.g. Assembly of motor vehicles
c) Fixed position layout: where a product remains in one position due to weight or bulk, e.g. Construction
of bridges or houses etc ⟶ more efficient to bring resources such as labour etc to the product
d) Office layout (usually service based such as workstations): involves areas pertaining to use by office
workers e.g. Chair, computer and desk ⟶ vary depending on the type of business such as a
manufacturing business office looking over a factory compared to a law firm located in a CBD

⎯ Monitoring, control and improvement

CASE STUDY: monitoring, control, improvement and apple

apple has the capability to customise iPhone colours and deliver high quality phones at a quick speed. They
also adjust the speeds of processes when necessary, e.g. Slowing down production due to scratches. Quality
control checks were added!

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a) Monitoring: involves the process of measuring actual performance against planned performance# ⟶ in
relation to operations, monitoring is used to measure all aspects from the supply chain to inputs and
through the transformation; can be measured through KPI’s: especially for lead times, inventory
turnover, defect rates, capacity/volume and costs.
Would monitor:
1) The quality of outputs
2) Speed of operations
3) Dependability of inputs and the transformation process
4) Flexibility of transformed and transforming inputs
5) Cost: taking an input and transferring it to a sellable output (involves monitoring defects as well as
transformation waste)
b) Controlling: occurs when KPI’s are assessed and corrective action takes place if required; if there is a
discrepancy between performance and goals, changes and improvements and adjustments need to take
place ⟶ this will ensure the business achieves and maintains superior quality in the production process
⟶ evaluation to improve the operations process
c) Improvement: refers to the systematic reduction in inefficiencies and wastage, poor work processes,
and elimination of any bottlenecks (slowdown in the production process, which leads to a backlog of
unprocessed production) ⟶ aims to improves: time, process flow, quality, cost and efficiency ⟶ it is
the function in operations that suggests that adjustments and readjustments may need to be made in
the short and long term.

Overall benefits from monitoring, controlling and improvement (KPIs):

→ Quality: through a minimally defective product and error free services, which allows the business to
produce top-quality products which helps generates strong sales
→ Speed: by increasing speed of production and delivery of services, products can be distributed much
quicker = improved sales; also involves transferring input a ⟶ output b at speed (means the business is
effective in responding to changing consumer tastes and preferences)
→ Dependability: by being on time with the reliable operations systems ⟶ forming strong relationships,
rapport and line of credit etc. (greater trust = greater sales)
→ Flexibility: by being able to manipulate the operations process quickly, you will be able to meet the
changes in consumer demands and preferences e.g. Clothing producer in terms of material, design
→ Cost improvements: when the operations become more efficient and productive after various analysis’,
it will be able to offer more value to consumers and thus accumulate more sales and greater profits
(lean production: aims to eliminate, waste at every stage of production. It involves analysing each stage
of the production process, detecting where inefficiencies are and correcting them.)

• Outputs
Inputs that have been converted to goods and services with ‘value-added’ to sell and distribute for a
profit; the final products or services that a business offers customers ⟶ outputs must be responsive to
customer demand and after-sales services such as customer service and warranties must be viewed as
outputs.

CASE STUDY: Outputs and apple store / Bunnings

Knowledgeable, friendly customer service at the apple store.
Bunnings – knowledgeable friendly people.

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 Business Studies Stage 6 Syllabus

• Customer service
Service provided to customers before, during and after the purchase of a product e.g. Personal selling or
after sales care ⟶ refers to how well a business meets and exceeds the expectations of customers in all
aspects of its operations
→ Good customer service = good customer satisfaction (more inclined to tell friends etc about
unsatisfactory customer service rather than good customer service)
→ Operations must review the any customer feedback including dissatisfaction resulting from defects,
poor quality and long lead times
→ Effective customer service is key to developing long lasting customer relationships (relationship
marketing)

Includes:
- Handling customer returns
- Answering questions and demands customers have as well as following up customer enquiries

• Warranties
A guarantee that a business stands by the quality claims of the product they provide and that they will
correct any defect with either a replacement, repair or a refund
→ Under current Australian legislation [fair trading act 1987 (NSW) and the competition and consumer
act 2010 (CTH)]: products must “have a level of quality, be suitable for the job, match the promotion
and be free from defects.”
→ The number of warranty claims made against a business will highlight the issues in the
transformation process
→ Operations managers need to rectify any issues in the transformation process, as costs associated
with warranty claims are detrimental to the competitiveness of a business

CASE STUDY: outputs and apple

apple will give a 1-year warranty for phones at no added cost.

operations strategies
• Performance objectives – quality, speed, dependability, flexibility, customisation, cost
- Performance objectives are the criteria to use to determine whether strategies are achieving their
goal (essentially a criterion for success through a competitive advantage)

Quality refers to having the highest quality good or service within the market
→ Quality is often determined by consumer expectation which are used to inform the production
standards (must be fit for purpose; e.g. A consumer will not expect as much from a budget good as
a premium good)
→ Many dimensions to quality that customers have expectations about:
conforming to specifications (being fit for purpose)
performance (whether or not a product does what it is advertised to do)
durability and reliability (does the product last?)
Features (does the product have any extras?)
Aesthetics (does it look good?)
Serviceability (is it convenient to repair?)
→ Good quality prevents wasteful expenses caused by recalls of defective products or warranty repairs

I. Quality of design:
→ Design determines the inputs and how transformation processes will be arranged #

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 Business Studies Stage 6 Syllabus

→ A business needs to decide on the quality of the product it will deliver

→ High quality designs will require more expensive inputs, increasing price
→ Some consumers may be unwilling to pay higher prices thus the design will need to reflect
consumer preferences
II. Quality of conformance:
→ Focuses on how well the product meets the standards of a prescribed design with certain
specifications
→ Measures the ability of a business to meet the level of quality design
III. Quality of service:
→ Focuses on the reliability of the service and the responsiveness of the delivery

CASE STUDY: Quality at Qantas

→ Refers to producing services that satisfy customer expectations#
→ At Qantas, this can be associated with: clean and tidy aircrafts, courteous staff, helpful and friendly
business culture, easily navigable and user-friendly digital services
→ E.g. Website or self-check in

CASE STUDY: Quality at LG

→ LG used to be known for bad products, now they are known for good products.

Speed producing and delivering goods and services faster and more efficiently as well as the time that it
takes for the production process to respond to changes in market demand#;
→ Speed aims to: reduce wait times, reduce lead times, ensure faster processing times
→ Correlates with volume flexibility of production in accordance with customer demand
→ There are certain limitations to speed as an objective: due to the ability of bottlenecks and
communication breakdowns to interfere with the coexistence of speed and quality (productivity
trade off: the risk if you speed up operations, that quality may suffer)

CASE STUDY: Speed at Qantas

→ Refers to the elapsed time between Qantas customers asking and receiving satisfactory service
→ Operational strategies that have been implemented to increase speed of service include booking
flights online, online check-ins

CASE STUDY: Speed at Woolworths

→ Woolworths self-checkouts – quicker shopping

Dependability refers to the consistency and reliability of a business’s products, regarding products
→ Dependability refers to how useful a product or service is before it fails or can’t deliver; can be
measured based on warranty claims made for physical products and complaints made for services
→ E.g. Providing outputs where needed and when they are required such as a restaurant or store being
out of stock

CASE STUDY: Dependability at Qantas

→ Usually measured by on-time arrivals and departures
→ Although historically Qantas’ dependability has outperformed many competitors, this dependability
has been compromised in recent years due to: mechanical failures, industrial disputes, system
crashes, 2011 shutdown without notice

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 Business Studies Stage 6 Syllabus

Flexibility being more flexible and quickly a business can adjust to changes in the markets and implement
changes to their operations process compared to competitors (dynamic set of operations processes; e.g. A
business being able to match demand if it were to happen immediately).
→ Can be linked to altering the type of production but also the volume of the production in accordance
to demand
→ Businesses need to ensure that they avoid running out of stock (stock out) but also ensure that they
do not overproduce
→ Flexibility and capacity can be improved through the purchase of technologies

CASE STUDY: Flexibility at Qantas

→ Evident through the strength of the Australian dollar during 2010 which led to a higher demand for
flights
→ Due to seasonal variations like holidays etc, Qantas must operate to a flexibility performance
objective to be able to adjust to major increases in demand; volume to meet demand to satisfy needs
→ Jetstar with its variable fare structure (baggage and catering options) demonstrates flexibility in
product mix (Qantas’ response to low cost carrier competition)

Customisation
→ Essentially refers to high variety at a lower volume which targets a niche market at a higher and
premium cost; individualised products to meet the specific needs and wants of customers
→ Customer orientation is implying that operations will aim to drive customisation through variations to
colour, size and functionality
→ Mass customisation: process that allows a standard mass product to be modified to the specific
needs and wants of a customer e.g. Names on coke cans, customisable Nutella jar etc; (however
TNC’s must also ensure they meet different cultural needs)

CASE STUDY: Customisation at Qantas

→ More options to Qantas customers through product variation
→ Achieved through: the one world-alliance services to more than 680 destinations, offering JetStar as a
low-cost alternative, flying to countries and correlating this with matching cuisines (e.g. Asian
countries will have Asian-style meals) and offering different classes of seating

Cost
→ Lower costs increase profit margins; refers to the minimisation of expenses so that the operations
processes are conducted as cheaply as possible
→ Businesses seek to be more efficient in order to pass on savings to consumers (by reducing costs;
cost leadership) and remain competitive; some strategies include: reduction of supplier costs,
management of inventory, cost and time effective distribution methods and the acquisition of new
technologies

CASE STUDY: Cost at Qantas

→ Cost has a direct impact on Qantas’ competitive advantage
→ Strategies used by Qantas to reduce costs include cutting flight capacity in response to decreased
demand, cancelling orders for new planes and deferring others worth $8 billion during the GFC,
restructuring management, freezing executive pay, reforming employment relations, fuel
conservation, encouraging internet sales (eliminating guest services employment costs)

• New product or service design and development

→ The consumer approach to product design is based on identifying consumer desires through market
research

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→ Changes and innovations to technology are also a source of product design and developments as
they enable new and appealing products to be made (e.g. Flexibility must be in tune with the
consumer desires)
→ Considerations that need to be taken when designing and developing are: quality, supply chain
management, capacity management and costs (price/quality interaction: what are consumers willing
to pay? - influences inputs)
→ Services that require interaction with consumers are largely customised to meet their needs;
however, some services do not need consumer interaction and are largely standardised
Implicit services: based on the feeling and is intangible; involves psychological wellbeing that comes
with the service
Explicit services: tangible aspect such as the application of time, skill and effort as well as expertise

CASE STUDY: new product or service design and development at Qantas

→ Qantas need to find new services or upgrade existing services to maintain their competitive
advantage and profitability
→ The process to bring a new service to the market includes: research and analysis to identify
opportunity, designing the product to satisfy that opportunity, and fully testing the product before
commencing production
→ New technology and new markets opening up often triggers new product development

CASE STUDY: new product or service design and development

→ Apple and Samsung keep coming up with new devices (iPhone, tablets) in response to each other as
they want to maintain the business advantage.
→ Telstra and 4g/5g. Telstra has been leading the charge for 4g deployment all over Aus. (greater
speeds)

• Supply chain management – logistics, e-commerce, global sourcing

→ Involves integrating and managing the flow of supplies through inputs, transformation process and
outputs in order to meet the needs of customers.
→ Supply chain management involves:
- logistics
- e-commerce
- global sourcing.

CASE STUDY: supply chain management at Qantas

→ Refers to controlling the flow of supplies through Qantas’s operations processes from sourcing raw
material like fuel to the final delivery and service to the customer.
→ Intention to achieve efficient and cost-effective production through: reduced inventory, increased
transportation speed and increased customer satisfaction.

CASE STUDY: supply chain management at Costco

→ Costco is building an Australian warehouse to improve logistics in Sydney. Kemps creek is halfway
from Sydney to Canberra.

a) Global sourcing
→ Refers to the business purchasing supplies (usually raw materials for inputs) or services without
being constrained by location.
→ Buying or sourcing from wherever the suppliers are the best meet the sourcing requirements.

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Benefits of global sourcing Challenges of global sourcing

– Cost and expertise advantages – Increased logistic costs
– Access to new technologies – Regulatory differences between nations
– Increasing complexity of operations

CASE STUDY: global sourcing at Qantas

→ Qantas has employed some pilots from NZ and cabin staff from Asia (lower costs)
→ Engine maintenance carried out in Malaysia (outsourcing) on a cost beneficial basis

b) E-commerce
→ Involves buying and selling goods and services via the internet
→ E-commerce is linked to supply chain management as it allows the supplier to access the needs
for stock ⟶ efficient means of measuring stock levels

Business to business sourcing (b2b):

→ E-procurement: use of online systems to manage supply; allows suppliers direct access to the
business’s level of supplies

Business to customer sourcing (b2c):

→ Business sells directly to customers via the internet; stock levels must be managed well and
information exchanged frequently in order to maintain accurate stock levels

CASE STUDY: E-commerce at Qantas

→ At Qantas, improvements in technology have replaced time-consuming and costly manual
processes of the past, especially in regards to booking flights and the check-in process
→ The Qantas website allows customers to book and pay for flights, check their frequent flyer
points, manage their bookings and check on flight status’

c) Logistics refers to the distribution but includes transportation, use of storage, warehousing and
distribution centres, materials handling and packaging
I. Distribution: refers to the ways of getting goods or services to the consumer
II. Storage: involves finding a secure place to hold stock until it is required

→ Storage on inventory is necessary to meet demands, especially if there are multiple locations
where stock is sold
→ The type of good sold will also determine the type of storage e.g. Perishable goods will need cold
storage
I. Warehousing: defined as the use of warehouses for the storage, production and
distribution of stock; however large costs are associated with warehousing; many
businesses opt for the JIT method, although warehousing can be effective especially if
demand increased occur under short notice
II. Distribution centres: DC’s are set for short term storage; they are strategically located to
minimise the time it takes to deliver stock to retail outlets

CASE STUDY: logistics at Qantas

→ Task of ensuring that Qantas has all the physical inputs needed at the right place and time
(pilots, crew, baggage, catering etc) for the operations process (flights) to occur undisputed and
at optimum efficiency
→ Recent industrial action and strikes has negatively impacted Qantas’ logistics

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• Outsourcing – advantages and disadvantages

→ Involves the use of external providers such as contractors to perform business activities; often
called business process outsourcing (BPO). Outsourcing options include:
I. Creation of shared service centres: an inhouse centre that performs work for multiple
subsidiaries
II. Fee for service: engaging a supplier to perform a service at a fixed price
III. Joint ventures: a service provider that provides the same service for multiple businesses in
the same industry
IV. Build ⟶ operate ⟶ transfer approach: use of offshore outsourcing

Advantages of outsourcing Disadvantages of outsourcing

Simplification and capacity to focus on Payback periods and cost: refers to how
core business activities: reducing the long it will take for the business to
number of activities performed in the experience the benefits of outsourcing as
business. there are initial costs associated with
organisational changes.

Efficiency and cost-saving: accessing Communication and language: offshore

regulatory differences and skilled labour outsourcing will yield cultural differences
from offshore outsourcing. and language barriers. This can lead to
misunderstandings about the agreed service
and KPI measurements.

Increased processing capabilities: Loss of control of standards and

products are produced and delivered information security: design specifications
with improved level of service. may not be adhered to and privacy may not
be as secure with an external provider.

Increased accountability: the service Hierarchies: outsourcing may create

provider is responsible for meeting the hierarchies, leading to various inefficiency.
KPI’s.

Access to skills/resources lacking in Information technology: the need for it

the business: double saving as no grows with outsourcing; incurs large costs,
money needs to be spent on training which may detract from the benefit of
and developing labour resources. outsourcing in the short term.

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CASE STUDY: outsourcing at Qantas

Advantages of outsourcing at Qantas Disadvantages of outsourcing at Qantas

Saving in capital outlay: factory space and Dependency: the operations process is more
machinery are provided by another business dependent on another party for the supply of
at their expense inputs and failures in the external supply chain can
cause major internal disruption and expense e.g.
Maintenance issues
Saving in labour: staff management and Loss of control and security: vulnerability to
expenses are covered by the provider proprietary and patent data and information
accessible by the supplier

Increased dependability: more than one Quality: control is no longer exercised over the
external supplier can be accessed; security inputs used by outsourced suppliers
of supply

Saving in cost: the other business can provide False economy: outsourced inputs can become
the input at a lower price than in-house more expensive over time so constant review is
required

Access to higher level skills: the other business Cost: the one-off expense of redundancies to staff
contains skills that don’t exist at Qantas no longer required detracts from the savings of
outsourcing

Increased flexibility: variations in demand are Industrial problems: which can arise from
managed by the other business downsizing and changes in management

Saving in management: having set up contracts, Damage to public image: negative publicity from
management can concentrate on the tasks it axing jobs to national individuals in order to achieve
performs in-house higher profits from cheaper international jobs

• Technology – leading edge, established

a) Leading edge; product differentiation
→ Leading edge technology is the technology that is most innovative and advanced at any one time
→ The use of leading-edge technology can help the business create products more quickly, with
higher standards and less waste
→ They are developed through the creation of innovative inputs

CASE STUDY: Leading Edge at Telstra

→ Telstra and it’s 4g/5g trials for mobile internet

b) Established; cost leadership

→ Has been developed and widely used; the baseline technology which is simply accepted without
question
→ They are functionally sound and help establish basic standards

CASE STUDY: established

→ Standard internet plans and copper wire networks

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• Inventory management – advantages and disadvantages of holding stock, LIFO (last-in-first-out), FIFO
(first-in-first-out), JIT (just-in-time)
→ Inventory refers to the amount of raw materials, work in progress and finished goods that a
business has on hand at any one particular time

a) Holding stock: considered as warehousing; stock is saved and stored for future use

Advantages of holding stock: Disadvantages of holding stock:

Consumer demand can be met; preventing Costs associated with holding stock
customers from seeking alternative businesses. e.g. Storage costs.

Reduces lead times between order and delivery. The cost of obsolescence which occurs
when stock is not sold.

Receival of immediate revenue. The invested capital and energy in

purchasing excess stock, which can be
Improvement of cash flow as older stock can be put in other areas of the business
sold at reduced prices.

Bull stock purchases can result in economies of

scale.

b) LIFO (last-in-first-out): this method of pricing inventory, it assumes the last goods purchased are the
first goods sold and therefore the cost of each unit sold is the last cost recorded
c) FIFO (first-in-first-out): this method of pricing inventory assumes that the first goods purchased are
the first goods sold and therefore the cost of each unit sold is the first cost recorded.
CASE STUDY: FIFO at Woolworths
→ Woolworths uses FIFO for fresh fruit and consumables. This is because vegetables go bad and
old, so the fresh stock must go out first.
d) JIT (just-in-time): inventory management approach which ensures that the exact amount of material
inputs will arrive only as they are needed in the operations process
→ This wide inventory management method allows retailers to display a wider range of products as
they require less storage space (shrinkage costs and losses are minimised as they need less
storage space)
→ In order for JIT to be successful, there needs to be a high ability to respond quickly to changes in
market demand and have reliable suppliers

CASE STUDY: JIT at Toyota

→ JIT: Toyota has just in time production. They stock products when they need it to reduce waste.
Capacity is not wasted either.

• Quality management refers to those processes that a business undertakes to ensure consistency,
reliability, safety and fitness of purpose for a product

CASE STUDY: Quality management at Apple

→ Apple has extremely high-quality control standards. Products are built to the highest standards.
They test the products after the final phone is put together and inspect it.

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 Business Studies Stage 6 Syllabus

⎯ Control [QC; reactive]

→ Involves the use of inspections at various points of the production process to check for problems and
defects.
→ In order for qc to be effective, a business must have set standards and parameters; this becomes the
criteria for the production process to be measured against.
→ QC will need quality targets set; failure to meet these targets would require appropriate action to be
taken.
→ QC management may require that labour is trained in order to meet a certain quality standard.
⎯ Assurance [QA; proactive to ensure problems do not occur]
→ Involves the use of a system to ensure that the set standards of production are achieved
→ QA is completed by taking measurements and comparing them to predetermined quality standards
→ Two important aspects of quality are: ‘fitness for purpose’ and ‘right first time’
→ Globalisation has given QA an international focus through the international quality standard iso 9000
⎯ Improvement [QI; proactive]
I. Continuous improvement (CI):
→ Ongoing commitment to improving a business’s good and services
→ This could mean improvement via innovation in stages or all at once
→ Staff must also be committed and involved in this process; done through taking initiative
and/or collaborative suggesting

II. Total quality management (TQM):

→ TQM focuses on the management of the total business in delivering quality to consumers
→ This moves away from an inspection orientation approach (qc) to an approach where
employees are involved and ensure that quality practices are being implemented in every
aspect of production
→ TQM can be achieved through 4 elements: benchmarking, employee empowerment,
customer focus and continuous improvement.

• Overcoming resistance to change – financial costs, purchasing new equipment, redundancy payments,
retraining, reorganising plant layout, inertia

a) Financial resistance:
i. Purchasing new equipment:
→ When purchasing new equipment, it is important to consider future operating and
maintenance costs, as well as the purchase price to avoid inefficient and costly
production.
→ It is important to outline if the equipment is essential to the business or if the product
could be provided through other ways.
ii. Redundancy payments:
→ A redundancy is where a worker’s employment is terminated because the employee is
no longer required for their services for various reasons including automation and
restructuring; employees are given a redundancy payout to compensate for their
services.

CASE STUDY: purchasing new equipment & redundancy payments and nab
→ Nab workers will be lost due to robots taking their jobs. They will be given redundancy
payments.

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 Business Studies Stage 6 Syllabus

iii. Retraining:
→ Involves an employee acquiring new skills; benefit is that the management is able to
keep staff they can rely on within the firm, however the disadvantage is the associated
costs of retraining such as time and cost.
iv. Reorganising plant layout:
→ New structures/equipment often requires a new layout of the firm’s promise
→ Change may involve constructing new buildings or renovations which are expensive
(correlates with process layout).

CASE STUDY: reorganising plant at Telstra / Qantas

→ Telstra and Qantas fired hundreds of workers. Qantas restructured to cut costs and
routes. Telstra wanted to save costs on call centres.
b) Inertia:
→ Reluctance or resistance to change; managers/owners resist change as it requires them to move
outside their comfort zones and away from the status quo.
→ Inertia of management usually occurs when it appears that the business is trouble free and there
are no immediate problems or threats that need addressing.

c) Managing change effectively:

I. Identifying the need for change:
→ Arises from analysing threats to opportunities for the business.
→ Usually arises from an assessment of market realities in the business environment where
change is needed to make the business more competitive.
→ Ideally, managers will be proactive and anticipate this need for change before action is
necessary.
II. Setting achievable goals:
Every business must set and communicate goals to drive the business forward as goals must
be ‘smart’ in order to foster a culture of change, rather than uncertainty.
III. Creating a culture of change:
→ Managers need to encourage and motivate employees to do well and not lack in
confidence for their ability to succeed; all parts of the business must be cohesive and
interdependent.
→ Change agents: individuals usually employees, who instil confidence and encourage
active participation and collaboration into the change process.

• Global factors – global sourcing, economies of scale, scanning and learning, research and development
a) Global sourcing:
→ Refers to the business purchasing supplies or services without being constrained by location
→ Global sourcing involves the sourcing of any business operations that gives the business cost
advantages ⟶ links to offshore outsourcing.
→ Outsourcing decisions are now linked to the global market and thus the best decision is made to
cost efficiency and productivity etc.
→ Benefit of global sourcing: labour expertise, cost advantages, access to more resources.
→ Disadvantage of global sourcing: increased logistical costs, managing difficult regulatory
conditions, exchange rate fluctuations and international contractual issues.

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 Business Studies Stage 6 Syllabus

CASE STUDY: global sourcing at Boeing / Apple

→ Companies like Boeing source globally as countries may have expertise in it. For example, Italian
firm Alenia Aeronautica makes the center fuselage, French firm messier-dowty makes the
landing-gear system, Diehl Luftfahrt Elektronik supplies the cabin lighting.
→ Apple’s iPhone uses parts from Japan (display), Korea (RAM), processor (Korea), storage (Japan)
and WIFI modules (China).
b) Economies of scale:
→ Refers to the cost advantages gained by producing on a mass scale.
→ Businesses are able to lower the cost per unit of inputs through buying large quantities.
→ When a business expands internationally, the decision can be based on scale advantages etc;
thus, leading to increased profitability.

CASE STUDY: global sourcing at Holden

→ Since Holden had low economies of scale in Australia and high running costs, it had to cut
workers and couldn’t average out costs. 20 0000 cars need to be made for a factory to be
productive, it was at 80 000 cars.

Many products are made in china because they have large factories that can enable huge economies
of scale. This is why products such as electronics, clothes and many other things are moved over to
china for production.

c) Scanning and learning (S&L):

→ Refers to the business scanning the global environment and learning the best practices.
→ Management journals, conferences, and staff members who have worked in other businesses
(particularly competitors) are all methods of scanning and learning.

Companies use social media keyword scanning tools to look for trends in their pages and customer
sentiments. Instagram, Facebook and Twitter scanners exist now.

d) Research and development (R&D):

→ Research and development help businesses create leading edge technologies and innovative
products.
→ Governments usually offer tax incentives and grants to encourage R&D.

CASE STUDY: research and development at GOPRO

→ GOPRO’s karma. They spent a lot of R&D and it was a total failure and they made losses.

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 Business Studies Stage 6 Syllabus

role of marketing
→ Marketing is the total process of creating a product and then developing and implementing strategies
that aim to promote, price and distribute a product to the market
→ All about determining what a business should be producing
→ Method of enhancing revenue streams and increasing market’s awareness of products.
→ Marketing involves a business planning to differentiate themselves through the, modification of the 4p’s
(price, product, place, promotion) with the aim of maximising business success
→ Marketing supplies products that satisfy consumer needs and include such products that improve
society’s quality of life
→ Marketing helps to construct a competitive market place that can lower the costs of products for
consumers and improve choice
→ Marketing provides employment opportunities, as to provide a product for a consumer requires the firm
to employ labour to assist in the market research process and to develop campaigns
→ Marketing offers techniques that have the ability to communicate ideas and messages that influence and
change consumer behaviour
• Strategic role of marketing goods and services
→ Focuses on turning the financial goal (long-term) of profit maximisation into a reality
→ If businesses want to achieve their financial goal of making a profit, their product needs to generate sales,
which is possible through a successful marketing plan which is based on precise research and design.
→ Marketing places a strong focus on customer orientation (central aspect; decisions are made in the best
interests of customers)
→ This reflects the idea that customer satisfaction is the key goal of a business which is a catalyst leading to
profit maximisation
i. Choice: businesses differentiate themselves from their competitors, through price, product
quality, features and service. All of these provide consumers with greater choice when
purchasing a product e.g. Choice in milk products
ii. Standard of living: businesses will often develop and market products that improve and/or
enhance the standard of living by making products that are cheaper, more efficient, and
more useful to the consumer; e.g. Development of phones into much smaller/faster devices
iii. Employment: to provide a product to consumers, businesses must employ labour to assist
in transforming input resources into finished products. Labour is also required to sell these
good and services, e.g. Mountain bike example (assembly, service, selling, delivery)
iv. Brand awareness: refers to the extent that customers are aware of a product/brand and its
features e.g. Nike is iconic for its swoosh, and athletic/lifestyle-based ethos
v. Market share: businesses will attempt to develop, promote and price products to a standard
that will give the business more customers and thus more market share than its competitors

CASE STUDY: strategic role of marketing at Qantas (to increase competitiveness and stay responsive
to consumer demands/interests)
→ Develops and enforces a comprehensive business plan and strategies
→ Identifies and satisfies customer needs as they are a customer-faced business
→ Gives the business direction
→ Helps to manage the always changing business environment
→ Encourages new product development
→ Places emphasis on market segmentation to better target its products to the relevant customers
→ Creates more dynamic distribution outlets
→ Focuses in market research

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 Business Studies Stage 6 Syllabus

• Interdependence with other key business functions:

→ Marketing concept: business philosophy that states that all sections of the business are involved in
satisfying a customer’s needs and wants while achieving the business’s goals.
→ Business should direct all its policies, plans and operations towards achieving customer satisfaction

Operations:
→ The success of a product or marketing campaign notifies operations what it needs to produce and
how much it needs to produce
→ Concerned with the process of manufacturing a particular good.
→ Work closely with the marketing department to incorporate product features that consumers will
respond positively to; these features are sourced through research

Finance:
→ Required to budget then provide funds for anything the marketing department wishes to develop,
implement or evaluate such as an advertising campaign
→ Businesses must consider whether the needs of its potential customers are financially viable for the
business to pursue; better understanding of what customers want ⟶ profitability
→ Budgets and forecasts must also be established for promotional campaigns and sales.

