Académique Documents
Professionnel Documents
Culture Documents
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A GRAPHIC GUIDE TO
BUSINESS SUCCESS
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Contents
Senior editor Georgina Palffy
Project art editor Saffron Stocker
Introduction 8
Editors Anna Fischel, Alison Sturgeon,
Suhel Ahmed, Hannah Bowen,
Joanna Edwards, Alex Beeden
Designers Natalie Clay, Stephen Bere,
Phil Gamble, Vanessa
HOW COMPANIES WORK 10
Hamilton, Jemma Westing
US senior editor Margaret Parrish
US editor Christine Heilman
Managing editors Stephanie Farrow, Gareth Jones
Business ownership 12
Senior managing Lee Griffiths
art editor Sole proprietorships and partnerships 14
Publisher Liz Wheeler Corporations 16
Deputy art director Karen Self Private and public companies 18
Publishing director Jonathan Metcalf Multinationals 20
Art director Phil Ormerod Franchises 22
Senior jacket designer Mark Cavanagh Not-for-profit 24
Jacket assistant Claire Gell
Jacket design manager Sophia MTT Start-ups 26
Pre-production producers Ben Marcus, Nikoleta Parasaki Start-ups from concept to launch 28
Producer Christine Ni Types of start-up 30
First American edition 2015 Business plans 32
Published in the United States by
DK Publishing, 345 Hudson Street
Raising money 34
New York, New York 10014 Business accelerators and incubators 38
A Penguin Random House Company
15 16 17 18 19 10 9 8 7 6 5 4 3 2 1 Buying and selling business 40
001—196402—Mar/2015
Mergers and acquisitions 42
Copyright © 2015
Dorling Kindersley Limited Divestitures 44
All rights reserved. Vertical vs. horizontal integration 46
Without limiting the rights under copyright reserved above, Management buy-ins and buy-outs 48
no part of this publication may be reproduced, stored in or introduced
into a retrieval system, or transmitted, in any form, or by any means
(electronic, mechanical, photocopying, recording, or otherwise), without Who’s who 50
the prior written permission of both the copyright owner and the above
publisher of this book. Board of directors 52
Published in Great Britain by Dorling Kindersley Limited Company hierarchy 56
A catalog record for this book is Stakeholders 60
available from the Library of Congress. Business cultures 64
ISBN: 978-1-4654-2979-7
DK books are available at special discounts when purchased in
bulk for sales promotions, premiums, fund-raising, or educational use.
For details, contact: DK Publishing Special Markets, 345 Hudson Street,
New York, New York 10014 or SpecialSales@dk.com.
Printed in China
A WORLD OF IDEAS:
SEE ALL THERE IS TO KNOW
www.dk.com
HOW FINANCE WORKS 98
Management 284
Economies and diseconomies of scale 286 Contributors
Lean production 288
Just-in-time 290 Dr. Julian Sims (consultant editor) entered academia
Total quality management 292 after a successful career in industry in the US and UK. He
is a lecturer in the Department of Management at Birkbeck,
Time-based management 294
University of London, UK; a Chartered Accountant (CPA Aus);
Agile production 296 and a Chartered Information Technology Practitioner (CITP).
Kaizen 298 His work is widely published in academic journals.
$
$
$
HOW BUSINESS WORKS
Introduction 8 9
Introduction
The term “business” refers to an organization or commercial
enterprise engaged in producing and trading goods and services for
money. We can trace the origins of business to the very foundations
of human society. When Homo sapiens evolved, mankind left behind
the nomadic hunter-gatherer lifestyle to become farmers. This allowed
for specialization of work, where individuals would become skilled
at specific tasks to serve a particular community need. Over time, this
enabled more complex goods and services to be produced and traded,
in order to provide for all members of society. Thus, human society
has been engaging in “business” for thousands of years.
Public companies
7%
of global economic
NAMING A COMPANY
Do
❯ Use a domain suggestion
tool to search for available
Don’t
❯ Include your name—if the
venture fails, your name will
internet domain names and be associated with it.
activity is accounted work back from there. ❯ Ape competition, because
❯ Be descriptive so potential if your name is unique, you
for by the world’s customers instantly grasp the
nature of the business.
have a better chance of
topping search-engine results.
100 largest companies ❯ Say the name out loud—it If your name is similar to that
of competitors, customers
may come across differently
from the written word. The can’t distinguish.
goal is that people can search ❯ Spend time thinking of a
and find it, especially online, name until your product and
just from hearing it. brand is finalized. Get the
❯ Keep it short and simple and product right first and the
avoid puns. name will follow naturally.
Multinationals
How it works
Many businesses start out as the most NEED TO KNOW
basic unit—either a sole proprietor or
❯ Firm Collective term for
a partnership. A sole proprietor is an individuals in a partnership
individual who is the only owner of
❯ Limited liability partnership
the business. This structure is easy to Unlimited liability: (LLP) Partners not personally
set up and there are no extra taxes to business debts accountable for business debts
paid personally
pay, unlike with a company. Instead,
the sole proprietor files a personal tax
return. There is risk attached, though.
A sole proprietor has unlimited liability,
so if the business fails, the owner must
personally pay debts. Partnerships have
more than one owner, and each can be
held liable for the whole debt of the
business in case of failure. Tax-efficient Simple
way to be registration
self-employed process
Sole proprietorship
Working alone requires only
simple administration and
relatively few start-up costs.
HOW COMPANIES WORK
Business ownership 14 15
FROM INDIVIDUAL
TO MULTINATIONAL
Sole proprietorships and partnerships
may grow into global names.
66%
of EU private WHEN TO MO
❯ Richard Branson Sole proprietor- COMPANY STVE TO
ship that expanded into Virgin empire sector jobs are in ATUS
❯ Steve Jobs and Steve Wozniak
Partnership that created Apple brand small or medium-
❯ Bill Hewlett and David Packard
Partners who founded HP technology size enterprises
❯ John D. Rockefeller, William
Rockefeller, Henry Flagler, Jabez
A. Bostwick, Samuel Andrews,
Stephen Harkness Partnership that
grew into Standard Oil corporation If the need fo
r ca
increases (and pital
potential
debts grow),
forming
a company m
Profit and ay be
beneficial. Se
control of the e pp.16–17.
business shared
Partnership
Like sole proprietors, partners
file only personal tax returns
and are liable for business debts.
Corporations
A corporation is a business entity considered distinct from its
employees and shareholders. The primary purpose of forming a
corporation is for shareholders to avoid personal liability.
NEED TO KNOW
❯ Stockholder An individual, group, Public characteristics
or organization that owns shares
❯ Issues securities through an Initial Public Offering (IPO)
in a company
❯ Can sell future equity stakes
❯ Doing business as (DBA) Operational
rather than company name ❯ Has greater access to financing
❯ Professional corporation (PC) ❯ Must meet reporting requirements set out by Securities
Corporate form used for primarily and Exchange Commission (SEC)
for doctors, lawyers, and similar ❯ Reduced control for initial owners
professional service providers
HOW COMPANIES WORK
Business ownership 16 17
CANADIAN
COMPANIES
Businesses in Canada can
be sole proprietorships,
partnerships, or
corporations. A business
can also be run as a
Privately held cooperative, a business
company that is owned and
In a privately held company, controlled by its
a limited group of private stock members. Canadian
owners controls the company. companies must
These companies do not offer register in the province
56.5%
shares to the general public on or territory in which
stock exchanges. they are domiciled.
of UK limited
companies have
Private characteristics
employees; the ❯ May issue stock and have shareholders. Shares,
remaining 43.5% however, do not trade on public exchanges
❯ Management is not required to file disclosure
are single-member statements with the SEC
❯ Dependant on private funding
companies (SMCs)
Private and public
companies
While the owner-shareholders of a private company may buy and sell
their shares privately (usually with director approval), any investor in
the financial market can trade the shares of a public company.
How it works
Although most of the world’s companies are set up as
private, public companies are seen as more prestigious
Differences between private
and profitable. For business ventures requiring large and public companies
amounts of capital, a public company offers greater Private company directors have to weigh up the potential
opportunity for raising funds, since shares can be sold capital increase of floating on the stock exchange against
to public investors to generate cash. Private companies the legal red tape aimed at protecting public shareholders.
must rely on private investors or use the capital
investment of their owners. Public companies are
subject to more stringent legal controls than private
ones, and are expected to disclose financial details. Private
27 million
the number of companies
Directors
Usually control all of the shares.
Reporting
in the US, fewer than In the US, no disclosure is required outside
the company; in the UK, it is mandatory to file
1% of which are public accounts at Companies House.
Shareholders and management
Shareholders are often actively involved in
FAMOUS PRIVATE COMPANIES management so decisions can be made quickly.
❯ Mars Confectionery and pet food; Financing
third-largest private US company Company must rely on private investment, which
❯ Rolex Swiss-based English company is often harder to attract because there are fewer
making status-symbol watches financial details available.
❯ LEGO® Danish company producing Valuation
household-name toy bricks Value of the company is more likely to fluctuate;
❯ Hearst Corporation Mass-media it is more difficult to assess because there are
multinational based in New York City fewer available financial details.
❯ IKEA Swedish retailer registered in Size
Netherlands selling flat-pack furniture
Number of shareholders is limited, usually to
❯ PwC Largest professional services fewer than 2,000.
network
HOW COMPANIES WORK
Business ownership 18 19
$55 billion
the amount raised on 141
GOING PUBLIC
There are legal requirements at each stage of converting
a company from private to public, such as voting in a
board of directors and deciding on a new name.
Inform staff
Must notify in writing anyone with
an interest (including employees
Public and proposed board members)
that company intends to go public
Register company
Directors
Documents setting out board
Not necessarily shareholders.
resolutions sent to Secretary of
Reporting State, who issues certificate
Companies have a legal obligation to disclose declaring the company is public
accounts and submit regular financial reports.
Make public announcement
Shareholders and management
Press releases issued, events for
Clear boundary is drawn between the role of
business held, and emails sent to
shareholders and management; may lead to
inform contacts of change
a conflict of interest.
Financing
Can tap financial markets to raise capital by
selling stock or bonds.
Valuation
NEED TO KNOW
Value of the company is easier to assess, from the ❯ Unquoted/unlisted company Another term for
trading price of shares and financial statements. a private company
Size ❯ Initial public offering (IPO) Stock-market launch
Number of shareholders is unlimited. ❯ Secondary stock offering Second-round sale of
shares to raise more capital
❯ Ticker symbols Unique code assigned to publicly
traded companies and used by stock exchanges
Multinationals
A multinational corporation has business operations in more than one
country. It usually starts as a national company and sets up subsidiary
(branch) companies abroad for production and sales.
Regional HQ Management
Case study: mapping a multinational and core admin functions
Sportswear company Nike has successfully spread around the globe from
Marketing UK campaigns
its corporate base in the US. It has manufacturing functions where technical and merchandising
expertise maximizes efficiency and keeps costs down; distribution hubs in
strategic locations; marketing and retail departments in countries where it
is establishing local markets; and call centers where they are cost-effective.
United States
Beaverton, Oregon
GLOBAL VS. MULTINATIONAL Senior management are located
at the company’s corporate base,
A global company has facilities in different countries but operates as a or “campus”, its center for decision-
single corporate culture with common processes. A multinational has making on global strategy, design,
facilities in different countries but each functions as its own entity, and marketing, and core functions.
adapting locally, with little communication between geographic divisions.
Global
World HQ Management,
hello hola! Apple is an example of finance, legal, IT, and admin
a global company—the
product is essentially
Global marketing
the same except for Branding and marketing
a language change.
Japan
Tokyo
Most manufacturing is based in
the Asia-Pacific region, benefiting
from expertise and lower wages.
Regional offices in 13 countries
also support production and retail.
Regional HQ Core
operations and marketing
Manufacturing Sites
in several countries
Brazil India
São Paulo Bangalore
Operations, marketing, and distribution for the Central and South American Call centers draw on a supply of
market are based in Brazil, with offices and retail outlets in all major countries. English-speakers on lower wages.
Central and South American Distribution Hub for retail Customer support
HQ Operational center stores across the continent Complaints and returns
Franchises
The franchise is a business model in which an independent
entity—the franchisee—is entitled to set up a branch of an
established brand. There are advantages for both parties.
Business-format franchise
9.2%
How it works
Organizations that do not intend to generate profit for
their shareholders, are self-governing, and committed
to a common cause come under the broad umbrella of
not-primarily-for profit, not-for-profit, and nonprofit
entities. On this spectrum, cooperatives may disburse
of all wages and salaries
profits to members, but charities are strictly nonprofit.
Although their goals differ, not-for-profits have a similar
paid in the US come from
type of company status and structure to businesses. the not-for-profit sector
Fraternal
Private organization
foundation Based on common
Similar to a charity but interests or beliefs such as
funded by one source, not social or academic interest
the public; generates or a benevolent cause;
revenue from investments; Freemasons and college
makes grants to other fraternities are
charitable bodies both examples
THRIVING SECTOR
Despite being NPOs, many cooperatives and ❯ US Nationwide Mutual Assurance: $23 billion
mutuals have a sizable annual turnover (gross ❯ Germany Edeka Zentrale AG cooperative:
revenue transacted). $16 billion
❯ Japan Zen Noh cooperative: $53 billion ❯ UK Co-operative Group: $16 billion
❯ France Crédit Agricole Group of ❯ Spain Mondragon cooperative: $14 billion
cooperatives and mutuals: $32 billion
HOW COMPANIES WORK
Business ownership 24 25
Committees formed
by board members
carry out specific tasks
Nongovernmental such as fundraising.
organization (NGO)
Funded by government or by Administration
international donor agencies staff often include
such as the World Health a proportion of
Organization (WHO); voluntary workers.
operate independently
Mutual
Raises funds from
members (usually
customers); often takes the
form of financial institutions;
profits reinvested in the
mutual or to sustain or
grow the organization
Chamber of commerce
Chambers from various
regions gather to promote
trade, investment, and
cooperation; usually funded
by subscriptions from
local businesses
Charity
Must be registered as a
charity; tax exempt; all
Social enterprise resources must be devoted to
May sell goods or services the charity’s stated charitable
to fund community projects; activities; may be organized
any surplus revenue as a trust, corporation,
reinvested in the enterprise or association
for the community
Start-ups
A start-up is a new business in the early stages of development and operation,
during which an entrepreneur or founding group comes up with an idea for
a product or service, researches it, develops a business plan, raises funds,
and launches with the goal of rapid growth. Registering intellectual property
(IP)—a unique creation, not just an idea—to protect it is an important stage of
the start-up process. Protection includes trademarks, patents, and copyright.
NEED TO KNOW
thousands of entrepreneurs with
web-based products and services
found funding, many on the
™ ®
❯ Internal start-ups Start-ups
that originate from inside a large
strength of their intellectual
property alone. Giants Google
and Amazon both started up at
©
organization that time. Since then, technology
❯ Patent trolls Companies or businesses have become one of the
individuals who buy up the patents most talked-about start-up types.
of failed start-ups and attempt to Their value is often based 100
collect licensing fees from potential percent on intellectual property.
infringers of the patent
HOW COMPANIES WORK
Start-ups 26 27
big idea
The
Consider Launch
the IP ❯ Win? Lose?
❯ Register IP ❯ Research indicates
❯ Find a name that, in most Western
countries, 80–90 percent
❯ Buy a domain
of start-ups fail.
❯ Research market
40%
how much it will make See pp.34–37.
See pp.32–33.
START-UP STRUCTURE
Business
Sole
Pros
o cial start-ups
S
Motivation
Making a difference
Example
Ex-athlete starts
fitness coaching
business
173%
the projected
Type of funding
Self, friends,
peers, bank loan
Example
Malaria blood-test kit
for smartphone
revenue increase
over three years
for mobile gaming Type of funding
Community, charity,
start-ups government, donation
HOW COMPANIES WORK
Start-ups 30 31
n a large c
t hi
wi or
p alab
le start-
up
ve
Motivation c
Innovating S
or
Motivation
i
iat
at i
Readiness to grow
Init
on
0101010011
0100010101
Example
PC manufacturer starts
a separate business Example
all business providing cloud Phone app
Sm data storage developer
Motivation
Feeding the family
Type of funding
Self, family,
bank loan
Example
Biotech
laboratory
Type of funding
Outside
investment
Business plans
Writing a business plan is one of the most important steps in
developing a start-up. The plan sets out the new business’s
goals, market analysis, and projected income and profit.
Key elements
Executive summary Business
Preparing a business plan can take
Fill in this section last, bearing in background
several weeks, and it is worth doing
mind that it may be the only part
thoroughly. It is a vital document Provide details of each person
a busy person reads:
for securing funding, so the financial in the business:
forecast must be both realistic and ❯ Business summary Company
structure, name, product or ❯ Experience Relevant work
accurate. If showing it to others, pare carried out to date
service, and customer profile
the executive summary down to two
❯ Business goals Three objectives ❯ Qualifications Credentials,
pages, write it in plain English, and such as diploma in horticulture
explain any technical terms. over one, three, and five years
for a gardening service
❯ Financial summary Expected
sales and costs, and funding ❯ Training Past and future,
including business skills such
❯ Elevator pitch Two-minute talk as assertiveness
to sell your idea to a customer
2.5x
more likely
❯ Product or service With a
picture if product is new
❯ Range If more than one, such as
garden design and maintenance
❯ How it is different What makes
or individuals and their profile;
local, national, or international
❯ Market research What the
local market is for similar
products or services
Back-up plan
Make a Plan B in case something ❯ Longer-term changes Shifts such
goes unexpectedly wrong: as working online, not on premises
❯ Short-term changes Cutting costs ❯ Closure Lessons learned and skills
or boosting sales immediately acquired if the business closes
Raising money
Almost every new enterprise needs funding to get it going, and to
keep afloat until it turns a profit. Financial help is at hand from a
variety of sources, suitable at different stages of start-up growth.
Term loan Paid back regularly Bank overdraft or credit card Factoring/invoice discounting
over a set period of time Interest charged monthly if balance Unpaid invoices sold at a discount
not paid in full to a company that collects them
for commission
❯ Bank Offers either personal or ❯ Bank or credit company ❯ Factors and discounters
business loans Financial organization that makes Companies that offer advance
❯ Government Offers low-interest loans to commercial ventures on unpaid invoices, for a profit
start-up loans
❯ Credit union Cooperative that
gives members low-interest loans
❯ Peer-to-peer (P2P) lending
NEED TO KNOW
Unsecured personal loans $
❯ P2P lending Loans made
❯ Friends and family May give between individuals over internet
interest-free loans $
❯ Crowdfunding Debt or equity
raised via internet platforms
HOW COMPANIES WORK
Start-ups 34 35
p fund
rt
-u
5–10%
in
Sta
g
of small and
medium-sized
enterprises in
the UK need no
start-up funding
Investors Grants
Equity capital is paid to the Financial awards and
start-up in return for a share prizes are provided
of the business. by public bodies.
Alternative models
Since the start of the economic CREDIT ANALYSIS CRITERIA FOR LENDING
downturn that started in 2008,
several innovative and more Capacity Collateral
personal types of funding, such The borrower’s ability to repay the The borrower is often expected to
as crowdfunding and peer-to-peer loan is shown by the business plan. pledge an asset that can be sold to
(P2P) lending, have evolved and Capital pay off the loan if funds are too low
blossomed on the internet. All to pay the monthly interest or repay
The borrower’s net worth is assessed the capital at the end of the term.
involve the principle of raising to check that assets exceed debts.
small amounts of money from large Conditions
Character
numbers of individuals who pool The lender is swayed by the current
The lender usually looks for a economic climate as well as by the
their resources to provide the loan
borrower with a good credit history. sum requested.
or equity needed.
(FFF)
The key to successful funding is to
choose the right type of finance $
at each stage of a company’s early
growth. Start-ups usually begin
modestly, with self-funding and help
from friends, family, and anyone else
who is prepared to take a high risk.
Crowdfunders and business angels
are amateurs willing the entrepreneur
to succeed, while venture capitalists
become interested when the level of RISK
risk goes down and they can expect
a healthy profit in return for injecting
substantial funds. Public markets such
as stock exchanges may step in as
sales soar and success looks probable.
At all stages, investors will conduct ENT
VE STM
credit analyis to asses a company’s IN
ability to repay its debt.
REVENUE
TIME
Idea Seed
HOW COMPANIES WORK
Start-ups 36 37
66% Personal
savings 5% Home
mortgage
$ 10% Bank
loan $ 1.5% Equity
investment
SALES
Business accelerators
Suited to start-ups that have limited financing, accelerators offer short–term (one
to three months) boot camps. Clients include web and software developers.
Marketing
Networking
Start-up pays advice
accelerator % of
equity in the business.
Management
Seed capital In return, accelerator of intellectual
provides help and property
services.
HOW COMPANIES WORK
Start-ups 38 39
Business incubators
Start-up pays
Often sponsored by nonprofit incubator %
organizations, incubators tend to be of equity in the
longer term (one to five years) and business. It may
cater for a variety of clients, many also pay rent to
science-based. share part of the
incubator’s work
space. In return,
it receives a range
of benefits.
Start-up
introduced
to
incubator
33
science laboratories work from
months
the average time
US start-ups spent Interaction with Seed money
in an incubator, other start-ups to get started
during 1999–2002
Buying and
selling business
Both private and public companies regularly change hands—they are bought,
sold, and restructured to reflect changing business conditions. These deals
all come under the umbrella term of mergers and acquisitions (M and A).
Acquisition financing is usually needed to pay for the purchase of another
company, often in the form of a loan or venture capital.
Buy-out Divestiture
The existing management team buys out Part of company
the company they work for. is split off to form
Buy-in new company; may
become acquisition
An external management team buys into target. See pp.44–45.
the company.
HOW COMPANIES WORK
Buying and selling business 40 41
million
The corporate world categorizes acquisition
deals according to the capitalization size (the
value of the company’s shares).
$ $ $ Large $2 billion to
$10 billion
$ $ $ $ Megadeal
Above $10 billion
Company A Company B
Merger manufactures luxury manufactures
cars in the US. luxury cars in Italy.
merges with
A B
Acquisition
takes over
A B
$112
New company A + B now has
an expanded market spanning
Europe and North America.
A+B billion
the record annual
spend by Japanese
companies on
overseas mergers
Expanded
company A and acquisitions,
now has
in-house in 2012
A
expertise for
producing
animated films.
Divestitures
While a merger results in a bigger company, a divestiture reduces
the size of a business by breaking it down into smaller components
or divisions, which are then sold off or dissolved.
Divestiture in practice
Smith Industries Inc. is one example of an industrial paint conglomerate that has grown
rapidly over the past five years, due to an increase in profits from its expanding sales in
China. It diversified into agricultural chemicals, textiles, and biotechnology, and set up a
separate division for each. Share prices fell in response to poor financial performance.
AGRICULTURAL BIOTECHNOLOGY
CHEMICALS
AGRICULTURAL TEXTILES BIOTECHNOLOGY
CHEMICALS
HOW COMPANIES WORK
Buying and selling business 44 45
NEED TO KNOW
❯ Spin-off New company formed as
the result of a divestiture; also called
a hive-off
❯ Reverse merger Not to be
confused with a divestiture, this
is a quick and cheap method
for a private company to go
52%
the potential
❯ Tracking stock Special type
of shares issued by a parent
company for the division or
public by buying a shell stock—
a public company that is no
rise in a parent
subsidiary they will sell; tracking
stock is tied to the performance
longer operating because it went
bankrupt or was simply closed.
company’s
of the specific division rather than
the company as a whole; also known
❯ Demerger Term commonly used
in the UK for divestiture
share price
as targeted stock
❯ Letter of intent Letter stating
following a
serious intention to do business,
often concerning M and A
divestiture
INDUSTRIAL
PAINT
Vertical vs. horizontal
integration
Companies that want to expand through a merger or acquisition
may decide on a strategy of either horizontal or vertical integration,
combining businesses involved in similar or dissimilar activities.
Horizontal integration
Two publishing companies, both involved
in the process of book creation but with
different areas of specialization, agree to a
merger deal to gain a larger market share.
PUBLISHER AB
ONLINE
BOOKSTORE
A
31%
of businesses
worldwide
planned to
expand through
PUBLISHER/ONLINE a merger or
Forward BOOKSTORE A
(upstream)
Publisher A buys acquisition in
Online bookstore A
to improve brand presence
and provide direct sales.
the three years
Vertical
from 2014
integration
A publisher acquires MERGER AND
two related businesses— ACQUISITION TYPES
PUBLISHER A
a printer and an online
bookstore—so that it can Conglomerate
have greater control over Combining two companies with
production of its books nothing in common: for example,
and their route to market. in 1985, tobacco-producer Philip
Morris purchased General Foods, a
new line of business unconnected
to legal wrangles around smoking.
Market extension
Backward
(downstream) PUBLISHER/ Combining two companies that sell
PRINTER A the same products but in different
Publisher A buys Printer A markets: for example, in 1996, the
to improve print capacity Union Pacific Railroad Company
and production costs and acquired the Southern Pacific Rail
provide warehouse space. Corporation to link railroads in
adjacent US regions.
Product extension
Combining two companies that sell
different but related products in
the same market: for example,
PRINTER A in 2014, Microsoft bought Nokia’s
mobile-phone unit to address
flagging PC sales and its weakness
in the mobile device market.
Management buy-ins
and buy-outs
A company’s ownership may undergo a change, which can be
driven either externally, known as a management buy-in, or
internally, known as a management buy-out.
Buy-in
Some companies, such as investment banks or venture capitalists, can make
sizable profits by purchasing undervalued businesses and transforming them.
Company Company
An outside
+
$
They raise funds
–
They fire and replace the
=
They overhaul the business
management team to buy a majority previous management team. to improve performance and
or investment group shareholding. realize its true value.
sees that a company
is undervalued.
HOW COMPANIES WORK
Buying and selling business 48 49
Company Company
Europe’s biggest
ever leveraged
buy-out—of
+ = chemist chain
Existing management
members buy company
Outside management
members brought in
New management team Alliance Boots
in 2007
Buy-out
A buy-out allows a large company to sell off a part of the business it no
longer wants or helps a small business owner to retire or move on.
46%
of UK employees
STRUCTURAL WHYS
AND WHEREFORES
Overtime pay
Managerial staff who are not paid for overtime
hold exempt positions. Non-exempt positions
believe what senior usually belong to non-managerial staff who are
paid by the hour and qualify for overtime pay.
managers tell them Who bosses whom
about what is happening When one manager has formal authority (decision-
making power) over another, it is called vertical
in their organization specialization. Horizontal specialization means
several managers have equal authority.
Shareholders
Any person or
institution that has
bought shares in
a publicly listed
company is a
shareholder. The
board works for
the shareholders,
who effectively $ $
own the company.
HOW COMPANIES WORK
Who’s who 52 53
Shareholders Shareholders
Chairman
CEO
and CEO
Shareholders Shareholders
Supervisory board
C-LEVEL VARIATIONS
The range of C-level positions varies
for each company. In addition to
the three top posts, there may be:
CAO Chief Administrative Officer
51%
of CIOs and CTOs
Mid-level management
Responsible for overseeing specific
functions in the organization, the
most senior managers at this level
head up different departments or
CIO Chief Information Officer say they are divisions. These managers are often
CTO Chief Technology Officer called directors (not to be confused
CPO Chief Product/Production pioneering new with the board of directors) or, in
the US, vice-presidents. The exact
Officer, responsible for overseeing
product development and digital approaches job titles, and the number of mid-
production level managers, vary depending
CMO Chief Marketing Officer,
within their on the company.
responsible for marketing strategy
and business development business
C-level positions are evolving,
adapting to market conditions and Junior management
business priorities. New roles are and other employees
emerging while some traditional
roles are disappearing. The role of Team leaders, such as supervisors
COO, for example, is less popular and assistant managers, implement
in modern organizations. Some of management plans. They also
the new roles include: coordinate teams of skilled and
CPO Chief Privacy Officer unskilled workers in, for example,
CSO Chief Sustainability Officer production, customer service,
and sales to carry out the core
CDO Chief Digital Officer
tasks needed for the company to
CKO Chief Knowledge Officer function efficiently and profitably.
