Introduction to Personal Selling

Personal selling is a direct communication process of selling. It is the

only component of a marketing promotional mix that includes two-way
communications in which a sales representative tries to assist or
persuade prospective buyers to purchase his company’s merchandise. .
It involves communication of a customized message to a prospective
customer by a sales man, usually in the form of face-to-face
communication, direct mail correspondence, or a telephonic
conversation.

Objectives of Personal Selling

 identifying prospects
 persuading prospects to buy
 Making customers satisfied
 Building strong customer relationship.
Along with these above-mentioned goals of personal selling, the selling
organizations do have other short term or long term objectives
depending upon the company's promotional objectives, such as
 To perform the complete selling jobs
The main objective of personal selling is to convince customers to make
a purchase, acting as the only element in the sales promotion. It
facilitates creating interest in the product by building complete
awareness of product. The interaction with the prospects make the
seller realize the peculiar interest and demand of the consumer and
that enables him to persuade the customer to respond by buying.
 To discover and identify new prospective targets
Along with maintaining relationship with existing customers, another
objective of personal selling can be to identify new targets by
understanding their needs and decision processes.
 To ensure and build customer’s cooperation
It is the task of personal selling to keep existing and prospective
customers informed about the modifications in existing product,
educate them about changes in the product line for maintaining their
interest in current stock and promoting the existing and new product
line by keeping customers satisfied and loyal to the company’s
products.
 To guide customers in making their buying decision
It also comes under the objectives of personal selling to providing
technical advice and assistance to customers in case of sophisticated
and digitalized products and where goods are generally designed on the
basis of target's specifications to make their buying decision rationally
and well informed.

 Build long-term relationships with customers

It is the responsibility of sale representatives to build long-term
relationships with customers. A strong relationship can only be built by
maintaining regular communication with a customer. This can be done
by having meeting with customers on a regular basis, discussing the
company’s products and giving them the assurance of delivering the
best and make them feel important.
Apprise customers of modifications and latest innovations
the sellers also inform the existing customers about the company's
products, the latest technological up gradations and modifications in
the product thereby strengthening customers’ knowledge of what the
company has to offer. And in the process they are made the new
prospects. This happens because of the strong relationships built
earlier.

Nature of Personal Selling

It is both science and art. It is a science based on human psychology.
The psychology of the customers has to be studied to gain knowledge
about their behavior.
The salesmen must have knowledge about the different parameters of
consumer behavior and should also possess a systematic knowledge of
goods he has to sell.
It is a science since salesman should follow certain basic principles,
techniques and approaches for concluding a sale and satisfying the
customer.

Personal Selling Evolution Stages

Advantages of Personal Selling
1. Facilitates two-way interactions
The ability to interact with the receiver allows the sender to determine
the impact of the message. Problems in comprehension or objections
can be resolved with in depth discussion of certain selling points
immediately.
2. Tailors the message
Because of the direct communication, messages can be designed as per
an individual consumer. This more precise and tailored message
content lets the seller address the specific customers’ concerns,
problems and needs. The sales representatives can also identify when
to start with the next selling point complete the sale or close the deal.
3. Lack of distraction
In many personal selling situations, an individual presentation is
conducted so the buyer is generally paying close attention to the sales
messages as a result of which distractions are minimized.
4. Assistance in the buying decision process
through interactive communication and relationship marketing, the
seller can assist buyers in his buying decision.
5. Source of research information
In a well-integrated and effective marketing department the sales
representatives can be the “eyes and ears” of an organization. Sales
representative can gather information about available competitors’
products and services, promotional, pricing strategies, and so on.

Limitations of Personal Selling

 High cost
it is time and money consuming as approaching to each and every
target individually requires lot of time and efforts on the part of the
salesman. And to cover huge targets, the employment and training of
large numbers of salesman are required which may prove to be very
expensive in case of mass communication.:
 Limited coverage
Personal selling cannot cover large number of targets as covered by
other elements of promotional plans like advertising. It is suitable for
small target groups.
 Inconsistent message
As we discussed that flexibility of tailoring the message as per the
target’s demand is the advantage of personal selling but sometimes it
bring inconsistency in the messages designed by sales managers. They
design messages keeping in mind some communication objective like
what is to be disclosed to targets but sometimes untrained salesman
can alter the message to communicate something which may not be
ethical or in the interest of the firm.