Human resources:
→ The design, implementation and evaluation of any market related research etc is powered by the
skills, time and creativity of human resources such as employees who design and build products
→ Staff must be motivated and skilled to develop products within the business that cater to the needs
and wants of potential customers.
→ It is through the marketing process that a business is able to determine the skills required for
employees to produce the desired product.

CASE STUDY: interdependence with other key business functions at Qantas

Operations:
→ At Qantas, operations constrain marketing through scheduling and rollouts of new initiatives; the
use of marketing strategies like sales promotions and advertising can help boost sales in non-peak
times to help smooth operations at Qantas in times of fluctuations in demand (attract customers
away from holiday times)

Finance:
→ At Qantas, finance depends on marketing to generate funds; new marketing strategies like new
lounges or carriers need to be funded. Budgets for marketing strategies also need to be established.

Human resources:
→ The right staff must be employed to create the service that will satisfy consumers. Marketing is
aligned with hr in developing job descriptions and designing training programs.

• Production, selling, marketing approaches

→ Aimed at increasing product awareness and sales and thus there are three core approaches

CASE STUDY: Production, selling, marketing approaches and Apple

Apple produced iPhone X’s in the hope that people would buy it, but people did not buy it. It was a good
product that was high quality but the demand was not there for it. They even tried selling it.

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1 Production-oriented approach: popularised around 1920-1930 (industrial revolution); relies on the

view that consumers based their purchasing decision on the overall quality of a product (little to no
concern for customer preferences); not focused on price but rather how good the product is (during
the time it was popularised, people owned less products however their products were of greater
quality).
→ The production orientation business philosophies state that ‘supply will create its own demand’; this
meant that businesses could just keep producing whatever they wanted as they thought demand
would never dry up.

2 Selling-oriented approach: popularised around 1920-1960: business concentrated on strategies that

would help create demand for the products over their competitors; this view relies on convincing
the consumer that they need the product (creation of needs, rather than satisfying needs);
businesses began to realise how hard it was to sell a good just based off its quality and that they
would be required to focus on strategies to sell their products ⟶ aggressive selling tactics in this
approach.
→ This change in orientation created the notion of one-way communication with consumers (business
to consumers):
⎯ Also, this approach aimed to rectify that a good cannot be sold based solely on quality and people would
need to believe that the good will be of benefit to them, which was evident through the implementation
of sales representatives to convince consumers of the benefits of a product.

3 Marketing-oriented approach: popularised around 1960-present: firms began to focus on the

marketing of their product by collecting information on consumer interests; business started putting
the consumer and their needs/interests at the core of all business activities (satisfying needs of the
consumers; based on market research)
→ Businesses began to use an integrated approach through a combination of the 4 P’s.
→ The marketing concept is the idea that consumer satisfaction is the key objective of business
operations; by listening to what consumers wanted and by focusing production and marketing
towards consumer demand, business will maximise sales and in turn profits.

Difference between selling and marketing approach:

→ Selling approach was primarily about selling, whereas the marketing approach moves away from just
‘promotion’ to focus on an integration of the 4 P’s.

Customer orientation:
→ Focuses on how a business delivering products to consumers in a way that maximises the
satisfaction they gain from purchasing the product and dealing with the firm
→ Consumers gauge their satisfaction with a production by comparing the level of benefits received
after having purchased/consumed the product, to the level of benefits expected prior to the
purchase (expected vs received).

Relationship marketing:
→ Is the process of fostering and maintaining long-term relationships with customers; it involves
creating a high level of customer satisfaction, value and service, thus ensuring that customers will
return (repeat sales).
→ By maintaining strong relationships, businesses increase their brand loyalty and ensure that
consumers continue to buy their product such as Qantas frequent flyer points; loyal customers
provide a constant clientele.

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• Types of markets – resource, industrial, intermediate, consumer, mass, niche

Resource markets: are those markets where the production and sale of raw materials occurs (primary
industry); e.g. BHP Billiton purchases machinery etc and uses these resources to make/obtain raw
materials such as iron ore.

Industrial markets: are those markets where goods that are used as supplies in the production process
are traded ⟶ usually businesses that are involved in the production of finished good e.g. Construction
materials such as concrete or agricultural materials such as fertiliser or Mitsubishi who buy components
and parts from different suppliers to assemble cars and trucks.

Intermediate markets: are wholesalers ⟶ ‘middle men’; consists of businesses that buy goods for the
purpose of reselling/wholesaling them to others e.g. If someone owns a clothing store that stocks a wide
range of clothing, they may purchase their stock from various wholesalers who have purchased this from
the actual brand itself who supplies the business with the product such as David Jones who buy bonds
underwear from bonds (industrial market) at a lower cost per unit and subway who is a retailer that buys
goods to make into sandwiches and salads for sale to consumers

Consumer markets: consists of consumers/household buyers who purchase products with the intent of
using/consuming them e.g. David jones selling bonds underwear to the consumers to make a profit.
I. Mass markets: consists of a large mass market for which a business produces, distributes and
promotes a large amount of the one product ⟶ apply to all customers such electric, water, bread,
postal services
II. Niche markets: consists of a small and specific market that provides specialised goods and
services targeted at a select group of people who would be interested and/or can afford it e.g.
People who buy luxury cars from Ferrari or target maternity clothing

Example: a business will tap into a mass market to sell a multivitamin, however it will tap into a
market segment to sell an age-specific vitamin e.g. Teenager/senior/child vitamin, whereas it will
tap into a niche market to sell a specific vitamin e supplement

influences on marketing

• Factors influencing customer choice – psychological, sociocultural, economic, government

Psychological factors: are internal influences within an individual that affect his or her buying behaviour.
There are five main influences:
I. Perception: what people perceive may be different from reality. Perception is the process through which
people select, organise and interpret information to create meaning e.g. People will refuse to purchase a
product they see as inferior. E.g. Apple
II. Motives: reason an individual purchase a product. These motives that influence. E.g.
III. Attitudes: is a person’s overall feeling about an object or activity; attitudes towards a product will
influence the purchase of it.
IV. Personality and self-image: these are the behaviours and characteristics that make up a person. This
may influence the style, type or quality of product you buy. Self-image relates to how a person views
himself or herself. Marketers will ensure they use celebrities and sports people to endorse a product as
people want their self-image to be a reflection of those who they regard as important and influential.
V. Learning: refers to the changes in an individual’s behaviour caused by access to information and
experiences. This is evident through direct experience such as when an individual first-handily
experiences the product and if they are satisfied this encourages brand loyalty. Also, indirect

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experiences such as when an individual view a commercial that shows other people enjoying the
product, the customer is inclined and makes the assumption that they would like the product also.

CASE STUDY: psychological factors at Qantas

I. Perception: Qantas are effective at influencing the perception of their premium brand being luxurious or
classy, where Qantas being a dual-carrier brand emphasises JetStar as a low-cost alternative which is
more fun and accessible for younger audiences which is dependent on self-image.
II. Motives: Qantas attempts to motivate customers by highlighting their safety record and advertising
their Australian heritage; to motivate international tourism, Qantas have used John Travolta and
Miranda Kerr as brand ambassadors; JetStar also benefits from this safety record however can use their
low prices and Australian ethos to motivate customers.
III. Attitudes: Qantas’ marketing department needs to address recent negative public opinion regarding the
brand due to: outsourcing and consequently industrial unrest that arose (loss of Australian jobs) ⟶
furthermore the problems with maintenance and recent mid-air disasters have impacted on people’s
attitudes towards Qantas’ safety.
IV. Personality and self-image: operating with a dual brand allows Qantas to target the brand-conscious
who prefer to travel with the premium brand, as well as the price-conscious who prefer to travel with
the low-cost carrier, JetStar.
V. Learning: direct experience such as when individuals fly Qantas and directly experience the brand’s
exceptional equality which encourages brand loyalty through repeat sales. Customers that fly JetStar
however experiences the benefits of flying using a Qantas carrier but are aware of the compromises (e.g.
Quality of service and features) they must make in order to access cheaper airfares. This learning
encourages brand loyalty to JetStar as a low-cost carrier. Furthermore, this is also evident through
indirect experiences such as when an individual view a Qantas commercial that shows other people
enjoying the flight, the customer is inclined and makes the assumption that they would like the service
also.

Sociological factors: sociocultural influences are external forces exerted by other people and outer groups
that can personally affect customer behaviour. There are four main factors:
I. Social class: social class or socioeconomic status refers to a person’s relative rank in society, based on his
or her education, income or occupation. As such, this influences the type, quality and quantity of
products an individual will buy. For example, a wealthier person may be inclined to purchase products
that are prestigious/luxurious/reflect their status, whilst also owning multiple cars, watches, boats etc.
II. Culture and subculture: culture is all the learned values, beliefs, behaviours and traditions shared by a
society. Culture influences buying behaviour because it infiltrates all that we do in our everyday life. It
determines what people wear, what and how they eat, and where and how they live.
III. Family and roles: family and family roles have a significant impact on consumer choice and buying
behaviour. For example, market research shows that most women still make buying decisions related to
healthcare products, food and sanitary/laundry supplies. Also, the role of children significantly affects
consumer choice as statistics which show, young people between the ages of 8 and 12, influence 70% of
all household spending each year.
IV. Reference (peer) groups: these are the people that a person closely identifies with. They influence
consumer choice as individuals will have similar attitudes, values and beliefs.

CASE STUDY: sociological factors at Qantas

I. Social class: the use of the Qantas club encourages business class customers to the premium brand
whereas the price conscious are more attracted towards the no-frills JetStar service.

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II. Culture and subculture: with the number of international routes increasing, on-board menus have been
diversified to accommodate the different cultures that choose to fly Qantas e.g. Asian menus on flights
to Asian destinations.
III. Family and roles: JetStar present itself as being more family friendly in marketing campaigns (links to
indirect learning experiences) by targeting younger audiences including families with young children who
are usually price-conscious.
IV. Reference (peer) groups: peer groups will influence the experience that travellers are looking for. A
more youthful peer group will opt for the price conscious JetStar, where they look to maximise their
experiences on the lowest cost, whereas a more mature group will opt for the brand conscious Qantas
to maximise comfort and enjoyment.

Economic influences: economic factors have a major influence on consumer choice. The economic cycle will
influence a business’s capacity to compete and a customer’s willingness and ability to spend.

I. Boom: this is a period of low unemployment/greater job security, rising incomes, increased
consumer confidence and higher levels of disposable income.
II. Recession: this is a period of high unemployment/lessened job security, decreasing incomes,
decreased consumer confidence and lower levels of disposable income.

CASE STUDY: economic factors at Qantas

I. Boom: in times of boom, Qantas experience a growth in international travel as a result of the
increase in the levels of disposable income. As such, demands on the premium brand will increase.
II. Recession: with the impact of the GFC, international economic instability, natural disasters and the
spread of epidemics; Qantas had to deal with the more price conscious customers who sought to
seek quality service at the lowest price. The growth of JetStar in international and domestic routes is
a direct response to this.

Government influences: governments use a number of economic policy measures as well as laws to
influence the level of economic activity. Depending on the prevailing economic conditions, the government
will put in place policies that expand or contract the level of economic activity. These policies directly or

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indirectly influence business activity and customers’ spending habits, and therefore will influence the
marketing plan.

I. Monetary policy: the use of interest rates to influence the level of economic activity; higher
interest rates increase the cost of borrowing and as such lead to decreased investing and spending,
also lower interest rates decrease the cost of borrowing and as such lead to increased investing
and spending.

II. Fiscal policy: the use/influence of government spending (injection) and taxation (leakage) through
the federal budget.
Expansionary stance: government spending exceeds taxation and as such economic growth
increases leading to greater consumer confidence and spending.
Contractionary stance: taxation exceeds government spending and as such economic growth
decreases leading to lessened consumer confidence and spending.
III. Legislation: governments also pass laws to regulate businesses (controls/provides limitations)
which influence marketing activities.

These include:
- Competition and consumer act 2010 (CTH) formerly the trade practices act 1974
- Sales of goods act 1923 (NSW)
- Fair trading act 1987 (NSW)

CASE STUDY: government influences at Qantas

→ Cut-price airline JetStar was put on notice in 2007 to treat its customers better or face action under
the fair-trading act 1987 (NSW.) This was in response to the number of complaints made in regards
to contractual terms and conditions.
→ Qantas now publishes the ‘true cost’ of fares (transparency) including previously hidden extra
charges and levies following a warning from the ACCC that it was misleading consumers.

• Consumer laws
→ One of the main influences of marketing which restricts what businesses can/can’t do such as
through laws which are designed to protect consumers from being exploited by a business’s unfair
practices, which often forces businesses to take certain steps to ensure legal compliance (otherwise
face criminal punishments, fines and sanctions which distorts the business image).
→ Despite marketing bearing a customer focus (meeting and satisfying needs/wants), businesses
ultimately seek to maximise profits.
→ Businesses have power over consumers such as having more information about a product and the
market, which unscrupulous and desperate business may exploit.
→ Such legislation includes: the competition and consumer act 2010 (CTH) formerly the trade practices
act 1974, sales of goods act 1923 (NSW) and fair-trading act 1987 (NSW).

⎯ Deceptive and misleading advertising

→ Unfairly creates an inaccurate impression to the consumer about some characteristic/feature of the
product, often in a deliberate attempt to convince them to purchase the product.
→ These coerced and manipulative advertisements often sway the thoughts/ perceptions of consumers
and businesses may act unethically to gain a competitive advantage.
→ Legislation ensures that advertising must be truthful (such as the features, content and place of
manufacturing) and not unfairly exaggerated (overstating benefits; however there is a certain level

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of leeway such as ‘best pizza in town’ is not illegal, whereas hiding/masking important facts about
the product is illegal) coerce consumers to visit stores through offering non-existent sales etc (such
as the bait and switch method where the business advertises a heavily discounted good, however in
a limited quantity where the business has acted unlawfully in an attempt to attract consumers into
the store).

CASE STUDY: Deceptive and Misleading Advertising and Coles

→ Coles was fined $2.5m for claiming that bread was “baked today” when it wasn’t.

CASE STUDY: Deceptive and Misleading Advertising and HP

→ More 200,000 hp Australia customers who bought certain models of hp printers were not informed
non-hp ink cartridges would not work in their printers.
→ Those customers could now be eligible for compensation, the ACCC announced today.

⎯ Price discrimination
→ An anti-competitive practice when different prices are set for effectively the same product in
different markets to take advantage of different levels of price elasticity regarding demand.
→ Refers to the process of an intermediate business such as a wholesaler giving priority to larger retail
store by providing them with cheaper stock inputs compared to competitors where they are charged
higher prices for the same stock (creation of an artificial advantage; does not apply for variation in
quality items such as ‘premium’ vs ‘budget’ tiers of the same product).
→ The competition and consumer act 2010 (CTH) aim to discourage blatant forms of price
discrimination within the business environment to combat uncompetitiveness and disadvantages to
smaller, less influential businesses.

CASE STUDY: Price Discrimination & Apple, Adobe, Microsoft

→ Apple, adobe and Microsoft had different pricing in Australia for services and products. People in
Australia pay more for music, games and more.

Two main and legitimate exceptions:

I. Price differences are legal if the different costs are reasonably explained such as through quantity or
transport/supply costs e.g. Economies of scale through bulk buying, where larger purchases can
drive down the price per unit (cost of production decreases as the volume of output increases).
II. To meet the price benefits/promotions offered by a rival business such as matching discounts
through Bunnings and Officeworks “we’ll beat it by x%.”

Resale price maintenance:

→ Under the competition and consumer act 2010, a manufacturer cannot refuse to sell goods to a
retailer who decides to sell the good at a price different to that suggested by such manufacturer.
→ Manufacturers believe this is ineffective as it negatively influences the perception/image of the
product.
→ Businesses may be offered suggested prices such as a recommended retail price or RRP to which it
is their discretion to sell the goods at the price they choose.
→ A manufacturer cannot discriminate against stores for selling at a price lower/higher than
recommended.

⎯ Implied conditions
→ Unwritten terms of a contractual agreement; this means of they are not explicitly stated; both
parties are bound by them

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→ Contracts for the sale of goods also contain ‘implied conditions’ to protect consumers; the law
determines that by selling goods the business makes certain guarantees such as an implied warranty
→ Main implied conditions (legal obligations) include: the seller having the legal right to sell the good,
the seller’s description of the good is accurate and consistent, the goods are of appropriate quality
and in working order and the good is fit for its intended purpose

CASE STUDY: implied conditions & Audi

- Products are meant to do what they represent. Audi misled the public on their car’s diesel emissions.
- The ACCC alleges that between 2011 and 2015, Audi knowingly misled the buying public by failing to
disclose it had used “defeat” devices during laboratory testing in order to produce a lower nitrogen
oxide emission reading than under normal driving conditions.

⎯ Warranties
→ Legally-bounded guarantees by a business to repair/replace or refund a good if it malfunctions,
usually valid for a limited time period unless it is a factory fault (from the point of production)
→ Warranties are standard for many tangible goods and businesses often offer extended
warranties for a competitive advantage
→ Warranties influence how marketers design and promote their products

CASE STUDY: warranties and dell

→ Dell Australia failed to comply with the competition and consumer act 2010 by failing to provide
accurate information to consumers regarding their warranty rights
→ As a result of court enforceable undertakings, the ACCC forced dell to email all customers who
purchased their products informing them of their warranty rights and was forced to produce an
article in the weekend Australian notifying the public of the ongoing investigation (public relations
blow)

CASE STUDY: warranties and apple

→ Apple misled customers in regards to “error 53”. Consumers were entitled to a free remedy (fix) but
were told no.

• Ethical – truth, accuracy and good taste in advertising, products that may damage health, engaging in
fair competition, sugging
→ Moral factors that affect marketing decisions beyond legal requirements. Some actions may be legal,
but society and/or the business may determine they are unethical
→ Although there are strict rules that regulate marketing, loopholes and grey areas lead to
questionable marketing practices that may be contentious/subjective for the law
→ From a business point of view, marketers make decisions based on how they interpret the ethical
opinions of customers as if the business partakes in unethical practices, their reputation and in turn
sales will fall
→ Also, if businesses repeatedly cross socially and legally defined boundaries, the government may
intervene/regulate marketing
→ Ethical criticisms of marketing: creation of needs (forced obsolescence of older products to
introduce new needs and products), stereotypical images of women and men, sexual appeal
(unrealistic and unattainable) as well as product placement (blurs line between advertising and
entertainment)

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CASE STUDY
→ Cigarettes companies did not want to display packaging showing the damage of their products, but
the policy was upheld.
→ ACCC opposes the acquisition of petrol stations by Woolworths due to the fact that it would reduce
competition. It would be bad for fair competition and result in a monopoly.

Truth, accuracy and good taste in advertising:

→ Truth and accuracy: in marketing laws relate to issues such as misleading and exaggerated
advertising; the marketing process is influenced by ethical concerns.
→ Advertisements often imply features about products and their effects without explicitly saying it,
which can often unethically mislead customers; if what is implied is false, from a legal point of view
it is difficult to prove that the advertising is deceptive/misleading.
→ Ethical considerations influence markers to be more truthful and accurate e.g. Display hamburger
photos which accurately show its appearance and size.
→ Includes: exaggerated claims (puffery), vague statements, and invasion of privacy.
→ However, one issue to do with truth and accuracy is advertisements that pose as objective product
reviews etc which reveal to be subjective and coerced (includes advertisements which include
‘ordinary people’ testing a product, however they are paid and scripted; non-impartiality and as such
untrustworthy from a consumer point of view).
→ Good taste: left up to the marketer’s judgement/interpretation; however, different parties may take
offence to the advertising.
→ Marketers act unethically when they exploit impressionable audiences such as children with ‘pester
power’ over their parents and/or the sexualisation of women through suggestive women to attract
the attention of teenagers.
→ ASB; advertising standards bureau: self-regulated corporation which regulates advertisements to
ensure they meet a certain standard (ineffective through unenforceability of guidelines).

CASE STUDY: Dolce and Gabbana Advertisement

→ Dolce and Gabbana advertisement; considered poor taste through gang rape scene or businesses
cutting ties with Austereo due to having affiliation with Kyle Sandilands.

Products that may damage health:

→ There are laws that affect the promotion and production of such goods; however, many areas are
unregulated.
→ There are strict safety standards that products must meet: some products may be legal in their
design such as cigarettes, despite having effects/consequences that may be harmful to the person.
→ Marketers may avoid designing product with such harm on ethical grounds e.g. Pre-mixed alcoholic
drinks are dangerous to teenage health through binge drinking; thus, manufacturers have decided
not to make these products or design them with less alcohol content for ethical reasons.
→ Furthermore, ethical guidelines regulate how a business may promote such products which may be
harmful e.g. Commercials at times when children are unlikely to be exposed to potentially harmful
products such as not during primetime and not after school.
→ Industry codes are in place to regulate the advertisements of such products e.g. Tobacco, alcohol,
gambling etc.

Engaging in fair competition:

→ Laws and ethical guidelines are in place to ensure fair competition, but there remain loopholes
which firms could exploit for a competitive advantage.
→ Fair competition is encouraged under the competition and consumer act 2010 such as businesses
reducing prices or improving quality.

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→ Businesses must implement a ‘ethical marketing policy’ which acts as a standard to assess the
business’s ethical performance.
→ Intense competition may lead to businesses adopting unfair practices which undermine other
competitors such as false promises, incomplete product descriptions or high pressure selling.
→ Examples of unfair competition: large chains temporarily setting unrealistically low prices to drive
smaller competition out of the market, or advertising campaigns which defame, misrepresent or
insult other competitors.

Sugging:
→ When a business disguises an attempt to sell a product under the ‘guise of market research.’
→ Considered to be unethical as people are often persuaded and exploited to make impulse
purchasing decisions involving substantial amounts of money.
→ Can be undertaken by a salesperson pretending to be conducting market research, whereas it is
solely trying to fool the customer into lowering their guard to create a level of trust in order to
pressure the individual to buy the product.
→ Makes it difficult for legitimate market researchers to call consumers as there is an instant
level/association with distrust/invasion of privacy/deception.
→ E.g. A telemarketer who calls a potential customer and begins asking research style questions,
however attempts to get a person locked into a contract.

marketing process
→ In theory are essentially the elements of a marketing plan.

• Situational analysis – swot, product life cycle

→ Provides the firm with the opportunity to examine its current position in the market.
→ The business will examine areas such as: the market share of its product, future trends within the
market, strategies used by competitors and changing consumer tastes and preferences.

Swot
→ Swot analysis is a marketing process and strategic planning technique used to help business identify
the strengths, weaknesses, opportunities, and threats related to business competition, product or
the internal/external business environment.
→ Strengths and weaknesses are categorised as internal business environment factors (generally
product related) whereas opportunities and threats are categorised as external business
environment factors (generally market related) and how these factors influence the business.

Examples of swot:
→ Strengths:
- Strong financial position
- Good reputation
- Loyal employees
- Economies of scale
- Competitive price advantage
- Innovative product
- Strong/efficient sales team
- Use of leading-edge technology
- Superior product quality
- Diverse product range suited to all/most consumer tastes and preferences

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→ Weaknesses:
- Weak financial position
- Bad public image
- Employees with no dedication/loyalty or commitment
- Diseconomies of scale (arise through an overexploitation of the strategy that the price
advantage is lost: overproduction that may often lead to obsolescence)
- Price disadvantage
- Outdated/obsolete product
- Ineffective sales team
- Outdated technology
- Inferior product quality
- Narrow product range
- Ineffective management

→ Opportunities:
- Fast growing and untapped market
- Vulnerable competitors
- Government approval
- Favourable government policies

→ Threats:
- Entry of new and dangerous competitors
- Loss of government approval
- Adverse government policies

Product life cycle

→ Consists of the stages a product goes through: introduction, growth, maturity and decline.
→ Important tool as different stages require different marketing strategies (analysis of market and the
product to determine which strategy is best appropriate).

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Introduction stage:
⎯ Determine pricing (price is often lower than competitors in a bid to increase market share)
⎯ Target markets are selected
⎯ Brand recognition is developed
⎯ Distribution channels are organised (often selective to allow consumers to form an acceptance of the
product)

Growth stage:
⎯ Focus on customer service and encouragement of customer loyalty to build positive rapport and
clientele
⎯ Development of product position (product quality is maintained and improved with the introduction of
support services)
⎯ The product is distinguished from competition
⎯ New markets and target groups are developed
⎯ Pricing is re-evaluated (introduction of discounting to further increase market share)
Maturity stage:
⎯ Sales plateau (level off) as the market becomes saturated
⎯ The business will aim to differentiate (renew) the product to uphold a competitive advantage
⎯ Evaluation of packaging to distinguish the product from competitors
⎯ Increased discounting may be implemented to hold off competitors
⎯ Emphasis on promotion/selling to continue to suggest that the product is the most superior in the
market

Decline stage:
⎯ Further discounting in order to sell remaining stock
⎯ Focus on reduced distribution channels
⎯ Decrease/cessation of promotion
⎯ Removal of the product from the market
May include: extension strategies which are minor alterations to the product (e.g. A special edition release)
or marketing the product for other purposes/uses in order to reverse the decline (may require new
promotional strategies and market research)

CASE STUDY: product life cycle & apple

decline - apple discontinued the old iPhone, iPod and iPad after they had released so many new generations
of phones and tablets. This was because sales were low and it was hard to support those devices.