CCO Chief Customer Officer
HOW COMPANIES WORK
Who’s who 56 57
15%
CHIEF EXECUTIVE
OFFICER (CEO)
Decides on corporate
CHIEF OPERATING policy and strategy
OFFICER (COO)
Responsible for
day-to-day operations; the average salary
reports to CEO and
acts as second
in command CHIEF FINANCIAL
rise for a C-level
OFFICER (CFO)
Manages company’s
executive reporting
financial risk;
reports to CEO to the CEO, in the
US between 1986
and 2006
MARKETING FINANCE
MANAGER MANAGER
Directs marketing Puts CFO’s plans or
department directions into
day to day action, instructing
junior managers
OPERATIONS R AND D
MANAGER MANAGER
Oversees operations Heads up research
division; may also and development
direct production (R and D) of new
department products
NON-MANAGEMENT EMPLOYEES
COMPANY HIERARCHY
Mid-level
CH
management
AIN
OF
CO
MM
AN
Supervisors and
D
team leaders
Non-management
employees
HOW COMPANIES WORK
Who’s who 58 59
CASE STUDY
Restructuring the big three US car manufacturers
The economic crisis of 2008 caused
the big three American car-making
at a lower level in the organization
to create a flatter, less top-heavy
25%
the decline in the
companies—General Motors (GM), company hierarchy.
Ford, and Chrysler—to rethink their ❯ Before restructuring Thirty levels of hierarchy
corporate structures. Market share technicians reported to one
had fallen and the three companies
needed to shed employees and find
production supervisor. between division
❯ After restructuring Seventy-five
ways to cut production.
All three took similar action to
technicians now reported to one heads and CEOs
reorganize the company hierarchy,
removing some managerial roles
production supervisor, through 18
newly created team leader positions. in the US, from
from the mid-management level
and installing more team leaders
1986 to 2003
Flat hierarchy
This looser model is more flexible and suitable for
companies that foster creativity.
❯ Only a few layers so mid- and low-level
management are merged
❯ Large number of employees reporting to each
manager; close supervision not possible
❯ More freedom for employees to make their
own decisions
CEO
CH
AI
NO
FC
OM
M AN
Supervisors and D
team leaders
Non-management
employees
Stakeholders
A stakeholder is anyone who is affected by the performance of the
company, while shareholders own one or more shares in a company,
which makes each of them a part-owner of the company.
$892
organizations ❯ Impact on local
❯ Contribution to inhabitants
enviromental and ❯ Concern for broader
social causes social welfare
❯ Legal compliance
million
the average drop in market
value triggered by negative
news about a company’s
human rights record
HOW COMPANIES WORK
Who’s who 60 61
$
Trade unions Suppliers Employees Lenders
❯ Treatment of workers ❯ Ability to pay debt ❯ Pay and benefits ❯ Ability to repay loans
❯ Fair pay, benefits, and ❯ Enough liquidity ❯ Longevity of the ❯ Integrity of
working conditions company management
❯ Employment prospects ❯ Financial strengths
of the company
STAKEHOLDERS
News breaks that spill is Stakeholder social media News media report on the
worse than BP claims. campaign intensifies. stakeholder backlash.
$60
Bill
$69
BILLION
$30
$0
US government criticizes Obama administration Share price drops 7 percent
BP and sends company a advises it could take legal in London trading.
$69 billion bill for cleanup. action to stop BP paying from
dividends to shareholders.
HOW COMPANIES WORK
Who’s who 62 63
BANG!
BANG!
@
#
Oil rig explodes, killing News media report on BP starts social media
11 employees and spewing the event. campaign on Twitter—
millions of gallons of oil into initially to minimize the
the Gulf of Mexico. impact of the spill.
$60
$$ $30
$0
Five of BP’s top 10 By June 25, BP’s share price BP shares trading at
shareholders sell off stock. has dropped by more than
half; over 34 billion shares $23.91
have been bought and sold. on June 25, 2010
Business cultures
Every organization has a particular workplace environment,
consciously or unconsciously shaped by the personalities, values,
and behavior of the people leading it and working in it.
DECISIONS MADE
DESCRIPTIONS
PROCEDURES
SYSTEMS
RULES
JOB
POWER
bureaucratic / controlling
HOW COMPANIES WORK
Who’s who 64 65
IP
RSH
NE
RT
PA
TASK
TASK
TASK
entrepreneurial / flexible
Corporate
structure
A company’s structure—the way in which it is organized—can have a major
impact on the way it performs. There are several models of corporate structure
typically used in the business world, and they continue to evolve. The first
consideration is whether power should be centralized at the top, with decision-
making in the hands of a few key senior employees, or decentralized, with more
power in the hands of staff, and with fewer people to go through for approval.
Choosing a structure
Most start-ups have a centralized structure. More complex structures either evolve or are designed
as the company grows, depending on the nature and size of the business, the complexity of the work,
any requirement for instant expertise, and the geographical location of parts of the business.
78%
of groups reach
100%
of groups reach
WARNING
When change is needed
Signs that a structure is not working
include low morale and high staff
turnover, no new products being
solutions to solutions to developed, and profit suddenly
accelerating or decelerating. Tools
simple tasks complex tasks to amend poor structure include:
❯ Business process reengineering
faster in faster in (BPR) Analyzing and redesigning
the workflow within a company.
centralized decentralized ❯ Altering the reporting line
In a traditional solid-line reporting
structures structures relationship, one line manager
oversees goals and performance.
It can be beneficial to switch to
the weaker chain of a dotted-line
reporting relationship, in which
a manager sets some but not all
the objectives.
Network Team-based
Decentralized
Suits creative For companies that Power is spread through the company,
and technology rely on innovation and staff make their own decisions.
companies in which and are customer ❯ Power shared
everyone is online. focused. See
❯ Organic
See pp.72–73. pp.74–75.
❯ Experimental
❯ Flexible
❯ Fast response to change
How it works
The chain of command is straightforward. The
business typically consists of a chief executive
Typical departmental hierarchy
officer (CEO) or president at the top, with the The departments operate independently, with the
various specialist departments or divisions, such managers reporting to the CEO or president, who has
as marketing and finance, aligned below. overall command. The sales and marketing department
usually takes responsibility for managing product lines.
Each department operates as an independent
unit, with its own budget, and reports directly to
the CEO, who takes responsibility for the operation
of all the departments. A functional structure is the
most common type of organization.
WARNING
Dangers of silo mentality
Silo mentality describes a scenario in which each
department has a different, closed view of its role within
the overall scheme and information does not get shared.
$
2 for 1
1 Sales and marketing 2 Finance is not briefed and Production/ Research and Finance
decides to launch a special processes the order for one
online two-for-one offer. item only. operations development manager
manager manager
41%
of UK companies FUNCTIONAL: PROS
AND CONS
say the structure of Pros
their organization is a ❯ Allows for the development of
specialization and expertise
barrier to improving ❯ Enables efficient use of resources
and potential economies of scale
CEO customer experience ❯ Offers obvious career path for
employees in each department
❯ Simple, efficient structure for
manufacturers producing a
limited range of goods for sale
Cons
❯ Formal lines of communication;
stifles innovation and creativity
❯ Departments fail to coordinate
efficiently with one another
❯ Response time on problems
and queries between different
departments slow
❯ Many decisions referred up
to the top, creating a backlog
How it works
Under the overall control of a CEO Division by geography
or president, several divisions work For businesses with products that need to
alongside one another to design, be adapted to local markets, an organization
research, produce, and sell a can be structured according to each of the
particular product, or to service regional markets it serves. These may be
a specific market. Each division domestic or international. Print technology
runs its own specialized functions, and services company Xerox has successfully
such as operations and production, adopted this structure (see case study, right).
sales and marketing, and finance.
A company may arrange its divisions
according to the types of product
it makes, the regions in which it
operates, or the customers to whom
it sells. Large companies may adopt
hybrid structures—by product and North America
geography, for example. The company’s
main market
CASE STUDY
Printer technology and services
company Xerox has restructured
several times to align the business
with the main markets that buy its
CEO products. In 1992, Xerox’s high-
profile change from a functional
to a new divisional structure, with
nine self-contained divisions each
serving a particular customer type,
hit the headlines. This also allowed
the company to focus on its core
business—digital publishing, color
copying, and printing.
Dividing the company by market
location is another strategy Xerox
has used successfully. In 2006, each
division was organized once again,
geographically, to ensure that those
making the decisions were closest
to the customers in each market.
Europe Developing Global services
The second-largest markets Additional division
region for sales All other markets consulting across regions
7%
Businesses with distinct customer
markets may be organized by
customer division. For example,
the financial institution Bank of
America Merrill Lynch caters to
individuals, small businesses, and the increase in
corporate and institutional clients.
CEO Xerox’s share
value when
it announced
its move from
a functional
CONSUMER
Typically the
BUSINESS
Products adapted or
INSTITUTIONAL
Large-scale provision
to a divisional
original market favorably priced to a single client structure
in 1992
Matrix structure
Unlike a conventional company hierarchy organized either by function
or division, a matrix combines the two approaches so that staff work
in both functional and divisional units, and report to two bosses.
How it works
A business that uses a matrix setup often begins Matrix structure
with the more traditional functional structure. As
In this case study, an oil-exploration and
the business develops, it may make sense to overlay
production company has several oil-
a divisional structure to meet changes in business refining projects to manage. The matrix
conditions—for example, if a company is managing guardian oversees the matrix and makes
several large projects for a client or expands globally sure it works efficiently.
and is selling its products in several regions. A matrix Engineering
grid may start out as temporary—perhaps formed to director
manage short-term projects—and become permanent.
The two chains of command in a matrix create the
grid. Staff report along a vertical line to a functional
manager, such as the marketing director, and along Matrix
a horizontal line to the project manager of a specific guardian
business line, brand, project, or region.
CEO 90%
of FTSE 50 companies
had adopted a matrix
structure by 2013
How it works The various parties can be scattered around the globe
The company at the center of the structure is stripped and are connected by the internet. Together, they
back to basic functions that are essential to the type of provide all the services needed for the network to
business being operated—research and development, function as one entity. This type of business structure
for example, in the case of a technology company. All is based on the idea of the social media network, and
other functions are outsourced to external specialists. so is known as a network enterprise.
Post-production
effects in
Copenhagen,
Denmark
Cinematographer in
London, UK
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Ne
en
Film Film editing
10 production in Osaka,
company, Los
+ - $
Angeles, CA
Japan
$
X =
Accounting
and finance
in Boston,
MA
Set design
Location scout in Sydney,
in Istanbul, Turkey Australia
Team-based
structure
As its name implies, a team-based organization (TBO) is made up
entirely of teams. Managers and staff from different departments join
to form teams handling specific projects, in the short or long term.
Team-based hierarchy
While TBOs still have a CEO, little other hierarchy exists. Team leaders are
part of the team rather than in a chain of command. At its best, a team-
based model fosters a culture of trust, so individuals take pride in their work CEO
and responsibility for carrying out tasks well and on time and budget.
Team Team
leader leader
Team A Team B
$
HOW COMPANIES WORK
Corporate structure 76 77
HOLACRACY—BREAKING BOUNDARIES
Staff are grouped into teams that set their own roles and goals and choose
their own leaders. The idea is that if power and responsibility are shared,
200–
300%
employees will give their very best. In 2014, the Las Vegas–based online
clothing retailer Zappos adopted the model for its 1,500 staff. Holacracy
is a trademarked term used by the company that invented this specific
management system. It follows the same principle as a flat lattice, but takes
the idea one step further by presenting a comprehensive management
structure with clear processes for internal operations and governance. the productivity
increase at US
TRADITIONAL
HIERARCHY
HOLACRACY—A STRUCTURE OF
SELF-MANAGED TEAMS
sausage-maker
Decisions
handed Johnsonville
down
from top Foods, from
Decision-
1982 to 1990, by
making by
committee
moving to a team-
based structure
TEAM-BASED: PROS
AND CONS
Pros
❯ Quick decision-making and
rapid response to problems
and challenges
❯ Reduced overheads because there
is no heavy management structure
Team
leader ❯ Open communication because there
is no fear of management reaction
Team C
Cons
❯ If staff lack expertise, decisions
may be flawed
❯ Limited sharing between teams
$ may affect business performance
❯ Decisions by consensus harder
to reach
Human
resources
The human resources (HR) department is responsible for all policies and processes
relating to the people employed by a business. To help the business achieve its
goals, HR has to make sure that it employs the right people with the right skills,
treats them consistently and fairly, and has a supporting framework to drive and
deliver the required level of performance.
Business goals
HR framework Business goals are the
The starting point for any driver for every business
decision in an organization is decision, and HR
its business goals. HR supports polices support them.
the delivery of these goals by
ensuring that there is a staffing
strategy to support the business
plan. Typically, an HR framework
sets out a people strategy
including the competencies
of the people who best suit
the organization. This is then
SELECTION SUCCESSION PERFORMANCE LEARNING
implemented in a range of areas, AND AND TALENT MANAGEMENT AND
from recruitment and selection RETENTION PLANNING See pp.84–85. DEVELOPMENT
to learning and development. See pp.82–83. See pp.82–83. See pp.82–83.
HR professionals work closely
with business leaders and
line managers to design and
implement HR systems that
back up strategic business goals.
3.2 billion
ESSENTIAL PEOPLE
SKILLS
As well as recruiting effectively and
ensuring that employees deliver, HR
plays a role in nurturing essential
people were in recorded people skills across the organization.
Relating to others
employment globally in 2014 ❯ Some people are natural leaders,
but most leaders can benefit
from objective thinking about
the leadership strategy they wish
to follow. See pp.88–89.
❯ Even in flattened, team-based
hierarchies, team leaders need to
develop leadership skills to guide
and support their teams.
See pp.90–91.
❯ Despite the revolution in technology,
people remain vital to organizations,
as skills and knowledge are central
to success. As a result, HR has an
expanding role. One example is
Google, which calls its HR function
People Operations (POPS) and treats
REWARDS AND EMPLOYEE its staff as a valuable asset, offering
BENEFITS ENGAGEMENT a range of attractive perks to “find
See pp.86–87. See pp.92–93. them, grow them, and keep them.”
See pp.92–93.
Managing projects
❯ Project management is an essential
skill for managers at all levels,
whether they are running regular
day-to-day activities or special
projects. See pp.94–95.
Negotiating
❯ The ability to negotiate successfully
is an essential skill. Awareness of
strategies and styles is key to success.
See pp.96–97.
The human
resources cycle
From the moment a company starts the process of recruiting an
employee to the time that person leaves the company, the individual
is in a cycle that is managed by the human resources (HR) department.
NEED TO KNOW CV
Contract
“Hire people
Once terms are
agreed and a smarter than
Employ contract signed,
the candidate you and get out
becomes the
company’s of their way.”
employee. Howard Schultz
HOW COMPANIES WORK
Human resources 80 81
$
An induction program
explains the new role and
Reward introduces the team. HR
gives a briefing on pay, tax,
and benefits such as leave,
insurance, and pensions.
94%
of recruiters
Job description and
person specification
Clear written statement
of the role, including job
in the US used, title, purpose, duties,
responsibilities, scope,
or planned and reporting structure,
as well as competencies
to use, social and qualities required. It
is used in the recruitment
Person specification
media for process to provide a clear
guide for both applicants Summarizes the necessary
recruiting and interviewers. or desired criteria for
candidate selection,
in 2013 including required skills
and/or competencies for
the role, experience, and
educational qualifications.
HOW COMPANIES WORK
Human resources 82 83
NEED TO KNOW
❯ Psychometric tests Often used
as an initial screening method,
these aim to assess attributes such
Applications as intelligence, aptitude, and type
The curriculum vitae (CV) or résumé is of personality, using verbal and
the essential document, often with non-verbal reasoning tests and
a cover letter. Companies behavior questionnaires.
may use an application
form instead.
CONTRACT
Selection Appointment
After HR has Companies may ask for
drawn up references and/or request
a shortlist, a medical examination for
candidates are the chosen candidate. The
assessed by employment offer is a legally
individual face- binding contract that sets
to-face interviews, out the terms and conditions
group assesssment, of the job.
and psychometric
testing.
Evaluating staff
For a business to achieve its goals, it needs to
have a process that measures the contribution and
performance of each individual against those goals.
Individual goals
How it works
The way in which tasks are done is becoming as
important as what tasks are done, as organizations
1 Set personal goals to align
with business strategy
Traditional performance-
management cycle
Performance management is an ongoing,
continuous process. Some companies are now
moving away from traditional performance
management to “crowdsourcing” as a way
for managers to collect, evaluate, and share
information on employee performance.
WINNER!
A WIN-WIN SITUATION
Evaluating performance is good for both
the business and the individual.
Business
❯ Aligns individual goals with company goals.
❯ Offers consistent approach, with benchmarks.
❯ Continuously enables improvement. Rewards
❯ Fosters the right behaviors and relationships.
Individual
❯ Understands what is expected of them.
5 Promotions and pay
raises in line with
performance
NEED TO KNOW
❯ Balanced scorecard
Framework to measure
performance against
strategic goals, devised by
Kaplan and Norton
❯ Competencies Defined
behaviors and attributes
that individuals must have to
perform effectively at work
Discussion ❯ Performance appraisal
2 Ongoing communication on
standards of work and behavior
to improve working relationships
Process via which individual
employee and their manager
can discuss performance and
development
360-degree feedback
Coaching Gives a rounded picture with
Customer
4 Appraisal
Formal feedback
from the line Direct Manager
manager, with reports
an opportunity INPUT FROM
COLLEAGUES
for individuals
to contribute
Colleagues
Motivation
and rewards
People work for money, but they are also motivated by other factors
such as doing a good job and being valued. Non-financial rewards
drive day-to-day motivation more strongly than pay and benefits.
How it works external to the actual work and others control the
In the past, tangible pay and benefits were the key amount, distribution, and timing. Employers now
motivational tools for employees. These financial recognize that while extrinsic incentives are clearly
rewards are termed extrinsic because they are important, intrinsic (psychological) rewards are crucial.
Individual
Extrinsic motivation
Policies implemented Employees get
by the company: psychological benefits
from doing meaningful
Financial rewards work and performing it
well. Only one in eight
❯ Base pay
workers—about 180
❯ Bonus million employees in
❯ Incentives 142 countries studied—
Benefits are committed to their
jobs and make a
❯ Pension contributions
positive contribution
❯ Paid holidays/vacation to their organization.
❯ Health care
HOW COMPANIES WORK
Human resources 86 87
Only this
the percentage of
EXTRINSIC
INTRINSIC
fully committed to Do this task or I don’t want to
get in trouble.
their jobs do this task – it is
pointless.
DEMOTIVATION
INCREASING MOTIVATION
Leadership strategy
and styles
Top-down leadership, in which managers give orders, is not always
the best way to get results. A number of different leadership styles
have been identified by business experts.
How it works
Every leader is an individual with
In 2007, for example, business
authors Eric Flamholtz and Yvonne
“Outstanding
his or her own approach. However,
over the years, management gurus
Randle developed a leadership
matrix based on Lewin’s theories,
leaders go out
have identified key leadership which shows the best style to use
in any given situation, ranging from
of their way to
styles that can be used to achieve
different results, depending on the autocratic (one all-powerful leader) boost the self-
environment. Many frameworks are to consensus (decisions reached
based on the ideas of psychologist by general agreement. Truly esteem of their
Kurt Lewin, who developed his inspirational leaders encourage
theories in the 1930s with three people to believe in themselves so personnel.”
major styles: autocratic, democratic, that they achieve results beyond Sam Walton
and laissez-faire (non-interference). even their own expectations.
TRANSFORMATIONAL LEADERSHIP
While different styles can suit different situations, transformational leadership,
in which leaders and their followers raise one another to higher levels of integrity
and motivation, was identified by guru James McGregor Burns as the most
effective. This has been developed by others, including
industrial psychologist Bernard Bass, who listed
the qualities of a transformational leader.
Inspires people
Stirs the to reach for the
emotions of improbable
Encourages people
others
Sets clear
goals
Affiliative “People come before task.” Use in times of stress, when Praise and nurturing
Focuses on creating emotional teammates need to recover can foster mediocre
bonds within a team and a from trauma, or when the performance and lack
sense of belonging within team needs to rebuild trust. of direction.
an organization.
Commanding/ “Do what I tell you.” Only use in times of Insistence should only be
coercive Demands immediate crisis or to control a used when essential; it
compliance, without problem employee can alienate people, stifle
discussion or negotiation. when all else fails. inventiveness, and create
a tense atmosphere.
Democratic “What do you think?” Use when it is necessary for This is not for use in crisis
Goal is to build consensus the team to buy into or have or when teammates are
through participation. ownership of, a decision, not well enough informed
plan, or goal. to be able to offer suitable
guidance to the leader.
Pacesetting “Do as I do, now.” Only use when the team Style can overwhelm
Expects and models is already motivated and some team members and
excellence, creating competent, and when fast adversely affect employee
challenging and exciting results are necessary. commitment; it may stifle
goals for the team. creativity and innovation.
Visionary/ “Come with me.” Use when the team needs This is not effective
authoritative Mobilizes the team toward a new vision because when a leader is working
a common vision and goal, circumstances have with a team of experts or
leaving the means up to the changed, or when explicit better-informed group.
individual. guidance is not required.
Leadership for
team building
Just as generals have to get the best from their troops, so business
leaders must make the most of their teams. The key is ensuring
that individuals work together to achieve a common goal.
How it works
From statesmen such as former British prime minster They have a passion that sweeps people along with
Winston Churchill to former General Electric CEO Jack them; they learn from mistakes and are prepared to
Welch, great leaders know that to achieve a long-term alter their course to meet changing circumstances.
goal, they must not only use their own capabilities but Much academic work has been done to study the
also maximize the combined strength of other people. traits and strategies of such leaders.
Encouraging
collaboration
❯ Allows open discussions
“Leadership is ❯ Demands and rewards
the art of getting collaboration
❯ Involves and engages people
someone else to
do something you
Building confidence
want done because ❯ Accentuates the positive
he wants to do it.” ❯ Shows trust by assigning
responsibility
Dwight D. Eisenhower
❯ Says “thank you”
HOW COMPANIES WORK
Human resources 90 91
Providing
know-how
❯ Knows own area
❯ Gets expert help for
other areas
❯ Shares context with team
Setting priorities 1
2
❯ Demonstrates focus; avoids ambiguity 3
❯ Is clear about what must and must
not happen
❯ Is prepared to change course if
priorities switch
Managing performance
❯ Sets clear objectives
❯ Gives constructive feedback; confronts
and resolves performance issues
❯ Aligns incentives with
team goals
Employee relations
and communications
Thriving organizations recognize the importance of harnessing people’s
ideas and energy to provide a competitive edge, while managers are
eager to gain, retain, and build employee commitment and engagement.
Commitment
Communication in practice
In this example, a company is establishing weekly
employee forums to facilitate communication and
build trust throughout the business. To strengthen
employee awarenees, engagement, and commitment
to the idea, various media are used, from email to
webinars and discussion. Managers focus ever more
on collaboration rather than just imparting information.
Engagement and
EMPLOYEE FORUMS
involvement
In many countries, employee communications used
to focus on structured industrial relations, managed
by HR. Employee relations are now based more on
trust and building strong relationships. Many firms
create formal works councils or employee forums.
At their best, employee forums:
❯ Allow representatives from across the Awareness and
DEGREE OF COMMITMENT
TIME
HOW COMPANIES WORK
Human resources 92 93
CASE STUDY
John Lewis $316
million
The UK-based John Lewis chain of ❯ Partnership council Made up
department stores is famous for its of 80 elected partners from across
unique employee-owned structure, the business, the council meets four
in which every worker is a partner times a year. The chairman and
in the business. It has a number of directors report to the council,
employee communication policies:
❯ Gazette Employees can send
which can remove the chairman.
❯ Branch forums Elected by
the amount paid
letters directly to management
through the weekly gazette.
employees at each branch, these
forums work with management to
in staff bonuses by
Managers publish their responses
in the gazette for all to read.
influence the running of their store
and select local charities to support.
John Lewis in 2013
REINFORCE AND
INTERNALIZE
Regular face-to-
face updates show
ESTABLISH PRACTICE employees how
A company-wide forums have
awayday illustrates made a difference.
to employees
how the forums
have changed
working practices.
STIMULATE POSITIVE
PERCEPTION
An inspirational seminar
illustrates the benefits
of the new forums.
ADOPT AND SHARE
AID UNDERSTANDING Employees attend forums
Resources placed on and then share their opinions
the company intranet on Twitter and Yammer so
detail how employee they feel involved and
forums will work. collaborate with managers.
CREATE
AWARENESS
The purpose of
employee forums
is explained at a
company-wide
video conference.
Project management
Besides day-to-day activities, a business may have projects that are
one-time, temporary, specific pieces of work. Projects need to be
managed to deliver on time, within budget, and to specifications.
Unclear ❯ Review project charter and revisit vision ❯ Seek clarity from sponsors
vision or lack and objective. and/or senior management.
of clarity ❯ Involve team so everyone understands
direction of work and avoids stalling.
Scope creep ❯ Manage requests for change against business ❯ Communicate to identify why
(project case and project objective. change is important and how to
changes once incorporate, or find alternative.
under way)
97%
of managers*
Monitoring and control Closure
❯ Measuring effort and progress ❯ Finalizing all activities believe project
❯ Managing and mitigating risk
❯ People management
❯ Communication
❯ Learning—project review
management
is critical
to success
*surveyed from 34 different countries
Negotiating strategy
Skillful negotiation is vital in business when two or more sides have
different viewpoints and each party wants to press for their own
advantage. The ideal outcome is a compromise that resolves conflict.
How it works talks can end in stalemate, bad feeling, and loss of
Like many aspects of business, negotiation is a business. Being able to negotiate is vital to build
process to find a mutually acceptable solution. Before strong working relationships, deliver a sustainable,
any discussion, each party must work to understand well-considered solution (rather than a short-term
the other’s interests and decide on strategy; otherwise fix), and avoid future conflicts.
Reaching agreement
Any strategy, from a wage negotiation between a trade union and employer to a
sales negotiation between a customer and a supplier, depends on the relationship
between the two parties. Good negotiation should leave each party feeling
satisfied with the outcome of the discussion and ready to do business again.
65%
of face-to-face communication
BODY LANGUAGE IN
DIFFERENT CULTURES
With international negotiations, it
can be hard to read body language
signals, particularly since the
is through non-verbal signals meaning of gestures can vary.
Eye contact Chinese
people avoid direct eye
contact to show respect
while American people
see lack of eye contact
as a sign of shiftiness.
Facial expressions
When emotions are
high in the US, it is
acceptable to frown,
even to swear, but not
to cry. Japanese people
might smile or laugh,
but never frown or cry.
Head movements In
much of Europe and the
US, people nod to mean
yes and shake their head
to mean no. But in some
parts of the world, such
as in Bulgaria, it is the
Agree, close, opposite way round.
and implement Gestures Western
❯ Conclude with an cultures use a hand
agreement that is extended towards a
mutually acceptable. person to indicate
❯ Clearly articulate and “Come here”. Chinese
note agreement and people would see this
concessions. gesture as offensive.
❯ Formalize agreement in Posture In the US,
writing and follow up. being casual is valued;
people might slouch
when standing or sitting.
In some European
countries, such as
Germany, a slouching
posture is considered
rude. Formality is
also valued in Japan,
particularly the ability
to sit upright and still.
$ $ $
$ $
HOW
FINANCE
WORKS
Financial reporting ❯ Financial accounting
Management accounting ❯ Measuring
performance ❯ Raising financing
$
$
$
Financial
reporting
Financial reports are everywhere: a bill at a restaurant is a financial report, as
are sales receipts and bank statements. In business, however, financial reporting
refers to the financial statements that make up a company’s annual report and
accounts. Compiled by accountants, they provide investors and lenders with
information to assess a company’s profitability, and enable company managers,
government, tax authorities, and other stakeholders to evaluate the business.