Types of Selling Situations

1. Creative selling
it involves identifying customer’s needs and way to satisfy them. It is a
process of initiating sale with prospecting customers. Sales
Representative in this group is generally known as Order–Getters.
Order getters identify those buyers with whom they have not involved
in any previous sale purchase transaction. Creative selling is the most
challenging selling situation, as this job requires the maximum skills and
preparations.
A salesperson must be able to demonstrate how his or her firm's
available merchandise will contribute to the customer’s well being and
satisfaction. In addition to approach targeted buyers, the salesperson
must assess the situation, identify the requirements to be met, present
the capabilities of available product or services for satisfying these
needs.
2. Order taking
once the initial level of sale taken place, the order taker may replace
creative seller, whose role is much more casual. It may involve a simple
re buy- that is, the order does not change much. When a slight change
is considered, the order taker may be involved in a modified re buy,
which may require some creative selling.
3. Missionary sales representative
The missionary representative is essentially a support role. While
performing many of the tasks assumed in creative selling, the
missionary representative may not actually take the order. These
representatives support and assist the above mentioned sales
representatives in their actual selling done process. He introduces new
products, promotional ideas and new programs but does not take
actual order as it is to be taken by the company’s order taker or by a
distributor representing the company’s products or services.

Functions of Salesman
1. To attract customers for the business
a salesperson is supposed to attract customers to buy the firm’s
merchandizes. This will lead to increase in sale. New customers may be
attracted through proper interaction or by providing full information
about the product by distribution of samples, displays of products etc.
2. To satisfy the needs of the consumers
Modern marketing aims to recognize and meet the needs of the
customers. He has to study and identify the demand of targets before
offering them any goods or services by asking them directly about their
expectations.
3. To generate revenue
The sale personnel are largely responsible for executing the firm’s
marketing plan of actions in the field to generate the revenues that are
to be managed by the financial people and used by the production
department. It is the main responsibility of a salesman to generate
revenue for its company by winning trust of large number of consumers
for his products and by converting prospective buyers into loyal
customers of his company. Generally they are assigned specific targets
to achieve and they have to persuade prospects in such a manner that
those targets can be achieved.

4. To generate adequate profits for the business

He is also responsible to generate sufficient profits as a result of sale of
value addition products to the target consumers as it is needed for the
growth and survival of the firm.
5. To earn goodwill for the business
He also attempts to develop the public image of firm in the market. He
tries to raise the goodwill of the business by initiating image building
activities such as sales promotion, true advertisement, high quality,
reasonable price, customer’s services etc.
6. Salespersons represent their company to customers and society in
general

Salespeople are primarily responsible for providing information on

customers’ needs and problems to the various departments in their
own firms. Opinions of the firm and its products are developed on the
basis of impressions made by these people in their work and outside
activities.
Consumer behavior and Consumer buying decision process

Introduction
Study of consumer behavior is very important because intentionally or
unintentionally we are consumer. With the philosophy of marketing
production trend to marketing trend of consumer behavior has been
important. In marketing some question create that as a marketer we
should pay attention to them and provide a reasonable answer for
them. One of the following questions is: What is the purpose of
consumer behavior? Considering that a marketer seeking to identify the
needs and demands of our customers and do the appropriate action to
meet those needs and desires, should understand Consumer behavior
as well. In this study, the researcher wants to explain his view according
to previous studies briefly in consumer behavior.

Definition
Consumer behavior include mental activity, emotional and physical that
people use during selection, purchase, use and dispose of products and
services that satisfy their needs and desires.

Key concepts of consumer behavior

1-Consumer behavior are to meet the needs and demands of him.
Behavior is a tool to achieve objectives and target consumer derives
from his needs and desires.
2-Consumer behavior includes many activities: All consumers have
differences in terms of thoughts, feelings, and decisions and ... With
each other. Marketers must pay attention to the activities of
consumers, some consumers activities are: See this advertisement,
purchase decision, the decision about how to pay (cash, credit) and...
3-Consumer behavior, including the selection, purchase and
consumption of goods and services that include elimination of three
steps before buying activities, purchasing activities, activities after
purchase.
4-Consumers in different time can play each of the three roles affective,
buyers and consumer. 5-Consumer behavior is
influenced by many external factors such as culture, subculture, and
social classes ... Located. These effects can be short, medium or long
term. 6-
Because people have different desires and needs, so their behavior is
different And the difference consumer behavior make predict
consumer behavior more difficult, to resolve this problem can
categories the market.