• Market research
→ Objective and systematic collection/analysis of information about the competitive environment,
including data on consumer behaviour, the nature of competition, and other factors that may impact
on business success.
→ Important to know: size, growth rate, level of competition of the market to assess certain
opportunities and threats.
→ Important to also know: how many customers, which type of consumers (characteristics),
demographic location of customers, customer uses of product, the effect of price changes on
purchasing habits and why consumers buy the product to assess strengths and weaknesses.

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CASE STUDY: Market Research & Apple

Apple had set up a website where people provided input or comments on apple products. Participating
customers will reportedly receive up to two surveys a month.
Can be classified as:
a. Qualitative: subjective questions e.g. Factors that motivate people’s purchasing decisions
b. Quantitative: concerned with statistics e.g. Size of customer based, size of market segment and growth
rate of market

Step 1: aims of research:

→ The questions the business wants to answer e.g. Who are our competitors, why do people buy our
product etc.
→ Aims need to be strictly defined otherwise research will be unfocused and result in poor information

Step 2: primary and secondary research:

→ Applies to how the research will be conducted: based on both the aims of research and practical
resources such as time/money/skills etc
→ Businesses often outsource research to an external specialised company because effective research
requires the aforementioned practical resources

Primary research: methods which involve the Secondary research: involves gathering data and
business generating new data through its research information that already exists
 Methods include: surveys, questionnaires,  Sources include: trade journals, magazines,
interviews conducted with potential newspapers and government publications
customers and test marketing experiments to (useful as they are produced by reliable and
observe the effect of various strategies informed government experts)
 Specifically tailored to the business aims /  Ineffective as they are not specific to the
needs and is effective as it is up to date; business/may be inaccurate and outdated
useful for qualitative research  However much cheaper and faster than
primary research

• Establishing market objectives

→ Goals for the marketing function that are designed to help achieve overall business objectives where
marketing plan is developed to meet these objectives
→ Relate to goals such as: increasing market share, increasing share price, maximising profit and
maximising growth as well as designing/developing products to better satisfy consumer needs and
geographical expansion
→ Establishing clear objectives is important as it fundamentally affects marketing strategy decisions
e.g. If the objective is to boost market share, the reduction of prices in the short term to attract
consumers is an effective strategy
→ Goals must be: smart: specific, measurable, achievable, realistic and timebound; the objective
therefore must have measurable details, take account of the capabilities of the business and
external factors with a set end time

• Identifying target markets

→ Group of potential consumers with certain shared characteristics at which a product is aimed
→ Marketing will be tailored to the characteristics of the designated target market and therefore will
adopt appropriate marketing strategies which are customer focused

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→ Businesses often target the entire market through a mass market approach which often fails to
satisfy the specific needs of each consumer; therefore, targeting market segments or a niche market
allows for the targeting of a group with shared characteristics.
→ The marketing function must determine which groups will be targeted; taking into account the size
of the market and level of competition in relation to the business and the characteristics of the
product.
→ The product/business may be better suited at targeting certain markets: e.g. Good reputation with a
certain demographic group or cost effectiveness by providing to a certain geographic location
→ By focusing on smaller segmented groups of similar customers, markets can design products that
properly meet their needs and develop promotional strategies tailored accordingly to their specific
characteristics.

• Developing marketing strategies

→ Marketing strategies are the main plans of action designed to achieve the marketing objectives of a
business; these strategies encompass the entire range of marketing activities such as research,
distribution and selling.

The 4 P’s:
I. Product: type of good/service affects the marketing strategy adopted; goods are tangible and can
often be stored in mass quantities whereas services involve the performance of the task
II. Price: relates to the methods used to determine pricing
III. Promotion: concerned with communicating with potential consumers in an effort to generate sales
IV. Place: concerned with how products are transferred from producer to final consumer

Modern marketing includes the 7 P’s however: with

V. people
VI. processes
VII. physical evidence
which embodies the recent emergences of e-commerce and globalisation.
→ In each of these points, the marketing strategies must take into account all of the previous steps in
the marketing process (e.g. Situational analysis etc)

• Implementation, monitoring and controlling – developing a financial forecast; comparing actual and
planned results, revising the marketing strategy
Implementation refers to the process of successful putting marketing strategies into practice through
the marketing mix which emphasises the effective interrelation and interdependence of marketing with
the key business functions:
1. Operations: pricing, positioning and distribution strategies can’t be implemented if operations
aren’t on schedule or budget
2. HR: production and sales targets can’t be met if HR aren’t managed effectively
3. Finance: no marketing strategy can be implemented without finance providing necessary funds

Monitoring refers to the process of measuring the business’ actual performance compared to
planned/forecasted performance e.g. Monitoring actual sales vs planned sales (identifying issue)

Controlling process of monitoring the business actual performance comparing this to desired
performance and taking corrective action to rectify any deviations from the expected standards ⟶ aim

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is to get as close to the target as possible, minimising deviations between actual/planned results
(resolving issue)

Developing a financial forecast: estimation of the firm’s future financial situation based on current
trends and known future events
→ Important as the marketing plan will have to be adapted to be based on the expected level of sales
and will be affected by the firm’s financial position
→ Forecast of expected revenue costs and profit outcomes for the future; outlining all costs (R&D,
promotion etc.)
→ Several uses: assists in finalising marketing strategies as marketers can accurately judge which
techniques will be most cost-effective as well as assisting with planning when funds are needed e.g.
For advertising
→ Allows comparison of current progress to expected progress to determine whether the strategies
are effective

Comparing actual and planned results:

Actual outcome: real outcomes of the marketing process e.g. Sales, effectiveness of advertising etc.
Planned outcome: outcomes that the marketing process desired/expected to achieve
→ Comparison of the actual and planned results allow for monitoring and this information can then be
used to revise the marketing strategy through controlling
→ For the business to be successful, these planned outcomes must be clear about the marketing
objectives such as level of sales etc.
→ The business must have access to accurate and relevant information about business performance
such as a clear and ordered system outlining marketing costs/sales revenues etc in order to
compare outcomes
→ Comparison with the outcomes (monitoring) allows for the identification of deviations
→ E.g. Cost ballooning or lower than expected revenues and must be analysed and revised with new
strategies (controlling) to have new marketing plans (implementation)

Revising the marketing strategy:

→ If product sales are lower than expected, an audit will reveal that marketing is having little impact
or there is an unforeseen change in the business environment (natural disaster or gfc etc)
→ This requires change to the marketing strategy through controlling based on information gathered
in monitoring e.g. The promotional strategies of a business may need changing if the product is not
selling effectively such as advertising in different media or more sales promotions

marketing strategies
• Market segmentation, product/service differentiation and positioning
Market segmentation
→ The division of a total market into smaller markets based on certain characteristics. By focusing its
resources and efforts to a smaller target group, a business is able to identify the specific needs of a
group and tailor its marketing plan accordingly
→ Market segment: a relatively homogenous group of consumers who are likely to react in a similar
way to a firm’s marketing mix

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Methods of market segmentation:

I. Geographic segmentation: division based on a customer’s location e.g. Rural or urban, climate or
topography etc. E.g. Woolworths has metro stores in the inner city, closer to place, more tourists.
II. Demographic segmentation: division based on a customer details e.g. Age, gender, occupation,
ethnicity. E.g. Nicer and more luxury cars are advertised in inner cities and not in western sydney.
III. Psychographic segmentation: division which is related to customer personality and attitudes as well as
how individuals use the product and why they purchase it such as values
IV. Behavioural segmentation: division based on people’s knowledge, attitudes and uses of products;
includes user loyalty and usage/consumption rate. E.g. Woolworths everyday rewards card to get
information on how often people shop.

Product/service differentiation
→ Process whereby businesses separate themselves from the competition by altering their product/service
and creating a competitive advantage; developing and promoting differences between the business’s
products or services and those of its competitors allowing them to gain more market share and
competitiveness
→ Important points of differentiation: customer service, environmental concerns, convenience,
satisfaction, social and ethical issues
→ Product differentiation: can be achieved by changing the appearance or features of the product, the
way the product operates, the quality or its image such as brand name, which immediately evokes a
perception of the product. E.g. Apple (strives to do things a little different and charge higher prices) such
as face scanners, augmented realities.
→ Service differentiation: can be achieved by providing exceptional after-sales service, prompt delivery,
time spent perfecting the service, level of expertise and qualifications, and quality customer service. E.g.
Microsoft has 24 hours online support for business and consumer customers.
→ Product/service positioning: the perceptions consumers have about the product’s image relative to its
competitors.

Positioning
→ Refers to how the product is perceived by the consumer relative to their perceptions about competitors

Positioning strategies:
→ Product user: the creation of an image in the mind of the consumer of the types of people that would
use the product; which they can relate to or desire to emulate
→ Product usage: the creation of an image in the mind of the consumer of how the product could be used
by them
→ Competition: openly positioning a product’s features in relation to competitors

• Products – goods and/or services

→ Are the goods/services that are developed to meet the needs of consumers
→ Products are defined by a set of tangible/intangible benefits that are aimed at satisfying the
consumer’s demands
→ Tangible benefits: physical attributes of the product e.g. Design, style, features
→ Intangible benefits: indirect benefits a consumer gets from buying the product e.g. Prestige
associated with owning a particular brand or the after-sales customer service that is offered

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⎯ Branding
→ Refers to the use of names, terms, logos, symbols and phrases to identity a particular product in the
marketplace; it is an effective way in which the product can be identified and distinguished from its
competitors
→ To be successful, a brand must attract attention: be memorable/recognised, assist in
communicating the position of the product, and be easily distinguishable from competitors
→ Brands serve as an assurance of quality: consumers associate a certain level of quality and
expectation with a brand; not only increases brand loyalty/repeat purchases but also allows a firm to
sell its products at a premium to competitors

⎯ Packaging serves two roles:

I. Functional role: packaging effectively protects/stores the contents of the product while it is
transported/sold; it also informs the customer of the basic product details and any other required
information such as ingredients/nutrition etc.
II. Branding role: the first thing consumers see about a product; it should be used to create a positive
image in the consumer’s mind or communicate about the brand and its attributes.
→ Packaging considerations: environmentally responsible and sustainable (biodegradable and
recyclable materials), ability to incorporate brand identity, packaging costs, and govt/ethical
requirements (tobacco warnings, % of Australian inputs etc).
• Price
→ Refers to what the business change for their good/service and prices have a significant influence on
people's purchasing decisions and help determine a business’s revenues.
→ Prices must allow for the business to recover its expenses/make a profit: whilst being consistent with
marketing objectives (e.g. Lowering prices to increase market share); whilst also allowing for the
business to be competitive and being affordable for their specific target market (consistent with
positioning of product).

• Price including pricing methods – cost, market, competition-based

refer to the overall blueprint/approach of a business to pricing products that marketers employ; with
each different pricing method (dependent on a variety of factors e.g. Nature of product/target market),
different pricing strategies are employed.

I. Cost-based: determines the price of a product based on the costs of production and the final profit
margin (mark-up through cost plus strategy) ⟶ focusing on recovering production expenses
(however may be disadvantageous as it ignores market demand and competition behaviours).
II. Market-based: based on market conditions; sets the price in relation to supply/demand (customer-
focused), regardless of the production costs (versatile and tailored prices)
→ Popularity: high prices through higher demand whereas if there is little interest, price may be
lowered in order to stimulate demand.
→ Different prices for a differentiated product may be set for different markets (allows customer
satisfaction and good opportunities to make a profit) e.g. Some strategies such as
skimming/penetration are market-based as they aim to make a profit from different market
conditions).
→ Required up-to-date and accurate information about the market (e.g. Fluctuations in demand
may cause confused prices for consumers).
III. Competition-based: determines the price based on the prices set by competitors (may be equal or
usually lower for a competitive advantage = which forces a price war).

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→ Dominant businesses are known as ‘price leaders’ and this is followed by other businesses.
→ Common in transparent markets for undifferentiated products: therefore, price is a
differentiated factor.
→ Businesses must not price collude as this is price-discrimination/poor engagement in fair
competition such as not predatorily pricing.

⎯ Pricing strategies – skimming, penetration, loss leaders, price points

→ Different pricing techniques that marketers can use to achieve business objectives such as higher profits
or market share.
→ The appropriate strategy is dependent on various factors: positioning of product, the product life cycle,
and market conditions.

Skimming price method that involves charging relatively higher prices in order to maximise profits
→ Skimming can either be used in: the introductory stage of a product life cycle to recover establishing
expenses through early adopters who are eager for the product and will pay a premium for it
(enthusiasts) which is later dropped if the product is obsolete or to increase market share e.g. For iPhone
and PlayStation; or is used when the demand is relatively price inelastic (demand doesn’t change when
price does such as petrol).

CASE STUDY:
→ Used by apple through innovative/leading edge technology: e.g. iPad in 2010 was set with relatively high
prices ($499-$829); success as apple sold 7 million devices between April and November 2010, through
skimming the max revenue from the ‘early adopter’ segment.
→ Tesla is more expensive that most EV’s but they are trying to gain back the value on r & d. The model S
costs $72700.

Penetration pricing strategy that involves charging a lower price than competitors in order to penetrate the
market and increase market share, with the intention of raising prices later; opposite of skimming
(penetration pricing focuses on lowering prices to stimulate demand).
→ Focus on enticing consumers who will be impressed/spread good word of the product.
→ Risky and short-term strategy to avoid heavily losses forever; the business will need to raise price once
they have established a clientele who are satisfied with the product and will pay for it if the price goes
up, in order to make a profit.

CASE STUDY: tablet competition; following successful launch of the iPad, competitors rushed to capitalise on
the fast-growing market and aimed to differentiate their product through price
→ E.g. Dell prices its streak tablet at $299 and amazon revised the price of the kindle 2.0 to $139 in order to
gain market share.
→ Netflix makes a loss on its subscriptions while gaining a lot of new customers. They had to take on new
debt.

Loss leaders pricing strategy of goods that are sold below cost price to attract customers to the business in
the hope that they will be enticed to buy other full priced products.
→ Tries to target consumer motivations and behavioural trends e.g. Rack of highly discounted clothes and
signage at the front of the store to entice passing customers.
→ Risks associated: businesses can’t afford to sell products at a low cost for too long (might not generate
enough profits made up from the full priced items to cover lost expenses) and also discounted prices
may tarnish the quality/fashionable reputation of a product.
→ A strategy for fast-generated financial return.

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CASE STUDY: McDonald’s 50 cent cones are a loss leader; however, consumers purchase other goods
evident through CEO of McDonald’s Matthew Paull.

Price points
→ Certain price levels at which people are more likely to buy a product for psychological/sociocultural
factors e.g. Clothing label may sell every day shirts at $59.95, semi-formal shirts at $79.95 and formal
shirts at $99.95; which is based on variations to quality, features and inputs.
→ Consistency of price points e.g. $10, $20 increments allows customers to accept certain prices and
differentiate products based on quality/value.

⎯ Price and quality interaction

→ Price of a product conveys information about it to the consumer such as psychological perceptions that
relate to price and quality (e.g. Most consumers equate higher price with higher quality and vice versa)
due to the fact that it means that they use inputs according to the price.
→ Self-perceived and uninformed judgements without trying the products which is based on price; the
increasing availability of online reviews etc, may reduce customer reliance on solely price for
information regarding quality.
→ Link between price/quality affects promotion and pricing (must reflect positioning of good; a low cost
may undermine the high quality of a product).
→ Price is also linked with prestige (psychological factors which contribute to the image of the product;
must conform with how consumers perceive the product) known as ‘conspicuous consumption’ as
individuals flaunt wealth e.g. Mercedes vs Toyota (exclusivity and prestige).

• Promotion refers to the strategies utilised by a business to attract the attention of the consumer to a
particular product; the promotion mix is the part of the marketing mix that endeavours to generate
interest in and awareness of a particular product.

⎯ Elements of the promotion mix – advertising, personal selling and relationship marketing, sales
promotions, publicity and public relations

i. Advertising: also known as ‘above-the-line promotion’ ⟶ mass communication that gives people
information about a product and attempts to influence their perceptions of the product’s branding and
positioning; it can communicate with large numbers of people and has low cost per consumer contact.
ii. Personal selling and relationship marketing: direct and spoken communication/promotion of a firm
between potential consumers with intent of making sales as well as fostering and maintaining long-term
relationships with customers; it involves creating a high level of customer satisfaction, value and service,
thus ensuring that customers will return (repeat sales).
iii. Sales promotions: also known as ‘below-the-line promotion’ ⟶ refers to the form of non-media
communication; includes the use of sales promotions like gifts with purchases, reduced price offers on
products, coupons with products that can be redeemed later, taste testing and promotional messages
via SMS to existing consumers; effective in inducing trial periods amongst potential consumers.
iv. Publicity and public relations: involve communicating the firm’s image to the public by developing and
fostering positive relations between firm and consumers; methods include the use of: tv, radio
interviews, and news conferences.
- Sponsorship: purchase of the right to associate a sponsor’s name, product, or services with the
sponsor’s product or business activity in turn for negotiated benefits

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⎯ The communication process – opinion leaders, word of mouth

Opinion leaders: influential people that have the ability to drive the decisions of others e.g. Athletes or
celebrities. Whether it is their profile within the community, their knowledge within a certain field, or
expertise, as well as personality allows that opinion leader to be used to communicate a product based
on their influence; consumers will create a perceived link between the leader’s reputation and the
product.

Word of mouth: form of publicity which relies on oral communication of a product: it involves
consumers relating to others their reaction/satisfaction to the use of a product or service, including the
degree of satisfaction. Consumers are more likely to place more weight on word of mouth than on the
opinion leaders hired by a firm.

• Place/distribution Refers to the physical distribution and availability of a product

→ Must consider how product is distributed, how it will be stored, with whom will it be stored and
where/who will the product be accessible to.

⎯ Distribution channels
→ Refers to the organisation and processes involved in the movement of the products from the
consumer to the final user.
→ Intermediaries: are businesses that facilitate the distribution of products to the market. They exist
to move the functions of distribution away from the manufacturer, allowing them to focus on other
functions.
I. Producer to consumer (P2C): the product is produced by a firm and passed directly to the
consumer.
II. Producer to retailer to consumer (P2R2C): the retailer is an intermediary who accesses the good
from the producer and sells the product to the consumer.
III. Producer to wholesaler to retailer to consumer (P2W2R2C): the wholesaler is an intermediary
between the producer and the retailer who then passes responsibility to the retailer as an
intermediary between the wholesaler and the consumer, for the distribution of the good.

E.g. Apple sells directly to consumers and also goes through retailers.

⎯ Channel choice – intensive, selective, exclusive

I. Intensive distribution: occurs when the firm saturates the market with its product by using all
available outlets. Generally used if the product is a low margin, high volume product and the
firm needs to maximise sales by maximising market exposure e.g. Kmart
II. Selective distribution: involves the use of a limited number of outlets to sell or distribute a
product. The business is selective about who resells the product and looks for outlets that have
good reputation and financial strength e.g. Ralph Lauren
III. Extensive distribution: extreme form of selective distribution in which very few or only are
outlet issues in a specific geographical area. It is commonly used to promote an image of status
and prestige for a product (positioning) e.g. Ferrari

⎯ Physical distribution issues – transport, warehousing, inventory

Transport: refers to the process of moving products from one location to another. The type of good
being distributed will be an important consideration for the business in deciding the best method of
transportation.

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→ Perishable goods like seafood (FIFO), to be moved from boats to markets to retailers as quickly as
possible e.g. Short lead times (interdependence with operations) as well as global distribution
efficiency (freight via air/sea).

Warehousing: refers to the process of storing products before they are ready to move to the next stage
of their distribution channels. It needs to be a well-designed space for goods, ease of movement and
access and excellent data control in order to; know what products are coming in, how and where will
they be stored, and where/when will they be distributed.

Inventory control: system that maintains quantities and varieties of products appropriate for the target
market. Businesses need to balance the cost of storage with keeping sufficient stock levels to meet
consumer demand.

• People, processes and physical evidence

People: the people element refers to the quality of interaction between the customer and those within
the business who will deliver the service.
→ Consumers make judgements on the business based on how the employees treat them.
→ Important for the business to employ staff that have product knowledge, respect for consumers, and
are willing to solve problems.
→ Businesses must be consumer-focused.

Processes: refers to the flow of activities that a business will follow in its delivery of a service
→ Refers to the set of processes to perform the task; businesses with inefficient processes will lose
consumers.
→ Without a tangible product, the processes must be highly efficient to achieve customer satisfaction.
→ E.g. Processes involved in online booking for flights: choosing flight and entering payment details,
confirmation email will be generated, electronic boarding passes will be sent, online seating
allocation done prior to flight; therefore, delivery system that allows this is the process of marketing.

Physical evidence refers to the environment in which the service will be delivered.
→ It also includes: materials needed to carry out the service such as signage, brochures, calling cards,
letterheads, business logo and website.
→ E.g. A school: the intangible product of education might be of high quality; however, the physical
evidence may be poor e.g. Small rooms, tables, chairs that may be broken or vandalised etc.)

• E-marketing practice of using the internet in order to perform marketing activities

→ There is a difference in providing product information on the internet, compared to providing an
opportunity for consumers to purchase the product online.
→ Many Australian retailers have been slow in adapting to these problems.
→ The following are e-marketing strategies that can be used; web pages, podcasts, SMS, social media
advertising, blogs and the internet.
→ The iconic sell through a website and don’t have many stores globally.

• Global marketing
Research of market: a business cannot assume that the same marketing strategies/ techniques will be
successful in all overseas markets. A product may fail to meet the government regulations for quality
and labelling. In addition, it may not meet the desire of consumers because it will not fulfil the cultural
preferences of the target consumers. Entering a new market without market research can therefore lead
to a costly mistake.

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⎯ Global branding
the advantage of marketing a global brand is that the product is instantly recognisable worldwide. It is
therefore a company’s most valuable asset, and is far less volatile than others (domestic businesses)
during a time of economic uncertainty. However, while global branding is cost effective, it may have
negative meanings in local languages and dialects.

⎯ Standardisation
→ Is the selling of the same product in more than one country.
→ For example, the PlayStation 3 is the same game console around the world.
→ Benefits of standardisation include achieving economies of scale, as there are reduced costs in
production and marketing of the product, and that customers are knowledgeable about the features
of the product and can access the same product in different locations.
→ Problems of standardisation are that it does not take into account consumers' different tastes and
preferences and different government requirements such as taxes, regulations and laws.
→ Contributes to economies of scale and is based on the assumption that global consumer needs and
interests are becoming more aligned/similar.

⎯ Customisation
→ As the marketing and customer relationship develops to include increasing individualisation and
customisation of products, differentiation of a product may sometimes be a better approach.
→ Differentiation is when the product is adjusted through its marketing mix to take into account
specific sociocultural, economic (e.g. Income levels), legal (e.g. Labelling requirements) and political
influences to make the product more attractive to the target markets in the specific countries.
→ For example, McDonald’s cannot sell beef hamburgers in India for religious reasons and coca cola is
made sweeter in America to suit local tastes.
→ Advantages of customisation as a global marketing strategy is developing a barrier to entry into the
market for other businesses. By customising and protecting intellectual property other businesses
may not be able to copy or emulate the customised feature. For this reason, customisation tends to
be profitable, especially if it means that a business increases its market share.

⎯ Global pricing
How businesses coordinate their pricing policy across different countries.
→ Customised pricing: occurs whenever consumers in different countries are charged different prices for
the same product.
- Many global businesses practise the cost-plus method to cover the added costs of exportation
(transportation, taxes, warehousing and tariff).

→ Market-customised pricing: sets prices according to local market conditions to avoid competition from a
domestic business, market customised pricing strategy allows marketers to vary the price depending on
the level of demand and competition within the overseas market.
- Also influenced by foreign currency exchange rates

→ Standardised pricing: is the practice of charging customers the same price for a product anywhere in the
world.
- Risks: domestic business may undercut the standardised price and changes in the exchange rate may
negatively impact on the exported price.

⎯ Competitive positioning relates to how a business will differentiate its products.

→ Business should strive to develop product leadership, positive customer relationships and operational
excellence.

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role of financial management

• Strategic role of financial management

→ to make funds available for business activities and to ensure that day-to-day transactions and
operations run smoothly from a financial perspective
→ Refers to the way businesses raise and use their funds; it is the process of planning, monitoring and
controlling the business’ financial position.
→ Effective financial management allows a business to maximise profits, increase the wealth of the
owner and expand the business outlets which is made possible through having liquid funds to ensure
smooth operational performance.
→ The strategic role of the financial plan is to give the business long-term goals through making good
financial decisions to strengthen the business by giving it sufficient and flexible access to funds,
allowing it to follow a range of processes to fulfil business objectives, whereas poor financial
decisions can leave the business burdened with high levels of debts, reducing opportunities to
achieve the objectives.
→ Tasks involved in financial management include:
- Maintaining and reporting information about the firm’s financial position.
- Forecasting future financial outcomes.
- Distributing financial resources to various business functions.
- Acquiring additional financial resources.

• Objectives of financial management

→ Financial management has short-term goals of ensuring that the business is sufficiently liquid and
solvent, while also aiming to boost long-term profitability, growth and efficiency.
→ Conflicts between short-term and long-term objectives e.g. Maintaining high levels of liquidity
means sacrificing possible opportunities for greater growth and profitability.
→ Incompatible objectives: include profitability and liquidity and profitability and solvency.

⎯ Profitability, growth, efficiency, liquidity, solvency

Profitability: ability of a business to maximise profits to ensure long term sustainability.
→ Profit relates to the earning potential of a business (profit = revenue - expenses) through either
increasing revenues or reducing costs by carefully monitoring revenue and pricing policies, costs and
expenses.
→ Profits created by the business will be either used to reimburse the owner or for future business growth
(retained profits).
→ The objectives of liquidity and profitability can come into conflict because the more current an asset, the
lower revenue it can raise e.g. If accounts receivables are given discount to encourage faster payment
this will improve liquidity, however lower the profit margin.

Growth: ability for the business to increase in size in the longer term.
→ can be in the form of increased profits or market share.
→ Internal growth: investing retained profits into the own business or by acquiring more resources
(organic).
→ External growth: where the business invests into other businesses/industries through horizontal or
vertical integration and diversification.
→ Expansion requires significant outlays of money and funds as well as growth need to be sourced
sustainably such as not exceeding the financial capabilities of a business to repay loans.

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Efficiency: the ability of the business minimises its costs and manage its assets so that maximum profit is
achieved with lowest possible level of assets.
→ Managers will always be looking for ways to maximise their profits/outputs and lower their
expenses/inputs e.g. Waste management or moving from labour intensive to capital intensive as well as
finding ways to collect owing receivables from consumers.
→ relates to operations or revenue-producing activities of the business.

Liquidity: the ability of a business to meet its short-term financial debts by having sufficient funds available
when needed; although many short-term debts can be paid in cash, cash is not the only measure of a
business’ liquidity as assets can be easily transformed into cash and thus count towards liquidity.
→ Effective liquidity management will ensure that the business has enough current assets (working capital)
to meet current liabilities.
→ A business may be highly profitable, however be illiquid if its value is tied up in assets that cannot be
quickly converted to cash.
→ Insufficient cash (current assets) means that the business cannot cover its short-term obligations
(current liabilities), however excessive liquidity means the business is losing opportunities to use the
money more profitably such as expansion.
→ Must have sufficient cash flow to meet financial obligations or be able to convert current assets into
cash quickly.