$50
what should be put into this report.
billion
The eight steps of the accounting cycle are
used by nearly all accountants. The cycle
helps by standardizing processes and makes
sure that accounting jobs are
performed correctly and in
the same way and order
for every activity.
the amount hidden via
See pp.102–103. loans diguised as sales by
Lehman Brothers in 2008
$ $ $
HOW FINANCE WORKS
Financial reporting 100 101
TYPES OF ACCOUNTING
There are seven widely recognized types of accounting:
❯ Financial Drawn up by accountants; ❯ Forensic Engages in disputes and
statements
c ial
an
n
NEED TO KNOW
❯ Debits Expenses—dividends,
assets, and losses. In double-entry
accounting, debits appear on the
left-hand side of the account
❯ Credits Gains—income, revenue,
owners’ equity, and liabilities. In
double-entry accounting, credits
appear on the right-hand side
Journal entries Posting ❯ Chart of accounts List giving
Accountants then analyze the Journal entries are then the names of all of a company’s
transaction and note it in the transferred to the general accounts, used to organize records
relevant journal—a book or an ledger—a large book or ❯ Audit trail Full history of a
electronic record. electronic record logging transaction, allowing auditors to
all the company’s accounts. trace it from its source, through
the general ledger, and note any
adjustments made
Trial balance
13%
$
A list of all the company’s accounts
$ $ is prepared at the end of the
accounting period, usually a year,
quarter, or month.
more accountants
will be required
in the US by 2022
10,000
55 230
21,000
Worksheet
Often, trial balance calculations
don’t accurately balance the
Adjusting journal entries books (see pp.116–117). In such
cases, changes are made on
Once the accounts are balanced, any a worksheet.
adjustments are noted in journals at
the end of the accounting period.
Financial statements
The formal records of a business’s financial activities are presented as
financial statements. Most jurisdictions require accurate information
by law, and financial directors and auditors are liable for its contents.
introdu nvironm
r’s It is common for the chairman re These pages contain much of
ct
en
i
Ou
ion
es
different values.
tu
r
s
re
or
Di
icators
ntal ac t audito
me c The environmental en Auditors are independent
Independ
Environ
r’s
report
ou
to
Note
rs
nts
Deconstructing a
financial statement TAXES
The profit and loss account shows
The percentage of business taxes taken by governments varies from country
revenues, costs, and expenses—
to country but the generic types remain similar:
how much money the business
makes—over an accounting period. ❯ Direct taxes are levied directly on profits or income and
The balance sheet shows what include income taxes, inheritance taxes, and taxes relating
to sales or purchase of property and other capital assets.
a business is worth at the time
it is published, and is relevant
to investors as it reveals assets, ❯ Indirect taxes are paid on goods or services, such as sales
liabilities, and shareholders’ taxes. Indirect taxes are often targeted to reduce consumption
equity—all useful for gauging of harmful goods, a factor relevant to companies working in
business health. The cash-flow the alcohol and tobacco industries.
statement shows the movement ❯ Green taxes are increasingly common and are often indirect.
of cash within a business—its They are generally used as a way of prohibitively increasing
liquidity. However, along with the the price of goods or services harmful to the environment,
big three financial statements, an such as air travel, landfill sites, or fuel, to diminish their use.
annual review contains a wealth
❯ Corporation tax is only paid by companies, not by sole
of information about a company’s
proprietors or partnerships. It is levied as a percentage of the
performance, of interest to its company’s total profit.
stakeholder groups. It is often the
notes that bring statements to life.
Our finance
This section contains the 30 25
$ headline financial figures of
ENVIRONMENT
Charitable donations
Companies vaunt their
philanthropy in the annual report,
detailing how much they have $
given away and how it has helped.
They may support charities
relevant to the nature of their
business or let employees vote
on recipients.
Customer satisfaction
Overall, this section shows how the
company works with customers to
96%
Wessex Water
improve service and support. In
monopoly and oligopoly industries,
customer satisfaction is particularly
important, as governments often set
high targets. Wessex Water’s annual
review shows a customer satisfaction
utility’s customer rating of 96 percent.
satisfaction score
FINANCIAL STATEMENTS
Financial statements for users operations and policies. For this reason, financial
The many financial statements included in the annual statements are useful to a wide range of stakeholders,
report are a gold mine of information for those who from the company’s employees, customers, and
know how to read them. They provide headline profit shareholders to potential investors, governments,
figures, explanations of issues from directors, detailed tax authorities, journalists, credit-rating agencies,
financial data, and information about companies’ banks, and the general public.
company is making
❯ Balance sheet ❯ To assess the long-term strength
❯ Dividends of the company
❯ To see how much will be paid
out to them
6% post-tax ❯ This percentage is estimated by dividing income after tax by the amount of investment. It is
return on capital useful for showing shareholders the kind of returns they can expect on their investments.
64% ❯ For most industries, gearing is a company’s debt compared to its equity. In the water industry,
gearing it compares a company’s net debt to its regulatory capital value (the value of the business that
earns a return on investment). Gearing is expressed as a percentage. See pp.174–175.
A3/A-/BBB+ ❯ Credit ratings assess the likelihood that loans will be repaid. A3 and A- fall at the bottom of
credit rating “strong capacity to meet financial commitments,” while BBB+ is at the top of the adequate
range. The major ratings companies in the US are Moody’s, Standard and Poor’s, and Fitch.
S/B
strength
FINANC
ANKS
Key elements
The profit-and-loss account,
balance sheet, and cash-
flow statements are the
most important financial
statements in an annual Accounting Profit-and-loss Balance sheet
review, supplemented standards statement Gives a snapshot of
by the report’s notes. Generally accepted Shows how much how much a business
To understand these principles standardize money a company is worth at a certain
statements, a knowledge practice worldwide is making and is time and is a good
of accounting principles, to ensure accuracy especially useful for indication of its
depreciation, amortization, and prevent fraud. potential investors long-term health.
and depletion is vital. See pp.112–113. and stakeholders. See pp.116–119.
Accountants also need ❯ International See pp.114–115. ❯ Balances company’s
to understand the legal standards simplify ❯ Outlines revenues assets against its
requirements that the account reporting. and gains minus equity and liabilities.
statements must satisfy ❯ Companies must expenses and losses ❯ Lists different types
and how environmental meet environmental or operating costs. of assets, including
laws can affect a business accounting rules ❯ Informs a company tangible fixed assets
and its accounts. and regulations. if a profit warning and current assets.
See pp.122–123. is needed.
$
HOW FINANCE WORKS
Financial accounting 110 111
$74 AUDITING
The accounts of public companies are
billion
given unbiased scrutiny by external
accountants to check that they are
accurate and clear. This is a legal
requirement in most countries,
designed to ensure market
confidence in the business
the total value lost by world and transparency
in corporate finance. A
shareholders in the 2001 company may also have
an internal audit process,
Enron accounting scandal which means that its
accounts are checked
before being submitted
to an external auditor.
Accounting standards
ECONOMIC MONETARY UNIT GOING CONCERN TIME PERIOD FULL DISCLOSURE
ENTITY ASSUMPTION ASSUMPTION ASSUMPTION PRINCIPLE
ASSUMPTION
Transactions by International economic The financial activities Different operations All information, past,
businesses owned activity is expressed in of a business will carry of a business can be present, or future,
Standard
by one group or monetary terms, with on indefinitely. divided into arbitrary which could affect
individual are kept all units assumed to be time periods. financial performance
separate from quantifiable, constant must be disclosed,
transactions made and not affected by usually in the notes of
by other companies inflation or deflation. financial statements.
owned by that group
or individual.
If a group owns Current manufacture Oil reserves will never Sales of toothbrushes If a coconut importer
two companies, of baseball bats is run out; gold in a gold can be measured daily, knows that a hurricane
Example
one manufacturing compared financially mine will last forever; a monthly, quarterly, and has damaged next year’s
televisions and the to manufacture that manufacturer will not so on (when in reality coconut crop, it must
other retailing cell was carried out 30 years go out of business. they are constant, or mention this in its
phones, the financial ago, without taking subject to variations that financial statement.
statements for each inflation into account. are not predictable).
company are separate.
Helps the group Shows as much of the Offers a model for Makes financial Provides full information
of companies and company as possible in businesses to look at reporting easier. for shareholders and
investors compare financial statements, the long-term future potential investors.
Purpose
Largely beneficial It is hard to measure It is not applicable The more often Companies may try
Pros and cons
Assets and liabilities are The time period in Revenue should If there are alternatives Accountants may
valued at their buying which a business’s be recorded at the for reporting on an make a professional
price (in countries expenses and revenue moment when: item, accountants decision to go against
with high inflation or figures are collected a) goods or services should choose to report any one of the other
hyperinflation, other always concurs. are exchanged; the lower amount of principles.
principles, such as b) assets can be income or asset gain.
fair value, are used). converted to cash;
c) it is earned—not
when it is received.
If a company bought a A grocery store A toy-maker takes an If a company is An oil refinery buys
factory 50 years ago for measures costs incurred order for 500 toys in involved in a lawsuit, a $100 whiteboard,
$100,000, that will be its and revenues gained July, delivers it in it must report the which could last
stated value today, even over the same time September, and is paid potential losses rather 10 years. Under the
though its market value period, because when for it in December. The than the potential gains, matching principle,
now is far higher. sales are high, costs revenue is recorded in in the notes of the it should be billed for
are also likely to be September, when the financial statement. $10 each year, but the
high, due to the need goods were exchanged. accountant enters it
to buy more stock. as a one-time cost.
Ensures uniformity Avoids different time Matches the time Prevents companies Saves time for small,
and prevents the scales, which could period that work was from overestimating almost insignificant
overvaluation of present a distorted undertaken to when money they will make in transactions when
assets, which was a picture and erratic the payment was the future, then running there is no risk of
feature of the 1929 financial results—for received, as with the into debt if it does not it being applied
Wall Street Crash. example, with high matching principle. materialize. misleadingly.
revenues from one
period and high costs
in another.
Assets, especially Helps to present Revenue may not Requires a degree Saves time on
property, acquired accounts in a always be received. of objectivity from accountancy.
a long time ago are representative manner. accountants: if this
invariably represented If there are doubts objectivity is absent, Makes information
as being worth less than about a recipient’s financial reports can easier to read—for
their current real value. ability to pay, the be misleading. example, figures can be
company can make rounded to the nearest
an allowance for dollar, thousand, or
doubtful accounts. even million dollars.
Profit-and-loss
statement
A profit-and-loss statement is a financial statement that shows all
revenues, costs, and expenses during an accounting period. It is also
known as an income statement, or an income and expense statement.
$
Case study: profit-and-loss statement
This statement taken from the 2013 annual review of Wessex Water, a UK utility company,
shows it was making a healthy profit (at the time, the exchange rate was £1 = $1.58).
Profit earned from the business’s core Operating profit 224.0 219.0
operations after expenses have been
Interest payable and similar charges (86.9) (81.7)
taken off, but before taxes have been
deducted; it does not include money Interest receivable 2.9 1.2
made on investments
Other finance costs (1.5) (1.0)
Profit before tax after all
income and expenses have been Profit on ordinary activities before taxation 138.5 137.5
taken into account, excluding Taxation on profit on ordinary activities (30.6) (44.3)
extraordinary payments
Profit attributable to shareholders 107.9 93.2
Level of profit that can
be paid out in dividends to the
company’s shareholders.
TYPICAL EXPENSES
Payroll Office supplies
$
Salaries and wages paid to staff, temporary Stationery such as pens, paper, and filing
contractors, and indirect labor systems, office printers, furniture, lighting
Utilities Legal fees and professional services
Water, electricity, and gas; postage and Accounting and legal fees, payable to
shipping; transportation accountants, auditors, and legal advisers
Insurance Interest on loans
Insurance on fixed assets and personal
liability insurance for employees
% Interest paid on money borrowed, which
counts as a business expense
Phone/internet bills $
Tax
Cost of telephone, broadband internet, Varying among jurisdictions, this may
and mobile devices used by employees include payroll tax and corporation tax
Advertising Entertainment
Sales and marketing of the company and Legitimate costs of business entertaining,
its products subject to certain criteria being met
$
Case study: operating costs
This table breaks down the company’s operating costs in more detail. It is important to
read any notes regarding depreciation and ordinary and extraordinary costs and gains.
$
Case study: balance sheet
This example from Wessex Water, a UK public utility company, shows how a balance
sheet works in practice (at the time, the exchange rate was £1 = $1.58).
Fixed assets (or non-current assets) ASSETS, LIABILITIES, AND CAPITAL Year 2013 Year 2012
are not easily converted into cash £m £m
and usually last longer than one
year. They are either tangible, such Fixed assets
as land, or intangible, such as a logo Tangible assets 2,167.1 2,069.2
Investments – –
Current assets are assets that last
one year or less, and can be easily
converted into cash. Cash, cash
equivalents, and inventory are
Current assets
the most common current assets Stock and work in progress 7.0 6.3
Debtors 162.6 153.9
Creditors are the individuals or Cash in the bank and in hand 181.0 211.0
organizations to which the company
owes money. Here, the money must 350.6 371.2
be repaid in the current financial year
Creditors—amounts falling due within one year (198.8) (171.7)
Net current assets equals current
assets after money due to creditors Net current assets 151.8 199.5
has been deducted
Total assets less current liabilities Total assets less current liabilities 2,318.9 2,268.7
is the sum of fixed and net current
assets minus liabilities due within the Creditors—amounts falling due after more (1,891.5) (1,811.9)
current financial year
than one year
Liabilities due in more than one Provisions for liabilities and charges (114.9) (115.3)
year are amounts due to creditors,
which are deducted from total fixed Retirement benefit obligations (93.1) (83.0)
and net current assets Deferred income (17.2) (17.9)
Understanding the notes after the summary, the detailed section of the balance
The balance sheet is a useful indication of the health sheet explains the specific financial workings of the
of a business, and it is important that investors know business in a number of notes. It shows exactly where
how to analyze it. It can be read in two ways—“at money has been gained or lost, in figures, and it
a glance,” as on the previous page, where general often includes a written commentary about potential
information is summarized, or in depth, with more developments that may affect the company, such as
detailed information about each element. Provided court cases, staffing, or availability of resources.
Balance-sheet notes
Investors may want to know more about the figures in the summary section, so additional notes and
tables give detailed breakdowns of the figures (at the time, the exchange rate was £1 = $1.58).
$
Case study: tangible fixed assets
This table presents details of Wessex Water’s tangible fixed assets (long-term assets
that cannot easily be converted into cash).
2013 2012
Individuals or entities that £m £m
sell assets to third parties on
Trade debtors 48.9 48.1
credit, receiving payment at
a later date Owed by group companies 31.8 35.0
Prepayments and 70.3 62.1
accrued income
Prepayments for services Other debtors 11.6 8.7
that will be received in the
future, which the business 162.6 153.9
has already been paid for,
and accrued income that
is expected in the future
PAYMENTS
ON ACCOUNT AND
= TOTAL
$
Case study: creditors
Creditors are individuals or entities that the business
owes money to. They are in credit of Wessex Water.
$
Case study: cash-flow statement
By analyzing this water utility’s statement, which includes a comparison to the previous year, decision-
makers can base future plans on past cash flows (at the time, the exchange rate was £1 = $1.58).
Capital expenditure and financial Capital expenditure and financial investment (215.4) (149.7)
investment is, here, the sum of the
sale of tangible assets plus connection
charges, grants, and deferred income Dividends paid (129.6) (129.4)
A JUICE
COMPANY SELLS
%
$100
GS
25
TA IN
IN ARN
= $80
A DEPRECIATION
- - + +
I
EXPENSE OF NO CHANGE
AND SPENDS
$20
OVER THE
IN WORKING
CAPITAL
CASH FLOW
$20 PERIOD $0 FROM
OPERATING
ON ORANGES ACTIVITIES
=
Cash flow from Cash flow from Total cash flow
investing activities financing activities Adding all three cash flows
Buying or selling assets This includes buying or gives the total. Separating
or investments is in this category. selling stock or debt and paying out the three types shows decision-
This figure is usually a cash outflow out dividends. Money made from makers the health of core activities
(negative figure) due to buying more selling something is called cash as opposed to financing and
than selling, but can be positive if inflow; money lost through paying investing, which bear little relation
there are significant sales. out is cash outflow. to day-to-day operations.
Environmental
accounting
Environmental regulations force companies to consider the impact of
their activities and to adopt corporate social responsibility (CSR) as
they grapple with legislation, climate change, and public opinion.
How it works
Globally, there are reams of different environment
acts spread across multiple jurisdictions that affect
Environmental credentials
the companies operating within their borders in Most companies include a section on environmental
different ways. Areas protected by environment acts accounting in their financial statement. Some details are
include the atmosphere, fresh water, the marine required by law, but the statement also gives an opportunity
environment, nature conservation, nuclear safety, and
to showcase environmental credentials to stakeholders.
noise pollution. International acts are usually ratified
by each country individually before taking effect
there. An example of a common global means of
reducing greenhouse gas emissions is emissions
trading (“cap and trade”), by which companies must
buy a permit for each ton of CO2 they emit over a Society
certain level. Those emitting under the agreed level
❯ Programs and practices
can sell their permits to other companies. that assess and manage
the impact of operations
on communities
❯ Fines and sanctions for
noncompliance with
CASE STUDY regulations
Cleaning up rivers
Wessex Water’s impressive record on pollution is
mentioned several times in its statement, including in Product
the chairman’s introduction. This prominence shows responsibility
that the company believes acting in an environmentally
conscious manner is important to its investors. The ❯ Life-cycle stages in which the
company illustrates several areas where it has acted health-and-safety impact
with others to positively affect the environment: of products and services are
assessed for improvement
❯ Work with the charity Surfers Against Sewage,
which campaigns for clean seawater ❯ Adherence to laws,
standards, and voluntary
❯ Its river strategy: collaborating with pressure groups codes relating to marketing
and organizations to reduce pollutants and the impact communications
of habitat alteration, and so increase the numbers
of aquatic plants, invertebrates, and fish in local rivers
❯ Improving water quality at swimming beaches in the
region, in compliance with mandatory standards
HOW FINANCE WORKS
Financial accounting 122 123
Economic
❯ Financial implications, risks,
and opportunities for the Human rights
organization’s activities ❯ Investment agreements
due to climate change that include human rights
❯ Financial assistance received clauses or that have undergone Labor practices
from the government human rights screening ❯ Workforce by employment
❯ Suppliers and contractors type, contract, and region
that have undergone screening ❯ Average hours of training
on human rights; actions taken per year, per employee by
to address any issues employee category
❯ Ratio of basic salary
of men to women by
employment category
Environmental
❯ Direct and indirect energy
consumption
❯ Waste by type and disposal method
❯ Water withdrawal by source;
discharge by destination and quality
❯ Fines and sanctions for
noncompliance with regulations
Depreciation
When a company buys an asset, its cost can be deducted from income
for accounting and tax purposes. Depreciation allows the company to
spread the cost, by calculating the asset’s decline in value over time.
$10,000
PURCHASE SCRAP ANNUAL
– VALUE
VALUE DEPRECIATION ($) $5,000
= $
USEFUL ECONOMIC
LIFE (YEARS) $ 1
0
60%
Tax authorities often specify the typical useful (economic) life of a particular asset.
This helps to standardize depreciation, and to eliminate uncertainty about value
and the number of years over which an asset can be depreciated.
0
,00
$17
0
,00
$13
000
$9,
000
$5,
2 3 4 5
TIME (YEARS)
Year 2 After the second year, the Year 3 At the end of the third Year 4 The van Year 5 By the
value has depreciated by another year, the van has depreciated has depreciated by end of year five,
$4,000. The van will lose an equal by another $4,000, and its book $4,000, to $9,000, the van is valued
amount of value each year for the next value is $13,000, although its at the end of four at only $5,000—
three years of its useful economic life. actual value may be more or less. years of life. its scrap value.
DEPRECIATION
is 15 (5 + 4 + 3 + 2 + 1). In year 1, it loses 33 percent When to use it This is another accelerated method that can also
(5 ÷ 15), in year 2, 27 percent (4 ÷ 15), and so on. be used for vehicles that lose most of their value early on.
HOW FINANCE WORKS
Financial accounting 126 127
particularly useful for transportation industries. When to use it This method may be used to match an airplane’s
flying hours with the revenue generated from those hours.
Amortization
and depletion
Similar concepts to depreciation, amortization and depletion are used
by accountants to show how intangible assets and natural resources
respectively are used up.
Amortization in practice
There are two types of amortization, one for spreading the cost of an
intangible asset, the other for loan repayment. Both are calculated in
similar ways, but loan repayments are worked out as a percentage.
Intangible assets
INITIAL COST YEARLY
In this example, a VALUE ($) =
USEFUL LIFE AMORTIZATION
company buys an
intangible asset— $20,000
a patent for a new, $20,000
= $2,000
revolutionary type $16,000
10 YEARS
of tennis racket—for
$20,000. The patent $12,000
will be useful for 10
years, so its cost is
recorded as a $2,000 $8,000
amortization (expense)
each year rather than as $4,000
a one-time cost. Unlike
tangible assets, a patent
does not have a salvage 0 1 2 3 4 5 6 7 8 9 10
value (see p.124). TIME (YEARS)
Loan percentage
COST OF LOAN YEARS TO REPAY
If a company has an outstanding loan worth = = %
$150,000, and pays off $3,000 of this loan YEARLY REPAYMENT 100
each year, then $3,000 of the loan has been
amortized. It can also be said that 2 percent 150,000 50
of the loan has been amortized, as it will = = 2%
3,000 100
take 50 years to repay the loan at this rate.
HOW FINANCE WORKS
Financial accounting 128 129
NUMBER
M $10
IO
OF TREES
ILL
N
M $9.1
IO
ILL
N
M $8.2
IO
ON
60,000
MI $7.3
ILL
LLI
ON
MI $6.4
50,000
LLI
ON
MI $5.5
ON
LLI
MI $4.6
40,000
LLI
ON
MI $3.7
ON
LLI
30,000
MI $2.8
ON
LLI
MI $1.9
N
LLI
20,000
IO
MI $1
LL
10,000
0
1 2 3 4 5 6 7 8 9 10
TIME (YEARS)
Management
accounting
For a company’s management to anticipate profit and loss, plan cash flow, and set
effective goals for the business, the coming year’s incomings and outgoings need
to be set out in detail. Unlike financial accounting, which is primarily for external
users such as investors, lenders, or regulators, management or cost accounting
takes place within a business to project expected sales revenue and expenses,
so that the business can decide how to best use its available resources.
Department budgets
Management accounting
Managers estimate what funds will be needed process
for expected outgoings. See pp.136–137. Planning is done for the financial (fiscal)
year that lies ahead—this is also called
Purchase orders (POs) the accounting year and is made up of
POs tell the finance department exactly how 12 consecutive months. Start and end
much money to reserve for payment. dates differ from country to country.
Timesheets
Staff employed on an hourly or daily basis fill in timesheets;
these help managers to calculate overall staff costs. See pp.140–141.
Invoices
Invoices submitted by contractors and suppliers have to be
matched against purchase orders and paid out. See pp.134–135.
Goods received
Employees log receipt of merchandise, describing
what the goods or services are and the quantity received.
Management
Information
Managers create budgets and document business costs is passed to
to monitor business performance, and plan for the short finance
and medium term. The information they collate sheds department
light on the financial implications of ongoing projects.
HOW FINANCE WORKS
Management accounting 130 131
80%
of accountants and
The Chartered Institute of Management Accounting (CIMA)
in the UK and the American Institute of Certified Public
Accountants (AICPA), with members in 177 countries, have
established Global Management Accounting Principles.
❯ Communication provides insight that is influential
Cash-flow statement $
This shows how well the business will be able to meet its financial
obligations and generate cash in the future. See pp.120–121.
Balance sheet
Financial The balance sheet estimates the value of assets and inventory held, $ $
analysis is so that management can reduce it if necessary. See pp.116–117.
passed to
managers Profit-and-loss statement
$
Also called an income statement, the P&L statement tells
management how much money the business made or $
Finance department
Accountants in the finance department (or contracted
from outside the business) receive information about
the costs from managers. They then use these to generate
reports and statements for the managers, who use this
information to make decisions for the next financial year.
Cash flow
The money coming in and going out of a business is its cash flow; the
balance of inflow and outflow is key to survival. Inflows arise from
financing, operations, and investment, while outflows are expenses.
Sales revenue
should never Ca
sh
in
be empty.” han
d
How it works and other sources. Cash flows out to pay employees,
Cash flow is the movement of cash in and out of a rent and utilities, suppliers, and interest on loans.
business over a set period of time. Cash flows in from Timing is key—having enough cash coming in to
sales of goods and services, loans, capital investment, pay bills on time keeps the company solvent.
Other revenue
Grants, donations,
and windfalls
❯ Grants from government or other
Loans institutions, usually one-time sums
for research and development
Bank loans and overdrafts ❯ Donations and gifts (applicable to
CASH nonprofit organizations)
IN ❯ Working capital loans to meet
shortfalls, with anticipated inflows ❯ Sales of assets and investments
as collateral ❯ Repayment of loans made to
❯ Advances on sales invoices other organizations
from factoring companies ❯ Tax refunds
$ CASH
IN ❯ Short-term overdrafts
❯ Also known as cash flow from
financing activities
$
$
CASH OUT
k
toc
or s
CASH
IN
CASH
IN
$
CASH IN HAND INCREASES
$
CASH CASH IN HAND STABLE
OUT
$
HOW FINANCE WORKS
Management accounting 134 135
NEED TO KNOW
❯ Factoring Transaction in which a
business passes its invoices a third
party (factor), which collects payment
from the customer for a commission
Cash conversion
Successful businesses convert their
product or service into cash inflows
80%
of small business
before their bills are due. To make the
❯ Accounts payable Payments a
business has to make to others
conversion process more efficient, a start-ups across
business may speed up:
❯ Accounts receivable Payments ❯ Customer purchase ordering the world fail
a business is due to receive
❯ Order fulfillment and shipping
❯ Aging schedule A table charting
❯ Customer invoicing
because of
accounts payable and accounts
receivable according to their dates ❯ Accounts receivable collection
period
poor cash-flow
❯ Cash-flow gap Interval between
payments made and received ❯ Payment and deposit management
Setting and
controlling budgets
Budget-setting is a process that
takes place between the department
managers, senior management, and
finance department in a company to
establish and control the cost of each
$
department or project.
1%
of companies
worldwide made
accurate budget
Consultation Prepare the budget
forecasts, from Senior management sets out The budget is usually based on the
2004 to 2007 the company’s objectives to the
departmental managers. Each
accounting year, but broken down
into shorter periods. Departmental
manager is then responsible for managers submit their budgets to
working out the budget required senior management for approval.
by their individual department, These may cover areas such as
in order to meet those objectives operating costs (salaries and supplies)
for the coming year. and administration (office expenses).
HOW FINANCE WORKS
Management accounting 136 137
$
$ $
Assets $ Assets $
TYPES OF INVENTORY
Inventory can include three types of stock, depending on the kind of business being
carried out: raw materials, unfinished goods, and finished goods. See pp.316–317.
N
RT
O
LA
EN
ER
CO
TO
Y
Y
Retail outlets plus Store displays and Computers for Trucks and branded Warehouse and
company headquarters back office furniture administrative work company cars distribution equipment
AL
AR
ER
Y
CO
INT
COP
TIE
E
TY
©
S
Brands and designs, Legally protected words Own brands, including Internet portal for Licensing revenue
creative innovation and symbols value and luxury ranges online sales streams
Costs
Costs are the direct or indirect expenses that a business incurs
in order to carry out activities that earn revenue, such as
manufacturing goods or providing a service.
How it works
There are two main ways of classifying costs:
direct, or variable, costs, which increase as more
Variable costs
goods and services are sold, and indirect costs, which
contribute to the overall running of the business and
can either vary with the level of production or stay The head chef orders
fixed. There are three main costs that businesses the ingredients that will
need to account for. The first is labor—wages paid to be required each day.
people employed to carry out a particular task. Labor For peak evenings the
can be regarded as direct or variable, or as a fixed cost of the food order
cost or overhead. The second is the raw materials is higher; for quieter
used in production and other materials used in nights, the food order
service industries—these costs are variable. The is lower. LARGE
FOOD ORDER
third is expenses, which are other costs incurred in
the course of the business’s activities.
LAUNDRY
SERVICES
NEED TO KNOW
❯ Break-even point (BEP) The
point at which total sales revenue
is equal to total costs
❯ Questionable costs Costs that
can be treated as fixed or variable
❯ Sunk costs Costs incurred in the
past that cannot be recovered
❯ Prospective costs Costs that
may be incurred in the future
depending on which business
decisions are made
PEAK QUIETER
EVENINGS EVENINGS
SMALL
FOOD ORDER
EXTRA
LAUNDRY
SERVICES
38%
the average total of US
The change in total costs incurred
when one additional unit is made
❯ Throughput costing An analysis
of the impact that one extra unit
of production will have on sales
❯ Cost-plus pricing Product price
business costs that can be is based on direct and indirect
costs, plus markup percentage
accounted for by indirect costs
Full cost pricing Direct costs Share of indirect costs
Direct costs can be measured in terms ❯ Materials ❯ Production and service
of how materials and labor are used ❯ Direct labor overheads
to produce each unit. Indirect costs ❯ Administrative
❯ Direct expenses
(overheads) are harder to assess but also and management
need to be factored in so that the full cost of ❯ All used exclusively to
overheads
each product can be calculated. Managers create a product or
service for sale ❯ Sales and distribution
and accountants must apportion indirect overheads
costs to reflect their contribution to the cost
of creating a single product. Once this is
ascertained, the full cost of that product can
be determined. In general terms, the price is
worked out by adding the direct and indirect
costs of production with a
profit margin that gives an
appropriate selling price.