Consumer buying decision process

Consumers to purchase some goods don’t need to pass during all stages
of the buying decision. However, some purchases are so important that
the consumer is forced to do all these steps carefully and meticulously.
1) Identify the problem

first stage of the decision-making process is that people can feel the
difference between current and desired situation, so trying to resolve
these differences.

2) Data collection
for solving this problem collects information. This information can be
internal (experiences) and external (family, exhibits, etc.)
3) Assessment Options
After gathering information, the consumer is ready to make a decision.
At this point, he should be able to evaluate different options and
choose products that meet the demands of him.
4) Purchase
this stage is the stage that all marketing activities are the result.
Consumer at this stage, according to the information already obtained,
Select a product that feels satisfy his need and buys it.
5) After purchase behavior
Consumer compare purchased products with ideas, products,
competitors, perceptions and expectations of the product and two
satisfaction and dissatisfaction, which may appear different reasons.
 BB Personal Selling

Definition
A two-way flow of communication between a buyer and seller, often in
a face-to-face encounter, designed to influence a person’s or group’s
purchase decision.

Sales management involves

planning the selling program and implementing and controlling the
personal selling effort of the firm.

How Salespeople Create Value for Customers

Identify Creative Solutions To Customer Problems.

Ease the Customer Buying Process

Follow--up After the Sale Is Made

Relationship selling
is the practice of building ties to customers based on a salesperson’s
attention and commitment to customer needs over time.

Stages in the Personal Selling Process

Prospecting
Search for and qualify prospects Start of the selling process; prospects
produced through advertising, referrals, and cold canvassing.

Pre approach
Gather information and decide how to approach the prospect.
Information sources include personal observation, other customers,
and own salespeople
Approach
Gain prospect’s attention, stimulate interest, and make transition to
the presentation. First impression is critical; gain attention and interest
through reference to common acquaintances, a referral, or product
demonstration.

Presentation
Begin converting a prospect into a customer by creating a desire for the
product or service Different presentation formats are possible;
however, involving the customer in the product or service through
attention to particular needs is critical; important to deal professionally
and ethnically with prospect skepticism, indifference, or objections.

Close
Obtain a purchase commitment from the prospect and create a
customer. Salesperson asks for the purchase; different approaches
include the trial close and assumptive close.

Follow up
Ensure that the customer is satisfied with the product or service.
Resolve any problems faced by the customer to ensure customer
satisfaction and future sales possibilities.

Techniques for Handling Objections

Acknowledge and convert the objection

Postpone
Agree and neutralize
Set Advantages.
Techniques for Closing

1. Trial close
2. Assumptive close
3. Urgency close

1-Prospecting
is the process of reaching out to potential customers in hopes of finding
new business. Prospecting is often the first part of the sales process
that comes before follow-up communication, lead qualification and
sales activity. Prior to prospecting, sales organizations often purchase
lists of raw sales leads.

Prospecting Tactics
While sales prospecting is routinely associated with cold calling, in
actuality there’s a diverse range of prospecting tactics that inside sales
reps use in order to grow pipeline. Then reps often reach out to
prospects. Cold calling is still widely practiced. However, sales
development reps frequently use emails to initiate contact with new
leads. Reps also frequently reach out to leads multiple times in order to
initiate contact. The best sales development reps are following up with
leads multiple times as it often takes more than 4 contact attempts to
initiate a conversation with a prospect.

Prospecting Tools
Reps sometimes use tools that can help them collect actionable data
about prospective accounts. Then, reps can utilize a series of tools to
boost productivity and help them connect with more prospects.
Some of these tools may include Local Presence dialers, voicemail
automation tools, email templates, click-to-call and prospecting metrics
dashboards.
2-Pre approach
Pre-approach’ means a salesman’ this preparation to approach a
prospect that he can succeed in turning into a customer. At this stage,
the salesman collects information about his different prospects with
reference to their age, education, social status, usual habits, likes,
dislikes, buying practices, etc. These additional information help a
salesman to plan his ‘sales talk’, when he actually approaches the
prospects. To put it in other words, the preparation to meet the
prospect is known as “Pre-approach”. By pre-approach, the salesman
tries to make successful presentation of his goods and services before
the prospect.