Solvency: is the extent to which the business can meet its long-term financial commitments/liabilities
(greater than 12 months) which is known as debt servicing.
→ Debt is useful and often necessary to function properly and expand, but finance must ensure that debt
levels do not exceed the business’s ability to repay the borrowings in the future.
→ Particularly important to the owners, shareholders and creditors of a business because it is an indication
of the risks to their investments.
→ Gearing is an effective measurement for solvency – the proportion of debt and the proportion of equity
that is used to finance the activities of a business.

⎯ Short-term and long-term

→ Tactical (one to two years; short-term) and operational (day-to-day; short term) plans of the business
would be measured against each other to ensure the business is meeting their shorter-midterm
obligations.
→ Strategic (two-five years and greater: long term) plans of a business are determined for a longer period
of time, which would be used to meet the long-term objectives of a business.
→ They tend to be broad strategic goals such as increasing profit or increasing market share and each will
require series of tactical and operational plans to assist in its achievement as well as monitoring and
controlling.
→ Reviewed annually to determine if changes need to be implemented.

students learn to:

• explain potential conflicts between short-term and long-term financial objectives
→ A short-and long-term outlook often conflict each other and require a balance which is challenging to
identify; the business must also balance liquidity in the short term and manage profitability to meet its
long-term financial objectives of solvency.
→ Common financial long-term objective is growth but expansion is often associated with costs and
gearing, which lead to lower overall profits in the short term.
→ Reconciling conflicts by constantly assessing achievements of specific objects to satisfy as many goals as
possible.

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CASE STUDY:
→ ABC learning centres decline in 2008: failed to understand the conflicting goals of growth/profitability
and liquidity and maximised growth through rapid international expansion with over $1.5 billion in long
terms loans, and when funds dried up in the GFC, ABC learning centres became unable to refinance the
loans and service these debts, leading the company to be insolvent and shares being worthless.

• Interdependence with other key business functions

→ The role of financial management includes budgeting, financing, financial analysis, financial controlling
and financial reporting to provide accurate information about the internal and external business
environment.
→ Marketing, operations and human resources departments rely on financial managers to allocate them
adequate funds.
→ Finance department also relies on the other three key business functions in order to generate sales and
therefore provide income to the finance department
→ Financial resources make it possible to achieve the objectives of profit etc by:
- Employing human resources for the business e.g. Hiring and increasing training for specialised staff
to increase efficiency and productivity as well as not delaying the payment of staff to ensure there is
enough cash on hand.
- Financing the operations of the business e.g. Identifying potential change to suppliers to reduce
costs, achieve economies of scale or attain more efficient capital such as machinery etc when funds
are needed (liquidity); sales of good results in income.
- Financing the marketing of the business e.g. Increasing market share using increase promotion and
improvements to product through analysis.

CASE STUDY: Interdependence with other key business functions and Sony Mobile
In 2009, Sony Mobiles cut 5000 jobs due to declining profits and finances. This is relevant as HR needs
finance to fund the expansion of departments and operations! Operations cannot expand as it may increase
their costs.

influences on financial management

→ Decisions affected by a wide range of factors including: nature and availability of different sources of
finance, government decisions and global market conditions.
→ Financial sources: different and appropriate ways that business can obtain money to perform all
business activities such as paying suppliers and buying capital.
- Main influences and risks: costs associated with the source of finance e.g. Interest payments, what
effect it has on the firm’s ownership and control structure as well as what are and how flexible are
the kinds of obligations that these sources demand.

• Internal sources of finance – retained profits

Internal sources of finance: generated from within the business itself or from the outcomes of business
activities and does not require the business to rely on outside individuals or lending institutions.
Owner’s equity refers to funds contributed by owners or partners to establish and build the business
- Equity capital can be raised by taking on another partner or seeking funds from an investor
- Sells off any unproductive assets or issues private shares

Main internal source of finance is retained profits:

- refers to the profits from a business’ activities that is left over after the deduction of expenses,
taxes, interest payments and dividend payments; which are reinvested back into the business rather
than distributed to the owners.

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advantages disadvantage
more likely to be misused compared to external sources
business’ debt levels do not rise
of finance due to unaccountability of funds

doesn’t have any additional finance costs such e.g. No financial penalty to pressure the business; very
as interest payments limited also

e.g. Establishing businesses will be unlikely to have

does not forfeit control of the business
profits to retain.

CASE STUDY: Internal sources of finance and Amazon

→ Amazon has returned 11 quarters of profits, after reinvesting nearly all retained profits from 2012 to
2015. The 2017 last quarter had $1.9 B in profit.

• External sources of finance obtained from individuals (creditors or lenders) and institutions outside the
business and is known as debt finance, which includes:
a) Equity financing: outsider investors take shares/ownership of the company in return for funds which
is evident through ordinary shares (new issues, rights issues, placements, share purchase plans) and
private equity.
Equity financing involves obtaining funds from individuals and institutions in return for giving these
investors a share/ownership of the business.
→ Can be raised from: existing owners or bringing in new investors.
→ Advantages: doesn’t contribute to business’ debt levels and doesn’t require interest payments.
→ Disadvantages: ownership structure of the business changes (investors gain influence of how
the company is run), future returns/profits distributed through more dividend payments to
these shareholders (loses value due to total equity being distributed amongst more people).
→ Two forms of equity financing: ordinary shares and private equity.
→ Preference shares: rare; main difference is that dividends are paid to preference shareholders
first before ordinary shareholders (even in times of liquidation) and their value is fixed based on
the nominal value of the share, however provide more security.
b) Debt financing: repayment of funds at a rate of interest evident through short-term borrowing
(overdraft, commercial bills, factoring) and long-term borrowing (mortgage, debentures, unsecured
notes, leasing).

⎯ Debt – short-term borrowing (overdraft, commercial bills, factoring), long-term borrowing (mortgage,
debentures, unsecured notes, leasing)

Debt financing: consists of the business borrowing money in the form of loans from banks and financial
institutions.
advantages disadvantage
The ownership structure of the business
Interest must be paid on the principal (ultimately, paying
doesn’t change; therefore, there is the same
greater amount of money than what is borrowed due to
number or shares and same distribution of
the fixed or variable interest rate).
profit (if not more) in the business.

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Most types of loans require level of security through

Usually, flexible and readily available when
assets to try to recoup the losses of a potentially unpaid
the business needs funds quickly and the
loan; and creditors have priority for remaining funds
loans are needed to suit the changing needs of
over internal lenders e.g. Investors, in a situation of
the business and/or market.
liquidation.

Difficult to secure a loan if the business is in a bad

The interest on the loan is a tax deduction. financial position due to risk of defaulting e.g. High levels
of debt or few too many assets for security.

Short-term borrowing: refers to the external sources of finance that the business is expected to repay within
one year (< 12 months).

Overdraft: short term loan from a bank, which is highly flexible (no withdrawal limit and no set repayments)
as it can be obtained or increased at short notice (increased working capital).

advantages disadvantage
A bank allows a business to overdraw its account to an agreed Require agree limits to the overdraft to
limit. be maintained at a high level.

Assists businesses with short-term liquidity problems e.g.

Repayable on demand.
Seasonal decrease in sales.

Costs for overdrafts are minimal and interest rates are lower Bank loans do not have the same
than other forms of borrowing. flexibility as overdrafts.

The day-to-day interest is calculated on the amount of Interest is paid on a costly variable rate
overdraft yet to be paid and is obligated to be repaid on the dependent on market conditions due to
demanded due date: however, financially-healthy firms not being secured by assets (high risk).
usually increase overdrafts when needed.

Commercial bills: short term loan from a financial institution, typically used for large amounts over $100,000
with an interest rate of repayment negotiated with the lender for a period of 30 – 180 days.

advantages disadvantage
Allows for flexibility and can assist with meeting the business’ immediate They are secured against
repayments and financing needs when significant and immediate injections a business’s assets and
of cash are needed. are generally rolled over
until the borrower is able
Borrower receives the sum immediately and promises to repay the money
to repay in full.
within interest at a future time.

→ ‘bill of exchange’: order requiring the borrower to repay the loan by a set date of usually 7-180 days
- The interval of 7-180 days is known as the ‘rollover period,’ where interest must be paid on at these
intervals, with the opportunity also to renegotiate the terms of the loan.
- At these intervals, only interest is paid: the total amount (principal) is fully repaid at the end of the loan
period/upon reaching maturity.

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Factoring: short-term source of finance, involves the business selling its accounts receivables to a debt factor
for a proportion of their total value; the business receives an immediate however reduced lump sum from
the debt factor who chases up those who owe outstanding debt.
→ Factoring companies may offer services:
- Without recourse: Business transfers responsibility for non-collection to the factoring company.
- With recourse: Bad debts will still be the responsibility of the business.
→ This involves greater risks than the other short-term debt finances because of the likelihood of unpaid
debts.
- It is an expensive source of finance and is a last resort.

advantages disadvantage
Business receives less than the amount owed to
Immediate access to short-term funds much
them, giving up some potential revenue (which the
earlier than would have been paid by the
debt factor collects) in return for money in the short
business’ creditors as well as saving on the
term; also, the debt factor’s aggressive collection
administrative costs associated with collecting
tactics to recover outstanding debts may deter
debt from customers.
future business.
The business will receive up to 90% of amounts of Full account will not be received for accounts.
receivables in 48 hours.
- By having immediate access, the business can
improve its cash flow and gearing.

CASE STUDY: Factoring and CFF

Companies like CFF provide invoice factoring. The invoicee receives an up-front payment for the invoice,
without having to invest resources into chasing up the debtor, a responsibility that is assumed by the invoice
finance provider.

Long-term borrowing: refers to the external sources of finance that the business is expected to repay over a
period longer than one year (> 12 months).

Mortgage:
advantages disadvantage
Long term loan used to finance property purchases. Loan secured by the property of the borrower.
Repaid with relatively low interest through regular
The property that is mortgaged cannot be sold or
repayments are made in intervals over an agreed
reused as security for further borrowing.
period of time, usually monthly instalments.

Debentures: form of long-term financing over a set period of time whereby a business borrows money from
lending firms or individuals.
→ Issued by a company for a fixed rate of interest and for a fixed period of time regardless of whether the
business is profiting.
→ Raises funds from investors instead of financial institutions.
→ Company repays by buying back the debenture.
→ Products must have a prospectus that informs investors about the business.
→ Usually secured against company assets until the debt is ‘redeemed’ (paid back to the holder).
→ Special feature: can be sold to other people and the business may not end up paying the original lender.
→ Called ‘marketable securities,’ similar to shares, yet no ownership in business.

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CASE STUDY: Debentures and Atlanta Gold

Atlanta Gold has $2.5M in debentures, the company is trying to delay the maturity date and change the
interest date.

Unsecured notes: form of long-term loans from individuals and institution for a set period of time; similar to
debentures,
→ except unsecured against any asset (no collateral).
disadvantages:
→ Greater risk for lender due to being unsecured which is compensated through higher interest rate.
→ Companies sell unsecured notes to generate money for their initiatives.

CASE STUDY: Unsecured notes and Toyota

Toyota sells 900 million in bonds for R&D Finance.

Leasing: practice whereby the business leases certain assets such as machinery, rather than buying them
(not out-laying entire sum initially and is therefore a form of financing).
→ Requires payments at set intervals to the owner of the asset, in exchange for the right to possess and
use the asset.

Costs and benefits are transferred from the lessor to the lessee. Lessee uses equipment and lessor owns and
leases the equipment for an agreed time.

advantages disadvantage
Enables enterprise to borrow funds and use
Ownership of the good at the loan’s conclusion is
equipment without the large capital outlay required.
dependent on the agreement and likely to repay
A business does not have to take on new debt to
more than the actual value of the good over the
fund the purchase and tax advantages associated
course of the agreement
with leasing.

Costs of establishing leases may be lower than other Interest charges may be higher than other forms
methods of finance. of borrowing.
If some assets are leased, business may be in a Corporations are required to reveal significant
better position to borrow funds. leases in financial statements.
Provides long term financing without reducing Business does not own the asset making it
control of ownership. difficult to attain a loan due to limited security.

Permits 100% financial of assets. Long term leases usually cannot be cancelled.
Repayments of the lease are fixed so cash flow can
be monitored easily.
Lease payments are a tax deduction.
Payments usually include maintenance, insurance
and finance costs.

There are two kinds of leases:

→ Operating leases are assets leased for short periods (shorter than life of asset). The owner carries out
maintenance on the asset. This can be cancelled.
→ Financial leases are usually for the life of the asset. Lease repayments are fixed for economic life of the
asset. This includes plant, equipment, vehicles, furniture etc. There are usually penalties for cancellation
of financial leases.

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CASE STUDY: Leasing and Tesla

TESLA leases out their vehicles to businesses. They pay for the running of it. Many car dealerships lease out
cars to people for money.

⎯ Equity – ordinary shares (new issues, rights issues, placements, share purchase plans), private equity
Equity refers to finance raised by a company through inviting new owners.

Ordinary shares
→ Most commonly traded shares in Australia.
→ Individuals with ordinary shares become part-owners of a publicly listed company.
→ Issuing shares can be very expensive, time consuming and must be legally-bound through various
documents; with the risk of under-subscription (not enough buyers to satisfy the offered shares).
→ Owners do not have voting rights at AGM’s (annual general meetings).

New issues: A security that has been issued for the first time on a public market.
Are offered to the public (primary financial market) for the first time (share float), either directly or through
an institution like an issuing house; very costly process as business is legally bound to provide a prospectus
(document giving detailed information about the company and the nature of the shares)
a business either:
→ Directly makes a public offering in the form of an IPO (initial public offering).
→ Have IPOs underwritten by a financial institution, which means that in return for a commission, the
institution is legally bound to buy any unsold shares?
→ Sell the shares to an issuing house or a bank at a lower price, that on-sells the share to investors (at a
higher price to make a profit: business must sacrifice potential capital).

CASE STUDY: New Issues and Atlassian

Atlassian issued shares for the first time in the US. They raised $462M dollars at 21 dollars per share.

Rights issues: way to raise equity finance after the IPO of shares where existing shareholders are granted the
privilege of purchasing new shares in the company at a special price and amount-based on their existing
number of shares.
→ Quick and relatively inexpensive way to raise extra share capital: however, shares are usually offered at
a lower price than might have been obtained on the market.

CASE STUDY: Rights Issues and Rio Tinto

Rio Tinto raised $15 billion in 2009 from a rights issues to allow it to meet its objective to cut debt by at least
$10 billion, amidst investor concern about high debt during GFC; drawback is that it would reduce the value
of each share as the value of the company has not changed but there is more distribution of shares on the
market at a lower price.

Placements: involves privately selling shares to a limited number of investors, rather than through public
offering; a business usually pays financial institutions to access these investors with these shares offered
below market price.
→ Saves on the cost and difficulty of IPO and is an effective way to targeting new investors to raise equity
finance quickly.
→ Additional shares are offered at a discount to their current trading price.
→ Intended to persuade specific investors to invest in the company.

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CASE STUDY: Placements and Tesla Motors

In 2010, agreed to sell $30 million worth of new securities to Panasonic corporation through a private
placement; advantageous to tesla as in addition to raising funds, it allowed access to Panasonic’s wealth of
technological expertise.

Share purchase plans: method of raising equity finance by giving existing shareholders the opportunity to
purchase more shares up to a specified amount, at a reduced cost without brokerage fees.
→ Allows companies to issue new shares without a prospectus
→ Can only use a maximum of $150, 000 in new shares to each shareholder
→ Quick and relatively inexpensive way to raise extra share capital: however, offered at a lower,
discounted price than would have been obtained on the market.

Private equity: refers to the money invested in a private company not listed on the ASX. The aim of a
private company is to raise capital to finance future expansion/investment of the business.
→ Goals of the equity investor must align with the business’ overall aims: however, the business may
benefit from the investor’s management skills and business contracts.
→ One of the most popular forms of private equity is venture capital:
- Take risks by taking a large stake in a company that has potential for a rapid and sustained growth.
- Do not seek long-term association with the business (rather significant gains over 2-7 years).
- Often have short-sighted goals and demand radical change to achieve this (which may be damaging
to the business’ future) ⟶ which raises questions regarding the virtues of the venture capitalist firm.

CASE STUDY: Private Equity and Facebook

→ Facebook in 2009, negotiated a private placement with Russian private equity business DST who made a
$200 million investment in Facebook in exchange for a 1.96% equity stake;
- Benefited Facebook as it allowed valuable experience and expertise that DST had gained from
successfully running five social networking sites in 13 European countries.
- Provided innovative ways to increase revenues on the website in light of Facebook’s struggle to
generate a revenue.
• Financial institutions – banks, investment banks, finance companies, superannuation funds, life
insurance companies, unit trusts and the Australian securities exchange

Financial institutions:
→ Collect funds and invest them into financial assets; they provide financial services and focus on dealing
with financial transactions such as investments, loans and deposits.
→ While most financial resources of a business is acquired from banks; finance is also available from a
variety of other institutions such as investment banks, finance companies, superannuation funds, life
insurance companies, unit trusts and the Australian securities exchange.

Banks: largest form of financial institution in Australia and major operators in financial markets and are the
most important source of funds for businesses; banks receive savings as deposits for individuals, businesses
and governments (RBA) and in turn make investments and loans to borrowers.
→ Most of the funds provided through financial markets come from banks that operate on their own behalf
or on the behalf of other corporations which may also operate in the financial market.
→ Perform an increasingly wide range of roles and have subsidiaries in other financial markets such as
superannuation funds and unit trusts.
→ Intense competition between banks has led to the introduction of new methods of enticing businesses
such as low fees, business advice, merchanting facilities e.g. EFTPOS, debit and credit cards, business
loans and internet banking.

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Investment banks: provide services in both borrowing and lending, primarily to the business sector
→ Provide different types of short- and long-term loans, and equity financing for businesses and therefore
can customise loans to suit the business’ specific needs and often impose conditions when providing
loans such as through securing the loan to an asset.
→ They can provide complex and tailored financial solutions to institutional clients including equities,
financial futures, fixed income securities, foreign exchange, equity exchange, market data analysis,
working capital, project and overseas finance, advice for clients on mergers and takeovers and provide
portfolio investment management services.

CASE STUDY: Investment Banks and Goldman Sachs

Goldman Sachs provides funding for businesses in return for ownership stake in that business such as
Kathmandu who required a significant injection of funds for expansion in exchange for a 50% stake in the
company.

Finance companies: non-bank financial intermediaries regulated by the Australian prudential regulation
authority (APRA) that specialises in smaller, commercial finance in the form of short/medium term loans to
businesses and individuals (often quick access to funds, however higher interest rate).
→ Their financial products include: hire-purchase loans, personal loans, secured loans, lease finance to
businesses, factoring and cash flow financing.
→ They raise money through shares issues (debentures) and have the security of priority over the firm’s
assets in the event of liquidation.

Superannuation funds: manage people’s superannuation outlay and have significant amounts of capital that
need to be invested in the corporate sector to generate returns for the retirement income of investors
→ Maintain portfolios that are heavily diversified and they are they are able to invest in long-term
securities such as company shares, government and company debt because of the long-term nature of
their funds and dependent on the risk appetite of the investor.
→ Compulsory, financial contributions from employers to a fund which will provide benefits to an
employee (if 18-69 and over $450 before tax in a calendar month) when they retire introduced by the
government under the superannuation guarantee (administration) act 1992.
→ Grown rapidly in the past 20 years due to tax incentives as well as being used to benefit the aging
population by boosting retirement incomes.

Life insurance companies: non-bank financial intermediaries who provide guaranteed cover in the form of a
designated, lump sum payment to the insured person/beneficiary in the event of death, as specified by the
terms of the contract.
→ Use money that consumers pay for purposes such as depositing in a bank or investing in the stock
market to make a profit; profits are mainly generated not from the premiums itself, but rather the
returns that they make from investing these premiums.
→ They provide both equity and loans to the corporate sector through receipts of insurance premiums,
which provide funds for investment.
→ The funds received in premiums, called reserves, are invested in financial assets.

Unit trusts: or mutual funds, take funds in the form of trusts from small investors and invest them into
specific types of financial assets.
→ Managed funds that pools capital from numerous investors; a portfolio manager will place this capital
into various investments, attempting to yield the highest return.
→ Unit trust investments include: the short-term money market (cash management trusts), shares,
mortgages, property and public securities.

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→ Unit trusts are usually associated or affiliated with a management firm that manages a diversified
investment portfolio for its investors.

Australian securities exchange: primary stock exchange group in Australia and is an accessible market where
shares are bought and sold; non-government body.
→ The ASX functions as a clearing house, payments system facilitator as well as market operator.
→ To be listed on the ASX, companies must conform to increased disclosure requirements; gives
shareholders greater transparency of the business.
→ Oversees compliance with its operating rules by individuals as well as businesses and promotes
standards of corporate governance among Australia’s listed companies.
→ Offers products and services such as: shares, financial futures, warrants, exchange traded options,
contracts for difference, exchange traded funds, real estate investment trusts, listed investment
companies and interest rate securities.
→ The ASX operates as a:
- Primary market: enables companies to raise new capital through ‘floating’ shares issues and through
the receipt of proceeds from the sale of securities.
- Secondary market: pre-owned securities such as shares are transferred/traded between investors
such as individuals, businesses, governments and financial institutions; transactions in this market do
not increase the total amount of financial assets but rather increase the liquidity of these financial
assets; influencing the primary market for securities.

• Influence of government – Australian securities and investments commission, company taxation

The government influences the business’s financial management decision making with economic policies
(e.g. Fiscal and monetary policy), legislation (impacts the choice of legal structure as different legal
obligations are imposed on different types of business) and various roles of government bodies/departments
(who are responsible for monitoring and administration).

Australian securities and investments commission (ASIC):

→ Government body; independent statutory commission accountable to the commonwealth parliament
which enforces and administers the Corporations Act 2001 and ASIC Act 2001 to protects consumers in
the areas of investments, insurance, superannuation and banking in Australia.
→ The aim of ASIC is: to assist in reducing fraud and unfair practices in financial markets and products,
promoting investor and consumer confidence and ensuring fair and transparent markets.
→ Ensures that companies adhere to the law, collects information about companies and makes it available
to the public such as financial information that companies must disclose in their annual reports.

Wide range of powers to enforce its legislation:

→ If a business breaches the law, ASIC will investigate and determine an appropriate remedy, depending on
the seriousness of the crime such as imprisonment and monetary penalties; which will generate negative
publicity for the business.

CASE STUDY: ASIC

→ ASIC dictates what’s allowed in financial markets and products. AMP misled ASIC on 20 occasions about
a practice of charging fees to customers who were no longer receiving financial advice. This is illegal
according to the Corporations ACT.
→ ASIC started proceedings against COMMBANK for manipulating the BBSW (interest rate setter).
COMMBANK traded bank bills to make it go up and down to improve its profits.

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company taxation: all Australian businesses that have been incorporated (private and public companies) are
required to pay company tax on profits which is levied at a flat rate of 30% of net profit on a progressive
scale.
→ The Australian government has undertaken a process of reform of the federal tax system that will
improve Australia’s international competitiveness and make Australia an attractive place to invest,
thereby driving long-term economic growth as well as increase employment and higher wages.
→ Taxation regulations will affect business’s financial decisions as some decisions might be better for
taxation purposes as well as require sound financial management so the business will have adequate
financial resources available for when their taxation obligations are due.

CASE STUDY: Company Taxation

→ In Australia, many companies were grilled over tax avoidance. Google and Facebook had to be TAXED
onshore, which meant that revenue HAD to be recorded in Australia. Facebook booked revenue of $327
million, ten times the $33.5 million recorded in the previous year.

• Global market influences – economic outlook, availability of funds, interest rates

→ Financial risks associated with global markets are greater and more uncontrollable (part of external
business environment) than those encountered domestically, but this is often necessary to implement
various business strategies.
→ Businesses can implement appropriate financial management strategies to minimise the negative effects
of risks.

Economic outlook: refers specifically to the projected changes to the level of economic growth throughout
the world (globalisation = more interdependence between economies and their business sector which relies
on trade for expansion and profits).
→ The global economic outlook will have a direct effect on the demand for Australian exports; a positive
outlook will increase demand for Australian products whereas a negative outlook will decrease demand.
→ If the economic outlook is positive (increased global economic growth) then this will impact on the
financial decisions of a business such as:
- Direct effect and increased demand for Australian exports, this would mean businesses will need to
increase production to meet demand and therefore require funds to purchase equipment, employ
staff or expand the size of the business.
- Decrease the interest rates on funds borrowed internationally from the financial money market;
results mainly from a decrease in the level of risk associated with repayments.
- Requires purchasing equipment, employ or train staff.
→ Decrease the interest rates on funds borrowed internationally from the financial money market.
- This may result in decrease of risk.
- As business sales increase, profits increase.
→ Poor economic outlook will impact on financial decisions of a business in the opposite way.

CASE STUDY: Economic Outlook

→ During the GFC, the economic outlook was low and borrowing of funds for companies was difficult!
Banks restricted the amount of money that companies could borrow (for internal leverage).

Availability of funds: refers to the ease with which a business can access funds (for borrowing) on the
international financial markets which includes institutions, companies and governments that lend money to
those who need to raise capital.
→ Various conditions and rates apply and these will be based primarily on: risk, demand and supply and
domestic economic conditions.

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→ The availability of funds will impact on whether Australian businesses can access the money they need
to expand.

CASE STUDY: Availability of Funds

→ As the stock exchange was doing good (as was the economy), it was easy for companies to get funds!
Investor sentiment was at its highest (compared to the GFC).

Interest rates: the cost of borrowing money that is paid to lender (the higher the level of risk involved in
lending to the borrower, the higher the interest rate). A business that plans to either relocate offshore or
expand internationally will normally need to raise finance to undertake these activities and financial
management must consider:
→ That Australian interest rates tend to be higher than overseas sources; therefore, Australian businesses
are tempted to borrow the necessary finance from these countries to gain an advantage of lower
interest rates; however, there is a risk that exchange rate fluctuations could see this advantage quickly
eliminated.
→ Overseas interest rates will also affect Australian businesses who borrow funds from overseas as if the
interest or exchange rate fluctuates, this could lead to an increase in repayments and decrease in profits.

students learn to:

• analyse the influence of government and the global market on financial management

Implications for businesses in relation to the influence of government

→ Legislation will influence the decision businesses make about their finances.
→ Businesses need to ensure they comply with legal obligations.
→ Legislation impacts on choice of legal structure as different obligations are imposed on different types of
businesses.
→ Don’t comply with regulations, ASIC can pursue a range of remedies.
→ Negative publicity.
→ Taxation regulations will affect business’s financial decisions as some decisions might be better for
taxation purposes.
→ Taxation regulations require sound financial management to have enough resources available for when
taxation obligations are due.