HOW FINANCE WORKS
Management accounting 142 143
JOB COSTING
Used for a CONTRACT COSTING
customized order
made to a client’s BATCH COSTING
$ Used for a large one-time job, often
the result of a tender process (when
specifications—for Used when a batch of identical a company bids for work) and
example, a printing products is made—for example, carried out at the client’s site—for
company that an electrical goods company example, a construction company
prints brochures manufacturing television sets building homes in a new residential
for a client development
$
$
Profit margin Selling price
❯ Must be able to generate profit ❯ Low: in order to gain market
$
for the company share, or to match competitors
❯ Must be in line with how the ❯ Cost-based: recover
product has been direct and indirect
marketed costs and profit
ME
❯ Must be Y HO margin that the
R E
pitched
LUXU R SAL market will accept
realistically so FO ❯ Service-based:
that customers flexible since no
will buy manufacturing or
distribution cost
Measuring
performance
There are two main ways of measuring a company’s performance: financial
and non-financial. To assess financial performance, a company calculates
financial ratios. To assess other areas of the business, a company examines its
key performance indicators (KPIs), which help management and staff evaluate
performance and how it can improve. KPIs also enable interested outsiders, such
as investors, lenders, or analysts, to decide whether to invest in the business.
n- cial s
nc res
N an ure
l
69%
slump, and what prospects ❯ May be calculated daily or
it has for future growth even more frequently for
❯ Standard set of ratios used internal use
by the financial industry ❯ Companies can set diverse
❯ Calculated based on figures
provided in financial reports
KPIs to reflect future goals
❯ Unique to each company
of multinationals
See pp.148–149. See pp.146–147. link performance
measures to
future financial
results
Key performance
indicators (KPIs)
Key performance indicators (KPIs), or key success indicators (KSIs),
are based on a company’s goals and vary depending on the company
and industry. KPIs are usually stated in a company’s annual report.
Corporate KPIs
KPIs can be set up as dashboards on computers
so that they can be checked frequently. These
dashboards show examples of KPIs specific Accounts
to departments in a company. Having
set their KPIs, the departments are
subject to managerial review,
which could result in
action if KPIs are
sub-standard. $
Number of retrospectively raised
d market purchase orders; finance report
es an ing Cus
tomer service
Sal
error rate (measures the quality
of report); average cycle time
of workflow; number of
duplicate payments
31%
of companies
BALANCED SCORECARD SYSTEM
This strategic system offers a different
way of monitoring a company’s
performance. It was proposed by
Robert Kaplan and David Norton at
❯ Learning and growth
Employee training and
corporate culture
❯ Business
use a computer the Harvard Business School in the
1990s, and Harvard Business Review has
processes
Includes specific
dashboard cited it as one of the most influential
business ideas of the last 75 years; it
measurements for
monitoring daily performance
is estimated that over 50 percent of
to monitor KPI large companies in the US, Europe, and
❯ Customer perspective
Customer satisfaction
Asia use the approach. The Balanced
measurements Scorecard consists of four ways to view ❯ Financial perspective
Traditional financial data
an organization’s performance:
Operations
ty
WARNING
Investors beware
Ratio analysis must be used over
time—at least four years—to
understand how a company
has reached its current position,
10–14%
the minimum return on
not just what the position is. For
instance, if debt has suddenly investment (ROI) needed
gone up, it could be because the
company is branching out into new
areas of potential profit, or to limit
to fund a company’s future
the damage of a poor past decision.
TOTAL YEARLY
CURRENT SHAREHOLDERS’ DIVIDEND
ASSETS DEBT TO DIVIDEND
WORKING = EQUITY = PER SHARE
EQUITY = PAYOUT
CAPITAL CURRENT RATIO TOTAL RATIO EARNINGS
LIABILITIES ASSETS PER SHARE
Other liquidity ratios Other solvency ratios Other investment valuation ratios
❯ Cash ratio is measured as total cash ❯ Interest coverage ratio is measured ❯ Net profit margin ratio is measured
(and equivalents) / current liabilities. as EBIT (earnings before interest and as profit after tax / revenue. Another
It shows whether a company’s short- tax) / interest expense. It indicates measure of a company’s profitability, it
term assets could repay its debts. A how easily a company can pay the is also useful for comparing a company
high ratio is seen as favorable. interest on its debts. The higher the with competitors. The higher the ratio,
❯ Quick ratio (acid-test ratio) is ratio, the more easily they can pay. the more profitable the company.
measured as current assets minus ❯ Debt ratio is measured as total ❯ Price to earnings ratio is measured
inventories / current liabilities. It shows liabilities / total assets. It indicates as market value per share / earnings
how easily a company can repay short- the percentage of the company’s per share. It indicates the value of the
term debt from cash. The higher the assets that are financed by debt. A company’s share price. A high ratio
ratio, the more easily it can pay. low ratio is considered favorable. demonstrates good growth potential.
Forecasting
Predicting future business performance is necessary to estimate
probable sales, income, costs, and profitability and thus gain
investment and maintain confidence in the company.
How it works operation and can be tracked over time. The tracked
Forecasting success or failure relies on historical and monitored data can provide an early warning
data—financial statements, financial ratios, and Key system for potential problems. For small businesses
Performance Indicators—that reflect business and start-ups, accurate forecasts provide a basis for
SS Success
Finding the Z score
Each of the above ratios is multiplied by
a specific value, to give them weighting;
results are added together to give Z score.
❯ A score of 0.2 or lower means the
company is highly likely to fail.
❯ A score of 0.3 or higher means the
company is unlikely to fail.
HOW FINANCE WORKS
Measuring performance 150 151
High borrowing,
high interest paym ility, seen in
continue
d ents, Low profitab
w, seen in holdings and dwindling reve nslide in profit
Low c a s h fl o
in cash
nue consistent dow from
f decline e years loss statements
pattern o t over consecutiv on profit-and-
ars
ce sh e e consecutive ye
on balan
Tracking fraud
For keen observers of financial statements, warning signs that
indicate fraudulent business activities may be detected in overly
optimistic statements and evasive attitudes of senior management.
89%
compared to base salary
of US corporate
fraud cases in
2010 typically How to detect fraud
Applying ratio
involved the Procedures should be in place to
hold accountable anyone who handles
analysis to
reveal key
company’s expenses. When these fall short,
internal and external auditors need
long-term
trends (see
CEO or CFO to take more drastic measures. pp.148–149)
HOW FINANCE WORKS
Measuring performance 152 153
CEO behavior Technicalities
❯ Evasive behavior by executives ❯ Late entry of sales or earnings
over important financial details adjustments
❯ Attempts by CEO to steer auditors ❯ Missing approvals or signatures
away from certain documents ❯ Photocopied documents presented
in place of originals
is the most
important factor INTEREST
PAYMENTS
Institutional lenders
in deciding how Money loaned by large financial bodies,
much debt the such as banks. See pp.158–159.
company takes on
HOW FINANCE WORKS
Raising financing 154 155
$
❯ As a general rule, companies with more equity company may be more
$
than debt are considered less risky to invest in risky, it may also have
because their assets outweigh their liabilities. greater potential for
So a company with significantly more equity growth—this is known as
than debt has a low debt-to-equity ratio and “gearing.” See pp.174–175..
is generally seen to be a low-risk investment.
Equity
FUNDS FROM
SHARE ISSUES
AND RETAINED
PROFIT $ $ $ $
Company
Bonds
Investor
lenders
FUNDS FROM Payments made
BONDS BOUGHT $ by bondholders.
See pp.170–173.
How it works
When a business needs funds, or capital, to pay for
expansion or investment in order to maintain its Raising internal financing
current operations, it is faced with two choices: either
Whether a company’s need for additional funds
find the money from outside sources, or find the money
is long- or short-term, steps can be taken to
from within the organization itself. Since there are
increase the level of funds within the company.
costs attached to bringing in funds from external
sources, such as interest that has to be paid on a
bank loan, the business managers must weigh up the
opportunity cost of using its own funds—the profit it
Short-term financing
could earn by investing those funds—against the cost For businesses wishing to raise funds without
of financing. recourse to external sources, there are three main
strategies they can implement to maximize the
amount of cash available for day-to-day operations
and capital expenditure.
10
8
DAYS IT Delay payment
TAKES
CLIENT 6 Large suppliers may offer a
TO PAY discount for early payment,
4 but they may also allow a
2
$ company longer terms for
payment, boosting cash
levels in the short term.
0 1 2
WEEKS IT TAKES TO SEND INVOICE
HOW FINANCE WORKS
Raising financing 156 157
USING PROFITS TO
Company FUND EXPANSION
A company seeking to grow may
choose to fund the expansion with
its profits. This option offers both
advantages and disadvantages.
Pros
❯ The use of profits means that no
interest payment has to be made,
Long-term financing unlike on money that is borrowed
For a business needing long-term ❯ Existing owners and directors are
financial help, its own resources able to retain full control over the
should act as the primary support. business, rather than sharing it
with new investors
❯ The company is able to keep a low
debt profile, which will appeal to
Reduce inventory $ future investors and lenders
$
It is expensive for a business Cons
to retain a large inventory ❯ Profits can take time to build up
of unsold goods. Cutting Retained profits sufficiently to fund expansion
the inventory back reduces ❯ Withholding dividends may upset
storage costs, the cost of A portion of profits may be
some shareholders who prefer to
production, and replacement pumped back into the business.
receive the profit as dividends
of goods that go out of date A company may also decide to
or become obsolete. sell assets to raise cash. ❯ Lost opportunity to earn funds
from investing profit rather than
spending it
al
fi nancing for
44
th
Tota ntern
eb
the average
usiness
li
number of days
it takes a limited
company in the
UK to pay a
30-day invoice
External financing
When business growth or unforeseen expenses cannot be met using
internal sources of financing, such as retained profit, organizations
must rely on finding funds from lenders or investors.
Debt factoring
80%
of external
$
Sell unpaid invoices to an external
source for an agreed amount in order
to receive immediate payment minus
a commission fee.
domestic banks
HOW FINANCE WORKS
Raising financing 158 159
$ $
Company negotiates Company sends invoices Factor pays company Customer pays Factor pays remaining
an agreement in which out to customers, and an agreed percentage factor the invoice invoice amount to
its unpaid receivables copies these to the of the invoices (typically amount after 30 days company, minus a fee
(invoices) are sold at a factor. Customer now 80–90 percent) within (or more if terms of (usually 2–5 percent of
discount to a “factor.” owes payment to factor. a few days of receipt. payment are longer). the invoice amount).
Shares
Raise capital by issuing shares to finance
growth. The company then retains less
profit, as it pays dividends to shareholders,
who also benefit from any capital gains in
the company’s value (see pp.164–165).
Borrowing
$
Secure long-term loans from banks and
other financial institutions, usually on
ancing fo
l fin r better terms than a bank line of credit.
a
rn
th
Finance leases
eb
al exte
Rent-to-own agreements
$ $ Pay for expensive assets, such as vehicles,
in installments. Overall cost may be higher,
$ but capital is not tied up.
Going public
When a company changes from private to public, it offers shares for
sale to members of the public. This process is known as going public
and enables the company to raise money for growth.
How it works
The process by which an
Ways to list on a stock exchange
organization goes public (also
known as flotation) marks the end There are three primary ways to take a company public,
of its life as a private company, after each of which has different associated costs. The type of
which it is no longer owned by a
public offering that a company chooses will be determined by
its size and how much capital it needs to raise.
small number of shareholders or
company members. A company
may choose to go public when it tion A company joins a new stock exchange
needs capital to finance growth. uc without raising capital, but by trading
od
Going public usually happens over its existing shares. To do this, over
Intr
❯ Overestimation If underwriters
overestimate the value of shares company issues. This is the most
newly on the market (new issue), expensive way to go public, but
it may flop due to lack of demand allows for a company to raise large
amounts of capital.
❯ Volatility Share prices in the first
Ini
1 Pretax earnings
above a certain
2
Meet the level
qualifications
Three years of
The specific audited financial
requirements are set statements
by the stock exchange
where the company Ability to pay the
annual listing fee
plans to list. Listing Appoint underwriters
conditions vary
between exchanges, These financial professionals will be
but typically demand: responsible for buying and selling
the shares to the public.
HOW FINANCE WORKS
Raising financing 162 163
$16.6 trillion
the total market capitalization
NEED TO KNOW
❯ Large cap Listed company with
market capitalization of more
than $10 billion
❯ Mid cap Listed company with
of companies listed on the market capitalization of between
$2 billion and $10 billion
New York Stock Exchange* * as of October 2014 ❯ Small cap Listed company with
market capitalization of between
$250 million and $2 billion
4 6
Promote the share offering
Company representatives, as well as
the underwriters, visit national and
$
international destinations to pitch $
to potential investors.
$
$
$
$
Sell on the stock market
The IPO is officially declared a few days
after potential investors receive the final
prospectus. The declaration is made on
5 a set day after the exchange has closed,
Set the final offer price and the shares are available for trading
the following day.
After ascertaining market conditions
and the anticipated demand, the
company decides the price and the
number of shares to issue. It is then
ready to launch the offering.
7 8 9 +
Shares and dividends
When a company goes public, it sells shares to investors, who become
part-owners in return for capital investment. The number and type of
shares bought by each investor determines the size of their ownership.
Management shares
Issued (usually given not sold) to
owners and members of company
management, who have:
✓Extra voting rights, so control
of company stays in the same
hands Iss
ue
d dir
ec t
ly
Non-voting shares
698%
So
ld
via
Preferred stock
Shareholders:
Exchange, in 1999
✓Receive fixed dividend, paid
ahead of any dividends paid RAISING MORE SHARE
out to ordinary shareholders
CAPITAL
✓Take priority in receiving a share
of any assets left after debts are
After the initial sale of shares, when a company
paid if company is insolvent
goes from private to public, the business can
✗ Have fewer, if any, voting rights raise additional funds by issuing more shares.
There are three main ways to do this:
❯ Rights issue entitles existing shareholders
to buy additional shares from the company
within a set time frame, before they are
offered to other buyers.
❯ Public issue is a process by which the
company issues a new allotment of shares
to sell to the public on the stock market.
❯ Private placement is a practice by which the
Deferred stock company sells its shares (or other securities)
directly to private investors, usually large
✓Shareholders receive company institutions, bypassing the stock exchange
dividends and share of assets, but all together.
only after all other shareholders
SHARES AND DIVIDENDS
Rising value of
shares
VALUE
Financial market observers believe (INDEX
that the emphasis on optimizing the POINT)
value of shares for shareholders began
in 1976, when the idea of maximizing 4,000 198
profit for shareholders became a OC 7
priority. Since then, the market has MO TOBE
ND R 19
3,500 AY
experienced a general upward trend CR : BLAC
AS
with occasional deep dips. The graph H K
tracks the average value of all shares 3,000
on London’s FTSE from 1964 to 2013.
2,500
$3 1,000
$1.5
0
$ 3 2,000 $1.5
0
SHARE PRICE TOO HIGH SHARES SPLIT SHARE CERTIFICATES ISSUED SHARE VALUE ALIGNED
A company listed on the stock The company decides on a share It issues new share certificates to The value of shares is now
exchange has seen its share price split. It halves the price of each holders, doubling shares held: a similar to that of competitors.
increase so that its shares now existing $3 share, so each share shareholder with 1,000 shares at The price encourages new
cost more than its competitors’. is now worth $1.50. $3 each now has 2,000 at $1.50 investors to make a purchase.
The high price puts off investors. each. Total worth is still $3,000.
19 20
9 20 F 10
HE 9 A 07 DE EBR
DO IGHT CR UGU BT UA
T-C OF ED ST CR RY
OM TH IT : G IS : EU
BO E CR LO IS R
OM UN BA OZ
CH L ON
E
1997
JULY:
A
FINAN SIAN
CIAL C
RISIS
2
00
–2
2001
ST
BU
00
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9/11
CO
20
ATTA TERRORI
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IN N CK
DO
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ORK
How it works
Shareholders usually receive a dividend if the company in which they hold
shares has retained enough profit in that financial year to make the payment.
The decision to make a payment is made by the board of directors. The dividend
might be paid every quarter (four times a year), or in two parts—an interim
dividend may be made partway through the year, with the final dividend paid
just after the end of the financial year.
$
$
$
$ $
$
HOW FINANCE WORKS
Raising financing 168 169
$
$
$
1602
the year the Dutch East
Keeping funds for growth
India Company became
The company keeps some of its profit to put back into the first company to
the business. It needs to strike a balance between
pleasing investors and expanding its operation. issue stocks and bonds
Paying taxes
Shareholders must
$ declare dividends on $
their tax return and
pay taxes on them.
The structure
The capital market encompasses the debt capital market,
ital mark
where bonds are sold, and the stock exchange, where shares
are sold. Both have a primary and a secondary market.
p
Ca
et
Primary market
The market issues new bonds and shares, with
investment banks overseeing the trading. It is
also known as the new issue market (NIM).
$
COMPANIES
GOVERNMENTS SELL BONDS SELL BONDS
AND SHARES
BONDS SHARES
Sold on debt capital Sold on stock
market (bond exchange (equity
market) capital market)
INVESTORS
HOW FINANCE WORKS
Raising financing 170 171
WHAT IS A BOND?
A bond is a debt security that time the interest is paid
$100
trillion
a company issues to investors. to the investor annually. When
By buying bonds, an investor the bond matures, the issuer
is effectively loaning money to repays the original sum of the
the issuers, who in return agree loan to the investor. Companies
to pay interest to the investor. or governments issue bonds to
A bond has a set term of raise money that can then be
maturity (a limited number of
years of validity) and until that
put back into the business or
used to fund government.
the estimated value
of global debt markets
Bonds or shares: pros and cons
Shares (equity)
✓Buyers of shares gain a stake in the company
✓Sellers of shares have to pay dividends,
BONDS SHARES although these can be reduced or suspended
if the company feels it is necessary
✗ Shares are more risky: changes in company
profits and in the economy as a whole can cause
share prices to rise and fall; if the company fails,
the shares become worthless
BOND
$100
BOND
$100
10 YEARS
$100
7%
interest
TYPES OF BONDS
Government bonds Corporate bonds
re d re d
cu cu
Se Se
Unsecured
Government bonds are the safest Secured bonds are secured by the Unsecured bonds are not
type of bond since governments assets of a company, making them backed by pledged collateral and are
in developed capitalist economies a less risky investment than shares. a riskier investment—if the company
are unlikely to default on interest Examples include equipment, trust fails, investors are paid only after
payments on the loan or on the certificates, and mortgage bonds. secured bonds have been paid
principal sum. out. Because they are more risky,
investors expect a higher return
(interest) on their investment.
INTEREST PAID (%)
100
90
80
70 $70
over 10
60
years
50
10 YEARS
40
30
20
10
0 1 2 3 4 5 6 7 8 9 10
YEARS
$100
$7
Investors receive annual interest Mature bond is repaid
Each year, the company pays an investor $7 Once the bond reaches its date of maturity, in this
(7 percent of $100) for each bond bought, in case 10 years, the original sum of money, $100, is
return for using the principal sum as capital to repaid to the investor. So the investor receives a
fund its business. After 10 years, the investor has total of $170, including interest, over the full term,
received a total of $70 interest per bond. in return for the original $100 investment.
Gearing ratio and
financial risk
Capital gearing is the balance between the capital a
company owns and its funding by short- or long-term
loans. Investors and lenders use it to assess risk.
Low
How it works
Most businesses operate on
Equity finance (shares) gearing
some form of gearing (also called
Pros
financial leverage). They partly
❯ Does not have to be repaid Company has
fund their operations by borrowing
❯ Shareholders absorb loss
less debt
money, via loans and bonds, on the
condition that they make regular ❯ Good for start-ups, which may
repayments of a fixed amount to take a while to become profitable
Company has
the lender. If the level of gearing is ❯ Angel investors share expertise
more equity
high (in other words, the business ❯ Low gearing seen as a measure
Low proportion of
has taken on large debt), some of financial strength
debt to equity, also
investors will be concerned about ❯ Low risk attracts more investors described as a low
its ability to repay and see this as and boosts credit rating degree of financial
an insolvency risk. However, if the Cons leverage. Equity
amount of operating profit is more comes from:
❯ Shared ownership, so company
than enough to repay interest, high has limited control of decisions ❯ Reserves (retained
gearing can provide better returns profits)
❯ Shared profit in return for
to shareholders. The optimum investors risking their funds ❯ Share capital
level of gearing for a company also ❯ Legal obligation to act in the
depends on how risky its business interests of shareholders
sector is, how heavily geared its ❯ Heavy administrative load
competitors are, and what stage ❯ Complex to set up
of its life cycle it is at.
LONG-TERM DEBT
× 100 $1.2 MILLION
SHARE CAPITAL + × 100 = 21.2%
$2 MILLION + $2.455 MILLION +
RESERVES +
$1.2 MILLION
LONG-TERM DEBT
HOW FINANCE WORKS
Raising financing 174 175
High gearing
25%
the ratio at
A water utility is the only water provider in the area, with several
million customers. The ratio of 64 percent is acceptable for a utility or below which
company with a regional monopoly and a good reputation.
a company is
traditionally
$360 MILLION
$82 MILLION + $120 MILLION +
× 100 = 64% said to have
$360 MILLION
low gearing
$
HOW
SALES AND
MARKETING
WORKS
Marketing mix ❯ Marketing approaches
Outbound marketing ❯ Inbound marketing
Business development ❯ Information management
Marketing
mix
The successful marketing of a product depends on the consideration of four key
elements—the product itself, its price, how it is promoted, and where it is sold.
This combination is called the marketing mix, and it is used as a tool for planning
product launches and campaigns. Before focusing on the marketing mix, marketers
need to define the target market for their product by determining which groups of
customers are most likely to purchase it.
❯ Identifies gaps in the market for the ❯ Breaks down the market into smaller
harvests launch of new products customer groups with similar needs
Price Cost
❯ What is the value of the product ❯ How much will the product cost
to prospective customers? the customer, and will it be seen
to represent a good buy?
❯ What is the usual price point
for this type of product?
How it works Marketers identify the goods and services they sell in
Consumers can be said to buy benefits rather than three or five product levels, with the benefit at the core.
products. For the marketer, the product itself is that The marketer’s job is to translate and communicate
benefit to the consumer, as packaged and presented. each product level as an offer to the consumer.
Actual product
Packaging, brand name,
quality level, design, and
additional features that set
it apart from rival products
ec
s
high-tech tire
o-f
free delivery •
e service
riendly • t
Takes rider
from A to B
s’ fre
•
th
ra
Augmented iti
rs
on
d
product on a
ge
pa
6m
al d 3
yi
sta y
warranty, after-sales service llm
rant
ent
s • 2-year war
HOW SALES AND MARKETING WORKS
Marketing mix 180 181
42%
of new product
NEED TO KNOW
❯ Personal branding Promoting oneself
as a product with a distinct brand personality
❯ Fast-moving consumer goods (FMCGs)
Sold quickly and at relatively low unit cost,
launches can be such as food and household products
expected to fail
Expected
product
Additional
desirable
benefits
Takes Augmented
rider from product
A to B Extra features
kes
2w
and benefits
ra
ee
•b
h
ls •
3 gears
ur
st
de
ligh
dy ri
t io
• re th
li a b l e • s m o o
te r
Potential
ec
de
nd
s ig
ot
a product
f ra
n br
pr
•c n
m
Future,
o lo now
n
• s io
e
HIGH PRICE
STRATEGIES Competitor Competitor
brand
brand brand
❯ Value positioning A product
plotted on the map so that it has
Brand’s
an attractive price while delivering current
good functional qualities. position
❯ Quality positioning A product
that is located on the map on
the basis of its perceived quality
or superiority.
❯ Demographic positioning
A product mapped according to
its appeal to a specific population
segment, such as consumers with
a particular occupation. LOW QUALITY
❯ Competitive positioning Product positioning template
A product that is very similar to
those of competitors, relying on The map shows how marketers position competing products
correct pricing to find a viable in the marketplace according to the price/quality variables (the
position in the marketplace. most commonly used) to identify a gap for the new product.
HOW SALES AND MARKETING WORKS
Marketing mix 182 183
EXPENSIVE
nt
i ssa
ro
C
bacon
s and An expensive
gg A breakfast dish breakfast food
E
ereal
ldc
o
C
Centrally
positioned,
cereal is the
most popular
breakfast food.
QUICK
SLOW
es
ncak With a slow cook time,
a
pancakes occupy a
P
reakfas
a nt b t
e al t
cer s
In
ot
H
Students make
the ideal target
Older people market for
and children instant breakfast
provide strong products.
demand for
hot cereals.
INEXPENSIVE
Breakfast positioning map
The positioning of the various breakfast foods
“Positioning is not what you do
has been determined by the speed at which
the food is prepared, measured from slowest to
to a product. (It) is what you do
fastest, and the price of each food type, from the
least expensive to the most expensive.
to the mind of the prospect.”
Al Ries and Jack Trout
Product life cycle
Every successful product launched on the market experiences growth
followed by decline. To maximize profitability, business managers
must recognize and manage each stage of the product’s life span.
Growth Saturation
Sales increase and the cost per Sales peak and the cost per
customer falls as profits rise. customer is at its lowest.
There are more customers—and Profits are now high and
more competitors. competition is intense.
Launch
Decline
SALES
TIME
HOW SALES AND MARKETING WORK
Marketing mix 184 185
6
customer types according to
how quickly they pick up on repackaging, repricing it, or
a new product. finding new markets
❯ Portfolio analysis Each of
months
EARLY ADOPTERS
a company’s products measured
EARLY MAJORITY
LATE MAJORITY
by growth rate and market share
INNOVATORS
to determine marketing spend
LAGGARDS
❯ Product life cycle management
(PLM) Tracking of product data
a product can be
PORTFOLIO ANALYSIS
labelled as “new”
34% 34% Rising stars
Products with a high
market share in a
high-growth market;
Withdrawal they require a big
marketing spend to
The product is phased out keep them growing.
as sales stall or continue to
fall. The business introduces
a replacement product before Cash cows
the old one is withdrawn. Products with a high
market share in a
low-growth market;
they generate money
to support rising stars.
16%
Problem children
Products with a low
market share in a
13.5%
high-growth market;
they need a big
marketing spend.
Dogs
Products with low
market share and low
growth; they may stay
in portfolio to keep
2.5% customers happy.
Price
Price is a crucial variable of the marketing mix: it generates revenue,
while product, promotion, and place yield costs. Pricing may also be the
marketer’s most potent tool because even minor tweaks affect returns.
Pricing strategies
Low quality
A number of different strategies can be
used to determine the price of a product.
Economy
Low price
Skimming
$$$$
5%
increase in price
❯ High launch price Charge more
than usual in the short term while a
product is seen as unique.
❯ Correct timing Set a higher price
when the business has a temporary
advantage in the marketplace,
High price
250–300%
to avoid the cheapest item.
of cost
Premium $
Geographic pricing
$$$$ ❯ High price Charge as much as
Charge different prices
for the same product
the market will pay for an item. in different locations.
❯ Unique value Apply premium
prices to products that have no
comparable substitute, such as
famous brand-name goods.
Non-pricing
❯ High production cost Charge
?
strategies
a premium price because a product
is customized and offers no savings Avoid adjusting the
through volume manufacturing. price to attract sales,
promoting superiority
of product instead.
Place
Knowing where customers shop, where a product is sold, and how
efficiently goods can be delivered to the consumer—called “place”
in marketing terms—is essential to sales success.
How it works
70.5%
A sales outlet is the place
Whether a company sells goods where a product is sold, suchas
or services, customers must be stores, catalogs, or e-commerce
able to find and buy those products sites. Sales channels are the
as easily as possible. Businesses merchants, agents, and distributors
have to decide on the best sales who take a product from the seller of device sales by
outlet and sales channel to get
their products to customers in a
and bring it to the consumer.