Objectives of pre-approach
(i) To provide additional information
Prospecting provides salesman only the names and addresses of
prospects. But this information may not be sufficient to convert a
prospect into customer. The salesman, at pre-approach stage, requires
some further information about the prospect- his likes and dislikes,
habits, types, economic status, behavior, nature, etc. As a result, it
becomes easier for him to deal with the real potential buyers.
(ii) To select the best approach to meet the prospects
All prospects are not equal in all respects. That is, all prospects cannot
be approached in one and same manner. Their nature are different and
hence need different treatment by salesman. Some are easy to meet;
while others are quite difficult to contact. Direct approach is suitable to
some prospects, while some others prefer indirect treatment.
(iii)To obtain information for planned presentation
Effective sales depend upon effective presentation and demonstration.
Intelligent pre-approach is the pillar of successful presentation. A good
pre-approach furnishes a salesman a clear idea into the buying motives
of the prospects.
(iv) To avoid serious mistakes
By pre-approach, a salesman knows beforehand about the likes,
dislikes, taste and temperaments of the prospects. For instance, some
prospects may not like smoking during sales- interview. This advance
knowledge of prospects helps the salesman to avoid any serious
mistakes during sales talk. If he finds any fault with his pre-approach,
he corrects it immediately to win the hearts of prospects
(v) To meet the prospects with confidence and
enthusiasm
A salesman, who presents his sales-talk without knowing prospect’s
nature and the situation, may commit more mistakes out of fear and
uncertainty. But a salesman armed with all possible information of
customers’ wants and desires to plan his sales campaign intelligently.
Thus person-approach makes a salesman more confident.
(vi) To save time and energy
Time and energy is valuable for all, but these are more valuable for a
salesman. In the absence of pre-approach a salesman may have to
meet both prospects and suspects.
(vii) To be successful in the sales-interview
Pre-approach also helps the salesman to come out successfully in the
interview with the prospect. As we have stated earlier buying is a
mental process, therefore the mind of a customer moves in a definite
direction from attention-interest –conviction-action- during the process
of selling. Any disturbance in this path distracts a customer and he
(customer) finds difficulty in arriving at a conclusion. If the salesman
preplans his approach, he will definitely help the customers in his
buying decision and will be successful in the sales-interview.
3- Approach
Positive, step by step proposition developed by a firm or
a salesperson to win a favorable response from the prospects. Sales
approach is what, in essence, distinguishes a professional from an
amateur.