Implications from global market:

→ Global economic outlook will have a direct effect on the demand for Australian exports.
- Positive outlook will increase demand for Australian products.
- Negative outlook will decrease demand.
→ Availability of funds will impact on whether Australian businesses can access the money they need to
expand.
→ Overseas interest rates will affect Australian businesses who borrow funds from overseas.
- If interest rates and or exchange rate changes, this could lead to an increase in repayments and a
reduction in profits.

processes of financial management

• Planning and implementing – financial needs, budgets, record systems, financial risks, financial controls

Planning processes involve the setting of goals and objectives, determining the strategies to achieve these
goals and objectives, identifying and evaluating alternative courses of action and choosing the best
alternative for the business.

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Determining financial needs:

→ Before future plans can be made about what the business needs, financial information needs to be first
collected and identified.
→ Identifying the financial needs of the business; sets out the financial needs of the business and looks at
budgeting, planning, valuing assets, raising finance and monitoring the financial policies and procedures
of the business.
→ The financial needs of the business will be determined by:
- The size
- Its stage in the business life cycle
- Its capacity to source finance (poor credit rating or limited assets = higher risk)
- Management skills
- The future growth plans for the business
→ Institutions need to guarantee that their financial commitments to the business will be successful. This
may also include analysis of financial performance, income statement, cash flow statement, balance
sheet and financial ratio analysis reports.

Developing budgets:
→ Are an important planning tool to assist a business to estimate resource requirements for a
→ specified future period to predict what will be achieved by a business.
→ Budgets provide information in quantitative terms such as the cash required, expenditure expectations
and forecasted revenue which provides direction and organisation.
→ Budgets are often prepared to predict a range of activities affecting the strategic, tactical and
operational plans of a business.
→ Budgets enable businesses to perform “controlling” as they allow direct comparison of planned and
actual performance and management can determine if objectives are being met
→ The classification of budgets includes:
- Operating budget: relate to the main day-to-day activities of a business such as sales production,
expenses and raw materials.
- Project budget: relate to capital expenditure in regards to projects such as research and
development (R&D); mainly focuses on the purchases of assets and the potential revenue which can
be generated from the asset.
- Financial budget: predictions of the operating and project budgets are included in the budgeted
- financial sheet and cash flows includes financial statements such as cash flow statements, balance
sheet and revenue statement.

Maintaining record systems:

→ Are the mechanisms employed by a business to ensure that data is recorded and the information
provided by record systems must be accurate, reliable, efficient and accessible.
- Needs to minimise errors in recording process.
- Producing accurate and reliable financial statements are important aspects of maintaining record
systems.
- Double entry system of accounting is important control aspect Identifying.

financial risks:
→ Often linked to debt finance that the business wants to incur; financial risks are the risks to a business of
being unable to fulfil its financial obligations.
→ Consideration needs to include both internal and external factors affecting risk and prior to any
borrowings;

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- External factors; unpaid accounts, interest rate and exchange rate fluctuations (global economic
outlook), theft.
- Internal factors; equity or debt financing (whether to use retained profits or is it possible that
shareholders can contribute to lessening debt) and the viability of expansion compared to cost of
borrowing (cost-benefit analysis).

Establishing financial controls:

→ Common causes and issues that can affect the business include the financial problems of theft such as of
inventory or assets, fraud such as conflict of interest, misuse of expense account, damage assets and
errors in record systems.
→ Financial controls are the policies and procedures that ensure the plans of the business will be achieved
in the most efficient way by mitigating the effect of financial problems.
→ Strategies are designed to ensure that they are followed by management and employees:
- Clear authorisation and responsibility for tasks in the business
- Separation of duties
- Rotation of duties
- Control of cash
- Protection of assets – locking buildings etc.
- Control of credit procedures – e.g. following overdue accounts

⎯ Debt and equity financing – advantages and disadvantages of each

Debt financing: borrowing money to finance the operations and growth of the business can be the right
decision under the proper circumstances; the owner does not have to forfeit control of the business, but too
much debt is highly risky and can inhibit growth.

Advantages of debt financing Disadvantages of debt financing

There is an increased risk if debt comes from
Funds are usually readily available and can be financial institutions because interest bank charges
acquired at short notice. and government charges may increase. Debt can be
expensive, e.g. interest must be paid.
Collateral; lenders will typically demand that certain
Increased funds should lead to increased earnings types of assets of the company be held as collateral
and profits. and the owner as a personal guarantor (liability of
business). Security is required by the business.

Interest payments are tax deductible. Regular repayments have to be made.

Flexible payment periods and types of debt are Lenders have first claim on any money if the
available. business ends in bankruptcy.

Control; taking out loans is temporary and the Cash flow; taking on too much debt makes the
relationship ends when the loan is repaid; the business more likely to have problems meeting loan
lender does not bear any say in how the owner repayments if cash flow declines; lead investors to
runs the business. It will not dilute the current view the business as high risk (high gearing) and be
ownership in the business. reluctant to invest
Fixed payments; principal and interest payments
Taxes; interest payments are tax deductible, must be made on specific dates without fail;
whereas dividends that are paid to shareholders businesses that have unpredictable cash
are not. flows/decline in sales might have difficulties making
loan repayments.

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Difficult to qualify if credit problems; if the business

Predictability; principal and interest payments are has credit problems or poor credit ratings, equity
stated in advance, so it is easier to work these into financing may be the only choice to finance growth
the company’s cash flow as debt financing will have a high interest rate due to
the risks involved.

Equity financing: with equity funds from investors, the owner is relieved of the pressure to meet the
deadlines of fixed loan payments, however they do have to forfeit control of the business and often have to
consult with these investors when making financial decisions.

Advantages of debt financing Disadvantages of debt financing

Does not have to be repaid unless the owner
Lower profits and lower returns for the owner.
leaves the business.
Cheaper than other sources of finance as there The expectation that the owner will have about the
are no interest payments. return on investment (ROI).
Cash flow - equity financing does not take funds Cost - equity investors however expect to receive
out of the business whereas debt financing takes returns on their money; the business owner must be
funds out of the company’s cash flow, which willing to share the company’s profits with the partners
reduces the money needed for financial growth. and sometimes the number of dividends paid could be
The owners who have contributes the equity higher than the interest rates on debt financing. Long,
retain control over how that finance is used. expensive process to obtain funds this way.
Less risk - lower gearing with equity financing as
Potential for conflict - the shareholders of the business
there are no fixed repayments to make which is
may not necessarily agree when making decisions;
helpful for businesses such as those in the
these conflicts can erupt from the different visions for
establishment stage who do not have positive
the company and disagreements on management
cash flows. Cheaper than other sources of finance
styles; an owner must be willing to deal with these
as there are no interest payments. Low gearing
different opinions. Ownership is diluted, i.e. the current
(use resources of the owner and not external
owners will have less control.
sources of finance).
Loss of control - the owner must forfeit control of the
Less risk for the business and the owner.
business when they take on additional shareholders.

→ In terms of equity, shareholder funds represent highest proportion of total funds to finance business
operations and assets.
→ The most important source of funds for companies because it stays in the business for an indefinite time,
as funds do not have to be repaid at a set date.
→ Equity is generally safer than debt but requires sufficient profits to be made so they can operate.

When deciding what type of finance to use, businesses will compare debt with equity and take into account
what the finance is needed for – the purpose. They must match terms and sources of finance to purpose.

Debt Equity
Lenders have prior claim in the event of liquidation. Shareholders have a residual claim on assets.
Debt must be repaid by periodic repayments. Equity has no maturity date.
Interest payments are tax deductible. Dividends are not tax deductible.
Lenders usually require a lower rate of return. Shareholders require higher return, higher risk.
Interest payments are fixed. Dividend payments are not fixed and may be
reduced though lack of funds.
Debt providers have no voting rights. Equity holders have voting rights.

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⎯ Matching the terms and source of finance to business purpose

Matching principle:
→ The terms of finance must be suitable for the purpose for which the funds are required.
→ E.g. Use of short term to fund long-term assets causes financial problems because mount borrowed
must be repaid before the long-term assets have time to generate increased cash flow.
→ Use of long-term finance for short term situations means business is still paying the mortgage after
situation is resolved.
→ Finance managers should match length or term of the loan with economic lifetime of the asset.
→ Short term finance should be used to purchase short term assets.
→ E.g. inventory (current or short-term asset) should be purchased with trade credit whereas new building,
(noncurrent asset), should be purchased with a mortgage.

→ Terms of finance: the legally binding conditions of the loan that determine the basis on which the
business obtains finance.
→ Sources of finance: the different ways (internal/external and equity/debt) the business can obtain
money to perform business activities such as paying suppliers or buying equipment.
→ Purposes of finance: refers to the reason or activity for which the business needs to acquire finance
according to the matching principle, the business should use short-term finance e.g. Overdrafts for short
term business purposes such as paying suppliers and vice versa.

• Monitoring and controlling – cash flow statement, income statement, balance sheet

Process of monitoring and controlling is important especially in the process of financial management.
Inconsistent methods of review will have impact on the viability of the business.

Process of measuring and comparing the actual performance of the business against planned performance
and taking corrective action e.g. If the business does not achieve its forecast due to unforeseen events which
might push the business off-target or some predictions underlying the report may be too unachievable.

Management obtaining information on the business’ actual performance and analysing the differences
between set expectations of the financial plan and actual outcomes.

CASE STUDY: Apple reported 61.1B in revenue and had over 15B in operating cash flow. Revenue comes
from income statement and CF comes from cash flow. The core business of Apple generated 61.1 B after
depreciation and taxes.

Cash flow statement: provides the link between the income statement and balance sheet.
→ Gives important information regarding a firm’s ability to pay its debts on time.
→ Indicates the movement of cash receipts and cash payments resulting from transactions over a period of
time.
→ Can also identify trends and be a useful predictor of change.
→ Users include creditors and lenders of finance as well as owners and shareholders, assessing a business’s
ability to manage its cash.
→ Potential shareholders check that a business has had positive cash flows over a number of years
→ Fluctuating pattern of cash flows might point to difficulties.

Cash flow statement can show whether a firm can:

→ Generate a favourable cash flow (inflows exceeding outflows).
→ Pay its financial commitments as they fall due e.g. interest on borrowings
→ Have sufficient funds for future expansion or change.

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→ Obtain finance from external sources when needed.

→ Pay drawings to owners or dividends to shareholders

In a cash flow statement, activities are commonly divided into three categories:
→ Operating activities:
- The cash inflows and outflows relating to purchase and sale of non-current assets and investments.
- These assets and investments are used to generate income for the business. E.g. Selling of an old
motor vehicle, purchasing new plant and equipment or purchasing property.
→ Investing activities:
- Cash inflows and outflows relating to purchase and sale of non-current assets and investments.
Assets and investments are used to generate income for the business e.g. selling of an old motor
vehicle, purchasing new plant and equipment or purchasing property.
Financing activities:
→ Cash inflows and outflows relating to the borrowing activities of the business
→ Borrowing inflows can relate to equity (issue shares or capital contribution from owner) or debt (loans
from financial institutions).
→ Cash flows relate to the repayments of debt and cash drawings of the owner payments of dividends to
shareholders.
- Cash inflows (cash receipts): the money received over the period of time such as accounts
receivables from sales, interests earned on deposits and cash received from the sale of assets.
- Cash outflows (cash payments): the money that the business spends over a period of time such as
payment to suppliers and interest payment to financiers
This is usually prepared from the income statement and balance sheet, as it summarises the transactions of
the business.
Based on this information: financial managers can take corrective action such as trying to delay payments or
turn over account’s receivables more quickly.

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Income statement (revenue statement): is a summary of the income earned and the expenses incurred over
an operational period of trading with the resultant revenue, expenditure and profit/loss.
→ By examining figures from previous income statements, managers can partake in monitoring and
controlling such as comparing and analysing trends before making important financial decisions.
→ Operating income earned from the main function of the business
- Sales of inventories
- Services and non-operating revenue from other operations
- Interest
- Rent
- Commission
→ The income statement is able to determine the following:
a. COGS: cost of goods sold is the value of stock that a business has sold to its customers
(COGS = Opening Stock + Purchases - Closing Stock).
b. Gross profit: business’s profit before the deduction of expenses (Gross Profit = Sales - COGS).
c. Net profit: business’s profit after the deduction of expenses (Net Profit = Gross Profit - Expenses).

→ Expenses can be characterised by the following:

a. Selling expenses: relate to the process of selling the good or service and can be directly traced to the
need for sales such as commission, salaries and advertising.
b. Administration expenses: costs directly related to the general running of the business such as rent,
telephones and computers.
c. Finance expenses: costs associated with borrowing money from outside people or organisations and
to minimising business risk such as interest payments, lease payments and dividends.

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Balance sheet represents a business’s assets and liabilities at a particular point in time and represents the
net worth (equity) of a business.
→ Shows the financial stability of the business.
→ Prepared at the end of the accounting period.
Balance sheet shows the level of current and non-current assets, current and non-current
liabilities – including investments and owner’s equity.

Assets:
→ Items of value owned by the business.
→ Current assets can be turned into cash within 12 months.
→ Non-current assets are not expected to be turned into cash within 12 months.

Liabilities:
→ Claims by people other than owners against assets.
→ Represents what is owed by the business.

Owner’s Equity:
→ The funds contributed by the owner(s) and represents the net worth of the business.

A balance sheet can indicate

whether:

A business has enough assets

to cover its debts.

The interest and money

borrowed can be paid.

The assets of the business are

being used to maximise
profits.

The owners of the business

are making a good return on
their investments.

Shows:
- Return on owner’s investment
- Sources and extent of borrowing
- Level of inventories
- Whether business has sufficient assets to continue to make profits in the long-term
- How much assets are financed from outside borrowings?
- Whether business can meet financial obligations
- How the year’s figure compares to previous years

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• Financial ratios are used for the analysis of the business situation - it allows management to make
informed decisions regarding the business. Main types of financial analysis:
- Vertical analysis
 Compares figures within one financial year.
 E.g. Expressing gross profit as a percentage of sales and comparing debt to equity.
- Horizontal analysis:
 Compares figures from different financial years.
 E.g. Comparing 2014 and 2015
- Trend Analysis:
 Compares figures for periods of three to five years.

⎯ Liquidity – current ratio (current assets ÷ current liabilities)

→ Is the extent to which the business can meet its financial commitments in the short term when they are
due, which usually refers to a period less than 12 months?
→ Current assets refer to those assets that a business may be able to easily transact, or to convert to cash,
in the short term if and when the need arises; whereas current liabilities are those short term obligations
that a business must attend to if it is to remain credible to those it is conducting business with

Strategies to improve liquidity include:

- Reducing and renegotiating current liabilities such as overdrafts by adding equity finance
- Selling non-essential non-current assets
- Using leasing and factoring agreements

current ratio = current assets ÷ current liabilities

→ Examples of liquidity:
- A 0.4:1 (40%) ratio is generally a poor financial position as the business will experience liquidity
issues by only having $0.40 in current assets for every $1 of current liabilities; thus, the business will
have cash shortages and will struggle in meeting their short-term liabilities, highlighting
unfavourable cash flow issues.
- A 2:1 (200%) ratio is generally a sound financial position for the firm, as the business has $2 in
current assets to cover every $1 of current liabilities; thus, the business has the ability to meet its
short-term liabilities and is liquid.
- A 4:1 (400%) ratio is generally a poor financial position as it is too liquid, having $4 in current assets
to cover every $1 of current liabilities, suggesting that the business is not fully utilising their current
assets such as cash to stimulate future growth; thus, it is recommended that the business reduces its
current ratio and invest cash into future growth opportunities for profitability.

CASE STUDY: Liquidity and Netflix

Netflix has $5.47B liabilities and $7.67B meaning that they have a ratio of 1.41. They can comfortably
pay off their short-term debts.

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Ratio Example:

⎯ Gearing – debt to equity ratio (total liabilities ÷ total equity)

→ The ability for a business to meet its financial commitments in the longer term
→ Gearing measures, the relationships between debt and equity

Expressed as ratio/number:
→ An important control aspect for management as this ratio must be carefully balanced.
→ Ratio of greater than 1 means business has less equity then debt
→ Ratio of between 0 and 1 means that business has more equity than debt
→ The higher the ratio, the less solvent the firm
- The higher the ratio, the higher the risk

Strategies to improve solvency:

→ Look at ways to reduce debt or increase equity
→ To decrease debt, businesses could sell non-essential assets to pay off their debts
→ Could renegotiate their loans to spread payment over a longer period
→ Business could lease assets as opposed to purchasing them
→ To increase equity, a business could retain more profits or inject more equity funding by either selling
ore shares or inviting new owners.

In order to determine gearing (solvency), the debt to equity ratio is:

debt to equity ratio = total liabilities ÷ total equity

CASE STUDY: Gearing and Netflix

Netflix has 3.37B of debt for 6.36B in equity. This means that it has a ratio of 53%. For every dollar of equity,
there is 53c in debt, which means that it can pay back its debt in the long term.

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⎯ Profitability – gross profit ratio (gross profit ÷ sales); net profit ratio (net profit ÷ sales); return on equity
ratio (net profit ÷ total equity)

Profitability
→ Is the earning performance of the business; profitability depends on the business’ ability to maximise its
revenue, but at the same time controlling its expenses (compared to previous years and industry
averages).
→ There are a number of stakeholders who are interested/affected by the profitability of the business
including the owner’s, creditors, shareholders and management.
→ Strategies to improve profitability:
- Cost control for fixed/variable costs
- Cost centres (business-wide initiatives to reduce costs)
- Revenue control (selling more)
- Minimising expenses and improving marketing
→ There are three ratios (the higher, the better performing) which are used to determine the profitability
of the business.

Gross profit ratio

→ Used by trading businesses (that purchase foods from suppliers and sells them at a higher price to
customers).
- Shows percentage of sales revenue that results from gross profit.
- Indicates the effectiveness of planning policies concerning pricing, sales, discounts, the valuation of
stock etc.
- in order to determine gross profitability, the gross profit ratio is:

gross profit ratio = gross profit ÷ sales

→ Expressed as a ratio:
- If ratio is low, alternative suppliers may need to be sources and competitors investigated.
→ Associated management strategies:
- Seek better deals for stock purchases
- Concentrate on stock with higher turnovers

Net profit ratio shows the amount of sales revenue that results in net profit
→ Costs or expenses after gross profit must be ow enough to generate a net profit.
→ Amount of sales must be sufficiently high to cover the costs or expenses of the firm and still result in a
profit.
→ Businesses should be aiming for a high gross and net profit ratio
Expressed as a percentage: (A lower figure needs attention)
Associated management strategies:
→ Monitor and control expenses
→ Increase volume of sales to compensate for smaller profit margins

In order to determine net profitability, the net profit ratio is:

net profit ratio = [net profit ÷ sales] x 100

CASE STUDY: Profitability and Netflix produced a profit of $227M.

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Return on equity ratio shows how effective the funds contributed by the owners have been in generating
profit.
→ Return for owners should be better than return gained from alternative investments.
→ In order to determine the return on owner’s equity, the return on owner’s equity ratio is:
return on equity ratio = [net profit ÷ total equity] x 100

Expressed as a percentage: (A lower figure needs attention)

→ The higher the ratio or percentage, the better the return for the owner
→ If returns are favourable, owners can consider expansion or diversification
→ If return is unfavourable, owners could consider selling off business.

Associated management strategies:

→ Reduce unnecessary assets
→ Re-examine areas of operation to concentrate on more profitable areas

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⎯ Efficiency – expense ratio (total expenses ÷ sales), accounts receivable turnover ratio (sales ÷ accounts
receivable)

Efficiency

→ The ability of the business to use its resources to achieve maximum output and productivity.
Strategies to improve efficiency:
- Cost centres and bogans to reduce expenses
- Monitor the types of expenses and the amount
- Take greater care in granting credit for receivables
- Monitor outstanding debts and enforce stricter interest conditions
→ Two ratios which are used to determine the efficiency of the business: expense ratio and accounts
receivable turnover ratio.

Expense ratio
→ The ability of the firm to use its resources effectively in ensuring financial stability and profitability of the
business.
→ Relates to the effectiveness of management in managing goals and objectives
→ The more efficient, the greater the profits and financial stability
→ Compares the total expenses with sales and allows the business to determine the amount of sales that
are allocated to expenses.
→ E.g. if the ratio is 12%, for every $1 of sales, 12c is absorbed by expenses; therefore, the higher the
percentage, the less efficient the business.
→ In order to determine the expense efficiency, the expense ratio is:

expense ratio = [total expenses ÷ sales] x 100

Expressed as a percentage: (A high or rising figure isn’t good and needs attention)
→ Compares total expenses with sales
→ Indicates the amount of sales that are allocated to individual expenses
E.g. selling, administration, COGs and financial expenses
→ Indicates the day-to-day efficiency of the business
→ A business aims to keep expenses at a reasonable level
- If selling ratio has increased, it could be due to advertising costs and how this has not generated the
expected sales.
- A decline in expense ratio may be a result of lower interest rates or less debt being used by the firm.
- As business varies, the standard percentage varies. Results should be compared with previous
results.
 Rising percentage needs attention
→ If expense ratio is too high, business should look at ways to monitor and control expenses.

Accounts receivable turnover ratio

→ Measures the effectiveness of the firm’s credit policy and how efficiently it collects its debts.
→ Measures how many times the Accounts Receivable balance is converted into cash or how quickly
debtors pay their accounts.
→ Dividing ration in 365 can determine the average length of time it takes to convert balance into cash
→ In order to determine the efficiency of collecting accounts receivables, the accounts receivable
turnover ratio is:

accounts receivable turnover ratio = sales ÷ accounts receivable (the higher the ratio, the better)

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average number of days to collect accounts receivable = [accounts receivable ÷ sales] x 365
(the lower the days, the better)

→ Expressed in days: (A figure no bigger than 10 days is desirable)

- Discount early payments and cash payments
- Charge interest on late payments
- Use outside credit facilities in order to avoid credit exposure e.g. Visa

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⎯ Comparative ratio analysis – over different time periods, against standards, with similar businesses
→ Figures, percentages and ratios do not provide a complete picture for analysis
→ Comparisons and benchmarks are needed
→ Judgements are made by comparing a firm’s analysis against other figures, percentages and ratios.

Comparisons can be made in a multitude of ways:

→ With results from previous years
→ With similar businesses
→ Against common industry standards or benchmarks
- Must be comparing the same things
- Each firm has its differences
Analysis can also include budget figures so predicted figures can be compared against actual figures over
short periods. This is available for parties within a firm rather than shareholders.

CASE STUDY: Comparative Ratio Analysis and Netflix

Netflix made a profit of 186.7M in 2016. They made 227M in 2017. This is an increase of 21.6% over the
same quarter in the previous year.

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Over different time periods

→ Historical analysis or trend analysis is the comparison of financial ratios over time; comparing current or
past ratios allows the business to analyse:
- How well the current performance rates are, given the financial history of the business (comparing
past performance with current performance).
- Possible future trends in the ratio/financial performance of a business (predicting/ forecasting future
financial performance of the business).
→ Issues that may arise from this include:
- Changes to the external business environment e.g. Shift in accounting policies.
- Factors affecting past years such as business structure and economic conditions may have changed
significantly over time.

Against standards
→ It is more desirable to compare a business’s performance against some common standard or benchmark
such as the frequently used industry average.
→ It is useful to help direct management’s attention to potential/underlying operating or financial issues.
→ However, financial performance of a business is affected by many factors, that it would be unwise to
ignore factors which may not be specific to the business.

With similar businesses

→ The business which is being used for the comparison must be in a similar industry and life cycle phase; as
economic conditions may affect businesses in different ways.
→ Accounting methods are rarely identical across large businesses; the differences in accounting policies
must be accounted for when comparing ratios with similar businesses.

• Limitations of financial reports – normalised earnings, capitalising expenses, valuing assets, timing
issues, debt repayments, notes to the financial statements

Limitations of financial reports

→ Financial reports and ratio analysis provide information on the state of the business and indicate trends
in its operations.
→ However, caution needs to be exercised when analysing financial reports because they may not give a
completely accurate assessment of a business’s financial position as a result of various limitations.

Normalised earnings
→ Earnings that have been adjusted to take into account changes into the economic cycle or remove one
off outlier that will affect profitability.
→ Done to give more accurate information on a company’s true earnings.
→ Easier to compare profitability figures for a business
→ E.g. A removal of a land sale, which would achieve large capital gain
→ E.g. A one-off MAJOR event occurring that affects a business’s sales
E.g. If there is a GFC, the reports for that year may be pessimistic, whereas if there is a boom, there
would be a higher degree of optimism; the contrast between these economic conditions make decisions
to invest difficult.

Capitalising expenses
→ Accounting method where a business records an expense as an asset on the balance sheet rather than as
an expense.
→ Does not accurately represent the true financial condition of the business as it understates the expenses
and overstates the profits as well as the assets.

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→ E.g. Research and development, development and expenditure

→ Two purposes to capitalising expenses:
- Inflating the value of the business: labelled as an asset to increase profitability, rather than the cost
of expenses taken from future earnings over time; they are deducted through depreciation over
time as the asset will be generating revenue over several years.
- Increase expenses to lower profit, therefore lowering tax: labelling as an expense to reduce net
profit and reduce taxation obligations.

Valuing assets
→ Process of estimating value of assets when recording them on a balance sheet.
→ Difficult to estimate especially non-current assets.
→ Value is often written as a historical cost, an accounting method where assets are listed on a balance
sheet at the value they were purchased.
- Advantage is that it can be verified
- Disadvantage is that value may distort business’s balance sheet, as it will not accurately represent
the true worth of the business’s assets because the original cost may be different.
→ Non-current assets usually increase over time (land) or may decrease in value (Motor vehicles) – this is
known as depreciation.
→ Business estimate how much value is lost overtime
→ Therefore, it is a limitation as depreciation rate is an estimate and may give false impression on how
much the business is actually worth.
→ Some assets are difficult to value – intangible assets such as good will, trademarks, patents and brand
names.
- There may be a temptation to over value them

Timing issues
→ Under the matching principle, expenses incurred by a business must be recorded on the income
statement for the accounting period in which the revenue is earnt.
- Expenses don’t match up to revenue
- E.g. Real estate may have sold a property in June but employer does not pay them until July.
→ Revenue earned will match costs that were incurred to earn that revenue
→ This presents a more accurate representation of the financial position
→ Accountants may adjust the timing of revenue inflows and debt repayments to make the business
appear more or less profitable according to its objectives.
- Understating profits: delaying recording payments near the end of the financial year to avoid paying
tax in the current financial year.
- Overstating profits: prematurely recording to inflate the net worth of the business which allows
them to appeal to investors as well as lending institutions.
→ Accounting standards AASB 137: provisions as ‘a liability of uncertain timing or amount’; the timing of
these liabilities can be manipulated e.g. Forcing employees to take leave when it is favourable for the
business and for financial reporting.

Debt repayments
→ Gearing ratio is often used to determine a business’s risk of meeting long-term financial commitments.
- Highly geared: Alarming to stake holders
- But increased risk as potential for profit is greater
- E.g. Higher debt to fund growth can mean more profits in the future
→ Financial reports can therefore be limited.

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→ Financial reporting can be limited because it does not have the capacity to disclose certain information
about debt repayments or provisions such as:
- How long the debts have been held for, the methods of the business to recover debts, the capacity of
the debtors to repay its debts and non-monetary debts which are owed to employees.
→ These debts have certain timing issues such as:
- Being paid on the invoice date with a specific amount; can lead to the accumulation of liabilities which is
negative for the business as time progresses e.g. Due to higher wages (inflation) and longer time periods
of leave.