2017 are forecast
way that benefits both parties.
to be smartphones
Selling through
wholesalers and retailers
Products are distributed in two
stages: by producer to wholesaler
and then wholesaler to retailer.
Example
E-commerce site selling
vitamins; they are sent
to customer by mail
or delivery service.
Consumer
Example
Electronics company
distributes its television
sets to a chain of
retail stores.
Retailer Consumer
Example
Farmer sells apples to
wholesaler, who sells
them on to supermarkets.
Example
Chocolatier in France
uses import agent in
Japan to sell its products
to wholesalers and on
to retailers. Agent Wholesaler Retailer Consumer
Promotion
Promotion is necessary for generating interest in and sales of a product
or service. A complex and expensive part of the marketing mix, it involves
communicating to customers and influencers such as peer groups.
How it works
The primary purpose of promotion
is to boost sales by attracting new
customers, while enticing existing
ones to try out something new. Personal
Most companies use a number of selling
communication activities to inform Interact with customers
and remind their target audience of face to face and tailor
a product’s benefits (see pp.196–231).
Co sales messages to
nsu
One of the long-term benefits of mer bee their needs.
communicating with customers is
that it helps to build brand loyalty.
NEED TO KNOW
❯ Integrated Marketing Customer
Communication (IMC) service
Promotion of the same brand Provides customers with
message across all media channels information about the
❯ MarCom (Marketing product; offers updates
Communication) Full range and special deals.
of promotional activities used
to reach out to the market
25%
the percentage of
Below the line (BTL)
Describes promotional
activities a business carries
out in-house, such as direct
mail or telemarketing, to
reach customers directly.
digital promotion
budgets spent on
mobile advertising
in 2013
HOW SALES AND MARKETING WORKS
Marketing mix 190 191
Advertising Direct
Run ad campaigns marketing
through media channels
Send product offers and
most likely to reach target
information directly to
market, and stick to Interactive
the potential consumer,
budget appropriate marketing
via mail or email.
for the product.
Build long-term
relationships with
customers using two-
way communication,
especially online.
Sales
promotion
Entice customer with
offers, free samples, gifts, Public
competitions, packaging, relations
and point-of-sale Generate positive interest
displays. in the company by
sponsoring events and
charities, or pitching
news content
to media.
Above the line (ATL)
Refers to online and
offline advertising
a business pays for
to target customers.
Market research
Asking customers what they think about a product is a vital part of the
decision-making process for marketers. Research offers insights into how
a product might perform and lowers the risk of marketing campaigns.
“Research + Intuition
= Decision”
Primary data
collection
New research to answer
specific question
CASE STUDY
?
Marketer Marketer
Coca-Cola launch
In 1985, Coca-Cola launched a new kind of cola.
The launch followed two years of taste tests, costing
$4 million, to refine the product. However, the drink
failed and had to be withdrawn in the face of
has a reaches a overwhelming disapproval from the public. In the
marketing postmortem, analysts concluded that the
question decision company’s researchers had failed to ask customers
DATA REQUESTED
DATA RETURNED
Secondary data
collection
Published material
on a subject
Agency
Carries out original
research and organizes
research data into
meaningful results
32%
Internal sources External sources
❯ Web usage data (for example ❯ Industry reports by trade
browser logs and online bodies, institutions, and private
sales records) research companies
❯ Customer profiles with buying ❯ Reports by broadcast, print,
the projected history and demographic data and internet media
increase in the ❯ Accounting records, such as
statements and balance sheets
❯ Academic papers, university
think tank reports, and
hiring of market ❯ Original data from past
market research reports
research library holdings
❯ Government surveys, reports,
research analysts and statistics
in the US by 2022
Market segmentation
In order to make decisions about who to sell their product to,
marketers try to identify distinct groups of consumers with similar
wants and habits who together form a “segment” of the market.
“Market segmentation
is a natural result of
the vast differences
among people.”
Donald Norman
194 195
Sociographic Psychographic
Identifies individuals’ connections Focuses on consumer’s interests, values,
on social media, or membership of and opinions to help marketers develop
political and other groups, helping relevant messages and find the right
marketers learn about consumers’ media channels to target a segment.
passions and interests. Potential Potential focus areas include:
focus areas include: ❯ Risk taker
❯ Group memberships ❯ Charitable
❯ Number of friends on social ❯ High achiever
media
❯ A tendency towards
expensive tastes
❯ A preference for
email contact
Geographic
Concentrates on a
customer’s place of
residence, so that any
product launched is
made relevant to their
environment. Potential
focus areas include:
❯ Post code
❯ Continent
❯ City
Demographic ❯ Neighbourhood
Uses basic consumer ❯ Population density
data, such as gender or ❯ Climate
age, to accurately categorize
needs and target products
appropriately. Potential
focus areas include:
❯ Income
❯ Nationality
❯ Family size and age
❯ Ethnic background
❯ Occupation
❯ Religion
Marketing
approaches
Every product launch requires strategic planning to make sure messages about
a new product reach the right types of consumers, are communicated through
the most effective combination of channels, and have the most relevant content
and style. Once marketers have researched the market and defined their target
audience, they face several key decisions on how to make their approach.
Types of approaches
Whom to target and how to go about it are crucial to Rather than sending the same message via different media,
success. Marketers may use several complementary they usually adjust the tone and style of the marketing
approaches to different groups of potential consumers. pitch to suit the channel as well as the target consumer.
85%
of all purchasing
decisons in the US are Engagement
made or influenced marketing
“Come dance
by women with me.”
It entices the
customer to
collude in
product sales.
See pp.204–205.
Sensory marketing
“Wake up and smell
Traditional the roses.”
channel allied It seduces the
with a dominating customer with sights,
style. “Let me tell sounds, and smells.
you,” it blares. See pp.206–207.
See pp.200–201.
Relationship marketing
“Let’s be friends.” It builds a rapport with its
audience of consumers. See pp.208–209.
20%
volume sales at a premium price to
a specific group of consumers, while
a mass approach tends to use heavy
promotion to a wider audience and
aims to achieve high-volume sales.
In reality, businesses tend to mix
of sales can
up both approaches, launching a
niche product and then expanding
make up to
it to a mass market. Marketers also 80% of profit
NEED TO KNOW
Long-tail marketing
Coined by Wired magazine editor Chris Anderson, the term “long-tail
marketing” takes its name from a demand curve (see below) depicting
products with low demand or sales volume—niche products—that
continue to sell and make profit over time.
PRODUCTS
HOW SALES AND MARKETING WORKS
Marketing approaches 198 199
Niche market
HYBRID APPROACHES
Using social media to identify and reach
more than one target market, marketers have
developed hybrid approaches that are more
flexible than conventional niche or mass-
market positioning of products.
Mass market
An unfocused strategy that aims at
the broadest customer base.
Large segment
Mass market Channels marketing resources to one
large segment of the mass market.
Who and how Adjacent segment
❯ Business targeting a large group of consumers Once large segment is fully penetrated,
with generalized wants and needs. product expands into related segment.
❯ Requires high marketing spend to promote Multi segment
products, which must be widely distributed.
Markets to several segments at once,
❯ Marketplace often crowded with other with a customized strategy for each.
competitors selling a similar product.
Small segment
Markets to a small segment with few
competitors, if resources are limited.
Niche segment
Focuses marketing resources on a
specific group of customers.
Mass customization
Customizes a strategy for each
sub-segment within the mass market.
Traditional marketing
Before the digital age, marketers relied exclusively on non-digital
channels, such as TV, radio, and print media, as well as direct mail,
events, and cold-calling, to convey their message to the consumer.
How it works
Traditional marketing encompasses
a number of tried-and-tested ways
of building a brand and pushing
a product to sell more. It remains a
key facet of marketing. Nowadays,
however, most businesses use Events
a mix of traditional and digital Staging sports activities,
marketing methods. One of the themed displays, parades,
advantages of traditional marketing or exhibits to promote a
is that companies have face-to-face product, cause, or brand.
contact with customers through TV
person-to-person selling, special Promoting sales through TV ads,
events, and event sponsorship. program sponsorship, or
product placement.
Traditional
marketing process
Small and large businesses use
a range of conventional marketing
channels, and often integrate them
with digital marketing strategies.
Direct mail
Mailing catalogs or circulars
to a targeted list of consumers,
often promoting special offers
on products.
Face-to-face Telemarketing
Approaching customers directly Calling potential customers who
to create brand awareness or have an identifiable need for a
persuade them to buy a product. product with a sales pitch.
HOW SALES AND MARKETING WORKS
Marketing approaches 200 201
Product samples
Offering free samples of a product to customers, giving them the
opportunity to try it before making a purchase —an effective way Billboards
to launch new products and build a customer base. Renting large outdoor advertising
spaces to market products. Cost
depends on the size of space, its
visibility, and the amount of traffic
that passes the location.
Radio
Using commercial slots on radio
to promote products either
locally or nationally, depending 25%
on the station’s reach. Newspapers and
magazines Traditional
marketing
Buying space in print media to Digital
run advertisements, or creating marketing
advertorials to market products 75%
or services.
25%
of US companies
surveyed in 2012
valued traditional
marketing while
75% valued
Brochures and flyers Networking
Promoting through mailing or Interacting with other people
digital marketing
locally hand-distributing printed at special events to develop
materials to promote businesses. professional contacts.
Digital marketing
Using the internet, marketers can connect directly and instantly
with current and potential customers to build brand recognition,
collect data, and encourage word-of-mouth recommendations.
How it works
Unlike traditional offline
e xperien
marketing, digital marketing
gives a business direct, two-way er ce
m
communication with customers.
Digital marketing employs some Consu
conventional approaches, such Customer blogs
about the gym
as “pop-up” or “banner” ads
on web pages, but it also relies
Q
R
CUSTOMERS VISIT THE GYM
co on
heavily on the power of social
d e ce
Bl we
er s
to
i s ll p
om c t
media for raising awareness of
og b
ta h
s t re
lin site
ke on
c u Di
a product or brand. This makes
n e
ks
to
to
it harder to measure return on
gy
m
investment. Digital marketing
Customer takes coupon to gym
Cu
techniques, a hybrid known
s
to
m
as “tradigital” marketing.
er
s c on
he w
du e b
le s i t
sa e
fr
ee
POSTER WITH
w
or
QR CODE FOR
Tradigital
ko
g
TRIAL
u t
tin
in practice QR code is
scanned
A new health club is launched with cell
nal marke
PRINTED AD
using a tradigital approach to WITH TRIAL phone
marketing. TV ads are aired with COUPON to
er
$
m
to
POSTER IN GYM
sc
% SHARE OF GLOBAL
Digi AD SPEND BY MEDIUM
tal
ma The internet is the fastest-growing
ng
6%
7%
Fe i a
e d so
v
ba c i a
9%
Directs Wi-Fi user to
ck l m
2012
40%
is e d
gi i a
$
ve
n
19%
18%
D Feedback is given
I LAN ING PA 1%
I-F GE via social media
W
6%
7%
16%
@
23%
t t a il s
s l e m gn
KEY
w r e r si
TV radio
n e f o me
er
magazines
eb
m aw
g y es
h e do
the percentage
rt r
f o me
ch to
ar u s
e-commerce
market forecast
to be held by
China by 2016
Engagement marketing
By involving customers directly in the development of a brand,
marketers hope to build a strong two-way relationship with
customers and win long-term loyalty.
How it works
Engagement marketing harnesses
several online and offline strategies Start with a “wow”
to draw a customer’s interest and experience
get them talking about products
Provide interesting, informative, or
and services. This contrasts with
entertaining content to draw potential
the more traditional style of customers to a web page.
marketing in which a brand
concept and product proposal are
presented to the customer as fixed,
to be either accepted or rejected.
Engagement marketing, on the
other hand, encourages customer
input so that they feel closer to the
brand. The goal is to lure potential
customers to the website with
an initial experience, and then Sale
work hard to keep them there.
Once customer makes $
PURCHASE
NEED TO KNOW
❯ “Sticky” customers Consumers
New prospects
who are loyal to a company and
return to make more purchases Offer incentives to existing
❯ Decision simplicity Ease
customers for recommending
with which consumers can product or sharing content.
find trustworthy information
about a product
❯ Churn rate Percentage of
customers that cut ties with the
company in any given time period
❯ WOM Word-of-mouth Social visibility
marketing, which relies Post interesting and relevant
on satisfied customers content on social media, and
recommending products COMMENTS
AND SHARES encourage dialogue.
to others
HOW SALES AND MARKETING WORKS
Marketing approaches 204 205
Virtual engagement
Design every aspect of a
website to maintain visitor
interest so people return for
new content.
IN-STORE PROMOTION
SOCIAL MEDIA
Actual engagement
Events
Encourage customers in the
Use previous customer real world to use product, meet
feedback to decide on best and speak with sales staff, and
content for publicity events. interact with other customers.
Sensory marketing
Sensory marketing targets multiple senses to sway purchasing
decisions. Based on research showing how the brain responds to
sensory input, this type of marketing acts covertly on the customer.
How it works
Sensory marketing is most obviously
used by the food and drinks Sight
industries, but its use extends Technology is making advances
to diverse products and services: with this, the most stimulated
computers designed with tactile sense in marketing, by using
materials, hotels scented to relax optical illusions, digital effects,
customers, and even fireworks 3-D, and 360-degree photography.
displays featuring edible confetti.
Typical channels for sensory
marketing include field marketing
(in-store events, samples, and
person-to-person sales), direct mail,
and product delivery. For online
businesses, however, finding a
way to use it remains a challenge.
Touch Smell
Marketers use 2-D and 3-D Customers are willing to
textural print techniques for pay more for a product
promotional materials and sold in an environment
packaging, as well as to sell that is scented appealingly.
products with tactile appeal.
81%
of consumers
born from 1980 Taste
Taste sensations
to 2000 value can be enhanced
or subtly altered by
experience over combining them with
touch, sight, and especially the
material items closely linked sense of smell.
HOW SALES AND MARKETING WORKS
Marketing approaches 206 207
Hearing
Sound is more
effective than sight
in triggering the
brain areas that
process emotions.
Relationship
marketing
The strategy of relationship marketing is to develop and
manage a trusting, long-term association with customers
and other markets that have links with the company.
How it works
Relationship marketing aims to corporations have now changed
replicate the type of interaction their focus from making the
that village stores once had with sale to relationships, and from
their customers, offering a high short-term reward to long-term
level of personalized service gain. The marketer can extend Supplier markets
to win them over for a lifetime. the network beyond the engaged Building a relationship
While small, local businesses customer to include employees, of collaboration with
naturally work this way, large suppliers, and others. suppliers makes good
commercial sense.
CASE STUDY
Starbucks
The strategy of coffee-shop chain Marketing internally
Starbucks exemplifies effective ❯ Barista training
relationship marketing. Centered on
❯ Tech development opportunities
core customer and internal markets,
it also involves suppliers, referrals, Marketing via referrals
and recruitment (employee) markets. ❯ Word of mouth
❯ Social media shares
Marketing to customers Marketing to employees
❯ Social media ❯ Stock options Influence markets
To maintain good public
❯ Business crowdsourcing ❯ Medical insurance
relations, the company works
❯ Familiarity with customers ❯ Partnership with regulators and consumer
❯ Loyalty program Marketing to suppliers or environmental groups.
❯ Reward card app ❯ Fairtrade programs
❯ Mobile payments ❯ Quality control
HOW SALES AND MARKETING WORKS
Marketing approaches 208 209
Referral markets
“Ignore the human
Customers can be word-of- element of marketing
mouth advocates for a company.
Related businesses may also at your own peril.”
refer trade. Bob Garfield
NEED TO KNOW
❯ Key account management (KAM) System
that coordinates departments in a business-
to-business (B2B) company to serve big clients
❯ Frequency marketing Promotion aimed
at increasing repeat sales by rewarding
CV CV CV customers for repeat purchases
❯ Direct response (DR) Marketing that
invites consumers to respond directly to
Recruitment markets the advertiser, by mail, telephone, or email
To attract the best ❯ Transaction marketing Strategy that aims
employees, a company may to persuade customers to make additional
market itself by offering one-time purchases at the point of sale
incentives to staff.
Outbound
marketing
Also called interruption marketing, outbound marketing involves a marketer
pushing a message to consumers. With this type of marketing, businesses
typically reach out to a wide audience by paying for advertisements on various
media channels. Although the audience may have no interest in the advertisement,
outbound strategy relies on delivering a high-impact message and generating
a response by creating familiarity through repetition.
32%
of UK brands cut
outbound marketing TYPES OF OUTBOUND MARKETING
spend in favour of Offline
spending more on ❯ Cold calling Campaign can be more effective
if conducted at the right time of day to suit target
content marketing, audience; message should be scripted carefully and
delivered in a genuine tone. See pp.218–219.
in 2013 ❯ TV commercials Although many consumers now
switch off TV advertisements, they are familiar with
and open to this type of media, and repetition gets
the message across. See pp.212–213.
❯ Radio This medium is the world’s most popular
mass communication channel with a global reach,
and is ideal for outbound messages aimed at an
international market. See pp.212–213.
Analyze
❯ Guerrilla marketing The use of a creative
Marketers monitor the and unconventional approach in high-traffic
progress of outbound public places can be a cost-effective way to raise
campaign and adjust the mix of brand awareness. This is a form of engagement
media or other paid-for channels, marketing. See pp.204–205.
then measure campaign results.
Actions Online
❯ Run control and test streams to ❯ Social media The types of advertising on social
compare the success of different media sites are increasing and include sponsored
media or campaign strategies. posts, promoted pins, and direct forms, such as
❯ Examine click-through-rate banner ads. See pp.228–229.
analytics, which look at how many ❯ Mobile technology Advertising that is tailored for
customers have clicked through to mobile devices takes the form of text and images, or
find out about or buy product, both, to offer special deals to users; promotions are
to determine online ad success. also made via apps. See pp.214–215.
❯ Measure direct mail response ❯ Social lead targeting This strategy taps into
rates, including breakdown individual profiles from social media and tailors
of different mailing lists or messages, which are sent via online networks, such
target demographics. as Twitter and LinkedIn.
❯ Analyze sales by outbound ❯ Search engine optimization (SEO) keywords
spend to establish which channels Paying for popular SEO keywords relevant to a brand
offer the best return on marketing can improve exposure by raising them in internet
investment (ROMI). search engine listings pages. See pp.230–231.
Traditional offline
advertising
Offline advertising uses traditional media channels, such as magazines,
TV, radio, and billboards, to market a product or service. Although online
advertising is growing fast, globally most advertising is still offline.
How it works
83%
Marketers choose different
The common criteria for both channels according to the target
online and offline advertising market defined for the product
is that businesses pay for ads or service being advertised. The
that are intended to catch a choice may also be based on the
consumer’s attention with ROI that a company has previously of all advertising
a brand or product message.
Businesses calculate the
experienced for that channel.
However, tracking the response
in India in 2013
success of their advertisement
by looking at the return on
rate of offline advertising is more
difficult and less accurate than
was via television
investment (ROI) for every ad
dollar spent. And to maximize
tracking online advertising
(see pp.214–215).
or print; digital
the ROI, they must make sure comprised just
they choose the right channel
for their target audience. 6.5% of the total
44.3% One of the most important set of figures for a marketing KEY
department is return on investment (ROI) for advertising Share of
spend, which indicates the success of its campaigns. Data overall offline
compiled by the Radio Advertising Bureau, UK, in 2013 ad budget
showed that TV and radio boasted the best ROI. Average return
on investment
per $ spent
18.1%
11.7%
$14.15 $12.53
$9.44 5.8%
$3.25
Newspapers
Fast publication process; Ads compete for attention
S themed newspaper with other material on
N EW sections allow for more page; usually black and
targeted advertising white, and text only
58%
Magazines
May remain in circulation Real circulation figures
for months; niche trade hard to source; securing
and special-interest titles ad slot requires planning
allow focused advertising months in advance
of marketers’ ad
Direct mail
Cost-effective; delivered May be perceived as junk budget globally
straight to people’s homes mail and instantly thrown
and offices; targets away; response rate was spent on
specific markets usually low
TV advertising
Billboards
High reach makes channel Heavy competition
in 2010, although
cost-effective; advertiser’s
message visible 24 hours
for prime sites; format
limits message length
86% of people
a day and complexity skip television ads
Movies
Potential to impress with Audience numbers
sophisticated, creative limited; members may
production; it has captive choose to enter theater
audience members after ads are shown
Online advertising
Marketers are increasingly advertising online to push marketing
messages to consumers. Online channels include display and mobile
technologies, email, search engines, and social media marketing.
210%
How it works engine queries. While display
When marketers advertise on the advertising is likely to get more
internet, they have to choose both views overall, search advertising
the form of the ad and a location has a better chance of reaching
that has an audience matching the target audience.
their target market. There are Other forms of digital advertising the growth
several advertising channels, but
the two most often used are display
include mobile advertising, which
embeds advertisements in mobile
rate of mobile
advertising and search advertising.
Display advertising includes
content viewed on smartphones
and tablets, or sends text messages;
advertising
banners with text and images, email, which delivers ad copy in China,
which appear on websites known directly to an email address; and
to be used frequently by target social media advertising, which a between 2013
consumers, such as news, social company uses to promote products
media, or video content sites. via its social media profile. and 2014
Search advertising is a method A major advantage of online over
of placing ads in the web pages offline advertising is that response
that appear in the results of search rates can be tracked effectively.
40%
32%
30% 28% 27%
20%
20%
11% 10%
10%
0%
Would unsubscribe from Would respond Would stop using Would protest on
a brand’s promotions negatively to future the brand’s product social media sites
brand messages or service
HOW SALES AND MARKETING WORKS
Outbound marketing 214 215
CASE STUDY
Mobile Cheaper to develop Different screen sizes and
content for mobiles than systems can distort ad Click fraud and botnets
for computers; easy layout; user may feel With pay-per-click (PPC) advertising,
to track ad effectiveness annoyed by interruption a business pays a website for every
click made on one of its ads, but click
fraud has become a serious issue.
Fraudsters set up a website and sell
PPC advertising, then infiltrate the
Email Offers opportunity to Recipient may delete computers of unsuspecting users
reach millions of potential email without reading it, with a computer virus known as
customers, especially and is more likely to do so a “botnet” to generate fake traffic
46%
of e-commerce sales in 2014
came from the Asia–Pacific region
Direct mail
By targeting a large number of potential customers via mail or email,
marketers hope to convert some into actual customers. This is
achieved through the timing, design, and wording of the message.
Group A
WEEKDAY Responds with two clicks
MAILING
on the company’s
See response
from email hit website
APPROACH A on Monday
@
Acquire names Send mail WEEKEND
Set size of sample and APPROACH B MAILING
split in half See response
from email hit
on Saturday
3.42%
was the average response rate to
Group B
Responds with
20 clicks on the
company’s website
1 2 3 4 5
A B
A B
How it works
60%
makes an outbound call,
Telemarketing works in it is to sell additional products or
two directions: inbound and services to an existing customer, or
outbound. A customer making a to entice a new customer to make a
call to a business (with a question purchase. Telemarketing sales can
or complaint, for example) is be monitored in orders per hour; of all call centre
referred to as an inbound call.
It gives the business a chance
for example, agent A may make
140 calls per hour and generate
staff in France
to retain a customer who may
be dissatisfied with a product
$400. A more effective measure is
revenue per call—if agent B makes
and India have
or service, or to win over a new
customer contacting the company
60 calls per hour but $450 worth of
sales, the conversion rate per call is
college degrees
for the first time. When a business higher for agent B than agent A.
INBOUND
Customer
telephones
call center
WARM OUTBOUND
Customer inquiry Call made to promote
The customer may have a new products/offers
question about service to existing customer
or billing.
COLD OUTBOUND
Call made to establish
first-time contact with
prospective customer
HOW SALES AND MARKETING WORKS
Outbound marketing 218 219
A B
Evaluate effectiveness
Telemarketers constantly evaluate the
effectiveness of calls.
Customer
The person who decides
whether to buy
a product.
Agent A Agent B
May adopt a May use a different
particular sales communication or
strategy or have a selling technique.
personal approach.
Outcome
AGENT A Gatekeeper At the conclusion of a marketing drive,
AGENT B
The person who answers telemarketers appraise strategies and styles
the call and decides to to help them decide on future campaigns.
pass it on.
Inbound
marketing
Inbound marketing lures customers by offering them appealing content, and
engaging with them. The approach pulls customers into a relationship with a
brand rather than “pushing” them into making a purchase, which is how
advertising works. Inbound marketing is also known as permission marketing as
potential customers are giving a business permission to communicate with them.
In other words, they are actively interacting with the company or brand.
Decision-making
NEED TO KNOW Ensure that content captivates potential customers or solves
❯ Top of funnel marketing (TOFU) problems for them; encourage two-way communication
Offers content to grab the initial
attention of potential customer
❯ Middle of funnel marketing Purchase
MOFU Offers more detail and Entice interested site visitors to become customers;
encourages participation make shopping online an easy and positive experience
❯ Bottom of funnel marketing
(BOFU) Attempts to win a
sale with low pricing, offers, or Advocacy
via customer recommendations
Provide excellent customer service; spur customers to make
recommendations and share on social media
HOW SALES AND MARKETING WORKS
Inbound marketing 220 221
41%
of marketers surveyed in
2013 believed inbound INBOUND MARKETING
STRATEGIES
marketing produced Offline
measurable return on ❯ Optimize retail space
Provide a well-designed physical
investment (ROI) environment that will both draw
customers in and encourage them
to come back.
❯ Engage media Generate press
releases to gain media coverage.
Focus on topics of real interest,
especially ones that can be backed
up by statistics and research.
❯ Interact face to face
Conduct events in stores that
provide a new experience/benefit
@ to customers; rent a stand at a trade
event and offer key information.
COMPANY
Pros Cons
nd
ou ❯ More likely to draw ❯ Response from market
Inb
$
Integration of channels
By coordinating the message on all
channels, businesses can optimize
the impact of a marketing campaign.
Blogging process
Marketers may use SEO tools (see pp.230–231) to gain insight into what’s being
talked about online, which helps them to determine the most suitable topics
for blogs. Many companies have the in-house talent to create blog content.
Post
Publish blog entry on
Select key word internet using web software
or question or specialized corporate
blogging platforms.
Determine key word, phrase,
or question that appeals
to the target audience.
Create content
Base content on key word/
KEY WORD question, and ensure that it
gives readers valuable insight
into the chosen topic.
Add links
Cite industry experts and
research reports; add photos
or videos, and provide links
to the original sources.
85.2%
NEED TO KNOW
❯ Disclosure Statement of whether
blog is sponsored, or if reviewed
products are given to blogger or
of internet users were independently bought
❯ Splog Spam blog containing
in Brazil visited fake articles designed to increase
the search engine rankings of
blog sites in 2011 specific websites
NG VITAL STAT
I IS
Syndicate/share GG
TI
O
Submit blog to syndication
CS
BL
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
BLOGGING
Capture content
Decide on topic, and create an outline,
then film video for vidcasts or record
audio material for podcasts.
Process content
Edit video footage or audio track for
background noise, mistakes, repetitions;
test and edit further, if necessary.
Publish content
Embed and publish content on new
post. Use app to generate feed address;
submit to iTunes or other platform.
Tracking
Count number of subscribers; use web
feed services to access user location, level
of interaction, and other statistics.
YES
NO YES YES NO
$ $
NO YES
KEY
Business potentially Blog generates revenue
influences blogger for blogger/business
Blogger operates
independently of business
Social media
marketing
By posting content on social media, marketers try to attract website
traffic and draw attention to their products and services. Occasionally,
interest in the posted content can multiply rapidly across these channels.
CONVERTING SEEKERS
TO JOINERS
The goal of content marketers is to
convert “seekers,” who have arrived on
a website, blog, or social media page,
into “joiners,” who subscribe and allow One major
two-way communication. beauty blogger
links to YouTube
post.
Stage 1 Marketers post content, such
as a video, article, or special offer, to
draw consumers (seekers and joiners).
Stage 2 They rely on “amplifiers”—social
media users who share content with their 12 smaller blogs
friends—to spread their post to a wider follow the link and
audience. post about it.