Different Sales Approaches

Soft Sell
Many customers appreciate the soft sell approach when they just need
some guidance in deciding on a selection. The seller can use gentle
persuasion or suggestion to convince the buyer. Soft sell techniques
include pointing out that many of the items were sold last week,
recommending a certain model that costs less or saying that you
recently bought the same product and are happy with it. No pressure is
used. You state facts and allow the buyer to decide.
Hard Sell
High-pressure tactics often are not well-received by customers.
However, the intimidation in the hard sell might cause some people to
buy a product they don’t really want or need. Hard sellers try to make
customers feel they must buy the product or service right now. The
salesman claims that the product might be gone tomorrow or the
customer has no need to wait because the seller guarantees
satisfaction. The seller tries to make the decision for the customer in a
hard sell. “You can afford it” or “If you don’t buy it now, it won’t be
here later,” the salesperson might say. Many customers are aware of
the hard sell and walk away immediately. The soft sell approach usually
results in more sales, but the hard sell works sometimes.
Consultative Selling
Consultative selling helps in selling technical products or services to
businesses. It might take days or months to close a sale. The seller
builds up a relationship of trust with the buyer, using technical
experience or certification to analyze problems and offer solutions. A
company may agree to have a sales engineer evaluate maintenance
improvements or cost reductions. The salesperson may ask questions
and review the information before making recommendations on
solutions. Retail sales clerks may use consultative selling if they are
knowledgeable about the products they sell, such as jewelry or
electronics. The seller gains the trust of the buyer.
Solution Selling
Buyers might have problems in choosing the right product, whether it’s
finding a unique gift for a special occasion or purchasing a car that fits
their specific needs. Solution selling defines the problem by asking
relevant questions and listening to the customer. Some salespeople
depend on talking to sell, but solution selling involves asking many
questions and listening carefully. Questions can help get to the root of
the customer's problem and give the salesperson a clear idea of what
to sell.
Customer Personality
Some sales techniques focus on understanding the different types of
customers. Friendly types may seem easy to sell to, but they might
hesitate when it comes to decision-making, because they don’t want to
upset anyone. It takes reassuring the customer to make the sale. Other
customers are wary of salespeople. You need to provide a great deal of
information while sticking to the facts to allow them time to consider
buying. Extroverts are enthusiastic, so they can take up too much of
your time. You need to keep your presentation short, but outgoing
types can be easily distracted and slow to buy. Follow up with emails or
phone calls and stress the benefits enthusiastically. Many sales training
courses include understanding customer personalities.
4- Presentation
Whether your customer buys from you or from the competition
depends on how good your presentation is.
Seven strategies to create successful presentation
1. Make the presentation relevant to your prospect
One of the most common mistakes people make when discussing their
product or service is to use a generic presentation. They say the same
thing in every presentation and hope that something in
their presentation will appeal to the prospective customer. I have been
victim to this approach more times than I care to remember having
been subjected to many “canned” PowerPoint presentations.
The discussion of your product or service must be adapted to each
person; modify it to include specific points that are unique to that
particular customer. If you use PowerPoint, place the company’s logo
on your slides and describe how the key slides relate to their situation.
Show exactly how your product or service solves their specific problem.
This means that it is critical to ask your prospect probing questions
before you start talking about your company.
2. Create a connection between your product/service and the
prospect In a presentation to a
prospective client, I prepared a sample of the product they would
eventually use in their program. After a preliminary discussion, I
handed my prospect the item his team would be using on a daily basis –
instead of telling him about the item I placed it in his hands. He could
then see exactly what the finished product would look like and was able
to examine it in detail. He was able to ask questions and see how his
team would use it in their environment.
3. Get to the point
Today’s business people are far too busy to listen to long-winded
discussions. Know what your key points are and learn how to
make them quickly. I remember talking to a sales person who
rambled at great length about his product. After viewing his
product and learning how much it would cost I was prepared to
move ahead with my purchase. Unfortunately, he continued
talking and he almost talked himself out of the sale. Make sure
you know what key points you want to discuss and practice
verbalizing them before you meet with your prospect.
4. Be animated
The majority of sales presentations I have heard have been
boring and unimaginative. If you really want to stand out from the
crowd make sure you demonstrate enthusiasm and energy. Use
voice more effectively and vary your modulation.
5. Use showmanship
In the book, The Sales Advantage, an example is given how a
vending sales person lays a heavy sheet of paper on the floor and
asks his prospect, “If I could show you how that space could
make you some money, would you be interested?” Consider the
impact of this approach compared to the typical approach of
saying something like, “We can help you make more money.”
What can you do to incorporate some form of showmanship into
your presentation?
6. Use a physical demonstration
A friend of mine sells sales training and he often uses the
whiteboard or flipchart in the prospect’s boardroom during his
presentation. Instead of telling his client what he will do, he stands
up and delivers a short presentation. He writes down facts and
figures, draws pictures, and records certain comments and
statements from the discussion. This approach never fails to help
his prospect make a decision.
7. Lastly, believe in your product/service
Without doubt, this is the most critical component of any
presentation. When you discuss solutions, do you become more
animated and energetic? Does your voice display excitement?
Does your body language exhibit your enthusiasm? If not, you
need to change your approach.