Notes to the financial statements

→ The notes on financial statements are usually located at the end of the financial reports.
→ These notes normally include additional information regarding methods of recording transactions e.g.
Accounting standards, details about why such items are included, events subsequent to the balance date
and critical accounting judgements/estimates.
→ Provides deeper understanding of the transaction as well as why/how it was recorded in such a way.
→ Reports the details and additional information that are left out of the main reporting documents
→ These contain information that could be useful to stakeholders
→ Contains accounting methodologies and further details about how figures were calculated

• Ethical issues related to financial reports

→ Any attempt to engage in creative accounting to portray a more favourable and inaccurate picture
should be avoided.
→ The valuing of assets should be particularly done ethically.
→ If debt funds are used extensively to finance activities in a business, there is an added risk for
shareholders.
- Impact of these risks is an ethical issue to be considered
→ Expenditures and revenues are estimated
- These should not be overestimated and revenues should not be understated.
- Done to allow for unexpected and uncertain events.
Laws that relate to this; Directors have a duty to:
- Act in good faith
- Exercise power for proper purpose
- Exercise discretion reasonably and properly
- Avoid conflicts of interest

CASE STUDY: Ethical Issues related to Financial Reports and Slater & Gordon
Slater & Gordon said that it had uncovered errors over three years relating to its cash flow calculation, that
summed to tens of millions of dollars. They also wrote things off creative accounting

Audited accounts:
→ An independent check of the accuracy of financial records and accounting procedures.
→ Potential users of information (e.g. shareholders) rely on auditors before they make important decisions
about the business.

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→ There are three types of audits:

- Internal Audits: conducted internally by employees to check accounting procedures and the
accuracy of financial records.
- Management Audits: conducted to review the firm’s strategic plan and to determine if changes
should be made.
 Factors affecting strategic plan include human resources, production processes and finance
- External Audits:
 Requirements of the Corporations Act (2001)
 Firms financial reports are investigated by independent and specialised audit accountants to
guarantee their authenticity.
 Auditor issues a statement that indicates that the business complies with Australian auditing
standards.
→ Internal and external audits assist in preventing unnecessary waste and inefficient use of resources,
misuse of funds, fraud and theft.
→ E.g. Cash is counted; condition and amount of inventory is checked and accounts receivable and non-
current assets are checked.
→ External auditors are used to provide an annual audit of accounting practice and procedures.
→ Small businesses commonly require audits if the business is for sale or to check against fraud or theft.

Record keeping:
→ Accounting processes depend on how accurately and honestly data is recorded in financial reports
- Source documents must be created for every transaction
- Temptation to receive transactions “cash in hand” and not record the transaction
 This could reduce the revenue, reducing the profit and reducing the tax burden
 The ATO regulates this and tax evasion can receive fines, harming the reputation of the business etc.

Reporting practices and inappropriate cut off periods:

→ Other stakeholders are entitled to access the business’s financial information.
→ Shareholders in a private company are legally entitled to receive financial reports annually
→ Pretending that profit is lower is an attempt to defraud the ATO
- This is illegal and unethical and can have other negative consequences
→ A business may wish to raise additional capital from existing shareholders or from a bank, understating
profit may make it more difficult to persuade those sources of finance to lend to the business.
→ Any purchaser of a business on sale would want to see financial reports for a number of years prior to
sale. Understating or overstating value of assets are counter-productive.

financial management strategies

• Cash flow management

Aims to identify trends and be a predictor of change to ensure the business has sufficient cash to meet
obligations at any point in time; also takes necessary action to ensure the business is securing measures to
improve cash flow.

Cash flow refers to the movement of cash in and out of the business over a period of time and it is essential
that cash inflows exceed cash outflows.
- Aims to ensure that the business does not incur unfavourable cash flow issues which may arise from
purchasing expensive long-term assets and non-periodic sales such as in seasonal industries.
- Cash inflows refer to sales, accounts receivables and the sale of assets.
- Cash outflows refer to operating expenses, payment to suppliers and loan repayments.

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⎯ Cash flow statements indicate the movement of cash receipts (inflows) and cash payments (outflows)
resulting from transactions over a period of time ⟶ allows managers to identify patterns of business
cash flow.
→ When used with a cash flow budget, the business can forecast/anticipate the business’ potential debts
such as cash shortages and the amount of such; assist in designing strategies to overcome these
problems.

students learn to:

• identify the limitations of financial reporting
The record does not tell what debts the business has or what is owed to the business itself by others.

Management strategies:
- Businesses may have cash shortfalls for a temporary period of time and therefore, financial flexibility is
important as a business must adapt their finances to cover planned or unexpected cash shortages to
avoid insolvency.
- In periods of reduced business confidence and adverse economic conditions or climate, businesses
should be concerned with being solvent with efficient cash flows by paying debts when they fall due,
rather than growth and profitability.

⎯ Distribution of payments, discounts for early payment, factoring

Distribution of payments involves distributing payments throughout a time period so that large expenses do
not occur at the same time and cash shortfalls do not occur.
→ Distributing payments throughout the year means there is a more equal cash outflow each month rather
than large fluctuations in particular months.

Discounts for early payment

→ A business’ goal is to ensure that many creditors do not use the distribution of payments strategy, as it
could negatively affect the cash flow status.
→ This can be overcome by offering creditors a discount for early payments.
→ This strategy is most effective when targeted at those creditors who owe the largest amounts over the
financial year period.

Factoring selling of accounts receivables at a proportion of their total value to a debt factor; the business
receives an immediate however reduced lump sum from the debt factor who chases up those who owe
outstanding debt.

- Advantages: immediate access to short-term funds much earlier than would have been paid by the
business’ creditors as well as saving on the administrative costs associated with collecting debt from
customers.
o The business saves on the costs involved in following up on unpaid accounts and debt collection.
o By having immediate access to funds, the business will improve its cash flow and gearing. However,
it must be remembered that the full amount will not be received for accounts.

- Disadvantages: the business receives less than the amount owed to them, giving up some potential
revenue (which the debt factor collects) in return for money in the short term; also, the debt factor’s
aggressive collection tactics to recover outstanding debts may deter future business.

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• Working capital management

→ Working capital is the term used in businesses to describe the funds available for the short-term
financial commitments of a business. Net working capital = current assets – current liabilities.
→ Working capital: defined as the business’ current assets fewer current liabilities, which represents the
value of assets that can be quickly converted to cash to fulfil their day-to-day operational needs such as
playing suppliers.
→ Working capital cycle: refers to the flow of money throughout the business such as outflows of working
capital such as paying for raw materials and the inflows of working capital such as collecting accounts
receivables; management must ensure sufficient working capital at all times to keep the business
running effectively.
- A business must have enough working capital to cover expenses, but have excess working capital
may suggest the business is missing profitable opportunities.

⎯ Control of current assets – cash, receivables, inventories

Control of current assets requires management to select the optimal amount of each current asset held, as
well as raising the finance required to fund those assets.
→ The costs and benefits of holding too much or too little of each asset must be assessed.
→ Working capital must be sufficient to maintain liquidity and access to credit (overdraft) to meet
unexpected and unforeseen circumstances.

Cash refers to money at the business’ disposal and the business must control their cash by having sufficient
levels of ready funds; a bank reconciliation statement checks whether the business and the bank’s figures
agree on the level of the firm’s cash in their accounts.
→ Cash ensures that the business can pay its debts, repay loans and pay accounts in the short term, and
that the business survives in the long term.
→ Supplies of cash also enable management to take advantage of investment opportunities.
→ Businesses try to keep their cash balances at a minimum and hold marketable securities as reserves of
liquidity.
→ Reserves of cash and marketable securities guard against sudden shortages or disruptions to cash flow.
- Insufficient cash levels: may need an overdraft in order to remain liquid, which are highly costly; can
be managed through a cash budget which is a tool for planning and controlling finance.
- Excess cash levels: whilst a buffer of cash is effective, excess cash should be redistributed to more
profitable opportunities such as investing it in higher interest accounts, securing raw materials in
advance to take advantage of lower price and paying accounts payable early for a discount.

Accounts Receivables money owed to the business for credit sales and to improve working capital
management, the business should adopt an efficient and firm collection policy and ensure that receivables
are converted to cash, when they fall due such as:
- Managers should remind customers when payments are due as the date approaches.
- If customers fail to pay on time, they should be firmly told that they won’t be provided any additional
credit.
- The business can threaten to put the consumer on a ‘credit blacklist,’ which will make it difficult for
them to obtain credit in the future.
- If the issue persists: the business could outsource the issue to a debt factor or to a specialised credit
control company.
- It is important for financial managers to monitor the level of bad debts and tighten up its credit system
by more thoroughly assessing the consumer’s credit histories and extending credit to favourable
consumers.

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- The collection of receivables is important in the management of working capital.

- Consequently, a business must monitor its accounts receivable and ensure that their timing allows the
business to maintain adequate cash resources.
- Strategies for managing accounts receivable include:
 Sending monthly statements to customers, stipulating a reasonable period for accounts (ideally
30 days).

Inventories refers to the business’ stock of raw materials, semi-finished goods and finished goods; working
capital management should aim to minimise inventory levels as it incurs storage costs and potential for
obsolescence and theft; however, they must have sufficient stock levels to satisfy demand and allow the
working capital cycle to run smoothly; issues involved inventory management include:
- When stock is stored, it may be damaged or stolen, creating additional wastage costs; thus, managers
should ensure that inventory is stored in a secure and appropriate location.
- Managers must ensure that record keeping is up to date and carry out periodical inspections to ensure
accuracy of the amount and age of goods.
- Inventory purchases increase the working capital requirements of the business as the business will not
realise the value from inventory until it is sold; compounded or accumulation of unsold inventory;
increases inventory management costs and leads to an increase in obsolete goods ⟶ to remedy this, a
business may sell off inventory at lower prices to free up storage, however, this may tarnish the
business’ reputation as ‘cheap.’
- Managers should seek to normalise their inventory turnover through regular and frequent sales of
goods; possible through the just-in-time or ‘JIT’ method which focuses on only ordering the required
demand of stock to ensure that inventory is not lying idle.
- A computerised inventory management system using barcodes to identify stock movement will give
firms instant information about what stock needs to be ordered and identify which stock is not selling
very well.
- Inventories make up a significant amount of current assets, and their levels must be carefully monitored
so that excess or insufficient levels of stock do not occur.

CASE STUDY: Inventories

→ Zara uses Just in time for its inventories. This means less stockpiled products and more cash.
→ Toyota uses JIT and just orders materials when they need it (gets orders from customers). Less piled up
stock and written off items.

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⎯ Control of current liabilities – payables, loans, overdrafts

Control of current liabilities

→ Current liabilities are financial commitments that must be paid by a business in the short term by
converting current assets into cash to ensure that the business’ creditors are paid.
→ Minimising the costs related to a firm’s current liabilities is an important part of the management of
working capital.

Accounts Payables refer to the money owed by a business to its suppliers and must be controlled by trying to
manipulate/negotiate the timing of payments such as till the last day possible to avoid having to borrow
funds.
- The holding back of accounts payable until their final due date can improve a firm’s liquidity position OR
it may also be possible to take advantage of discounts offered by some creditors, which reduces costs
and assists with cash flow.
- Accounts must, however, be paid by their due dates to avoid any extra charges imposed for late
payment and to ensure that trade credit will be extended to the business in the future.
- As there are costs involved in providing and receiving credit, businesses may negotiate reduced prices if
credit card facilities are used.
- Costs and benefits in using credit must be determined in the control of accounts payable.
- Credit risk: a firm must carefully consider its gearing and must manage its cash flows effectively to
ensure it can meet its upcoming interest and principal payments.
- Interest rate risk: due to fluctuations it is easy for a firm to become overextended when market interest
rates change ⟶ when controlling its loans, the firm must examine how its loan repayments could be
affected by interest rates and businesses must be flexible to avoid illiquidity and insolvency.

Loans refer to the borrowing from financial institutions; create current liabilities due to the regular interest
and principal payments - without effective management, it can represent a significant ongoing burden to the
business.
→ Management of loans is important, as costs for establishment, interest rates and ongoing charges
must be investigated and monitored to minimise costs.
→ Short-term loans are generally an expensive form of borrowing for a business and their use should
be minimised.
→ Bridging finance can be provided by banks to cover times when funds from the settlement of asset
sales, such as property, have not been received but payment for another property is required.
→ However, the costs in interest rates and charges associated with bridging nance are high.

CASE STUDY: Loans

→ Whitehaven Coal renegotiates the debt. Interest on the $1.4 billion debt facility will be about 100 points
better than the 6 per cent on Whitehaven's previous loan.
→ Total debt had fallen from $22.7BN to $14.9B.

Overdrafts short term loan from a bank, which is highly flexible with no withdrawal limit and no set
repayments as it can be obtained or increased at short notice, however, it should only be used for covering
expenses for short periods of time; can usually be very expensive as interest is paid on a costly variable rate
on a daily basis.
- However, can be controlled if approved by the bank by extending them, so that they can be repaid later,
when there are sufficient current assets such as collecting accounts receivables.
• Features of overdrafts differ between banks, but generally involve an arrangement with the bank that
the business’s account can be overdrawn to a certain amount.
• They enable a business to overcome temporary cash shortages.

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• Banks require that regular payments be made on overdrafts and may charge extra fees, but interest is
usually less than that for a loan.
• Bank charges still need to be carefully monitored and businesses should have a policy for using and
managing overdrafts and monitor budgets on a daily or weekly basis so that cash supplies can be
controlled.

⎯ Strategies – leasing, sale and lease back

Strategies to improve working capital: management may employ drastic strategies to alter the flow of cash
throughout the business in order to avoid cash shortages or excess surpluses.

Leasing business purchases the right to use an asset e.g. Machinery through periodic payments rather than
purchasing it outright.
→ Firms can also increase their number of assets through leasing and this means that revenue, and
therefore profits, can be increased.
→ Regular and fixed payments made for the lease can be planned to match the business’s cash flow.
→ Note that as it is an expense, it is also tax deductible.

CASE STUDY: Leasing

→ Tesla Leases out their cars to companies to generate cash.
→ Telstra leasing out phones. People can use phones for up to 2 years and then have the option to wait or
buy it.

Sale and lease back

→ The selling of an owned asset to a lessor and leasing the asset back through fixed payments for a
specified number of years.
→ Sale and lease- back increases a business’s liquidity because the cash that is obtained from the sale is
then used as working capital.

CASE STUDY: Sale

→ Toyota sells their manufacturing plants in Australia. It will recover some capital and result in a loss of
2600 jobs.

• Profitability management
→ involves the control of both the business’ costs and its revenue; maximising profits involves minimising
costs and maximising revenue
→ accurate and up-to-date financial data and reports are essential tools for effective profitability
management.

⎯ Cost controls – fixed and variable, cost centres, expense minimisation

Cost controls
Costs should be monitored and controlled with the aim of reducing expenses and maximising profits; the
costs associated with a decision need to be carefully examined before it is implemented. The costs
associated with a decision need to be carefully examined before it is implemented.

fixed and variable

→ Fixed costs are not dependent on the level of operating activity in a business – they must be paid
regardless of what happens in the business.
→ Variable costs are those that change proportionately with the level of operating activity in a business.

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→ Changes in the volume of activity need to be managed in terms of the associated changes in costs.
→ Comparisons of costs with budgets, standards and previous periods ensure that costs are minimised and
profits maximised.

cost centres are particular areas, departments or sections of a business to which costs can be directly
attributed; management may provide each sector with a budget and monitor their expenses to minimise
waste and achieve maximum use of resources.
→ aim to make employees more accountable for the costs incurred by their area of business, thereby
reducing costs.
→ specific policies are implemented to pinpoint weaknesses in cash flow and to assist managers identifying
which functions are overspending.
→ They have both direct costs and indirect costs. Direct costs are those that can be allocated to a particular
product. Direct costs are also called variable costs. E.g. depreciation of equipment that was used solely
in the production of one good.
→ Indirect costs are those that are shared by more than one product. E.g. depreciation of equipment used
to make several products would have indirect costs allocated on some equitable basis.

CASE STUDY: Cost Controls and Amazon

→ Amazon is trying to reduce the number of boxes used to cut costs.

expense minimisation profits can be weakened if the expenses of a business are high, as they consume
valuable resources within a business; guidelines and policies should be established to encourage staff to
minimise expenses where possible through strategies such as:
→ negotiating better deals from current suppliers or searching for BOGANS
→ outsourcing inefficient functions and departments through a specialist business which will improve
efficiency such as wastage costs
→ finding cheaper suppliers of phone, internet and electricity services
→ using contractors or casual staff to reduce their on-costs associated with hiring permanent staff

CASE STUDY: Expense Minimisation and GOPRO

→ GOPRO reduced operating expenses by 54% to $548M. They are aiming for $400M.
→ Costco negotiates in bulk and doesn’t spend much on fancy stores. They just use a warehouse and have
basic decorations.

⎯ Revenue controls – marketing objectives

marketing objectives:
→ Marketing strategies and objectives should lead to an increase in sales and hence an increase in revenue.
→ Sales objectives must be pitched at a level of sales that will cover costs, both fixed and variable, and
result in a profit.
→ Businesses should focus on the customer base on which most of the revenue depends before
diversifying or extending product ranges or ceasing production on particular lines.
→ Pricing policy affects revenue and, therefore, affects working capital.
→ Pricing decisions should be closely monitored and controlled.

CASE STUDY: Revenue Controls – marketing objectives

Companies like DJ, Myers and TopShop have discounts during non-Christmas seasons to even out sales and
clear out stock.

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→ Sales objectives: refers to setting targets to achieve a certain level of sales or market share; clear sales
objectives give management an identifiable target to work towards which is measured for effectiveness
using a cash budget.
- a cost-volume-profit analysis can determine the level of revenue sufficient for a business to cover its
fixed and variable costs to break even, and predict the effect on profit of changes in the level of
activity, prices or costs.

→ Sales mix: refers to the proportion of sales associated with the particular products in the product range
of the business.
- managers can then identify which product contributes most to the revenue and which product
contributes least; from this, managers can determine which product to concentrate on and which to
eliminate from the product range.
- allows managers to examine ways to improve sales e.g. improving marketing strategies, 4 P's, and
targeting different markets.

→ Pricing policy: when pricing a product, firms must take into account what the consumer is willing to pay
for a good or service, and whether the price of the good covers the associated production costs.
- this can be done through a sales reporting system that reports sales figures, and breaks them down
into type of consumer etc.
- this allows the business to target specific markets who regularly purchase the product and employ
specific strategies to attract them, whilst also determining an appropriate price that will be suitable
for this market.

• Global financial management

Financial risks associated with global expansion are greater than those encountered domestically, but such
risk taking is necessary for the business strategy to be implemented.

⎯ Exchange rates: The foreign exchange rate is the ratio of one currency to another; it tells how much a
unit of one currency is worth in terms of another.
→ Exchange rates fluctuate over time due to variations in demand and supply.
→ Such fluctuations in the exchange rate create further risk for global business.
→ When revenues and expenses are transferred between nations, the exchange rate can either increase or
decrease their value.
→ Currency fluctuations will also affect the business’s ability to meet their financial objectives.

A currency appreciation raises the value of the Australian dollar in terms of foreign currencies.
→ This means that each unit of foreign currency buys fewer Australian dollars.
→ However, one Australian dollar buys more foreign currency.
→ Therefore, an appreciation makes our exports more expensive on international markets but prices for
imports will fall.
→ The result of the appreciation, therefore, reduces the international competitiveness of Australian
exporting businesses.

A currency depreciation has the opposite impact.

→ A depreciation lowers the price of Australian dollars in terms of foreign currencies.
→ Therefore, each unit of foreign currency buys more Australian dollars. The result is that our exports
become cheaper and the price of imports will rise.
→ A depreciation, therefore, improves the international competitiveness of Australian exporting
businesses.

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- Exporter: risk if currency appreciates

- Importer: risk if currency depreciates

Appreciation of $AUD (Depreciation - vice versa) → the $AUD is stronger in the Forex market

Positive Negative

→ imports are cheaper, therefore businesses → exports are more expensive, therefore
that use raw materials are able to reduce there is a reduction in international
production costs competitiveness

→ borrowing from overseas sources becomes → tourism in Australia falls as it becomes

cheaper; thus, value of foreign debt and debt more expensive and there is less
repayments for foreign loans reduce foreign investment into Australia

CASE STUDY: Exchange Rates

→ BMW lost 2.4 BN in profits due to exchange rates changing. BMW did not want to pass on its exchange
rate costs to consumers through price increases.
→ Exchange rates hit Toyota’s profit and it dropped by 23%.

⎯ Interest rates
→ A global business has the option of borrowing money from financial institutions within Australia, or
borrow money from financial markets overseas, which tend to be cheaper than Australian interest rates.
→ However, the real risk here is exchange rate movements as any adverse currency fluctuation could make
the advantage of borrowing money at a cheaper interest rate overseas turn into to a disadvantage as the
interest rate will naturally increase.
→ Changes in interest rates will therefore have a major impact on a business’s profitability if they have
borrowed money from finance markets overseas.

⎯ Methods of international payment – payment in advance, letter of credit, clean payment, bill of
exchange

Methods of international payment

→ transactions involve the exporter providing goods and services to the importer in return for payment;
selling goods overseas presents more challenges and risks than selling domestically and therefore the
business must select the appropriate method for payment
→ the risk to the exporter is that they may not receive payment and the risk to the importer is that they
may not receive the product
→ method of payment is dependent on: amount, perceived risk, relationship between buyer and seller,
industry practices and terms offered by competitors

payment in advance
payment made in advance to the exporter; greatest risk to the buyer as they may not receive the product
they have purchased or the goods may be damaged, however eliminates all risk for the seller

letter of credit
document/contract between the buyer and the seller in a transaction is guaranteed by the importer’s bank;
this bank guarantees payment to the exporter if the exporter meets the conditions laid out in the letter of
credit from the bank

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→ this method reduces risk for both parties as the bank is normally a much more secure and trustworthy
source than an overseas buyer

clean payment
payment for the goods is made by the importer after the goods have been received; also called ‘open
account,’ and essentially shipping in advance
→ agreement between the buyer and the seller; the seller (exporter) agrees to supply the goods on credit
to the buyer (importer); this means that the buyer receives the goods and pays for them later; usually
within a specified credit period
→ very risky for the exporter and low risk for the importer

bill of exchange
A document drawn up by the exporter demanding payment from the importer at a specified time. This
method of payment is one of the most widely used and allows the exporter to maintain control over the
goods until payment is either made or guaranteed. There are two types:
→ Bill against payment:
- Using this method, the importer can collect the goods only after paying for them.
- The exporter draws up a bill of exchange with his or her Australian bank and sends it to the
importer’s bank along with a set of documents that will allow the importer to collect the goods.
- The importer’s bank hands over the documents only after payment is made.
- The importer’s bank then transfers the funds to the exporter’s bank.

→ Bill against acceptance:

- Using this method, the importer may collect the goods before paying for them.
- The same process applies as with documents against payment, except the importer must sign only
acceptance of the goods and the terms of the bill of exchange to receive the documents that allow
him or her to pay for the goods at a later date.

⎯ Hedging refers to the practice of reducing and eliminating risk of financial transactions
→ When two parties agree to exchange currency, and finalise a deal immediately, this is referred to as a
‘spot exchange.’
→ The exchange rate to determine these transactions are known as spot exchange rates, the value of one
currency to another currency on a particular day.
→ Due to fluctuations of the Exchange Rate, it is necessary to engage hedging to minimise the risk of
currency fluctuations.
→ Hedging helps reduce the level of uncertainty involved with international financial transactions.

CASE STUDY: Hedging

→ Companies lock in the price of oil at $65, just in case the price of oil falls.
→ Buyers can also lock in the price of things like coal and other inputs.

Natural hedging:
A business can have multiple ways to minimise or eliminate the risk of foreign exchange exposure:
→ Establishing offshore subsidiaries
→ Stores overseas in the country they are trading in
→ Arranging for import payments and export receipts denominated in the same foreign currency. Any
losses from a movement in the ER will be offset by gains from the other
→ Marketing strategies to attempt to reduce the price sensitivity of the exported products
→ Insisting on both import and export contracts in AUD to transfer risks to the buyer

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Financial Instrument hedging:

There are a number of financial products available, called derivatives, to minimise or spread the risk of
exchange rate fluctuations.

⎯ Derivatives
→ financial instruments and contract between two or more parties to spread the risk of exchange rate
fluctuations
→ value is based on an agreed-upon and predetermined underlying financial asset or security such as a
share price or a foreign exchange rate
→ three methods of derivatives include:
- Forward exchange contract: A contract to exchange one currency for another currency at an agreed
exchange rate on a future date.
 Usually after a period of 30, 90 or 180 days.
 The bank guarantees the exporter, within the set time, a fixed rate of exchange for the money
generated from the sale of the exported goods. E.g. The Apples in America may become more
expensive as Australian dollar drops – so the bank guarantees a set price / exchange rate for this
deal in the future for a period of time.
- Options contract:
 Foreign currency options provide another strategy risk for risk management.
 An option gives the buyer the right, but not the obligation, to buy or sell foreign currency at
some time in the future.
 Option holders are protected from unfavourable exchange rate fluctuations.
 They maintain the opportunity to gain money if the ER movements are favourable.
- Swap contract:
 Introduced in 1980s.
 Very popular financial instrument for businesses to hedge.
 A Currency swap is an agreement to exchange currency in the spot market with an agreement to
reverse the transaction in the future.
 Involves spot sale of one currency together with a forward repurchase of the currency at a
specific date in the future. E.g. Swapping $50 million AUD for USD now and an agreement to
reverse the swap in three months.
 Businesses use this when they need to raise finance in a currency issued by a country which they
are not well known and are forced to pay a higher interest. E.g. A medium-sized Australian
business needs Japanese yen, but is not well known in Japan. It can find a Japanese business (or
a Broker can find one) that wants AUD and the swap can proceed.
o The Australian business borrows AUD in Australia where it is well known and can arrange a
loan for a cheaper interest rate to the Japanese business in exchange for yen.
o The Japanese business would repay the Australian dollar loan and vice versa.

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role of human resource management

• strategic role of human resources

→ refer to the management of total relationship between an employer and employee in order to
achieve the strategic gals of the business.
→ HR management includes functions such as recruitment, equal opportunity, training, development,
separation and how they align to achieve business goals.
→ HR management aims to reduce conflict and grievances between the employer and employee
through effective procedures and relationship maintenance.
→ HR has a resource-based view; it focuses on the internal resources of the organisation and the
contribution they make to the competitive advantage of the business.
→ HR sees an employee as an asset rather than a cost.
→ Encourages open communication and goal orientation.
→ Staff costs are generally 60% of operational costs so businesses examine ways to improve
competitiveness.

Strategic approaches include:

→ Seeing an effective workforce as a way of adding value to all areas of their business performance.
→ Focusing on the use of specific HRM strategies to retain, reward and motivate effective and skilled
employees to achieve the business’s objectives.