Content
37%
of businesses
NEED TO KNOW
❯ Social graph Internet graph that
maps connections between user
groups, such as Facebook friends
created ❯ Social media optimization
in Germany (SMO) Use of online communities
to maximize social media coverage
used social of product or event
❯ Social media monitoring
media in 2013 Process of tracking the number
of mentions a brand or company
receives on social media sites
Content is tweeted
to 460 followers
#
of the company.
# #
# #
#
#
#
#
# # #
#
#
#
#
Content is
retweeted
to 750 other
followers.
# #
# #
#
#
Content is posted
on Facebook by
one Twitter user.
SEO process
These tools can be used regularly in a
continuous attempt to move a website
higher up the listings. Keyword selection
Use a combination of intuition
and analysis to choose words.
Reporting and
tracking
Use tools to track traffic and
report on website ranking.
Collaborative process
Marketing departments generate
brand identity while sales teams do
the selling. Working together, they
Live events Face-to-face
aim to take potential customers on Social communication
a journey from brand awareness media
to repeat sales, communicating the
message through various channels.
Public Telemarketing
relations Email blasts
Advertising
HOW SALES AND MARKETING WORKS
Business development 232 233
15%
of companies have
BUSINESS DEVELOPMENT
STRATEGIES
Business development is reliant on growth. Sales and
marketing teams can increase long-term profitability by
building up a customer base and then trying to retain it.
specialized business There are several ways to ensure that the customer base
remains buoyant.
development staff who ❯ Chart customer journey from before to after sale
❯ Think of ways to reduce cost of sale and increase
are not involved in sales customer satisfaction
❯ Integrate sales processes with marketing to gain and
retain customers; think about ideal customer
❯ Monitor and evaluate these processes regularly
$
Follow up sales with effectiveness intellectual
efficient delivery, Track marketing capital
excellent customer spend on each Nurture talent
$
REVENUE
service, and channel and analyze and foster
personal contact results to gauge creativity in
to reinforce return on marketing order to
$
positive customer investment (ROMI). optimize ongoing
relationships. See See pp.242-243. marketing efforts.
pp.240-241. See pp.244-245. $
Special
Return on
offers and Traffic- Innovation
investment
updates driving
(ROI)
to website
Branding and
rebranding
A brand is defined by the characteristics that mark a particular
product. Branding is used to communicate a product’s qualities to
a consumer, and create a lasting bond between supplier and customer.
How it works works for both the supplier and the customer, aiming
When a supplier develops a brand, it creates a defined to eliminate uncertainty and risk and to convey key
set of values, expressed in product imagery, colors, logo, attributes. Social media helps to promote brands—for
slogan, jingles, promotional imagery, and association example, 29 percent of Facebook users follow a brand
with high-profile individuals or characters. The brand and 58 percent have “liked” a brand.
Develop the
concept
Marketer focuses on
positioning (where brand Sincere Down to Rugged Tough, Sophisticated
sits among competition earth, honest, kind, strong, outdoorsy, Exclusive, romantic,
in terms of function and thoughtful masculine elegant
look) and building a
consistent and clear
personality.
Competent
Bold Reliable,
Carefree, intelligent,
spirited, authentic,
youthful successful
HOW SALES AND MARKETING WORKS
Business development 234 235
Apply marketing mix
NEED TO KNOW
Product Price Promotion Place ❯ Brand equity Power of
a well-respected brand to generate
more sales than the competition
❯ Brandwidth Measure of the
effectiveness with which a brand
connects across a wide range
of consumers
❯ Brand architecture Overarching
plan to develop one or more
brands and create a hierarchy
The consumer
nd
Bra au
Research
di
t
Rebrand
Lead-generation process
Generating leads is a multi-step process that involves sales,
marketing, and customer service teams working together
to plan, design, produce, test, and refine a campaign.
Produce campaign
Create and deliver materials
for each medium involved in
the campaign.
RESEARCH
Ascertain which
Plan the approach media and customer SEO/PPC
touchpoints are Integrate search
Set goals and parameters, including most effective. engine optimization EMAIL BLASTS
expected return on investment (ROI) (SEO) efforts and
and number and quality of leads. Include a benefit
pay-per-click spend for the recipient
(see pp.230–231). and a call to action
BIG IDEA
REVIEW (see pp.216–217).
Devise a compelling
OBJECTIVES PLANNING message to engage
Check that they Ensure that sales, and entice leads.
are realistic; marketing, and
compare with customer service are TELEMARKETING
previous efforts. working together. Review key
TRADE SHOW
message and
AUDIT Invite potential leads
SYSTEMATIZE call script
Assess current to visit the company’s
Integrate customer with customer
lead generation. stand and meet face
relationship management service team.
to face.
(CRM) software to
manage the leads. ADVERTISING
Generate broad
interest with ads
on selected media.
Identify target customer Design campaign
Define the characteristics of the Craft a multi-channel message to
customer the business is aiming to entice the lead to opt in and give
capture in as much detail as possible. contact information.
HOW SALES AND MARKETING WORKS
Business development 236 237
ANALYZE
QUALIFIED LEADS PERFORMANCE
Determine percentage Identify adjustments
of initial contacts with needed to keep campaign
purchase capability. on track.
Refine
RESPONSE RATES Fine-tune the filtering process to
Tally how many ensure that leads being generated are
leads have been ONLINE high quality and likely to buy.
generated so far. CONVERSION RATES
Calculate percentage of web
visitors converted to leads.
How it works
Sales and marketing departments
are responsible for generating sales
income for a company. The first Raw lead
step is to locate or identify potential Potential customer—
customers—lead generation. The perhaps a website visitor, or
second step is to make contact a suitable person who can Pitch Find precise needs
be approached by of suspect; show product’s
with those potential customers
cold-calling qualities and unique values
and entice or persuade them to
buy—lead conversion. to counter objections.
A sales pitch is used to convert
leads into customers. However,
nowadays the stereotypical spiel
delivered by an overzealous
salesperson has been largely Pitch Reinforce product’s
replaced by more sophisticated value to prospect; offer
tactics, such as live chat on Prospect payment options; highlight
shopping websites, which inform One step away from becoming customer satisfaction policy.
customers and invite them to a customer, prospects need a final
participate in a dialogue, rather enticement to convince them to
buy the product.
than simply pestering them.
Visitors to
website 3,000
Suspect
Raw leads show their interest
by remaining on website or by Leads click on
not ending phone conversation call to action 600
with cold-caller.
Leads interact
with company 150
Leads qualified
by company 50
Sales closed 10
Inactive
Prospect isn’t ready to buy
immediately, but shows enough THREE CLASSIC SALES PITCHES
interest to suggest they might
buy in the future. High concept
Catchy introduction that captures the vision or key idea of a
product or business; intended to grab attention and interest
Elevator
Short summary (under a minute long) that explains the
why, what, and how of a business or product
20-minute deck
Dead lead Presentation that explains the product or business in detail;
Lead will not convert, but may be how it can serve the need a prospective customer may have
worth trying to revive in future.
Customer retention
Existing customers help businesses generate the majority of profit
and growth through making additional sales and referrals, and so
retaining these customers is a high priority for marketers.
+ Identify satisfied
customers
Customer referral
Introduce retention
improvement strategy
Monitor and measure
by analyzing
Customer feed-
back surveys
Listen to
Identify the customers and
Attrition rate
dissatisfied identify people at
risk of defecting. Calculate the number of customers
Defection retained (existing), lost (exiting), or
Find out why certain gained in a given period.
customers have left Loyalty
and which competitor programs
they have gone to. Reward customers
Complaint analysis with improved
incentives for
Examine written
staying loyal.
customer complaints
and call-center records.
Boost customer $ $ $
service
Offer employees Revenue targets
incentives to build Measure revenue targets against
customer relations.
–
cost of customer retention efforts.
HOW SALES AND MARKETING WORKS
Business development 240 241
Unhappy
1-2 3-4 5-6
with price
7-8
Net promoter score ®
9-10
ROMI in practice
The diagram shows how a commercial air-conditioning
company might use ROMI to measure the performance
of a marketing campaign. The company spends $2,100
on a direct-mail promotion, which it aims at offices in three
major cities to generate sales leads and secure new contracts.
The direct-mail brochure contains a contact form offering
@
a 10 percent discount to new clients who respond to the
promotion within a specified period of time.
TOTAL REVENUE
= ROMI
MARKETING BUDGET
HOW SALES AND MARKETING WORKS
Business development 242 243
63%
of chief
LONG-TERM BENEFITS OF MARKETING INVESTMENT
Some aspects of marketing investment are difficult to measure immediately. The benefits
of providing excellent customer service, for example, or investing in research to help
marketers retain customers, may not be evident right away but will reap long-term profits.
officers
believe ROI
will become $ Run marketing campaigns
the leading
Cost of market investment
Results
Total new customers = 3
Average customer spend = $6,500 (after 10% discount
deducted from average $7,222 total spend)
Revenue from marketing = $19,500 (3 x $6,500)
Campaign spend = $2,100 + $2,167 (3 x $722) cost to
14 qualified leads 3 of these company of promotional discount = $4,267 total
(who are become ROMI = $4.57 per customer / per $ spent on campaign
a good fit for the customers
product) become
sales opportunities
$19,500
= $4.57
$4,267
Intellectual capital
The knowledge within a company that is
used to improve business performance P TALENT
TO
is known as its intellectual capital.
No. 1
How it works
Every business has capital, NT
AN I ELLEC
which refers to the physical, UM T
H
tangible assets that appear Difficulty
on the balance sheet of its
financial statements.
A business also has Human capital
intellectual capital—the The combined talents of the staff and
knowledge and skills inside the executives employed by the business.
company. This collective know- It includes skills and abilities, drive,
VO L U
CE
how is hard to quantify and creativity, and innovativeness, all of
IE N
measure, but it is essential to M which can be quite hard to measure.
ER
OF
E
a company’s ability to generate PR XP
AC TIC AL E
revenue. For instance, management
must provide training and a
handover period for new staff
so that human capital does not
go down when people leave the Difficulty
company, taking their expertise
with them. Management academics NAL LINK
have identified three main kinds EX
TE R S Customer capital
of intellectual capital: human, Goodwill developed between a company
structural, and customer. and its customers, reflected in customer
loyalty to the business and its products.
This relational capital can be extended to
suppliers, but is very hard to quantify.
NEED TO KNOW
ELATIONS
TR HI
❯ Strategic capital A company’s KE
R
PS
MA
AS
SL
NG IP
to a business or organization; can RE L ATIO NS H
be audited under various systems
(see far right)
HOW SALES AND MARKETING WORKS
Business development 244 245
RN AL LINK
TE S
IN MEASURING INTELLECTUAL
ATI
ONAL RO CAPITAL
IZ UT
N
IN
A
ES
8am
developed to quantify and measure a
company’s intellectual capital.
9am
FIVA
Framework of
intangible value areas
(FIVA): an eight-step
system used to
“The only irreplaceable calculate the worth
of a company’s
capital an organization intellectual capital.
possesses is
the knowledge Knowledge capital
scorecard
and ability of Method developed
by New York University
its people.” professor Baruch Lev
to rate a company’s
Andrew Carnegie
intellectual capital and
assess its contribution
to a company’s success.
Information
management
Monitoring the marketplace and making sense of the vast quantities of data
available has become a priority for businesses; the data is crucial for digital
marketing, which is taking on increasingly sophisticated forms. Most businesses
have a system in place for managing information—and the most successful ones
use data not only to monitor day-to-day performance at every level, but to predict
future outcomes and plan accordingly.
External Internal
Outside the business, data flows in Within the business
from production, supply chain, sales itself, data feeds into
outlets, partners, and customers. the marketing and IT
teams from operations, Executives
finance, and human
resources.
oduction
Pr
Forecast Analysis
n
pply chai
Marketing and IT
DATA
Su
DATA
DATA DATA
t
les outle
7%
of organizations
TRANSFORMING DATA
INTO DECISIONS
With relevant data easily accessible (see pp.262–263)
a business can identify its strengths and weaknesses
employ a chief in order to improve its processes and operations, as
well as its customer relationships (see pp.264–265).
digital officer
LEGAL COMPLIANCE
Le g
al
Operations
system
Human Resources
Cu
s
to
Make decisions
mers
CUSTOMER EXTERNAL
RELATIONSHIP DATABASE Historical data
Information Creates data archives
MANAGEMENT
(CRM) gathered from
Data from CRM sources outside
sources the company
HOW SALES AND MARKETING WORKS
Information management 248 249
14%
the increase
Digital dashboard
Displays regularly updated business results using customized graphics.
is improved Thu
Fri
Sat
by 10% Sun
Mon CLICKS
Tue
Wed
Thu
Fri
Sat
Sun
Retrieve and analyze Mon PURCHASES
Staff can fetch data to answer Tue
specific questions about what is Wed
Thu
happening in the company. Fri
Sat
Sun
SPREADSHEETS
Form primary BI
tool to display data
(basic or advanced)
OLAP CUBES
Online analytical
processing cubes
58%
enable 3-D analysis
Actual sales: $4,700,000
of three variables
Expected sales: $8,125,000
on spreadsheet
BUSINESS INTELLIGENCE
AND BUSINESS ANALYTICS
The example of a 5 percent sales dip shows how BI and
BA can be used to examine and understand the situation.
Business intelligence
❯ Type of data investigation Results reveal past and
93%
of IT executives
current event in the business.
❯ Questions answered What has happened in the
in Brazil say
business in the past and what is happening currently?
❯ Tools used Reporting, dashboards, scorecards,
that their
online analytical processing (OLAP)
Business analytics
business could
❯ Type of data investigation Examines past event in be improved
the business, and applies the patterns discovered to
a future scenario. by using big
❯ Questions answered Why did it happen? Will it happen
again? What can we do to stop it from happening again? data analytics
❯ Tools used Statistical analysis, data mining, pattern
matching, predictive modeling or intelligence
HOW SALES AND MARKETING WORKS
Information management 250 251
Pattern matching
Predictive analytics
Process of trawling through large Program that conducts
quantities of data to find patterns advanced analysis of data
between variables, which can be to forecast future outcome
applied to other sets of data.
Monitoring
Data mining Process that uses software
to show what is currently
Use of computerized processes happening in a business,
and software programs to find providing real-time results
relevant patterns in large sets to help key operations
of data. make decisions
Statistical analysis
Software that organizes and
investigates every piece of
relevant data and interprets
Ou it to show trends and patterns
In
t
Raw data Analysis Reporting
This includes company records Software tools are used to Method that draws on
(past and current customer data process and study raw data. historical data to provide
a general overview, revealing,
and transaction histories) and Analysts interpret results and
for example, how the business
external data (economic, trade, make forecasts that help future
performed in a given year
and industry reports). business decisions.
Marketing and IT
The rise of digital marketing strategies means that marketers are
working more closely with IT specialists to develop the best ways
of launching and managing online publicity campaigns.
78%
of marketing
NEED TO KNOW
❯ MarTech Annual business
conference that focuses on
overlap of marketing strategy
and technology
executives ❯ Actionable metrics
Measurement of campaign
believe that results which enable businesses
to make informed decisions
digital strategies ❯ Vanity metrics Measurements
of campaign results that appear
will transform positive but are not meaningful
❯ Growth hacking Low-cost
marketing online marketing techniques,
such as using social media to
IT person by 2020 improve sales
Must find or develop
software tools to
implement and
manage online RISE OF THE MARKETING TECHNOLOGIST
campaigns.
Online marketers rely on software to monitor and analyze campaigns, generate
content, and extract data. The job of the marketing technologist, who has
knowledge of both marketing and IT, requires a broad knowledge base.
WEBSITE
ARCHITECTURE
SOFTWARE MARKETING
PROGRAMMING SOFTWARE
SOCIAL AND
DATA AND
MOBILE
ANALYTICS
PLATFORMS
IT CONTENT
OPERATIONS MARKETING
AND SEO
Collecting
consumer data
Capturing key data is a priority for any business seeking to understand
the marketplace. However, the task requires the use of innovative
strategies to circumvent consumer sensitivity about privacy issues.
Surveys
Gather customer
How it works feedback via
There are a number of methods
Collecting data to create email, text, or
companies use to collect customer mail, and
data. When there is contact between a consumer profile face-to-face
customer and the company, marketers Digital marketing and e-commerce have questionnaires.
can use the opportunity to gather as accelerated the rate at which customer
much information as possible. This information is gathered. Some methods
might happen at the point of sale in a require the customer’s input, such as
store or online, where marketers are questionnaires that appear online. Others,
able to observe customer behavior. such as website tracking, are possible
Marketers may also choose to solicit without the need to contact the customer.
information directly by asking their
customers to fill in registration forms
and conducting telemarketing calls
or customer surveys. Observations
Study customer’s
behavior while they
shop in a store or online.
WARNING
Customer
Data collection errors research
❯ Barraging Using a customer’s data Conduct research on existing
to bombard them with information customers or on those who
on products viewed or sites visited fit the customer profile.
❯ Overlooking technical flaws
Failing to integrate apps properly,
leading to inconsistency (and errors)
in collecting customer data Contact center
❯ Using only automated systems Monitor customer
Neglecting the opportunity to calls and store data
strengthen relationships with on preferences and
customers by communicating purchase history.
with them personally
HOW SALES AND MARKETING WORKS
Information management 254 255
Social media
View customer’s
profile information
58%
of marketers
TECHNOLOGY AT
THE CHECKOUT
In this technological age, businesses have
the means to learn about their customers without
bombarding them with questions. Retailers, for
on social media.
could link data example, typically use three methods in stores
to capture information about the customer.
to an individual
Loyalty program
customer A company may collect
by 2012 loyalty card
information by inviting
customers to register for
a loyalty program that
offers an incentive. A
loy
a lt y
c ar
loyalty program also
d helps track customer
preferences.
Website trackers
Track website visitor’s
movement around a site and
Point of sale
see what attracts interest.
software
Computer software
programs that track a
customer’s purchases
are available, allowing
marketers to tailor offers
Competitions to their spending habits.
Use competitions to collect
information, from opinions
to demographic data.
Mobile technology
The use of smartphones
enables marketers
to compile data, for
example the frequency
Transactions of customer visits and the
Ask questions at amount of time they
checkout—in the store, spend in the store.
online, or on the phone.
Data warehousing
The process of data warehousing involves information from a company’s
internal system, such as invoices and sales logs, as well as data from
outside sources, being filed away in an electronic vault.
50%
How it works The data is often used to assess
The data warehouse is a repository beliefs and intuitions about
that holds the company’s sales and the business. For example,
operational history, as well as the marketing manager of a
relevant economic and trade power tools company might
information from other sources. presume that 25–35-year-old of companies
The data goes through three stages
before it is stored in the warehouse,
men are more likely to purchase
their products than women in
surveyed in 2011
which makes it usable for analytical
purposes. Once stored, the data
the same age bracket. The
manager would test this belief
were not sure their
may be accessed by all areas of
a company—from accounts and
by analyzing sales data and
customer records accessed from
data warehouses
operations to sales and marketing. the data warehouse. were future-proof
Warehousing process
The data stored is regularly updated. When the business requires information
from the warehouse, it is transformed into an accessible format and analyzed
using software tools.
EXTERNAL USABLE
DATA FORMAT
Includes
government
statistics on EXTRACT,
business LOAD,
TRANSFORM USABLE
(ELT) FORMAT
HOW SALES AND MARKETING WORKS
Information management 256 257
HUMAN RESOURCES
“How much have we spent
on contract staff this year?”
Storing data
The data is stored in three
sections: metadata, summary
data, and raw data.
Accessing data
Using software, the data can be
METADATA analyzed and retrieved in three
Information ways: via online analytical
relating to the processing (OLAP), reporting
data itself
tools, and data mining.
SUMMARY OLAP
DATA Accesses data to
Business activity answer specific
information questions
Sociographic
Shares with 125 friends on social media
variables
Behavioral view
❯ Shopping location Prefers
to shop in smaller stores
❯ Purchasing habits Buys in Sociographic view
75%
of marketers say
bulk to save money, responds
to discounts
❯ Social media Actively shares
interests with connections
personalization
❯ Degree of loyalty Faithful
to a brand, but open to
❯ Community Influential
member who socializes and
could have a
better offers contributes to neighborhood significant effect
❯ Groups and clubs Member of
bird-watching and hiking groups on customer
retention
Geographic view
❯ Continent North America
❯ City Booming metropolis with
Customer work and social opportunities
❯ Climate Varies from below
profile freezing in winter to hot and
humid in summer
dimensions
What does the ideal customer look
like? Where do they live? What do
they spend their money on?
Demographic view
❯ Age group 35–54 (helps
gauge family priorities and
income)
❯ Status Married (children affect
spending choices)
❯ Occupation and salary
Teacher, $65,000
CUSTOMER PROFILING
WEBSITE DATA
WWW How often do they visit the site?
Which web pages do they look at?
SOCIAL DATA
Which social media networks are they
connected to? Do they share links?
TRANSACTION DATA
How much have they spent, how
often, and on which products?
CRM DATA
What’s their contact history with call
centers? How have they responded
to campaigns?
Customer
LOYALTY DATA
How loyal are they to the company? Do
they use the company loyalty program?
profile
MAIL DATA
What email contact has there been?
@ What has the response rate to emailed
content been?
$ POINT OF SALE
What observations have sales staff
made from interacting with customer?
HOW SALES AND MARKETING WORKS
Information management 260 261
NEED TO KNOW
❯ Omnichannel customer
Three ways to use a customer profile Consumer who shops using
multiple channels, including
2
Sell more to existing customer Mining customer
profiles to see their spending habits, likes, and interests to a provider and champion them,
enables marketers to make personalized offers. bringing in other customers
in the process
Reward loyal customers Identifying good customers
3 and offering gifts and incentives tailored to their tastes
increases customer lifetime value.
❯ 360-view Profile that gives
marketer a complete picture of
a customer, making it possible to
predict their needs and behavior
Big data
Business is trying to harness the huge amount of consumer data now
available online. This information can be analyzed and used to create
detailed profiles to target customers more precisely.
Social media
Data monitors what people are saying about the
organization and its products.
Audio
Data includes news broadcasts, interviews, call center
recordings, and podcasts.
38%
of marketers had a
NEED TO KNOW
❯ Apache Hadoop Open-source software
library for storing and processing big data
❯ Terabyte One trillion bytes
❯ Petabyte Unit of digital data equivalent
centralized database for to 1,024 terabytes
❯ Exabyte Unit of digital data equivalent
customer data by 2014 to 1,024 petabytes (five exabytes equates
to all words ever spoken by human beings)
Log data
❯ Customer reviews DATA MANAGEMENT
❯ Customer service
Organizations can choose either offline or
❯ Audio files of customer online options to store big data and various
service calls, for example software for access and analysis.
❯ Big storage hardware Servers; storage
and network equipment capable of
supporting many terabytes of data
Emails ❯ Software Includes programs for research
@ ❯ Internal communications
❯ Customer contacts
❯ Email campaigns
and analysis, storage and access, and
graphic visualization of data
❯ Cloud services Third-party providers
that offer storage networks for big data
management and access
Customer relationship
management (CRM)
CRM (customer relationship management) is a computerized system used
for managing and coordinating marketing, sales, and customer-support
data to maintain good customer relations and improve profitability.
How it works of ways: the sales team may use it to find new business
CRM is a software tool in the company’s IT system leads and improve relationships with existing customers,
that records all interactions the business has with the marketing team may use it to reward loyalty, and
customers. The information can be used in a number customer service may use it to deal with problems.
AUTOMATION
CRM can use automation as a tool to respond to customers who visit and use a website.
@ @
age
Age Location
sp on
inte ecial ssi
re s ofe
ts pr @ @
@
e ge Gender Family size
siz nd
ily er
location
f a m
@ @
Profession Special interests
HOW SALES AND MARKETING WORKS
Information management 264 265
871%
Marketing
Target groups for special
campaigns; monitor and
Sales
reward loyalty; generate leads
Convert new leads; find
the average return new prospects; cross-sell
and upsell opportunities;
on investment customize pitches
delivered by CRM
Customer contact form
CRM uses the information to group
customers according to their
buying behavior.
Price quote
The company sends a price quote
in response to the customer’s
interest in their product.
Customer feedback
The company asks questions to
glean information about the
customer’s views.
E-commerce transaction
The customer pays for the product
via the internet.
Support ticket
An automated ticket allows
the customer to track delivery
of the product.
Finance
Operations Generate invoices in a
Improve efficiency of timely manner; manage
manufacturing, product Customer service payment process
delivery, ordering, Respond to service issues
and tracking immediately; manage
customer cases; gather
feedback
Compliance
In most countries, companies have to adhere to laws and industry
regulations that govern how they can sell and market their products.
The rules are there to make sure that businesses operate fairly.
Marketing regulations
To protect the consumer, regulatory bodies produce guidelines
instructing companies on how they should market their products.
Negative-option billing “Please uncheck the box if you do not wish to…”
HOW SALES AND MARKETING WORKS
Information management 266 267
NEED TO KNOW
66%
of all email traffic
❯ CAN-SPAM Act International legal ruling
that sets out commercial email requirements
and penalties for violation
❯ Phishing Fraudulent sending of emails
while pretending to be a genuine entity, to
gain the recipient’s bank details, for example
in 2014 was spam
A marketer promoting a product with a special offer must set out the terms and
conditions in writing. In the UK, use of the word “free” is subject to regulation.
Telemarketers must promptly disclose key facts of the proposed sale, including
cost and quantity, restrictions and conditions, and refund policy.
Marketers must refrain from sending bulk unsolicited emails, the most
common form of spam, or other types of unrequested messages.
Any item offered alongside the main product purchased must be presented
as an option to buy, not an item the consumer must take action to refuse.
HOW
OPERATIONS
AND
PRODUCTION
WORK
Manufacturing and production ❯ Management
Product ❯ Control ❯ Supply chain
Manufacturing
and production
Once a firm has decided what goods or services to make, its directors have to
choose the method of production that best suits consumer demand, the product,
and the market, as well as one that will be the most profitable. Companies work in
three general areas of industry, which together form a production chain to provide
consumers with finished goods or services.
Production methods
Before the Industrial Revolution, products were made Primary production
by craftsmen. Then factories brought people together to The acquisition and processing of raw materials—in this
work on machines. Typically, this was job production, with case, navy beans, as well as tomatoes for the sauce
one person making one item. Economist Adam Smith first
introduced the concept of division of labor, which led to
mass production, with car-maker Henry Ford bringing in
the moving assembly line at the start of the 20th century.
Today, manufacturers can combine the best of all methods,
with large-scale production of personalized products.
Production typically involves three stages—here, from
navy bean to canned beans sold in supermarkets. PRODUCTION IN PRACTICE
Native to South America, navy beans are grown either for the
immature green pods, eaten fresh as green beans, or for the
beans themselves. These are dried and used most commonly
in baked beans, a dish that originally came from Boston, MA.
trillion
several resources
❯ Capital Money invested in business, including
money spent on production tools, such as
equipment, machinery, and buildings
❯ Land Natural resources used to create goods
and services—for example, physical land or
the value of China’s annual extractable resources such as minerals, lumber,
oil, or gas
manufacturing output in ❯ Labor People employed in a business to
produce the goods and services
2011—the largest in the world ❯ Enterprise Entrepreneurs and/or leaders
who bring the factors of production together
to make the whole process happen
The raw beans are mixed with tomato The labeled cans are transported to warehouses and from
sauce, sugar, salt, and secret spices. The there to supermarkets and other outlets to be sold. Several
ingredients are cooked in vast pressure brands vie for market supremacy of this popular convenience
cookers, ensuring consistent texture and food, using advertising, price, and taste differentiation.
a long shelf life, and then sealed in tins.
Job production
In job production, items are made individually. Each item is one job,
which is usually finished before another is started. This method is
typically used for small-scale production or for large one-time projects.
Proof dough
The dough is left to
rise (proof) in pans.
Batch 1
Batch 2
HOW OPERATIONS AND PRODUCTION WORK
Manufacturing and production 274 275
million
❯ Economies of scale: low unit ❯ Repetitive work, so workers
costs, as large number is made may be less motivated
❯ Customer offered choice ❯ Costly because may require
of, for example, size, weight, storage of raw materials, work
and flavor in progress, and finished items
loaves of bread were ❯ Output and productivity (see p.139)
increases with use of specialty/ ❯ Requires detailed planning
sold every day in the dedicated machinery and scheduling
UK, in 2014
Bag up to complete
All the rolls finish the production
process together.
Bake rolls De-pan and cool rolls
The whole batch is The rolls are removed from
baked at the same their pans.
time at the same
temperature.