5- Close
Sharp Angle Close
When the customer asks for a concession, whether it is price,
delivery or additional features, respond by asking, “If I can do that
for you today, will you sign a purchase order?” This is an
important closing question – if you agree without asking for close,
then the customer has an open door to continue asking for
concessions.
Assumptive Close
If you have an established relationship with the customer and he
respects your judgment, jot down the items he is considering on
an order form as you are discussing his needs. When the timing is
right, put an X on the signature line, hand it to the customer and
say, “Here” Then be quiet.
Emergency close
Trial close
Direct Close
When you have addressed the customer's concerns and you are
confident that she knows the value of your product or service,
then pose the question directly

6- Follow up
1. Say thank you
Some companies send emails. Others say it with a card they
enclose with the invoice. Whatever your method, it’s important to
say thanks after making a sale as part of making it a good
experience for your client. “You’re letting him know he made the
right decision when he bought from you,”

2. Check in
It’s a good strategy to call clients a week or two after the sale and
find out how everything is going. Are they happy with their
purchase? How was the service they received? Do they have any
questions?

3. Keep the lines of communication open

Ask your clients for permission to communicate with them. Then
send helpful information and advice based on their needs and
interests. Focus on high-value content, such as guides, articles or
educational webinars. This is the phase of consolidating the trust
between you and your client.

4. Think second sale

Once trust is established and you are fully aware of your client’s
expectations, the stage is set to go back and offer a
complementary product.

5. Ask for referrals

Happy customers will refer you other customers. When a
recommendation comes from someone who has actually used
your services, it has an extra layer of credibility and trust.
Delighted clients make the best advocates because third party
claims of excellence carry more weight than self-promotion. For
the most part, customers are willing to refer because they know
how important referrals are and people like to help.

A post-sales plan should be a part of every company’s sales and

marketing strategy. Here’s how the follow-up will help you.
 Boost your sales happy customers are more likely to come back
and buy more.
 Increase customer retention Satisfied customers are more loyal.
 Generate customer testimonials and referrals “If you can put a
quote and a name to a client case, you can take that to the bank,”
Galley says.
 Improve your performance Customer feedback will help you
improve your products or fix service problems.
 Innovate by listening to customers’ needs and problems, you are
gathering invaluable intelligence to create new products or
services.
 Differentiate by following up, you’re doing something most
businesses don’t bother with and that sets you apart from the
herd.
 Communication

Communication is a dynamic process through this process we convey a

thought or feeling to someone else.
How it is received depends on a set of events, stimuli that person is
exposed to.
How you say what you say plays an important role in communication.

TOTAL COMMUNICATION PROCESS

Writing
9% Speaking
30%
Reading
16%

Listening
45%
LEVELS OF COMMUNICATION

VERBAL
Intra verbal: intonation of word and sound
Extra verbal: implication of words and phrases, semantics
NON-VERBAL
Gestures
 Postures
Movements
Symbolic
Barriers in Communication
Encoding Barriers.
The process of selecting and organizing symbols to represent a
message requires skill and knowledge. Obstacles listed below
can interfere with an effective message.

1. Lack of Sensitivity to Receiver.

A breakdown in communication may result when a message
is not adapted to its receiver. Recognizing the receiver’s
needs, status, knowledge of the subject, and language skills
assists the sender in preparing a successful message. If a
customer is angry, for example, an effective response may
be just to listen to the person vent for a while.

2. Lack of Basic Communication Skills.

The receiver is less likely to understand the message if the
sender has trouble choosing the
precise words needed and arranging those words in a
grammatically-correct sentence.

3. Insufficient Knowledge of the Subject.

If the sender lacks specific information about something, the
receiver will likely receive an unclear or mixed
message. Have you shopped for an item such as a computer,
and experienced how some salespeople can explain
complicated terms and ideas in a simple way? Others
cannot.
4. Information Overload.
If you receive a message with too much information, you
may tend to put up a barrier because the amount of
information is coming so fast that you may have difficulty
comfortably interpreting that information. If you are selling
an item with twenty-five terrific features, pick two or three
important features to emphasize instead of overwhelming
your receiver (ho-hum) with an information avalanche.

5. Emotional Interference.
An emotional individual may not be able to communicate
well. If someone is angry, hostile, resentful, joyful, or
fearful, that person may be too preoccupied with emotions
to receive the intended message. If you don’t like someone,
for example, you may have trouble “hearing” them.

Transmitting Barriers:
Things that get in the way of message transmission are
sometimes called “noise.” Communication may be difficult
because of noise and some of these problems:

1. Physical Distractions.
A bad cellular phone line or a noisy restaurant can destroy
communication. If an E-mail message or letter is not
formatted properly, or if it contains grammatical and
spelling errors, the receiver may not be able to concentrate
on the message because the physical appearance of the
letter or E-mail is sloppy and unprofessional.