Major strategic challenges in the future for HR include:

→ Developing and retaining talented staff
→ Improving leadership development
→ Managing ageing workforce
→ The increase role of technology
→ Ethics and corporate social responsibility
→ Increased contracting out (outsourcing) of employment

• interdependence with other key business functions

→ The role of HRM in their role of achieving business goals are not apparent but are like the managers
of any other functional area, with the same responsibilities.
→ Effective HR policy within an organisation is linked to profitability gains, share price increases and
higher incidence of long-term survival.
→ Link between HR and marketing is apparent in stronger relationships between business and
customers.
o Business is able to determine the skills required for employees to produce the desired product
and sell it.
→ Link between HR and operations, the businesses that invest in relationship between them and
employees are more likely to see a better performance.
o Level of service experienced by the customer is more likely to be positive.
o Works closely with HR to ensure the business has recruited staff with the relevant skills and
experience necessary to produce a product (good or service) HR will monitor the performance
of employees in production of goods and services and train and develop them.
→ Link between HR and Finance, budgets are established towards training and development,
workplace education. HR needs to work within these budgets to provide for employee needs.
→ Effort to improve opportunities for employee training and development and/or rewards has a
positive correlation with employee productivity in the operations process.

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• outsourcing often used to obtain a superior and more efficient service, better functional quality and a
lower cost service than would be provided internally.
→ Fostered the development of new organisational structures, with the growth of contracting out or
outsourcing business functions.
→ Involves the use of third-party specialist businesses such as recruitment firms.
→ Aims to take advantage of the specialist skills provided by the specialist and to achieve a reduction
in labour costs.
⎯ human resource functions allow firms to focus more on their core business as they grow whilst experts
in HR assist by planning for growth, development and management of staff.

⎯ using contractors – domestic, global

using contractors
Contractors are primarily used by most businesses to create cost savings or to access greater expertise and
capabilities to improve competitiveness.
→ Can be obtained for most business functions, but are particularly used for processing functions
o Repetitive and easily measured, making it easy for a business to determine the cost savings and
productivity gains.
→ Generally recommended for non-core functions, allowing staff to focus on the broader aspects of
managing a firm.

There are also risks which increase as the proportion of a firm’s activities are outsourced. This includes:
→ Cost overruns
→ Loss of quality
→ Difficulty coordinating activities
→ Difficulty monitoring quality and performance in outsourced activities
Businesses should set clear and legally binding terms, timeframes and conditions in a contractor agreement
to avoid conflict and expensive litigation further down the track. Includes confirming responsibility for
superannuation, insurance and workers compensation.

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domestic subcontracting
→ avoids the need to employ additional in-house staff which leads to a simplification of business activities
and a reduction of on-costs as well as a minimisation of potential industrial conflicts.
→ Allows firms to focus their resources on essential business activities, leaving the detailed support or
compliance – related activities to experts, such as payroll management or order fulfilment
→ This is attractive for small to medium-sized businesses lacking the capacity to undertake internal
auditing, compliance updates, research or manage some functions at the professional ‘best practice’
level of larger firms.
→ This has the potential to improve the quality and productivity of a business’s service without the
resource scale normally required to achieve this level.

Contract for service: exists where employment is temporary and not ongoing; there is an agreed upon fee
and time period between the employer and independent contractor for a service that will be provided.

Contract of service: exists where an employee offers his/her services to an organisation on a regular and
permanent basis; the employee is subject to the lawful control and authority of the employer as outlined in
the employment award.

global subcontracting
→ increased pressure for businesses to become globally competitive and economic downturns such as the
GFC, have pushed businesses to seek foreign offshore contractors in the Asia-Pacific region to reduce
costs and businesses often use outsourcing as a stepping stone to a global expansion.
→ risks associated with global contracting include:
- quality control
- cultural barriers such as language and values
- security issues such as confidential information
- complexities with international law
- higher national labour turnover within the business as well qualified Australian employees will be
replaced and made redundant with less qualified and cheaper staff

Process outsourcing: the dominant form of outsourcing which involves repetitive, easily measured and
documented work e.g. recruitment, transnational payroll management, maintenance and customer
complaints.

Project outsourcing: most commonly found in areas such as HR, marketing, information technology, and
design.
→ It involves much greater use of intellectual property and strategic outsourcing involves much greater use
of IT and strategic business knowledge.
→ Operates on a longer time frame.
→ More difficult to measure.
→ Quality cannot be fully anticipated based on whether expectations such as completion date and quality
will be met.

CASE STUDY: Outsourcing, Human Resource Functions, Using Contractors – Domestic, Global
Many companies now hire or use external services to conduct hiring, payroll for them. One service that they
use is SAGE. “Sage Payroll Outsourcing - Our outsourcing team of Payroll Administrators are highly qualified
and experienced in payroll administration and management.”

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Global outsourcing carries some risks:

→ Difficulty controlling the quality and reliability of service.
→ Cultural differences such as language or accent issues, which will impact customer service.
→ Security issues such as opportunities for sharing of confidential company information and client
poaching.
→ Lack of remedies for breach of contract or other legal matters under foreign legal systems.
→ The (often) high labour turnover particularly experienced in all call centres.
→ Well-qualified employees may be replaced by less qualified staff, causing the quality of the service to
decline.
→ If the function can be clearly identified, measured, managed and supported by a binding legal framework
then it may be more suited to outsourcing.

Three types of global outsourcing:

→ Polycentric
→ Ethnocentric
→ Geocentric

key influences

• stakeholders – employers, employees, employer associations, unions, government organisations, society

employers
→ Employers are those who exercise control over employees.
→ Handle human resource management issues on a daily basis including developing programs.
→ Employers’ responsibilities are increasing, as recent legislation encourages them to negotiate
agreements and resolve disputes.
→ Under recent legislation, employers have gained more power to make agreements relevant to the
individual workplace or enterprise.
→ Not all employers support government policy enough to engage in full confrontation with unions and
employees, as the costs of such confrontation may be very high, with prolonged industrial disputes.

employees
→ Employees are workers under the control of an employer.
→ Employees today are more highly educated than in the past.
→ They become bored very quickly and demand more challenging, interesting work, involvement in
decision-making processes.
→ Many feel driven to build their career through a succession of jobs in a range of different organisations.
→ Practice of ‘churning’ — moving frequently from one job to another in different organisations— is
increasing, particularly in-service industries.
→ Businesses hoping to retain and motivate skilled staff need to put extra effort into developing staff
career and training plans, rewards and opportunities for greater employee involvement.
→ Many unions have responded to worker fears and have made employment issues such as job security—
a priority in negotiating agreements.

employer associations
Originally created by employers as a counter-party to unions, to represent employers in the making of
awards through the conciliation and arbitration system.
→ Assists employers in formulating policies and processed log of claims serviced on their members by
unions.
→ Acts on behalf of employers in collective bargaining sessions and before industrial tribunal, courts,
commissions and committees.

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→ Provides advice on matters such as awards, unfair dismissals and discrimination.

→ Make submissions to safety net wage cases.
→ Negotiate agreements.
→ Lobby governments and other organisations with views and interests of employer, industries and trade.
→ Unlike unions, employer associations represent employers on a broader range of issues beyond HR and
industrial relations matters.
→ E.g. Australian Medical Association, Australian Chamber of Commerce and Industry.

trade unions
→ Organisations formed by employees in an industry, trade or occupation to represent them in efforts to
improve wages and working conditions; unions are now under pressure globally as membership is
declining due to:
- community attitudes often favour individual rather than collective approaches to problems.
- collapse of the centralised wage fixing system.
- poor image of unions in media.
- recent legislative changes which reduce power and role of unions.
→ In response, unions are expanding their range of services and becoming more active in recruiting to
regain membership numbers.
→ System for resolving industrial disputes gave unions a powerful role in HR and provided them with an
official bargaining position in the making of agreements.
→ Unions won major improvements in terms and conditions of employment.
→ Currently under global pressures as membership declines to historically low levels.
→ Unions are expanding range of services and becoming more active in recruiting to regain membership
numbers.
→ Services also include free or discounted legal services, superannuation schemes, cheap home loads,
training programs etc.

government organisations
→ Pass laws which provide the legal framework for industrial relations.

Legislator
→ Led to the growth of the judicial system, and the institutions and processes used by employers and
employees to conduct bargaining and resolve disputes.
→ Governments are able to implement the legislation they enact — achieved through publishing
information and guidelines providing advice to the government and the public and investigating
breaches of legislation.

Employer
→ Federal and state governments employ one-third of Australian workers.
→ Regarded as the pacesetters in terms of responsible industrial relations policies.
→ Introduced practices such as maternity leave, flexitime and affirmative action for women

Responsible economic manager

→ Ensure non-inflationary, stable economic growth and a high standard of living for Australian.
→ Conflict between government and economic goals impact industrial relations.

Administrator of government policies on industrial relations

→ Government are able to implement the legislation they enact.
→ Achieved through publishing information and guidelines providing advice to the government.
→ Investigating breaches of legislation.

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Representative of Australia in the international arena in foreign affairs, trade and international labour
matters
→ Australia is a member of the International Labour Organisation.
→ Government generally implements legislation based on the treaties and conventions it signs with
international organisations.
→ Social justice legislation E.g. discrimination and human rights.

Governments are trying to have a bigger role in Industrial relations through External Affairs and Corporations
powers.
→ Fair Work Act
o To create a national system to simplify industrial relations so employers were not forced to
negotiate under multiple jurisdictions.
o To reduce business costs through creating greater certainty and efficiency in dealing with industrial
matters.

Statutes
Laws made by federal and state parliaments. E.g. Laws relating to employment conditions.
→ Awards the Commonwealth gove,6w9rnment limited powers to make laws about industrial issues,
known as residual powers.
→ Provides framework for awards and agreements, resolution of disputes and requires employers to:
o Meet WHS requirements
o Maintain workers compensation
o Superannuation

society
→ General assembly of United Nations passed the UDHR in 1948, recognising the importance of work to
people’s lives.
→ It is becoming widely accepted that workplace practices are reflective of behaviours that are upheld
within society.
→ Issues such as perceived discrimination, harassment and unfair working conditions are becoming
increasingly publicised.
→ With strong media attention, businesses must be seen to respond in a manner that is consistent with the
view of society.

• legal – the current legal framework

the current legal framework

→ the employment contract creates obligations for both employer and employee, and all businesses
operate within a legal framework of common law and statute law.
→ covers the nature of employment contracts and agreements as well as dispute-settling method which
allows for the protection of human rights in employment and employee welfare such as providing a safe
workplace, minimum wage entitlements and anti-discrimination and equal opportunity initiatives.

CASE STUDY:
7/11 and many places got fined in 2017 for not paying enough (legal) wages to workers. This was owed
under the General Retail Award 2010.

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⎯ the employment contract – common law (rights and obligations of employers and employees), minimum
employment standards, minimum wage rates, awards, enterprise agreements, other employment
contracts

common law

rights of employers:
→ Providing work.
→ Payment of income and expenses.
→ Rights that employees will carry out work with care and responsibility, especially in respect to work
health and safety.
→ Notified according to agreement / award of an employee’s intention to take leave entitlements.
→ Receiving formal advice of a worker’s intention to leave the business in accordance to the award /
agreement.
→ Meeting requirements of industrial relations legislation.
o Providing a workplace and work practices such as equity policies and promotion that are free from
discrimination.

rights of employees: being remunerated (at a specified rate according to the award) for the time they work
with additional allowances, having access to paid and unpaid leave entitlements and having access to a safe
and healthy working environment with appropriate training.

obligations of employers: fulfilling their duty of reasonable care and safety for employees under the Federal
and State Work Health and Safety Act 2011 (Cth) such as safe environment, EEO policies, training and
supervision and protection from unfair dismissal, appropriate and on-time payment of incomes and
expenses as well as providing work to employees in accordance to their award.

obligations of employees: ensure that they maintain the integrity and confidentiality of business
information, account for all money that comes into business, follow written/verbal procedures and policies,
complete forms related to taxation and its deduction from income and give appropriate notice of
termination of employment in accordance with relevant award.

minimum employment standards

Fair work Act (2009)
→ The Australian Federal government has introduced a new industrial relations system by the introduction
of the Fair Work Act (2009).
→ This Act was introduced in July 1, 2009.
→ It replaces the previous government’s Work Choice.
→ The Act continues to move to a national industrial relation system and include 90% of workers.
→ Only employees working for state governments will not be covered.
→ These employees will remain on state awards.
→ The Act seeks to create a fair balance between employers and employees by abolishing Australian
Workplace Agreements (AWAs).
→ AWAs were individual contracts between employers and employees.
→ These AWAs, it is claimed, created a power imbalance between employer and employee relationships.
→ Work Choices was often labelled ‘Bosses’ Choices’ by critics of the former system.
→ The Act relies on collective bargaining at the enterprise level.
→ This is where the employees in a workplace seek an enterprise (common) agreement with the employer,
which covers all employees.

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Key changes:
→ Australian Workplace Agreements (AWAs) will no longer be allowed
→ A system of national Modern Awards is introduced
→ Unfair dismissal rules will now apply to SME with over 10 employees
→ A body called Fair Work Australia (FWA) replaces all the previous agencies dealing with industrial
relations issues, such as the Australian Industrial Relations Commission (AIRC) and the Fair Pay
Commission (FPC)
→ FWA will be headed by an independent commissioner
o It will be the government’s ‘one stop shop’, which aims to simplify the complex processes under
Work Choices

Powers of Fair Work Australia

→ FWA will have the power to:
o Vary awards
o Determine minimum wages
o Approve agreements
o Rule on unfair dismissal
o Ensure good faith bargaining
o Rule on industrial actions
o Mediate on industrial disputes

Safety Nets
→ The Act retains this centralised aspect of industrial relations which maintains and extends a safety net
for all employees that cannot be bargained away.
→ A safety net is a set of minimum wages and conditions for all employees.
→ A Minimum Wage Panel in Fair Work Australia will make annual wage determinations
→ There will be two types of safety nets:
o the 10 Basic Safety Net conditions
o The Modern Awards with 10 additional employment matters
FWA increases the scope of the Safety Net from 5 basic conditions under Work Choices to 10 basic
conditions. These are:
1. Maximum weekly hours of work 6. Community service leave
2. Requests for flexible working arrangements 7. Long service leave
3. Parental leave and related entitlements 8. Public holidays
4. Annual leave 9. Notice of termination and redundancy pay
5. Personal/carer’s leave and compassionate 10. Provision of a Fair Work Information
leave Statement

minimum wage rates refer to the employee’s base rate of pay for number of ordinary hours that they have
worked.
→ Minimum wages (for individuals outside of an award) are generally determined once per year by a
specialist Minimum Wage Panel of Fair Work Australia and currently sits at $16.87 per hour (before tax,
with a 25% casual loading).
→ Modern Awards will set out minimum wages, which will be set by the Minimum Wage Panel on an
annual basis.
→ The Panel allows organisations and individuals to make submissions to it when determining changes.
→ This introduces a further centralised component to the industrial relations system.
→ Some unions are concerned that Modern Awards will make certain workers worse off.

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→ Considerations by the minimum wage panel in making their determinations will include:
o The performance and competitiveness of the National economy
o Productivity
o Business competitiveness and viability
o Inflation and employment growth
o Promoting social inclusion through increased workforce participation
o Relative living standards and the needs of the low-aid
o The principle of equal remuneration for work of equal or comparable value
o Providing a comprehensive range of fair minimum wages for junior employees, employees to who
training arrangements apply and employees with a disability

awards refer to a legal document that establishes and outlines the minimum wage and working conditions
for all employees within an industry or a business under the Fair Work Act 2009 and Fair Work Australia who
assists the employers and employees (including unions) reach a common agreement.
→ Conditions of modern awards include: base pay rates, conditions and requirements for employment,
overtime and penalty rates, leave entitlements, dispute resolution procedures and superannuation
entitlements.
→ Australia’s award system was restructured from 4300 awards to 122 awards which encompasses a wide
range of industries and employees.
→ Modern awards: apply to all employees (excluding high income earners and managers) and covers the
usual conditions of an award with a ‘flexibility clause’ which allows conditions to be negotiated to a
Individual Flexibility Arrangements (IFA) to suit individual circumstances.

enterprise agreements collective agreements made at a workplace level between an employer and
employees about terms and conditions of employment, which are usually negotiated between the employer
and employees (including unions).
→ Enterprise agreements may be union or non-union agreements.
→ All Enterprise agreements must include grievance procedures in cases of dispute such as work-based
resolution committees, must comply with the NES and cannot offer rates or conditions below the
mandated and equivalent award.
→ Enterprise agreements must also pass the ‘Better Off Overall Test’ or BOOT, which ensures each award-
covered employee will be better off under the agreement than they would be under the relevant
modern award.

Union Powers
→ Employees will be allowed to be represented by a union.
→ Unions will have the right of entry into the workplace.
→ There is a greatly enhanced role for unions Oversight of workplace relations.
→ The Office of Fair Work Ombudsman replaces the Workplace Ombudsman.
→ Fair Work Inspectors will have power to investigate and enforce breaches of the Act on behalf of an
employees.
→ The Federal Court and Federal Magistrates Court will hear matters that arise under the new workplace
relations laws.

other employment contracts

→ Full time: work between 35 and 40 hours per week (may be requested to work longer with overtime
allowances), entitled to a minimum of four weeks holidays per year and receive 1.1 weeks of long-
service leave for each year of service to the business.

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→ Part time: work less than 38 hours per week (with the choice of additional hours) and have access to the
employment entitlements offered to full-time employees on a pro-rata basis (in proportion to the
percentage of time they work compared to a full-time employee).
→ Casual: employed by the business for short periods of time and must work a minimum of 1 to 3 shifts
(subject to the employer’s demands), do not receive holiday or sick leave entitlements and usually miss
out on promotion and experience fluctuating incomes, however they receive casual loading to
compensate for this.
→ Fixed term: contractors tend to have a set term or specific project for their contract to which they
submit an invoice on completion of a task or project; control their own work and delegate responsibility
to others (carries risk and obligations on a job undertaken including insurance and tax).

⎯ work health and safety and workers compensation

work health and safety
Safe Work Australia developed a single set of WHS laws to be implemented across Australia, unifying state
laws under the Work Health and Safety Act (WHS) Act 2011.
→ Employers must comply with WHS requirements and ensure the health, safety and welfare of all
employees by providing a safe work environment and system of work, ensuring that processes and
procedures are conducted in a safe and appropriate manner.
→ Businesses must ensure that the goods that they design, supply or install will not injure or damage the
health of others and individuals on-site (including visitors) are not exposed to risks arising from
operation.
→ All employers must take out worker’s compensation insurance or face sanctions such as imprisonment
or a $55000 fine; this compensation scheme generates its funds through its premiums and provides
medical and financial support to injured stakeholders.
→ WorkCover NSW inspects, gathers information and issue improvement and prohibition notices to non-
compliant or unsafe businesses; they must also be notified of any death or injury in the workplace and
any plans to carry out dangerous work.
→ Businesses can most effectively comply to WHS by: undertaking regular safety audits and emergency
training, conducting benchmark re-evaluations and implementing comprehensive safety programs,
issuing policy statements and visible safety signs and conducting regular safety training for staff

workers compensation provides a range of benefits and assistance to an employee and their family who has
been impacted from an injury at work (which has resulted from total or partial incapacity to perform work, if
there is a need for medical/rehabilitative treatment or if there is permanent or partial loss of use of parts of
the body).
- An injured employee may claim compensation (weekly payments, payments for permanent
impairment/medical treatment and legal support) through WorkCover NSW or sue for negligence and
receive common law damages.

⎯ anti-discrimination and equal employment opportunity

anti-discrimination
→ discrimination occurs when a policy or practice disadvantages a person at work because of personal
characteristics.
→ Employers must develop and implement anti-discrimination policies and practices.
→ E.g. Sex Discrimination Act 1984 (Cth), Anti-Discrimination Act 1977 (NSW), Affirmative Action (EEO for
Women) Act 1986 (Cth)
→ Legislation enforced by bodies like Human Rights Commission, Anti-Discrimination Board NSW
→ Employers much comply with legislation and conducts audits to ensure no discrimination.

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→ People who suffer discrimination can take range of actions.

o Internally externally, formally or informally
→ Anti-discrimination efforts should begin from very beginning = recruitment stage on merit basis.

equal employment opportunity refers to equitable policies and practices in recruitment, selection, training
and promotion.
→ Affirmative Action: measures taken to eliminate direct and indirect discrimination, and for
implementing positive steps to overcome current and historical causes of lack of equal opportunity for
women, POSITIVE DISCRIMINATION.
o (affirmative action for women and minority groups).
o Required all private sector employers and all higher education institutions to implement affirmative
action programs for the employment of women and to submit annual reports on their progress.
o Affirmative Action (Equal Opportunity for Women) Act 1986
→ There is significant gender inequity in management roles in Australia = GLASS CEILING
→ Flexible working conditions and environment enable employees to balance work and family.
o Australia’s national paid parental leave scheme provides support for employees to return to jobs
after leave.
o Childcare Subsidy Scheme.
→ Strategies commonly used to resolve a complaint of discrimination include an apology, counselling,
official warning, mediation, conciliation or disciplinary action.
→ Developing a code of practice and making equal opportunity awareness a criterion in promotion and
performance appraisal is two of the practical strategies that can be used to improve affirmative action
and gender equity.
→ Businesses that do not comply are likely to be named in parliament, and excluded from government
contracts and industry assistance grants.
NOTE: The cost of replacing staff is MORE than retaining them.

• economic
→ demand for labour is determined by consumer confidence and demand for goods and services within the
economy which is known as derived demand.
→ this can lead to structural changes which are changes in the pattern and nature of production (must be
flexible).
→ effective training and staff empowerment are critical to business success, however a fall in employment
in manufacturing has arisen due to rapid technological change.
→ globalisation: has increased the level of international competition which has forced many businesses to
restructure, outsource inefficient business functions or subcontract production to compete effectively
on the basis of cost and efficiency, allowing them to reduce costs and increase their product range.
- peak/expansion: employers compete for employees by offering high wages and more favourable job
prospects in order to attract them in times of labour shortage and increased demand; unions have
stronger bargaining power to demand wage increases, which may then place upward pressure on costs
and prices, creating inflation.
- trough/downturn: businesses are forced to reduce the size of their workforce (downsize) due to the
decrease in demand and businesses must limit their capacity of employees.

CASE STUDY: Economic

→ When the economy is bad, people spend less and less positions for people get fired. during the GFC,
unemployment was high 5.8%
→ Qantas sacks 1750 jobs. During the GFC the markets were turbulent and company profits were down.

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• technological
technological change is a major source of improvements in productivity, communication and competition
between businesses; this causes the nature of production and services to change; which allows new jobs to
be created, whilst others are made redundant.

advantages:
- allows the business to develop more efficient production techniques
- employees are upskilled in the use of new workplace technologies
- employees are encouraged to deliver the product in new and innovative ways
- fosters a process of continued learning and teamwork whereby staff become mentors to colleagues
through the process of learning new technologies
- reduces the repetitive nature of labour-intensive work

disadvantages:
- loss of employment as technology itself becomes the main tool of production
- employee resistance to change as the workforce becomes reluctant to learning new technologies
- reduced employee morale as workforce is less productive and less important than technology leading to
lower levels of employee empowerment

CASE STUDY: Technological

NAB robots are taking over simple tasks in NAB. 6000 workers getting fired, 2000 hired only.

• social – changing work patterns, living standards

Changing work patterns: growth in part time and casualised work has arisen due to the emergence of retail
and hospitality industries; businesses are in search of greater flexibility and are likely to offer employment
positions that allow employees to receive a favourable work-life balance.
- Women now account for a greater proportion of the Australian workforce and are under-represented in
positions of power.
- Technological developments have facilitated the considerable decline in employment in Aust.
Manufacturing sector
- There are fewer unskilled jobs available within the market.
- career flexibility and job mobility: have increased as employees are taking more control over their own
careers, especially in creative and knowledge-based fields like education and technology which provide
the most flexibility in the workplace.
- increased participation rates: has arisen due to increased involvement and empowerment of minority
groups in the workplace such as women and older individuals; within the current economy:
 individuals have incentives to work longer
 better employment opportunities
 ability to live healthier and longer lives
- ageing of the workforce: respond by;
 upskilling the population
 creating incentives to encourage staff to postpone retirement through superannuation
 implementing appropriate human resource strategies to transfer skills to those remaining in the
workforce.
- early retirement: usually for the eligibility of superannuation or for health reasons; a growing number of
people are returning to work in a part-time capacity following retirement for financial reasons or to
relieve boredom or retired life.

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living standards have increased due to government policies such as:

- WHS
- regular wage increases
- performance bonuses
- fringe benefits
- flexible working hours
- leave and superannuation benefits
which has made employment more rewarding.

→ major concerns for Australians about their living standards as a result of employment include:
- increasing income inequality in Australia
- casualisation of the workforce (places pressure on finances due to fluctuations)
- increasing pressure as governments retreat from welfare
- encourage individual responsibility for retirement due to the inability to cater for a burgeoning
population
- lack of a work-life balance

• ethics and corporate social responsibility

→ CSR is the continuing commitment by companies to behave ethically and to contribute to economic
development, whilst improving the quality of life of the workforce and their families, as well as the local
community and society at large.
→ Stakeholder apart from shareholders include employees, customers, suppliers, community organisations
and local communities.
→ This enhances the reputation and standing of the business and may be used to promote recruitment of
staff for the business
→ Ethical business practices refer to the business’ actions that are socially responsible, morally correct and
reflective of ethical standards; demonstrates corporate social responsibility through regular audits of
their overseas factories to combat forced labour and unsafe working conditions as well as working with
agencies to support ethical practices in operations.
→ Ethical businesses can achieve a safe and rewarding working environment that allows it by: complying
with social justice and industrial legislation covering areas of WHS and anti-discrimination, creating
challenging work and projects to stimulate intrinsic rewards for staff, fostering teamwork and
empowerment of staff, providing study leave and training opportunities to improve skill base and
promoting a flexible work-life balance.
→ benefits from ethical principles: staff retention and absenteeism rates improve as staff feel more valued
and respected, business performance is enhanced and significant marketing opportunities to exemplify
the business’ upholding of corporate social responsibility to improve its reputation.
→ ethical issues that may arise in the workplace include: discrimination, unfair dismissal, workers
compensation/WHS and unethical work practices and conditions which are combated by:
 code of conduct: statement of acceptable and unacceptable behaviours in a business to ensure
equality, legal compliance and employee empowerment.
 code of ethics: statement of the firm’s values and key principles that ensure equity and commitment
to consumers to provide a quality good or service.

Strategies to promote CSR within the workforce include:

o Promote effective affirmative action and anti-discrimination programs.
o Encourage staff to volunteer their time to participate in community-building activities.
o Develop initiatives that reduce the business impact upon the environment

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processes of human resource management

• acquisition
→ involves fulfilling staffing needs through job analysis, recruitment, selection and placement that allows
the business to hire staff by examining and analysing the business’ internal and external environment to
determine the nature and amount of staff required.
→ the quality of the workforce and the effectiveness of human resources allows the business to effectively
achieve their business goals; the workforce must adapt to and align with the corporate culture of the
business to consistently achieve the aims of the firm.