How it works example where elements of the car are put together
Flow production typically involves large factories along a line; robot arms may install wheels and
equipped with conveyor belts and expensive workers may perform specialized jobs. Significant
machinery, the assembly of individual components, output is possible with even a small number of
which may be bought in from other companies, and workers. Newspaper printers, oil refineries, and
the automation of tasks. Car manufacturing is an chemical plants also use flow production.
PARTS ASSEMBLY
CAR ASSEMBLY
HOW OPERATIONS AND PRODUCTION WORK
Manufacturing and production 276 277
Ready for
customer
When customer
Door assembly Finishing Inspection demand is high,
car companies
may run their
production lines
continuously.
Mass customization
Sophisticated technology and manufacturing developments allow mass
products to be personalized. The low unit costs of mass production
combine with the marketing opportunities of custom-made.
Lace color
million
B. Joseph Pine II outlines four distinct types:
s
lace
t e r ned d sole fit
Pat hione arrow
Cus 7.5, n
Size
Continuous production
During continuous production, a product is made 24 hours a day,
seven days a week. The production line runs continuously to cope
with demand, and staff work around the clock in shifts.
Wood Papermaking
Lumber is a renewable In this continuous process,
resource and logs are automated machinery runs
stockpiled. Trucks make 24 hours a day, 365 days a year.
constant deliveries to
processors for pulping.
Paper recycling
HEADBOX
Recycled paper is Fiber and water are fed
an important resource onto a moving wire mesh.
for the paper industry.
WIRE SECTION
Some of the water is
sucked away to leave wet
fibers that form paper.
HOW OPERATIONS AND PRODUCTION WORK
Manufacturing and production 280 281
4 billion
trees are cut down every
TYPICAL USES
Continuous production is used for undifferentiated
commodities required in large and constant amounts.
LEC
TRICIT Y
S AND CHEM
year to make paper :E A IE I
GY
CA
ER
ND
ENER
REFIN
L PLANTS
GAS
OIL
PRODUCT OD
R S PR UCTI
PE I AS
ON
ON
PA
GL
DRYING
The paper is dried off.
COATING AND
CALENDERING FINISHING
PRESS SECTION
The paper is coated, AND SUPPLY
More water is
compressed, and The finished paper is
squeezed out of
smoothed. constantly supplied
the wet sheets.
to printers, packers,
and newspapers.
Hybrid processes
Manufacturing firms may adapt existing processes or combine two
production methods for optimal performance, particularly if they make
a wide range of products.
WORKER 3 WORKER 4
HOW OPERATIONS AND PRODUCTION WORK
Manufacturing and production 282 283
WORKER
CELL 3 CELL 4
Management
Every manager in a business, particularly in manufacturing, has to
ensure that all resources—from materials to equipment and staff—
are used efficiently, while keeping the customer continually in
mind. Managers make key decisions to lay down procedures
and set standards and then work continuously to improve
processes to ensure that the company remains profitable.
Which approach?
How people and processes are organized in making and delivering the product
Agile
to the customer is critical if a company is to survive fierce competition and rapidly
shifting consumer demands in a global market. In making decisions about how production
a business can meet its goals, managers may combine a number of approaches How can we be more
as many are interlinked and achieve similar outcomes. responsive to shifts in
customer demand?
See pp.296–297.
MANAGER OR LEADER?
Management and leadership are not the same, but are Time-based
closely linked: management
❯ Managers plan, organize, and coordinate; leaders How can we use
also galvanize and motivate. time effectively?
❯ Managers organize workers to maximize efficiency; See pp.294–295.
leaders also nurture skills and develop talent.
❯ Managers focus on the bottom line; leaders also
look to the horizon.
❯ Managers tell people what to do; leaders also
ask questions.
❯ Managers make sure workers are doing everything
that needs to be done; leaders also inspire workers
to want to do more than needs to be done.
The following classic distinction has been attributed to
two different business leaders and writers, Peter Drucker
No. 1
country for
and Warren Bennis: management is doing things right;
leadership is doing the right things.
innovation in
2014: South Korea
HOW OPERATIONS AND PRODUCTION WORK
Management 284 285
$ $
Economies and
diseconomies of scale
Kaizen
What scale of operation is best
How can we drive for us? See pp.286–287.
continuous
improvements?
See pp.298–299.
Lean
INNOVATE production
How do we
INVOLVE
EMPLOYEES
FOCUS
ON VALUE $ minimize
resources to
reduce costs?
See pp.288–289.
STRATEGIC
ALLIANCES WITH MINIMIZE
SUPPLIERS WASTE
CUSTOMERS
Just-in-time
UNINTERRUPTED AT THE HEART How can we meet customer
WORKFLOW OF WHAT demand and minimize stock?
WE DO
See pp.290–291.
Total quality
management
How do we improve customer
satisfaction? See pp.292–293.
Economies and
diseconomies of scale
Economies of scale are one of the advantages of large-scale production
and result in a lower unit cost of each item produced. However, costs can
also go up as the operation grows, resulting in diseconomies of scale.
Economies of scale
While it may be inefficient for a small dairy to supply milk to a supermarket,
it is cost-effective for a large dairy operation producing thousands of bottles.
If a delivery is too large, though, wastage can creep in due to associated costs.
SUPERMARKET
AVERAGE COST AND REVENUE
DELIVERY
OF 100 1 VEHICLE
BOTTLES
DELIVERY
OF 10,000
BOTTLES
$
Few economies of scale Economies
HOW OPERATIONS AND PRODUCTION WORK
Management 286 287
NETWORK ECONOMY
Online networks, such as eBay and Facebook,
150
million
rarely stray into diseconomies of scale. They can
deliver economies of scale even at an international
level: the cost of adding one more user to a
network is almost zero. However, the resulting
benefits may be huge, because each new user
in the network can interact or trade with other
members of the network. the number of eBay
users worldwide in 2014
DELIVERY
OF MORE
THAN
10,000
BOTTLES
Waste
Non-value-added processing
Waste
Transportation in stages
Waste Waste
Poor workflow, Underutilization of
Underused people
5
NEW STOCK IS DELIVERED TO
benefits of reduced inventory STORE TO REFILL SHELVES
are balanced against the cost
JUST-IN-TIME
PROS AND CONS
Pros
❯ Lower stock so less storage space
and less working capital needed
❯ Demand-pull avoids obsolete,
out-of-date stock
❯ Staff spend less time checking
and moving items
4
Cons SYSTEM
TRIGGERS
❯ No room for error—for instance, DELIVERY FROM
if there are any faults in the SUPPLIER WHEN
MINIMUM STOCK
stock delivered, the whole LEVEL REACHED
day’s production is halted
❯ Operation is reliant on suppliers
❯ No cushion for sudden upsurge
in demand
HOW OPERATIONS AND PRODUCTION WORK
Management 290 291
1
CUSTOMER
SELECTS
ITEM FROM $62
billion
SHELF
the value of
Just-in-time in retail Dell computers
To reduce stock levels, many supermarkets
now use just-in-time deliveries, relying on
sold in 2012
computer data systems. In manufacturing,
systems are often based on Kanban cards—
dockets for withdrawing and ordering items at
each workstation of the production process.
2
CASHIER SCANS
BARCODE
CASE STUDY
3
COMPUTER SYSTEM
SIGNALS WAREHOUSE
Dell’s just-in-time computers
Computer produced when customer orders it:
❯ Customer’s individual specification is sent
straight to factory floor.
❯ Just in time manufacturing sees deliveries
of supplier parts arriving at one side of the
factory and unloaded directly into bins to
build customer order.
❯ Inventory and costs are reduced.
Total quality
management
Success though customer satisfaction is the ethos of total quality
management (TQM). Everything a company does is relevant, and the
focus is on managing and improving processes rather than outcomes.
philosophy for
managing an Involve everyone Perfect processes
in quality Walt Disney viewed the theme
organization to Founder Walt Disney firmly parks as factories producing
believed in quality and saw it delight. He built quality by
meet stakeholder as everyone’s job, something designing processes and
that could not be delegated. repeating them.
needs without
compromising
ethical values.”
Chartered Quality Institute
HOW OPERATIONS AND PRODUCTION WORK
Management 292 293
12,000
Disneyland “cast members” are
NEED TO KNOW
❯ American customer
satisfaction index (ACSI)
Cross-industry benchmarks for
employed to make guests happy customer satisfaction in the US;
NCSI is the UK equivalent
❯ Net Promoter Score (NPS®)
Metric for company performance
Employees Exceptional service from the perspective of customers,
Disney calls its employees Cast members (employees) who are divided into promoters,
“cast members.” They are are focused on delighting passives, and detractors
trained in every aspect of the customer—their sole job
delivery, including posture, is to make visitors happy.
gestures, facial expressions,
and tone of voice.
Suppliers Continuous
Disney collaborates with improvement
suppliers—for example, it has Walt Disney saw the theme
partnerships with McDonald’s parks as an incomplete
and Coca-Cola—to ensure product; today, improvements
consistent quality. come from the bottom up.
Case study:
managing time in
Ford Electronics INVENTORY
Between 1988 and 1994, Ford $200 MILLION
Before
PRODUCTION CYCLE
1 DAY
HOW OPERATIONS AND PRODUCTION WORK
Management 294 295
70%
of companies use
PART OF PROJECT MANAGEMENT
Time-based management is a critical
part of project management. Timing
aids include:
❯ Tools such as Gantt charts show
❯ Methodologies such as Agile
help project managers working
in software development
respond to the unpredictable;
formal project- the project schedule as a bar chart,
making it easy to plot and monitor
they are often implemented via
the Scrum framework, in which
one person takes charge of constant
management daily progress and targets.
❯ Project management systems
reprioritizing. Based on the premise
that software cannot be built up like
methodologies PRINCE2 (PRojects IN Controlled
Environments) and similar methods
a product on an assembly line, as it
would be out of date before it was
help to structure projects step by
released, every area of development
step in logical, organized ways.
is constantly reappraised.
2 1 3
Regularly finding extra
floor space was a necessity
due to high inventory.
POOR STAFF LESS COMPETITIVE PROFIT LESS THAN
MOTIVATION $100 MILLION
Measuring by cycle
$ $
Simply measuring performance
in a different way—over a shorter
production cycle—allowed people
to see new opportunities.
$ $
NEW FACTORY
How it works
The goal of agile production is to stay ahead of the
competition. Often incorporating concepts of lean
production (see pp.288–289), agile has an extra
dimension: meeting customer demand rapidly and
effectively. It relies on flexible and collaborative workers,
who can deliver swiftly and effectively. The company
has to be able to change or increase production quickly. Rapid response
Design of products might incorporate modular concepts, Company setup allows it to
allowing for customization, and strong relationships respond quickly and effectively
with suppliers are essential. to customer and market demands
stomer
u
C
Customer
demand is
Agile manufacturing
trigger to start The organization has to create a position
production from which it can alter course as nimbly and
swiftly as a cheetah. It needs to be able to
retool facilities quickly, modify agreements
with suppliers, and continually introduce
new ideas and improvements.
Integrated
Product
technology
reaches Effective information
consumer systems, often linked
to suppliers
Continuous innovation
Constant search for new and better
ways to deliver for customer
HOW OPERATIONS AND PRODUCTION WORK
Management 296 297
3 months
the time it took Wikispeed Strategic partnerships
Supplier collaboration rather
to develop a revolutionary than contract negotiation
Flexible
workforce
Self-organizing,
adaptable teams
Kaizen
Started in Japan, kaizen is a system of continuous improvement that
involves all employees. From senior managers to people on the shop
floor, everyone is encouraged to suggest improvements day to day.
How it works
The kaizen philosophy is “to do it better, make it better, standards and then looking for ways to continually
improve it even if it isn’t broken, because if we don’t, improve those standards. It is supported by
we can’t compete with those who do.” Kaizen is rarely a framework of training, communication,
about ideas for major change but has more to do with and supervision, and results in improved
ongoing, systematic, incremental improvement. A efficiency, productivity, quality, lead
relentless attempt to eliminate unnecessary activities, time, and customer loyalty.
delay, or waste (muda), Kaizen starts with setting high
Innov
known as plan, do, check, act. Central to kaizen are quality,
ongoing effort, involvement of every employee as part of Quality
their daily work, willingness to change, and communication.
BETTER Innovate—find
AND BETTER and implement
better ways to
Kaizen was created in Japan meet requirements and
after World War II. It comes increase productivity.
70
from the Japanese words kai,
which means “change” or “to
correct,” and zen, which means
“good.” Companies such as Effort
Toyota and Canon have seen
significant improvements by suggestions per
e
implemented at
KAI ZEN
Toyota in 1983
Gauge measurements
against required standards.
CHANGE GOOD
HOW OPERATIONS AND PRODUCTION WORK
Management 298 299
FIVE FOUNDATIONS
The five steps of workplace organization,
known as 5S, are the foundations for
ze
S
Seiri (Sort)
Keep only essential
items in the work area.
Standardize operation Remove and store all
and activities; make unnecessary items.
each improvement
standard practice,
enshrined in the five
foundations, or 5S.
Willingness Seiton (Streamline)
to change Retrieve ordered
items swiftly and
easily to create
efficient workflow.
M clean, because
cleanliness leads
to efficiency.
ea
sure
Seiketsu
(Standardize)
Keep consistent work
practices, tools, and
workstations, and
Measure the make roles clear.
People operation—for
involvement example, the length of
the production cycle Shitsuke (Sustain)
and amount of
The four cornerstones
in-process inventory. above become the
standard way to
operate all the time.
Product
The items that firms sell to satisfy a consumer need and to make a profit for the
business are broadly termed product, whether they are something tangible like
toothpaste or an intangible service such as an insurance policy. In a typical life
cycle, a product is developed and launched, and a few customers take it up. The
domino effect causes wider distribution. Growth eases as the market becomes
saturated, and sales flatten and decline until the product is no longer viable.
Product evolution
From start to finish, every product,
such as a tube of toothpaste, goes
through a process of testing,
innovation, and quality control to
ensure that it will make the biggest
impact on release and throughout
its life span. Successful companies
understand the limited life span of
products and thus invest in the early
stages to maximize growth later on.
trillion
Home entertainment offers different products to
consumers. These are four examples of products at
different stages in their life cycle (see pp.184–185):
❯ Introduction 3-D televisions—only recently
available for the home
❯ Growth Blu-ray players—steady increase in sales
the value of goods because of enhanced viewing experience
❯ Maturity DVD players—challenged by more
traded between EU sophisticated technology
member states in 2013 ❯ Decline Video recorders—cheaper and more
modern viewing formats now available
B
Process
1 2 3 4
Product
generati
a o
de
n
I
HOW OPERATIONS AND PRODUCTION WORK
Product 302 303
Test concept
Feedback from consumers, using focus
groups, interviews, or online evaluation,
ensures that an idea is worth pursuing.
Analyze market
Analysis of opportunity,
influenced by predicted
growth and trends,
helps build a picture of
potential sales.
Test market
Product is tested on Develop products
section of market,
perhaps a selected
geographic area with
good representation of
target audience.
Launch
Innovation triggers
Shifts in society, such as leaps in IT
and growing concerns about climate
change, as well as internal company
developments, create new needs.
gy
t
ci
vi
ag
Crea
Ef fi
ng
ed
$
blem/cris
ro
is
P
umer nee
Idea on
mental i
s ns ea
m collabo
Co
ds
ir
-t
su
ra
Env
Cross
tion
es
HOW OPERATIONS AND PRODUCTION WORK
Product 304 305
Brainstorm Action
Individuals and The culture and processes of the
teams need the time company have to be favorable for
and mental space to testing the viability of ideas.
think originally.
ng at all le lea
r missio rrectly m
ni co
n
ea
C
e
t
ve
List
Impac
sured
ls
w
d
Flat m
cture
Design
Any product has to be well designed to succeed. Excellent
designs for everyday items—from the Anglepoise lamp to
reflective road signs—have shaped our modern world.
How it works
H ME R S
The starting point for design is RC TO
S
an idea for a product that fulfills
CU
RESE
a need, whether it is a specialty
item or something in day-to-day
use. The designer has to think of
ways in which a product can serve
its purpose and meet other criteria, IDE
AS
O GY MING
including aesthetics, cost, OL
N OR Explore concept
durability, and environmental
NEW ECH
T
BR AINS
considerations. The design may From scribbles on a piece of
T
CONSIDERATIONS
FOR DESIGN SUCCESS
❯ Functional Serves a purpose
❯ Aesthetic Enjoyable to use
❯ Innovative Different and
new, possibly using innovative
technology
❯ Easy to use Understandable and
with useful features
❯ Simple Unobtrusive, subtle
❯ Long-lasting Sustainable, not Redesign
too fashion-sensitive Next year, the
❯ Environmentally friendly product may End product
Minimizes resources and pollution need revamping. The design of the final version
that goes on sale may look
very different from the
initial concept.
HOW OPERATIONS AND PRODUCTION WORK
Product 306 307
10–18%
of the budget for bringing
Feedback
Now is the time to find
out what people think
of the product and how
a new product to market it could be improved.
is spent on design RS
(EX TERNA
L TU
RING
E
C
)
CUSTOM
MANUFA
Design decisions
Before full-scale
production begins, INTERNA
G( L
all decisions have N
)
I
MARKET
to be made and
paperwork, such as
intellectual property
rights, finalized.
Quality management
For businesses, quality is not a vague term but a philosophy of
meeting or going beyond consumer expectations. Excellent quality
management can give a company a key competitive edge.
Cost of quality
Quality management is essential to ensure
COST OF DEFECT
that any defects are nipped in the bud, the During production,
quality management
earlier the better, and definitely before they involves testing,
become apparent to the consumer. evaluating, and
inspecting quality.
Defective items may
be scrapped.
Quality management at
CUSTOMER FIRST the product-design stage
is low-cost and integral to
Before the 1970s, quality was seen the process because it
prevents issues farther
as something to be inspected and
down the line.
corrected. Then US businesses
began to lose out to Japanese
companies—for example, Toyota
and Honda were able to produce
cars at lower cost and with a much
higher quality. The difference
was that quality had a strategic
meaning for Japanese firms—they
made the customer their priority
and were the first companies
to define quality as meeting or
exceeding customer expectations.
$3.6 million
the annual saving Singapore
NEED TO KNOW
❯ ISO 9000 Set of international
quality standards and certification
demonstrating that companies
have met standards specified
❯ Malcolm Baldrige National
supermarket NTUC FairPrice Quality Award Annual award
Service industry
❯ Getting the desired result
Once the product is with
the customer, a defect is ❯ Consistency
expensive. Financial cost
❯ Responsiveness to
includes returns, repairs,
and recalls, but the customer needs
impact on the company’s ❯ Courtesy/friendliness
reputation may be even
more damaging. ❯ Promptness
❯ Psychological factors,
such as good atmosphere
LOCATION OF DEFECT
Product
standardization and mechanization
Low volume
to full automation. Companies in Low standardization; unique,
the top right-hand corner have one-off products
high-volume products and a
small range so continuous flow
production is the best option.
EVOLVING PROCESS
1
The product-process matrix
was first introduced by Harvard
5
academics Robert H. Hayes and
Steven C. Wheelwright in the
Harvard Business Review in 1979.
Dressmaker
Since then, some companies
have worked out the apparent
contradiction of how to customize China accounts
high-volume products (mass
customization). Nevertheless, the
product-process matrix remains
for one-fifth
relevant in many industries. of global
manufacturing
HOW OPERATIONS AND PRODUCTION WORK
Product 310 311
Process
Sugar refinery
Mass
production
Continuous
flow; nonstop
process
(see pp.280–281)
Car assembly
Assembly line
RARELY VIABLE
Connected line
An assembly line is not normally
flow; process
a suitable process for making
repeated for
multiple products at low or
each product
medium volume.
(see pp.276–277)
Batch
production
RARELY VIABLE
Disconnected
Batch production is not normally
line flow;
Bakery a suitable process for making
similar process
standardized products at
adjusted for
high volume.
each batch
(see pp.274–275)
Job
production
Jumbled flow;
complex, unique NOT VIABLE
process design
for each order
(see pp.272–273)
Control
Essential in any type of organization, control is fundamental when the primary
goal is to generate profits. Control needs to cover costs, resources, and quality
of the product or service to ensure that the operation runs smoothly. As well
as crossing departments, control has to run from top to bottom, with directors
formulating strategy while managers allocate resources, people, materials,
and equipment and oversee the work of individuals and teams.
FUNCTIONS ALONG
THE CHAIN Investment relies Policies on, say, Processes are Procurement
While directors work on cash flowing maintaining the in place to purchases raw
on strategic investment, back into the optimum level of control costs, materials from
policy, and process business from inventory are with continual companies
control, management the cupcake supported along reviews of the that meet its
may use tools such sales, balanced the chain by most efficient use stringent
as Six Sigma to perfect by the cost of finance, HR, of resources. standards.
operational control. production. and IT.
See pp.320–321.
HOW OPERATIONS AND PRODUCTION WORK
Control 312 313
LEGALLY IMPOSED
CONTROL
130:1
the average ratio of CEO
Many industries are subject to
external controls as well as their own:
❯ Financial institutions National and
international regulatory controls
❯ Advertising industry National
regulation to protect public interest
to employee pay of FTSE 100 ❯ Health and social care National
laws to protect vulnerable members
companies in 2014—compared of the public
❯ Manufacturing National
with a ratio of 47:1 in 1998 regulations on health and safety
ABC
ABC CAKES Task control
CAKES
Metrics and key performance indicators
are set for each task. They control, for
example, how long it takes to ice and
decorate a batch of cupcakes.
KE CO MPANY
ABC CA
Capacity decisions
The fundamental decision is whether to compromise
on demand or capacity—whether to put customers or
the streamlining of operational costs first.
Customer focus
The company, in this case a car dealer, keeps Manage capacity— Increase demand
more cars in stock than required so it can raise prices To use up stock, pricing
always satisfy customer demand. Customers are happy to have a policies increase demand
product immediately but must by encouraging customers
pay a higher price to cover the to buy fast—for example,
cost of holding excess stock. offering on-site deals
for older car models.
$
$$
$
$$
$
$$
$
$
$$
$
$$
SALE
HOW OPERATIONS AND PRODUCTION WORK
Control 314 315
Resource focus
The company uses resources as efficiently as
possible. Wastage is kept to a minimum, but
90 million
the number of iPhone 6 units
satisfying demand is hard because work is at
full capacity and output cannot rise. made by one manufacturer
to meet demand in 2014
Manage capacity—keep stock low
It produces stock according to demand and holds low
inventory to minimize unnecessary spending and storage costs.
Inventory management
Successful inventory management is a fine balance between satisfied
customers and minimizing the risk of holding too much stock. In this
example, the clothing company is managing the supply of T-shirts for a
range of sites and for direct delivery to customers.
Smaller storage
Firm may use smaller facilities to hold
buffer stock—for example, to meet
seasonal demand.
HOW OPERATIONS AND PRODUCTION WORK
Control 316 317
NEED TO KNOW
❯ First in, first out (FIFO) Oldest inventory items
sold first (or recorded as sold for accounting
purposes rather than physically moving goods)
❯ Last in, first out (LIFO) Most recently produced
items sold first (or recorded as sold)
142,000
different items were
❯ Stock-keeping unit (SKU) A distinct item that
has its own stock code handled by Walmart
❯ RFID tag A chip that enables remote tracking
of an item by radio sensors Supercenters in any
one store in 2005
Main warehouse
Company may have one main warehouse or a number Delivery to customers
of warehouses as hubs for smaller storage facilities. Efficient and timely delivery is part of
the overall customer experience,
especially as online shopping grows.
Stock is checked in by scanning bar
codes or RFID tags.
Customer returns
Returns are checked out by scanning
bar codes or RFID tags. Batch number
and other data can be monitored.
Quality control
There is a series of processes to ensure that a business maintains a
prescribed level of quality in its products or services. Quality control
is particularly important in industries where safety is an issue.
THE CONSTRUCTION
INDUSTRY
Standard safety procedures are mandatory in
developed countries, including site organization
with suitable work gear, limited access, materials
storage, and traffic flow; working at heights using
appropriate ladders and scaffolds; and avoidance
of slips and trips with awareness of obstacles,
trailing cables, and uneven or wet surfaces.
$4.4
billion
Packaging station
Samples are tested to check
that sealing is accurate, labels
are correctly applied, and
overall presentation is good.
Storage Transportation
The temperature is checked The temperature in
for accuracy and safety, and the vehicles and their
samples are tested for taste, delivery time are
texture, and contamination checked to ensure
by foreign objects. product freshness.
Six Sigma
Used in organizations to strive for near-perfect products and
services, Six Sigma is a disciplined, data-driven approach for
eliminating defects in any process.
$320
helps with data collection and analysis
for black-belt projects
million
Champions Translate the company’s
vision, mission, and goals to create an
organizational deployment (OD) plan
and identify individual projects
1 CHAMPIONS
Mobile-phone maker
Motorola used Six Sigma
Define
quality as a goal for its
Define the project’s purpose and manufacturing operations;
scope; identify processes that need CEO and chairman Jack
improvement; determine customer Welch made it central to
needs and benefits. his business strategy at
General Electric in the
1990s; tech company Dell
has used a form of Six
²³
Analyze
billion
the cost of supply
❯ Adding value Companies may try to add value along
the chain, rather than just seeing it as a way to transport
a product from A to B. See pp.324–325.
❯ Delegating functions To save money and use
specialized expertise, the business can outsource
activities and/or have them done by local companies or
chain transportation a branch of its own company offshore. See pp.326–329.
❯ Returning goods Part of the supply chain involves an
in the US, in 2009 efficient system for dealing with goods returned by the
consumer. See pp.330–331.
❯ Competitive edge At every stage, the company
compares its performance with its competitors to see
how it can improve. See pp.332–333.
❯ Ethics and the environment Taking responsibility for
avoiding pollution and protecting workers’ rights is part
of the package. See pp.334–335.
How it works of the value chain is that how activities are organized
Harvard Business School professor Michael Porter first and carried out determines a company’s costs and
introduced the concept of a value chain in his book thus its margin (profit). Each link of the chain must
Competitive Advantage. Most organizations have communicate to other departments clearly and
dozens—possibly hundreds—of activities along the promptly. For example, marketing and sales must make
supply chain in the process of converting raw materials accurate sales forecasts and pass them on in time for
(inputs) to products or services (outputs). These can procurement to buy the correct type and quantity of
be classified generally as either primary or support raw materials, who in turn must connect with inbound
activities that all businesses must undertake. The idea logistics so they can organize receipt of goods.
100
Top reasons for outsourcing
Growth and success for many businesses is underpinned
90 by outsourcing, as a number of firms ask: why do it
ourselves, if another firm can do it faster, better, or cheaper?
Organizations recognize that using external capabilities,
80 capacities, knowledge, and skills opens opportunities. Some
firms now focus only on their core business; in a global survey,
this was cited as one of the top reasons for outsourcing.
70
60
50
36% 36%
Lower costs Focus on core business
External provider often benefits Firm can identify and prioritize
40 from economies of scale its primary activity
30
13%
Improve quality
External organization paid
20 for delivering a quality
product or service
10
0%
HOW OPERATIONS AND PRODUCTION WORK
Supply chain 326 327
NEED TO KNOW
❯ Outsourcing Subcontracting work
to another company or buying in
components for a product rather
than manufacturing them
❯ Network structure Tasks or
operations are performed by
another company—which may be
in the same country, a neighboring
90%
of firms
❯ Offshoring Practice of moving
a company’s operating base to a
country, or overseas—within a
network structure of organizations
worldwide say
foreign country where labor costs
are cheaper
outsourcing is
crucial to growth
strategies
10%
Increase speed
to market 4%
External expertise
often brings shorter
Encourage innovation
Frees up internal capability and
1%
lead times Save capital
buys in knowledge
and ideas Frees up capital to invest in
areas for growth
REASON
Offshoring
Moving jobs outside the country where a company is based is called
offshoring. Either the company employs people overseas to perform
some functions, or work is outsourced to a third party overseas.
Examples of offshoring
KEY
CHILE
INDIA: OFFSHORING
WORLD LEADER
ESTONIA
POLAND The Americas and Europe are
IRELAND India’s largest customers and
account for 60 percent and 31
percent, respectively, of India’s IT
and business processing exports.