Job analysis:
→ undertaken through staff interviews, observations and reports from performance appraisals and
evaluations to identify the most appropriate candidate.
- internal environment analysis: business’ goals and culture, focus may be on growth or downsizing,
influences demand for specific skills and will define the type of staff that fit the firm’s organisational
culture.
- external environment analysis: competition, labour market trends and costs, economic trends and
demand, changes in law and industrial relations that influences the provision of recruitment

Recruitment, selection and placement:

→ Recruitment: process of locating and attracting the right quantity and quality of staff to apply for current
or anticipated employment vacancies.
→ Employee selection: gathering information about each applicant and using this information to choose
the most appropriate applicant.
→ Placement: involves locating the employee in a position that best utilises the skills of the individual to
meet the needs of the business.
- effective recruitment, selection and placement involves: evaluating and hiring qualified applicants who
are motivated and have goals that are aligned with the business and using a fair and non-discriminatory
selection process which gives applicants a realistic understanding of their responsibilities.

• development involves induction, training, organisational development and performance appraisal that
allows the business to enhance employees’ motivation and commitment to the business (ensuring staff
are retained) through development of their skills and experience through mentoring and professional
learning.
→ development results in increased motivation of employees, greater business flexibility and improved use
of technology that can lead to individuals feeling more recognised and competent in performing their
jobs to a high standard.
→ innovative technologies and processes that a business must ensure that employees at all levels are
continually improving and adapting to changing management principles.

Induction:
→ a well-prepared and effective induction program:
- gives employees a positive attitude to the job and the business through an explanation of the
business history, culture and goals
- strengthens the confidence and motivation of the employee
- explains major safety policies and procedures
- establishes a respectful and good working relationship with other employees and supervisors

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Training:
→ aim is to seek a long-term change in employees’ skills, knowledge, attitudes and behaviours in order to
improve work performance in the business such as communication, teamwork, critical thinking and
motivation
→ focuses on acquiring new skills and knowledge to help the business adapt to change and
establish/maintain a competitive advantage
→ the features of a training program must include:
- an assessment of needs and understanding the business objectives
- an evaluation of internal and external factors that affect the business

Organisation development:
→ benefits of flat hierarchical structure that allows the business
- to develop shared ideas
- autonomous solutions to problems
- improve efficiency and remain responsive to consumer needs; however, have reduced promotional
opportunities

Organisational structure: businesses are using flatter structures to improve efficiency and competitiveness
by creating more opportunities for employees to innovate and participate in solving business problems.
o Flatter structure means employees granted with more autonomy and can reduce promotional
opportunities. HRM must try and retain workers by:
- job enlargement: increasing the range of tasks in a job.
- job rotation (multi-skilling): moving staff from one task to another.
- job enrichment: increasing the responsibilities of a staff member.
- job sharing: two or more individuals sharing one employment role.
- self-managing teams
- mentoring and coaching: used to motivate staff, focusing on building personal relationships,
improving skills and performance and enhancing teamwork, performance and morale.

Performance appraisal:
→ the process of assessing the performance of an employee against a set criteria or standards to recognise
strengths, weaknesses and opportunities for further development or training (if employees consistently
perform below expectations, training programs need to be revised).
→ used to assess an employee’s suitability for promotion and their potential value to the business’ success.
→ performance appraisal involves four main objectives:
- provide feedback from management to employees regarding performance
- measurement against which promotion and pay rises can be determined
- help the business monitor its employee selection
- identify employees’ training and development needs

• maintenance focuses on the processes needed to retain staff and manage their wellbeing at work.
→ providing working conditions and environment that motivates staff to be increasingly productive, gain
satisfaction from work and remain loyal to the firm; involves remuneration that accords with the need to
motivate employees to work productively and efficiently, while maintaining the quality that is
synonymous with the firm.
→ staff wellbeing is maximised by encouraging staff to participate in decision making and giving employees
control over their work lives as well as communication strategies to foster a strong workplace culture.

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→ offering flexible working hours and positions as well as family friendly programs to foster a work-life
balance and suit the different needs of employees is critical such as job sharing or work-from-home
positions.
→ if the firm retains loyal and committed workers, a business is able to: increase productivity, improve
morale amongst workers, improve communication between management and workers, reduce the level
of absenteeism and decrease costs through lower staff turnover.

Communication and workplace culture:

→ effective workplace relationships depend heavily on the strength of a business’ communication such as
regular team meetings, staff bulletins and newsletters, seminars, social functions, email and suggestion
boxes.
→ these allow the business to focus on building trust and fostering a positive workplace culture through a
direct recognition of staff achievements and the prevention of miscommunication which can lead to
conflict and inefficiencies;
- communication and criticism must always be constructive in order to foster a positive culture and
allow employees to improve from previous mistakes.
→ many firms have redesigned their layout to create spaces for individuals to meet together in central
locations such as boardrooms or cubicles.
→ a positive workplace culture can often be tainted by bullying and sexual harassment which lead to staff
turnover, absenteeism and low productivity, where a business can respond to this through:
- grievance procedures
- mentoring/buddy system
- open and confidential communication
- information about workplace bullying

Employee participation:
→ encourage employee participation to improve communication, empower employees and develop their
commitment to improving quality and efficiency.
→ employees are trained to solve problems and use critical thinking skills to make decisions in order to
provide a quicker and more efficient service to consumers.
→ businesses benefit from employee experience and knowledge on the job and improvements that they
suggest are critical to business competitiveness and success.
→ effective participation is fostered through regular team meetings and briefings to discuss customer
feedback, company trends and issues; which builds a shared purpose and common workplace identity.

Benefits:
→ businesses carefully consider the value of these benefits in terms of positive reputation, retention of
staff, family friendliness (balancing work and family responsibilities) and workplace culture, as they are
expensive and some attract fringe benefits tax to the employer.
→ benefits may be:
- monetary: paid training opportunities, travel allowances, health insurance, subsidised gym
membership and company car.
- non-monetary: flexible remuneration options, working hours and arrangements, career break
schemes, job sharing, work-from-home arrangements, family leave and part-year work
arrangements.
- fringe benefits: Paid training, health insurance, company cars

But value of these expenses = expensive = incurs Fringe Benefit Tax (FBT).
E.g. Rio Tinto provides their employees benefits such as residential allowances, subsidised medical expenses,
commuting reimbursements.

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Legal Compliance and Corporate Social Responsibility

→ All employees are required by law to make sure their HR policies and procedures comply with legislation.
→ Bullying, sexual harassment, exploitation, intimidation and high workloads = causes workplace stress,
toxic environment. Undesirable workplace culture.
→ Non-complying business risk
 Possible litigation
 Fines / penalties
 Poor public image
 High staff turnover, absenteeism, low morale
 Reduction in profits

• separation refers to the process in which an employee leaves a business and can be either:
- voluntary: retirement, relocation, resignation or voluntary redundancy
- involuntary: retrenchment, involuntary redundancy or dismissal
→ Separation can occur on account of a natural transition by the employee seeking other opportunities
or retiring; separation can also arise from a need to a manage an employee out of the business when
their conduct or performance does not match the requirements of the business or align with its
corporate culture.
→ To avoid claims of discrimination and the adverse effects on morale and productivity due to
employees leaving, notice and leave entitlements given must comply with legislation and industrial
awards.

Dismissal:
→ summary dismissal: termination of an employment contract which must be fair, sound and reasonable
according to the Fair Work Commission, given the circumstances.
→ Dismissal can happen based on poor performance or redundancy due to organisational restructuring.
- FWC determines whether employer made reasonable efforts to investigate allegations and allowed
the employee the right to respond to the allegations.
- dismissal can arise due to: misconduct, poor performance and redundancy (due to organisational
restructuring, a downturn in business or technological change).
→ before dismissal, businesses are required to: give employees a warning about their poor performance
or misconduct, provide them advice and support so they have the opportunity to improve and notify
employees of the reason for the termination and an opportunity to respond.

Unfair dismissal:
→ in recent years, businesses have tried to reduce costs and improve productivity by reducing staff
numbers, flattening management structures and making greater use of technology; however, this
widespread restructuring and change in managerial policies have contributed to industrial disputes and
unfair dismissal claims.
→ unfair dismissal occurs where an employee is dismissed by their employer and they believe the action is
harsh, unreasonable or unjust.
- employees can make claims of unfair dismissal to Fair Work Australia and reinstatement will occur if
the case brought by the dismissed party is upheld.
- unfair dismissal claims can create adverse publicity for the business internally and externally, with
the potential to lose customers.

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strategies in human resource management

• leadership style refers to ways that managers communicate with their employees to inspire and
motivate them to work together to achieve an organisation’s goals
→ it is crucial for management to provide direction, implement plans and motivate staff in a manner
that enhances employee workplace performance.
→ the leadership style of the business must be adapted to meet the needs of the changing business
environment such as the knowledge and skills of staff, the relationship between the leader and staff,
time and resources available as well as the extent of the decision being made; many businesses has
moved towards a behavioural approach to management and leadership.

Autocratic (authoritarian) leadership style:

→ managers lead based on the classical scientific view that they are responsible for telling their employees
what is required to be completed and the manner in which to complete the task.
→ they demand immediate compliance from staff with little/no employee contribution in decision making
as decisions must be made quickly and solutions to problems are usually scientifically measured and
researched.
→ Works well with unskilled/inexperienced labour where work is highly organised and controlled e.g.
Works well in defence force.
→ Inflexibility = issues of absenteeism and staff turnover.
→ Employee relations tend to become source of conflict.

CASE STUDY: Apple was run by an authoritarian style by Steve jobs.

Participative (democratic) leadership style:

→ emphasis on inclusive group consensus and the generation of unique and effective solutions to issues
through consultation and collaboration.
→ the skills and knowledge of employees are valued in the business culture where managers believe
satisfaction and empowerment leads to productivity and consistent motivation.

Delegative (free-rein) leadership style:

→ involves a clear understanding between leaders and employees about decision making and collaboration
within the business; employee empowerment.
→ belief that employers trust in the ability of employees who have the relevant and adequate skills and
knowledge to complete a task and make decisions.

CASE STUDY: Participative and Democratic

→ Satya Nadella, Microsoft CEO allowed employees to make their own decisions. He allowed them to take
centre stage and gave them confidence.

• job design – general or specific tasks

→ job design is the number, kind and variety of tasks that an employee is expected to carry out in the
course of performing their job.
→ effective job design often leads to increased productivity and efficiency within the workforce through
increased job satisfaction.
→ human resource management should seek to develop a job design that satisfies the employee’s personal
and professional requirements.
- the main objective of the provision of a wide variety of tasks is to improve worker enrichment,
engagement and productivity through changing and challenging tasks.

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- a business must clearly delineate work functions and the skills required to effectively carry out
particular jobs within the business;
- job design is required to meet the needs of the changing nature of work and the impact of
innovation and technological change on the business.
- job analysis: various procedures to identify the content of an employment position in terms of the
activities involved, present level of skills and potential skill shortfalls in the business, strategic goals
and qualifications/experience.
→ specific tasks: represented through the scientific management approach that identified one best way for
doing a task and that worker skills should be matched specifically to the requirements of the task
(specialisation).
→ general tasks: refers to a greater variety of tasks to be performed by employees to improve worker
satisfaction and engagement.

→ BEFORE (SPECIFIC TASKS): Scientific approach pertained towards job specialisation = dissatisfaction and
inflexible.
→ NOW (GENERAL TASKS): more variety of tasks to be performed with the objective to improve
productivity and worker satisfaction, through 4 job design approaches:
o Job rotation: employees switch, for a period of time from one job to another → allows for variety
and greater understanding of biz
o Job enlargement: employees given more to do → variety + challenge
o Job enrichment: employees are given more control and independence over how they do their work
→ more interesting + challenging + motivating
o Job sharing

• recruitment – internal or external, general or specific skills

recruitment
→ recruitment is the process of locating and attracting the right quantity and quality of staff to apply for
employment vacancies or anticipated vacancies.
- recruitment of skilled staff in designated roles ensures that the business can conduct the required work
to the requisite standard to achieve their strategic objectives
→ effective recruitment and selection allow the most appropriate applicant to be selected; the sources and
methods used in recruiting will depend on the recruitment objectives and policies of the business; most
businesses utilise an effective balance of internal and external recruitment with a mix of general and
specific skills.
→ businesses can appoint employees from within the organisation to alternative positions, promote and
reward current employees to positions of greater responsibility or can draw employees from outside the
business who can contribute unique insight, ideas and experience.

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internal recruitment involves filling the job vacancies with people from within the business

advantages disadvantages
 motivational for staff to perform in order to be  can reinforce a competitive and
recognised as a candidate for an employment position rivalrous culture for the employment
position on offer
 builds commitment and loyalty
 often attracts a significant number of
 aligned with the corporate culture of the business internal applicants who must be
 can lead to succession of promotion opportunities managed and motivated if
unsuccessful
 cheaper than external recruitment with a lessened
chance of failure as staff are observed in terms of their  little value added to the business as
existing performance (strengths and weaknesses) there are no new skills or
qualifications

external recruitment involves filling the job vacancies with people from outside the business.

advantages disadvantages
 wider applicant pool  risk of unknown staff
 new ideas and perspectives may provide better solutions to  lost productivity in
business issues orientation
 specific skills are already held by candidates (no need for  new employees may be
training) incompatible with the
 dilutes internal politics business culture
 more diversity in employment  effort and time in induction
 builds the organisational brand through publicity

general or specific skills

→ general skills are often inherent and are critical in building a successful workforce and business culture,
however specific skills can be taught;
- general skills: flexibility, versatility, social confidence, positive attitude, ability to work in teams or
independently, leadership and decision-making styles, willingness to learn, ability to work under
pressure and motivation
- specific skills: highly specialised and are required for jobs mainly within the fields of STEM

• training and development – current or future skills

→ training aims to develop skills, knowledge and attitudes that lead to superior and more productive work
performance; attempts to address significant shortages of skilled labour and trains employees to be
well-rounded and adaptable (upskilling).
→ development refers to enhancing the skills and attitudes of employees in line with the current and
future needs of the business; encourages employees to take advantage of opportunities in order to
develop a career within the business, leading to a more skilled and experienced workforce.
→ necessary to ensure appropriate induction as well as the need for targeted training to assist with making
employees more skilled at their roles; competitiveness.
→ effective training and development allow a business to successfully manage changes within its internal
or external environment.

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→ current and future skills: businesses need to implement a systematic process to evaluate the needs of
their workforce, the supply of skills in the industry, the demand of these skills and the changing pattern
and need for skills
- the shift to a largely service-based economy and the introduction of automated production
processes in manufacturing fields has seen the obsolescence of many traditional skills
- businesses need to consider the mix of skills they can currently develop internally and those for
which are viable in the future, which the business must recruit

Benefits of training for EMPLOYEES Benefits of training for EMPLOYERS

• Opportunity for promotion and • Higher productivity through better job

self- improvement performance and use of HR
• Improved job satisfaction through better • Goals and objectives more effectively met
job performance
• Reduced costs due to less staff turnover and
• A challenge – the change to learn new absenteeism, and fewer errors and accidents
things
• More capable and mobile workforce
• Adaptability – help cope with changes

• performance management – developmental or administrative

→ performance management: addresses both individual and business performance; successful individual
performance will often translate to the business’ strategic objectives being met.
→ linked to the development function as this involves assisting employees to manage their work and
personal performance goals in the context of the business’ goals as well as their personal development
needs; clear link between the overall targets and objectives of the business and the individual employee’
targets.
→ performance management may focus on a wide range of administrative skills or may strategically focus
on the development of specific employees in order to grow and become an important asset to the
organisation.
- refers to the process of recognising the efforts and contributions of employees to their work; a key
element of performance management is the aligning of a shared vision of direction and goals
between the business and employees, the establishment of measurable and accountable KPIs and a
formal performance review process/ appraisal.
- establishing a link between performance evaluation and employee development will ensure that
staff remain motivated and the employee as well as the organisation both benefits.

developmental
→ developmental model: focuses on improving individual performance through establishing objectives
such as reaching sales targets that are consistent with achieving the organisation’s goals; uses data to
develop individual skills and abilities of employees to improve effectiveness in their roles.
- benefits include: demonstrating the effectiveness of the current workforce and skills, identifying
training and development needs as well as communicating the business expectations and long-term
strategic goals.

administrative
→ administrative model: model which assesses the progress of the business in meeting its strategic goals
and where necessary identifying areas for improvement such as establishing new goals or employee
performance.

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- benefits include: higher productivity, better financial performance, comparison of performance

against agreed standards and builds self-efficacy and accountability as performance is recognised.

• rewards – monetary and non-monetary, individual or group, performance pay

rewards involve the use of both monetary and non-monetary rewards and remuneration; employers must
analyse an effective and equitable mix of rewards to boost motivation and ensure the highest level of
productivity is achieved.
- a rewards system should aim to motivate staff, be well-planned, equitable, clearly communicated,
relevant, cost effective and integrated with the corporate strategy; should reinforce strategies that
support a desirable corporate culture such as customer orientation.

monetary rewards reflected in pay or having financial value.

→ direct monetary rewards: base pay, incentive pay (bonuses and commissions) and allowances (overtime
and shift work).
→ indirect monetary rewards: insurance, superannuation, healthcare, childcare and flexible work
schedules.

non-monetary rewards
→ direct non-monetary rewards: interesting and challenging work, responsibility, recognition,
advancement and performance feedback.
→ indirect non-monetary rewards: positive HR policies, competent supervision, congenial colleagues, safe
and healthy working environment, fair treatment, opportunities for learning and development.

individual rewards

group rewards

advantages of a group reward disadvantages of a group reward

 encourages a greater sense of  not all employees may apply equal effort to the work
teamwork process
 employees become more motivated  employees may have different personal goals that do not
as they are working within a team become recognised or rewarded in the group achievement
 improves communication between  conflict may occur within the group disallowing individually
staff performing employees to be recognised

performance pay refers to the remuneration that is based on distributing rewards according to individual
employee performance; as the employee reaches targets and demonstrates improved performance, they
will be rewarded through increased pay.

advantages of performance pay disadvantages of performance pay

 performance may improve as employees  performance of the employee is considerably
are encouraged to work more effectively influenced by external factors and may be difficult
 productive employees are driven to work to measure
for the business as they may regard  possibility of conflict may emerge due to the
performance pay a measure of their success process of measuring performance which may be
 it encourages unmotivated and inefficient unclear
individuals to improve performance  unfair and could lead to higher levels of labour
turnover

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• global – costs, skills, supply

→ businesses are entering international markets to take advantage of the opportunity to reduce
production costs and gain access to new markets, to make use of foreign labour and establish offshore
subsidiaries.
- global businesses will have to balance the opportunity to reduce costs by assessing cheaper labour
compared to the cost of training labour with appropriate skills; as such, foreign governments are
investing into education and training to create a highly skilled and flexible, yet still cheaper
workforce to attract foreign direct investment and expansion.
→ the Federal government allows the use of 457 work visas which allows skilled migrants to enter Australia
in light on ongoing economic problems in Europe, where a number of long-term unemployed, but highly
skilled workers have attracted the interest of some Australia businesses in search of workers especially
in the fields of IT and cleaning.
→ involves businesses attracting the most effective employees for different roles and matching their skills
to the business requirements, regardless of the employee’s nationality or culture.
- polycentric staffing: a multinational staffing strategy where each subsidiary/foreign office is
managed as a sole entity and is managed by host country nationals in order to reduce language or
cultural barriers.
- ethnocentric staffing: a multinational staffing strategy where each subsidiary/foreign office is
managed as a sole entity and is managed by home country nationals in order to maintain a
consistent corporate culture and values.
- geocentric staffing: a multinational staffing strategy where each subsidiary/foreign office is
managed as a sole entity and is managed by the most qualified and appropriate person for the job,
irrespective of nationality.

CASE STUDY: Telstra

→ Telstra cut 300 jobs in 2016 to outsource call centre jobs. This brought the total to 10,000 overseas
workers. Wages over there are $9 USD per day.

• workplace disputes
→ An industrial dispute is a disagreement over an issue or group of issues between an employer and its
employees, resulting in the employees ceasing work.
- industrial conflicts such as strikes (workers withdraw from work) and lockouts (employers close the
entrance to a workplace and refuse admission to the workers) between stakeholders are inevitable
due to conflicting interests and goals, however must be resolved effectively as this could lead to high
levels of absenteeism and staff turnover and in turn lower productivity and customer support.
- major causes of industrial disputes include: remuneration (matters including wages, allowances and
entitlements), employment conditions (matters including WHS, leave and benefits) and job security
(matters including retrenchment, downsizing, global outsourcing and managerial policies).

⎯ resolution – negotiation, mediation, grievance procedures, involvement of courts and tribunals

resolution workplace disputes:

negotiation: collective bargaining, which is a method of resolving dispute when discussions between the
parties results in a compromise.
- can benefit the parties involved by increasing their knowledge of company policy, business’s objectives,
workers’ concerns and issues involved in implementing change.
- attitudes of management in acknowledging nature of dispute and being prepared to listen to the
concerns of employees is crucial.

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mediation: confidential discussion of issues in a non-threatening environment and in the presence of an

impartial and third party such as a lawyer or union representative who assists the conflicting stakeholders to
reach a settlement.
- allows parties to become empowered by their resolution of their issues and reduces the risk of issues
escalating to litigation.

grievance procedures: formal procedures written into an award or agreement, that state agreed processes
to resolve disputes in the workplace;
- useful in reducing the risk of the issue turning into a serious legal dispute and it is important that issues
are effectively resolved and handled professionally to ensure employee confidence in the process.

Conciliation: process whereby a third party, usually as FWA representational, assists the two parties reach
an agreement through a recommendation of strategies to resolve the dispute with constructive and
impartial suggestions to ensure all concerned parties are satisfied with the final outcome.

Arbitration: if conciliation fails, the matter may be referred to arbitration by FWA which is a process
whereby the third party is a panel of FWA members who hear both sides of a dispute and makes a legally
binding decision to resolve the dispute in the form of a directive order.

Common law action: considered as the ‘last resort’ and is open and available to all parties affected by
industrial action, however usually serious issues such as compensation for negligence.
- parties may make direct claims for damages caused by the other party.

CASE STUDY: Workplace Disputes and Resolution – Negotiation, Mediation, Grievance Procedures,
Involvement of Courts and Tribunals

Qantas 2009 strike

Workers strike over pay, conditions and the outsourcing of jobs overseas after negotiations failed. FWA
declared it illegal after it got escalated and a conciliation process followed. Qantas management has made
an early agreement with the Australian Licensed Aircraft Engineers Association (ALAEA) in a deal that reflects
compromise by both parties, despite earlier strong rhetoric from both sides.

2018 rail strike

Workers were unhappy with conditions and pay, so they sought the help of unions and wanted to strike.
They wanted better hours and a more balanced workload. Prior to the strike there were many negotiations
which were unsuccessful. Fair work Australia got involved in the end after they deemed it illegal and the
strike got called off.

effectiveness of human resource management

• indicators
→ performance measures that are used to evaluate individual or organisational effectiveness.
- indicators are often compared to that of best practice businesses or internal divisions to determine
strengths and weaknesses through a process of benchmarking and the establishment of
performance standards.
→ indicators are gathered and collated in human resource audits which are used to systematically analyse
and evaluate human resource activities and their effectiveness.
- quantitative measures: demonstrate the actual effect of indicators in numerical terms such as the
percentage of absenteeism or disputation.
- qualitative measures: involves detailed feedback and research on key issues, which allows
judgements to be made about the business such as the reasons for disputation or decreased
productivity.

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⎯ corporate culture refers to the values, ideas, expectations and beliefs shared by members within the
business.
→ an effective corporate culture is one that is believed, demonstrated and acted upon by management and
employees.
- employee productivity can most effectively be maximised through a constructive corporate culture
where employees are trusted, mutually collaborate, are highly trained, skilled and mentored.
- effective workplace relationships depend heavily on the quality of a business’s communications
systems and participation of employees in decision making including collaborative team work.

CASE STUDY: Corporate Culture and Changes in Staff Turnover

Uber lost nine executives due to bad culture. Company’s “hustlin’” culture had encouraged “poor
behaviour”, how illicit drugs and alcohol were being used at work events.

⎯ benchmarking key variables refers to the process of measuring and comparing an employee’s
performance against established ‘best practice’ standards, standards of other business (industry
standards) or standards of previous years.
→ if employees are unable to meet performance goals on a regular basis, it will be clear that management
must examine why and how this is occurring.
- different methods of benchmarking include: informal, performance-based, best practice and
balanced scorecard, which collates qualitative and quantitative data to best assess the
developmental needs and strategic goals of the business.

⎯ changes in staff turnover refers to the rate at which employees leave the business through voluntary or
involuntary means such as dismissal and retrenchment.
→ important to benchmark the business’ staff turnover against that of other businesses in the industry as
well as to determine the type of staff leaving and the reasons for their departure.
- a high level of staff turnover caused by voluntary separation is indicative of poor employment
relations within the business such as dissatisfaction, which can affect employee commitment,
productivity, service quality, corporate skills and finances;
- however, some level of turnover is considered healthy in businesses, as new ideas are brought in
and often stimulate innovation in work practices.

⎯ absenteeism although employees are unable to attend work for reasons such as illness, pressing
domestic necessities and family issues, employees who neglect their commitments of working at a
schedule time suggest dissatisfaction or potential conflict with the business.
→ costs of absenteeism: disrupted work which places additional demand on present staff and may cause
hostility within the workplace as well as lost revenue, lower productivity and higher labour costs (casual
employees).

⎯ accidents
→ all workplaces across Australia must be aware of potential WHS hazards and it is imperative for human
resources to ensure that compliance to WHS is of paramount importance.
→ businesses must adopt systematic, legally compliant and best practice WHS procedures by conducting
safety audits, safety training and preparation and enforcing a culture of safety.
- such as the Lost Time Injury Frequency Rate (LTIFR), which indicates the effectiveness of human
resource management strategies.

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→ effective human resources management and prevention of accidents will lead to:
- time and cost savings on compensation claims.
- improved staff morale leading to increased productivity.
- positive and responsible corporate image where customers appreciate the effort of businesses
producing a safe product within a safe environment.

CASE STUDY: Accidents and Absenteeism

TESLA had a lot of injuries at their factories and workers too many days away. Workers had been “having a
hard time, working long hours, and on hard jobs”.

⎯ levels of disputation
→ the level and seriousness of the disputes and the frequency with which they occur indicate the extent to
which employers are successfully managing the employment relations function;
- it is necessary for employers to examine why the disputes are occurring and rectify the practices that
cause disputes such as WHS or managerial policy.
- ongoing levels of disputation are likely to be reflected in higher levels of absenteeism, staff turnover,
lower morale and covert industrial action.

⎯ worker satisfaction refers to whether employees are happy, content, and satisfied which is reflected
through the fulfillment of their needs and desires at work; employee satisfaction is improved by
matching the purpose of the business with the skills and cultural fit of the employee, thus reflecting a
fluid and cohesive corporate culture (which must be family-friendly, flexible, rewarding and positive)
satisfied employees will often work more efficiently and value the organisation which they work for;
effective leadership is important for employee satisfaction and commitment through recognition and
empowerment.

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