UKRAINE Services include financial services
CZECH (41 percent), high-tech/telecom
REPUBLIC (20 percent), manufacturing
ROMANIA (17 percent) and retail (8 percent).
RUSSIA
CHINA
PHILIPPINES
INDIA
GHANA
MALAYSIA
$
SINGAPORE
SOUTH AFRICA
INDONESIA
$
Reverse supply chain
Supply chain takes a product to a customer. Reverse supply chain is
the series of activities it takes to retrieve an unwanted or used product
from a customer and dispose of it, recycle, or resell it.
Reverse logistics
The cost to companies of reverse supply is enormous.
For example, in the US, statistics from the Reverse
Logistics Association suggest that the annual volume of
consumer returns is estimated to cost $150–200 billion.
This represents about 0.7 percent of gross national
product (GNP) and 6 percent of the US’s total annual Companies may have processes in place to
retail sales of $3.5 trillion. collect used or unwanted items, whether
from the customer or a retailer.
CUSTOMER RETURNS
US retailers Sears and JCPenney were the first
stores to allow consumers to return goods with
no penalty. This pioneering move in the late
19th century encouraged people to shop with them
and helped build a loyal following. British retailer
Marks & Spencer at one time had the most lenient
returns policy in the retail word—until 2005 they
had no time limit on returns, as long as the
customer could produce a receipt.
$
Manage disposal
HOW OPERATIONS AND PRODUCTION WORK
Supply chain 330 331
NEED TO KNOW
❯ Electronic waste (e-waste)
Electrical or electronic devices
that are unwanted, do not work,
32%
of an item’s original product
or are obsolete
❯ Warehousing Administrative value could be reclaimed
and physical functions necessary
for storage of goods, either for as a result of a well-managed
selling or retrieval
reverse logistics system
Transport Receive
Items and components are sorted and Items are carefully checked on return.
separated, ready for reselling, recycling, If they are to be resold, they must be in
or disposal. pristine condition.
Sort Inspect
Benchmarking
Businesses use benchmarking to improve efficiency by comparing
their performance with that of other organizations. The goal is to
identify and learn from best practices within or outside the industry.
bu
pa
ild
Com
energy an eplaces l
itors dm any r igh
on p ti
m
m
Co
ng
on
ny
ey
Monitor value
Compa
saved
rg
s’
r’
o
tito
en
y-
yl
ef fi
Compan
erg
Compe
Analyze differences
cient
y use
C02
or gaps
It sees that a comparable
company has a much lower C02
carbon footprint.
nergy au
ut e dit
so o
ie
fo
rr
ca
wn
building
How it works
For a business, CSR goes further than aiming to be
compliant with national or international regulations,
managing risks, or corporate philanthropy—it has
to be an integral part of every aspect of operations,
helping to create a sustainable business. A company
still has to be competitive and profitable, but
must avoid making decisions merely for short-
Community
term gain. Instead, it has to consider the future Housing; healthcare;
impact on society, the environment, and a wide infrastructure; partnering with
range of stakeholders. Companies now report local institutions; local supplier
annually on how they have met their CSR and are initiatives; education; training;
benchmarked and ranked against competitors. local employment
97%
of UK FTSE 100
companies Environment
reported on Company’s carbon footprint,
including recycling; water and
CSR in 2011 waste management; energy use;
transportation
HOW OPERATIONS AND PRODUCTION WORK
Supply chain 334 335
Workforce
Workplace safety, health, and
well-being; diversity; equal
opportunities; learning and
development; ethical policies Suppliers
and practices Fair trade, supply-chain ethics,
and sustainability (including use
of child labor); code of conduct;
transportation policies
CSR
stakeholders
A number of different
business areas have to be
considered in assessing a
company’s CSR, from how
it affects people working in
and for the company to
wider environmental and
community implications. Operations
Ethical trading including marketing
practices and pricing; managing
customers; financial reporting;
policies; values
CASE STUDY
Fairtrade International
Many consumers expect the companies they buy their
latte from to uphold ethical practices. A US campaign in
2000 pressurized Starbucks to serve Fairtrade coffee.
The public wanted to understand the coffee giant’s
supply chain as there was concern for the livelihoods of
coffee farmers, many of whom are indigenous people.
Fairtrade International ensures that coffee farmers
receive a fair price for their crop, plus a premium that is
invested in improving farming practices. Coffee was one
of the first products to carry the Fairtrade Mark.
How companies work
Businesses in the US are registered in the state in which they are domiciled.
Most states and the federal government recognize four business structures:
sole proprietorship; partnership; corporation; and nonprofit corporation.
The First Amendment to the US Constitution restricts Individual states can set marketing and advertising
the government’s ability to limit or inhibit public rules, particularly for highly regulated industries like
speech or communication. However, courts over the health care, financial services, and real estate.
years have ruled that commercial speech is subject At the state level, the Better Business Bureau accepts
to less protection than noncommercial speech. and responds to complaints regarding companies doing
The Federal Trade Commission (FTC) was business within state jurisdictions.
established in 1914 through the Federal Trade
Commission Act. Much of the FTC’s work involves In Canada
enforcing truth-in-advertising regulations, a legislative Freedom of speech and expression in Canada is
rubric that requires ads to be truthful, not misleading, protected by Section Two of the Canadian Charter
and backed by scientific data if appropriate. In a case of Rights and Freedoms. As is the case in the US,
of suspected false advertising, the FTC can sue the commercial speech is afforded less protection than
perpetrator in federal court to obtain a cease-and- political or other types of expression. Still, the Charter
desist order, freeze assets, and obtain recompense places numerous limitations on the federal and
for victims. A bill pending in Congress at the time of provincial governments’ ability to abridge marketing
writing, the Truth In Advertising Act of 2014, would and advertising communications. For example,
prevent marketers from using digital tools such as Canada’s Supreme Court in Ford v. Quebec (1988)
Adobe Photoshop to alter the appearance of models’ struck down a Quebec law that required all advertising
bodies and faces in ads. signs to be in French.
The FTC also enforces legislation aimed at electronic Commercial speech in Canada is also governed by
marketing communications, such as email campaigns the Consumer Packaging and Labelling Act (1985). The
and telemarketing. For example, the Commission can law prohibits the use of misleading ads and claims on
file suit against agencies suspected of violating the consumer goods.
National Do Not Call Registry. Telemarketers are
forbidden from calling consumers who have entered Data protection
their numbers in the registry. Similarly, the FTC Unlike Europe, with its centralized Data Protection
enforces the CAN-SPAM Act of 2003, which requires Directive, the US does not have a single, overarching
marketers to give consumers a means to opt out of law on data protection. Rather, Congress has passed
receiving future messages. a series of laws that together form a framework
The Federal Communications Commission (FCC) around the safeguarding of consumers’ privacy and
also has some authority to regulate commercial speech. information. Many of these rules are directed at
For instance, the FCC enforces the CALM ACT of particular industries. For example, the Department
2012, which stipulates that broadcasters and cable of Health and Human Services enforces the Health
companies must air commercials at the same volume Insurance Portability and Accountability Act of 1996
as regular programming. (HIPAA). The Act dictates the administrative, physical,
US-SPECIFIC INFORMATION
How sales and marketing work 340 341
Also known as the Public Company Accounting Reform Standards and quality control
and Investor Protection Act, the Sarbanes-Oxley Act of In the US, numerous independent standards
2002 (SOX) was passed by Congress in the wake of organizations play a role in ensuring adherence
several high-profile corporate accounting scandals— to standards and quality control in various industries,
most notably at Tyco International, WorldCom, Enron, including manufacturing, services, and health care.
and Enron’s auditor, Arthur Andersen. Many of these standards are promulgated by the
SOX established the Public Company Accounting International Organization for Standardization (ISO),
Oversight Board (PCAOB), which regulates auditing of a nongovernmental organization based in Geneva,
corporate financial statements. It prohibits auditing Switzerland. ISO 9000 sets out eight principles
firms from operating consulting businesses and for achieving quality control and operational
stipulates that a company may not engage an auditor consistency. ISO 9001 establishes formal processes
if certain members of senior management worked for that companies must adhere to, including the
that company within the prior year. establishment of formal quality-control committees,
SOX requires Chief Executive Officers and Chief to achieve the designation. ISO 3100 stipulates
Financial Officers to sign and attest to the veracity of procedures for controlling and managing risk,
their company’s financial statements. Board audit while ISO 22,000 concerns food safety.
committees must have at least one independent director. There are other, privately sponsored quality-
In addition to government oversight, the auditing control initiatives in which many large US companies
profession has stepped up self-regulation in the wake participate. Beyond ISO, one of the most widely
of the financial scandals. The American Institute of adhered to is the Six Sigma program, which was
Certified Public Accountants (AICPA) has in recent developed by Motorola and widely deployed by
years issued several key Statements on Auditing General Electric under former CEO Jack Welch.
Standards (SAS). SAS 70 sets audit standards for the Six Sigma seeks to build processes aimed at removing
services industry, SAS 85 requires auditors to obtain defects from the manufacturing process.
written representations from management, and SAS 99
sets out steps to be taken to detect material Health, safety, and the environment
misstatement and accounting fraud. Companies operating in the US are expected to operate
in a socially responsible manner that attempts to
In Canada minimize environmental impact while protecting
Businesses in Canada are governed by the Competition worker health and safety. The federal Environmental
Act. The Act prohibits misleading advertising and Protection Agency (EPA) has broad authority to
marketing practices, and requires truthful statements interpret, apply, and enforce federal laws concerning
concerning warranties, guarantees, and prices. It environmental impact. The EPA regulates greenhouse
enables wronged parties to sue defendants for fraud gas emissions, estuarial runoff, and wetlands
in civil court, usually at the provincial level. protection, among other things.
US-SPECIFIC INFORMATION
How operations and production work 342 343
B
7-Eleven 23 burn rate 30
360-degree feedback 85 business accelerators and
360-view customer profile 261 incubators 38–39
B2B lead generation 237 business analytics 250–51
A
Baby Boomers 194 business angels 35, 36–37
back-up plan 33 business cultures 64–65
balance day adjustment 103 business development 232–45
A/B testing (mail marketing) 216 balance sheets 116–19 business goals 78–79
absorption costing 142 analysis 118–19 business intelligence software 248–49
accounting see financial accounting current assets 138 business launch 27
acid-test ratio 149 equation 116 business ownership 12–25
acquisition of company 31, 41 balanced scorecard 85, 147 business plans 32–33
ACSI (American customer satisfaction Bank of China 161 business process reengineering
index) 293 bank line of credit 34, 133, 158–59 (BPR) 67
actionable metrics 253 Barings Bank 153 business-format franchise 23
ACW (after-call work) 219 batch costing 143 buying and selling businesses 40–49
adaptive customization 279 batch production 274–75
C
advertising bear market 166
advertising to sales ratio (A/S) 213 behavioral targeting 215
ATL (above the line) 191 benchmarking 326–27
BTL (below the line) 190 big data 262–63 call center locations, top five 219
online 214–15 billboard marketing 201, 213 call to action (CTA) 239
traditional offline 212–13 blogging 224–27, 228–29 callable bond 172
agents, selling through 188–89 board of directors 52–55 CAN-SPAM Act 267
agile business 74 board members, choosing 19 Canon 298
agile production 296–97 disclosures 107 capacity management 314–15
aging schedule 135 body language in different cultures 97 capital investment and lump sums
Agricultural Bank of China 161 BOFU (bottom of funnel marketing) 220 132
AHT (average handling time) 219 bonds 170–73 capital markets and securities 170–73
AIDA (Attention, Interest, Desire, book value 124, 150 capital and reserves 117
Action) 237 bookkeeping 102–03 capital structure evaluation 155
Alibaba Group 161 Boots 49 cascading 76
Amazon 26 bootstrapping 14 cash conversion 135
amortization and depletion 128–29 botnet virus 215 cash cows 185
annual report 100, 104–05, 106, 109 BP (British Petroleum) 62–63 cash flow 132–35
Apache Hadoop software 263 branding and rebranding 234–35 corporate failure signs 151
Apple 20, 304, 306, 315 brand loyalty 240, 259 and fraud 152, 153
appraisal see staff evaluation personal 181 gap 135
HOW BUSINESS WORKS
Index 344 345
D
management 134–35 corporate success 150
statement 120–21 corporation tax 106
see also cost accounting; financial corporations 16–17
accounting cosmetic customization 279 data
CEO (chief executive officer) 53, 54, cost accounting 130–43 data to decisions transformation 247
55, 56, 57 see also cash flow; financial mining 153, 249, 251, 257
chamber of commerce 25 accounting quality (DQ) 248
channel margin 189 cost per lead (CPL) 237 visualization 251
charitable donations 107 cost per thousand (CPT) 213 warehousing 256–57
charity 25 cost per touch (lead conversion) 238 debt
chart of accounts 103 cost-plus pricing 142 bad 102
checkout technology 255 costs, fixed vs. variable 140–41 bonds as debt investments 171–72
children’s marketing 266–67 costs and pricing strategy 33 and business failures 14
Chrysler 59 credit and creditors 36, 109, 117, capital structure evaluation 155
churn rate 204 119, 156 cash-flow reconciliation 120
Cisco 72 CRM (customer relationship corporate failure signs 151
cleaning (direct mail) 216 management) 264–265 debtor categories 119
clickstream 215 C-suite 54 factoring 158–59
cloaking 231 crowdfunding 34, 35, 36 gearing ratio 174–75
cloud services 263, 264 current assets 117 loan interest 115
Coach 44 current ratio 149 loan note 158
Coca-Cola 193, 293, 306 customer loan percentage payment and
cold calling 211, 218 acquisition cost (CAC) 241 amortization 128
collaborative customization 279 behavior 194–95, 258, 259 ratio 149
communication, art of 92, 178 capital 244 repayments 132, 133
company hierarchy 56–59 churn rate 204 utility company affordability 120
company shares 164–65 complaints 240 decentralization 67, 74
comparative claims regulation 266–67 consumer data collection decision simplicity (consumers) 204
competitive product positioning 182 254–55 defect measurement 320–21
competitor analysis 33 customer relationship management defensive merger 43
compliance regulation 266–67 (CRM) 264–65 deferred income 114
conglomerate 46 customer returns 330–31 deferred ordinary shares 165
conservatism 113 data regulation 266–67 delayed payment 156
consolidated financial statements 105 decision simplicity 204 deleverage 175
construction industry safety expectations, and quality 308 Dell 279, 291, 321
procedures 319 feedback surveys 107, 240–41, demand-pull production 290–91
consumer see customer 265 Deming Prize 309
content marketing 220–21 lifetime value (CLV) 243 departmental hierarchy 68–69
continuous production 280–81 loyalty programs 240–41, 255, 260, depletion and amortization 128–29
contract costing 143 261 depreciation 124–27
control, chain of 312–21 personalized product design calculation 115, 118, 126–27
control systems 64 278–79 Deutsche Telekom AG 161
cooperatives 24 profiling 258–61 Dia 23
corporate bonds 173 retention 240–41 differential costing 142
corporate failure signs 151 segmentation 264 digital asset management (DAM) 253
corporate social responsibility (CSR) selling direct to 188–89 digital dashboard 249
334–35 service 146, 190, 265 digital marketing 202–03
environmental accounting 122–23 “sticky” customers 204 direct costs 142
corporate structure 66–77 uptake 185 direct mail marketing 216–17
INDEX
direct response (DR) marketing 209 exabyte 263 flat lattice structure 76
direct taxes 106 expansion funding 157 flipping 165
directors 18, 19, 50, 53, 55, 115 Expedia 44 flow production 276–77
disbursement quota 25 expenses 115, 140, 152 flyers 201, 210
disclosure (blogging) 225 extension strategy 185 Ford 294–95
disruptive innovation 305 external financing 158–59 forecasting 150–51
diversification 42 extrinsic motivation 86 forensic accounting see fraud, tracking
divestitures 44–45 franchise disclosure documents
dividends see shares and dividends
F
(FDD) 22
divisional structure 66, 70–71 franchises 22–23
doing business as (DBA) 16 fraternal organization 24
donations 133 face-to-face marketing 200, 205, 221, fraud, tracking 152–53
double-entry bookkeeping 102, 131 260 frequency marketing 209
due diligence 41, 43 Facebook 161, 287 frugal innovation 305
Dunkin’ Donuts 23 factoring 34, 135, 159 full cost pricing 142
factors of production 271 full disclosure principle 112
E
fair trade 335 functional structure 68–69
fast-moving consumer goods funding 154–63
(FMCGs) 181 external financing 158–59
earnout 48 finance leases 159 flotation 160–63
EBITDA to sales ratio 148 financing sources 154–75 internal financing 156–57
eco-innovation 305 financial accounting 110–29 start-ups 34–37
economic entity assumption 112 accounting cycle 102–03
G
economic life 124 accounts payable and receivable
economies of scale 286–87 135, 148
mergers see mergers accounts receivable turnover
economy pricing 186 ratio 148 GAAP (Generally Accepted
effective capacity 315 conventions 31 Accounting Principles) 113
efficiency 148, 150, 326–27 international standards 112–13 gearing ratio and financial risk
electronic waste (e-waste) 331 KPIs 146 174–75
ELT (extract, load, transform) 256 see also cash flow; cost accounting Generation X and Generation Y
email direct mail marketing 216–17 financial forecasts 33 194
regulation 266–67 financial management 100–09 General Electric (GE) 60, 320, 321
employee relations 92–93 financial performance measurement general ledger 103
employment laws 80 144–53 General Motors (GM) 59, 161
endorsement regulation 266–67 financial ratios 148–49 geographic pricing 187
Enel SpA 161 financial report types 100 globalization 20, 105
engagement marketing 204–05 financial reporting 100–29 Global Management Accounting
Enron 153 financial risk and gearing ratio 174–75 Principle (GMAP) 134
enterprise portal 30 financial statements 104–09 GNC 23
environmental accounting 122–23 deconstructing 106–07 going concern assumption 112, 131
environmental concerns, KPIs 147 fraud, tracking 152–53 going public 160–63
environmental, social and gorporate for users 108–09 goodwill 129
criteria (ESG) 60–61 finished goods inventory 139 Google 26, 79, 304
equipment purchase 133 first in, first out (FIFO) 317 government bonds 173
equity 149, 150, 155, 171, 174 FIVA (framework of intangible value governmental accounting 101
ERP (enterprise resource planning) 264 areas) 245 grants 35, 133
Eurobond 158 fixed/tangible assets 117–19, 124, 125, green taxes 106
events marketing 200, 205, 210 133, 138–39, 153 greenhouse gas emissions 123
HOW BUSINESS WORKS
Index 346 347
H
interest rates and dividends 169 last in, first out (LIFO) 317
intermediaries, selling through lateral integration 47
188–89 lateral structure 76
haptic technology 207 internal financing 156–57 lead conversion 238–39
Hearst Corporation 18 internal markets 209 lead generation 236–37
Hertz 279 internal start-ups 26 lead nurturing 238
Hewlett Packard (HP) 15 international accounting lead scoring 238
hire-purchase agreements 159 standards 112–13 leadership strategy and styles 88–89
historic cost principle 113, 131 internet marketing 202–03 leadership for team building 90–91
holding company 105 interstitials (advertising) 215 leadership/management differences 284
Honda 308 inventory 316–17 lean production 288–89
horizontal integration 46–47 inventory and assets 138–39 lean start-up 28
human capital 244 inventory reduction 157 leasing costs 115
human resources 78–97 inventory turnover ratio 148 legally imposed control 313
cycle 80–81 investment returns 120, 121 LEGO 18
KPIs 147 investors 35 Lehman Brothers 100
human rights, and environment 123 financial ratios warning 149 letter of intent 45
hybrid processes 282–83 invoice discounting 158–59 leverage 64
ISO 9000 309 limited companies 16–17
I
IT and marketing 252–53 line position 58
line relationship 69
J
LinkedIn 83
IBM 72 liquidity ratios 149
IKEA 18 listed company 163
immediate capacity 315 JCPenney 330 loans see debt
inbound marketing 220–31 job costing 143 long-tail marketing 198
income and expense statement 114–15 job production 272–73 long-term financing 157–59
incremental budget 137 John Lewis 93 loyads 261
increments 282 Johnsonville Foods 77 loyalty programs 240–41, 255, 260, 261
incubators 38–39 JPMorgan Chase & Co. 153 Lutron 279
indirect costs 142 just-in-time production 290–91
M
indirect taxes 106
K
influence markets 208
information management 246–67
infrastructure assets 118–19 MACRS (Modified Accelerated Cost
initial public offering (IPO) 160–63 kaizen improvement system 298–99 Recovery System) 124
innovation and invention 304–05 Kanban cards 288, 291 McDonald’s 20, 23, 70, 292
intangible assets key account management (KAM) 209 magazine marketing 201, 213
amortization and depletion 128–29 key performance indicators management 284–99
inventory 139 (KPIs) 146–47 management, and fraud 153
intangible capital 244 KFC 23 management accounting 130–31
integrated marketing knowledge capital scorecard 245 management buy-ins and
communication 190 buy-outs 48–49
L
integration, vertical vs. management shares 164
horizontal 46–47 management/cost accounting 130–43
mergers and acquisitions 42–43 management/leadership differences 284
intellectual capital 244–45 labor costs 140 managing capacity 314–15
interactive marketing 191 labor practices, and environment 123 manpower costs 115
interest cover ratio 175 large cap listed company 163 manufacturing franchise 22
INDEX
N P
manufacturing and production 270–83
MarCom (marketing
communication) 190
mark-up comparison 187 naming a company 13, 28 Pacman strategy 43
market correction 166 national employment laws 80 Panda and Penguin (Google) 231
market extension 46 negative-option billing 266–67 paradigm 64
market penetration pricing 187 negotiating strategy 96–97 partnerships 14–15
market research 192–93 net assets 117, 118 patent 129
market segmentation 194–95 net profit margin ratio 149 patent trolls 26
market share 42 Net Promoter Score (NPS®) 293 pattern matching (data) 251
market value of equity 150 network structure 74–75 pay-per-click (PPC) advertising 215
marketing approaches 196–209 networking 83, 201 peer-to-peer (P2P) lending 34
marketing and IT 252–53 new product development 302–03 Pemsel test 25
marketing mix 178–95 newspaper marketing 201, 213 performance management 81
marketing regulations 266–67 niche marketing 198–99 performance measurement 144–47
marketing technologist 253 Nike 20–21 and budgets 137
Marks & Spencer 330 nongovernmental organization perpetual bond 172
Mars 18, 279 (NGO) 25 person culture 65
MarTech conference 253 nonprofit organizations 24–25 personal branding 181
mass customization 278–79 NTT Group 161 personal selling 190
mass marketing 198–99 NTUC FairPrice 309 personal warranty 48
matching principle 113 petabyte 263
O
materiality principle 113 philanthropic sector 25
matrix guardian 77 phishing 267
matrix structure 72–73 Pizza Hut 23, 324
media engagement 221 OAO Rosneft 161 place and distribution channels 188–89
members (shareholders) 16 offshoring 328–29 planning, programming, and
merge/purge software 216 Ohlson O score 151 budgeting systems (PPBS) 137
mergers and acquisitions 42–43 OLAP (online analytical processing) platform corporation 21
integration, vertical vs. cubes 249, 257 podcasting/vidcasting 226–27
horizontal 46–47 oligopoly 107 point of sale software 255
Merrill Lynch 70 OLTP tool (online transaction Ponzi/pyramid scheme 153
metadata 231 processing) 256 portfolio analysis 185
microfranchising 22 omni-channel customer 261 potential capacity 315
micropreneur 30 online advertising 211, 214–15, 260 power culture 64
mid cap listed company 163 online lead conversion 239 predictive analytics 250, 251
millennials 194 online value chain 325 preference shares 165
mobcast 226 operating profit 114–15 premium pricing 187
mobile technology 215, 255 operations 33, 121, 147 price and pricing strategies 186–87
Model Business Corporation Act 54 ordinary shares 165 price to earnings ratio 149
MOFU (middle of funnel marketing) 220 outbound marketing 210–19 primary market 170
Mondelez 44 outbound vs. inbound marketing private companies 18–19
monetary unit assumption 112 222–23 private foundation 24
monopoly 47, 107 outsourcing 326–27 private corporation 17
motivation and rewards 86–87 overheads 132 private placing shares 165
Motorola 321 overleveraged 175 process costing 143
movie advertising 213 overtime pay 51 Procter & Gamble (P&G) 72
multinationals 20–21 overtrading 151 product
mutual organization 24–25 owned media 237 costing 142–43
HOW BUSINESS WORKS
Index 348 349
S
push/pull strategy 189, 220, 222 Six Sigma control 320–21
PwC 18, 145 skimming pricing 186
slice and dice data 248
Q
salaries and wages 115, 132, 152 small cap listed company 163
sales small and medium-sized enterprises
and fraud 152, 153 (SMEs) 38
quality control 318–19 KPIs 146 social economic scale 261
quality management 308–09 pipeline 238 social enterprise 25
total quality management 292–93 pitch 239 social graph 229
quality product positioning 182 promotion 191, 205 social lead targeting 211
questionable costs 141 revenue 132 social media marketing 228–29
tracking 249 and benchmarking 327
R
sales tax 106 big data 262
salvage/scrap/residual value 124 and branding 234
search algorithm 231 see also blogging
radio marketing 201, 210, 213 search engine optimization (SEO) social media monitoring 229
raising money see funding 230–31 sole proprietors 14–15
raw data 251 Sears 330 solvency ratios 149
INDEX
T V
spam use regulation 266–67
span of control 58
special offers regulation 266–67
spinoffs 44, 45 tangible/fixed assets 117–19, 124, valuation of company 18, 19
splog 225 125, 133, 138–39, 153 value 186
spreadsheets 249 task culture 65 Value Added Tax (VAT) 106
staff evaluation 84–85 tax accounting 114–15, 120 value chain 324–25
performance–management cycle 64 tax payments 106, 109, 115, 119, 120, value product positioning 182
staff position 58 133, 169 value-stream mapping 288
stakeholders 60–63 team-based structure 76–77 vanity metrics 253
and corporate social responsibility team-building leadership 90–91 venture capitalists (VCs) 35, 37
(CSR) 335 technology, mass customization vidcasting 226–27
and financial statements 108–09 278–79 Virgin 15
and share value 62 telemarketing 218–19 virtual business incubator 39
Standard Oil 15 regulation 266–67 Visa 161
star schema data 248 terabyte 263
W
Starbucks 72, 208, 335 TERM (technology-enabled
start-up pivot 28 relationship management) 264
start-ups 26–39 term loan 34, 158
concept development 28–29 ticker symbols 19 wages and salaries 107, 132
funding 34–37 time-based management 294–95 Walt Disney 292–93
incubators see business accelerators TOFU (top of funnel marketing) 220 warehousing 331
and incubators total quality management 292–93 warrant 172
types 30–31 quality management 308–09 waste elimination 288–89
statistics 109, 251 Toyota 288–89, 290, 298, 308 Watson Wyatt index 245
“sticky” customers 204 tracking stock 45 Wessex Water 107, 109, 114–15,
stock exchange listing 160–61, 162 trade event marketing 200, 205, 210 117–19, 122–23
stock exchanges, world’s top 162 traditional marketing 200–02 wholesalers, selling through 188–89
stock-keeping unit (SKU) 317 traditional offline advertising who’s who 50–65
straight-line method of depreciation 212–13 Wikispeed 287
124–25 transaction marketing 209 windfalls 133
strategic capital 244 transnational corporation 21 WIP (work in progress) 317
structural capital 245 transparent customization 279 WOM (word-of-mouth) marketing 204
subsidiary company 105 trending product claims 302 working capital/total assets 150
Subway 23 trial balance 103 WorldCom 153
success metrics (marketing) 242 tunneling 152 Wyndham Hotel Group 23
sunk costs 141 turnover 114–15
X
super angels 35 TV marketing 200, 210, 213
supplier markets 208 TVR (television rating point) 213
suppliers’ payments 133
U
supply chain 322–35 Xerox 70, 71
surplus management 135
Z
sustainability, KPIs 147
sustainable investment 106 undertrading 151
swap ratio 43 underwriters 162
sweepstakes and contests unquoted/unlisted company 19 Z-score models, forecasting with 150
regulation 266–67 useful/economic life 124 Zappos 77
SWOT analysis 33 USP (unique selling point) 33 zero-based budget 137
synergy 47 utility company, debt affordability 120 Zeta analysis 151
HOW BUSINESS WORKS
Acknowledgments 350 351
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