2. Conflicting Messages.
Messages that cause a conflict in perception for the receiver
may result in incomplete communication. For example, if a
person constantly uses jargon or slang to communicate with
someone from another country who has never heard such
 expressions, mixed messages are sure to result. Another
example of conflicting messages might be if a supervisor
requests a report immediately without giving the report
writer enough time to gather the proper information. Does
the report writer emphasize speed in writing the report, or
accuracy in gathering the data?

3. Channel Barriers.
If the sender chooses an inappropriate channel of
communication, communication may cease. Detailed
instructions presented over the telephone, for example, may
be frustrating for both communicators. If you are on a
computer technical support help line discussing a problem, it
would be helpful for you to be sitting in front of a computer,
as opposed to taking notes from the support staff and then
returning to your computer station.

4. Long Communication Chain.

The longer the communication chain, the greater the chance
for error. If a message is passed through too many
receivers, the message often becomes distorted. If a person
starts a message at one end of a communication chain of ten
people, for example, the message that eventually returns is
usually liberally altered.
Decoding Barriers.
The communication cycle may break down at the receiving end
for some of these reasons:

1. Lack of Interest.
If a message reaches a reader who is not interested in the
message, the reader may read the message hurriedly or
 listen to the message carelessly. Miscommunication may
result in both cases.

2. Lack of Knowledge.
If a receiver is unable to understand a message filled with
technical information, communication will break
down. Unless a computer user knows something about the
Windows environment, for example, the user may have
difficulty organizing files if given technical instructions.

3. Lack of Communication Skills.

Those who have weak reading and listening skills make
ineffective receivers. On the other hand, those who have a
good professional vocabulary and who concentrate on
listening, have less trouble hearing and interpreting good
communication. Many people tune out who is talking and
mentally rehearse what they are going to say in
return. We’ll see some techniques for improving listening
skills in Chapter 2.

4. Emotional Distractions.
If emotions interfere with the creation and transmission
of a message, they can also disrupt reception. If you
receive a report from your supervisor regarding proposed
changes in work procedures and you do not particularly like
your supervisor, you may have trouble even reading the
report objectively. You may read, not objectively, but to
find fault. You may misinterpret words and read negative
impressions between the lines. Consequently, you are
likely to misunderstand part or all of the report.

5. Physical Distractions.
If a receiver of a communication works in an area with
bright lights, glare on computer screens, loud
 noises, excessively hot or cold work spaces, or physical
ailments, that receiver will probably experience
communication breakdowns on a regular basis.

Responding Barriers
The communication cycle may be broken if feedback is
unsuccessful.

1. No Provision for Feedback.

Since communication is a two-way process, the sender must
search for a means of getting a response from the
receiver. If a team leader does not permit any
interruptions nor questions while discussing projects, he
may find that team members may not completely
understand what they are to do. Face-to-face oral
communication is considered the best type of
communication since feedback can be both verbal and
nonverbal. When two communicators are separated, care
must be taken to ask for meaningful feedback.

2. Inadequate Feedback.
Delayed or judgmental feedback can interfere with good
communication. If your supervisor gives you instructions in
long, compound-complex sentences without giving you a
chance to speak, you may pretend to understand the
instructions just so you can leave the stress of the
conversation. Because you may have not fully understood
the intended instructions, your performance may suffer.

Active Listening Skills

Active listening is an essential mentoring skill. One of the most
common mistakes mentors can make is confusing hearing and
listening. Hearing is merely noting that someone is speaking.
Listening, however, is making sense of what is heard and requires
the individual to constantly pay attention, interpret, and
remember what is heard. Hearing is passive; listening is active.
The passive listener is much like a tape recorder. If the speaker is
providing a clear message, the listener will probably get most of
what is said. For mentors, this is not enough. They must be active
listeners. Active listening requires the listener to hear the words
and identify the feelings associated with the words. Mentors
should be able to understand the speaker from his or her point of
view. There are four essential requirements for active listening:
• Intensity
• Empathy
• Acceptance
• Willingness to take responsibility for completeness

Improving Active Listening Skills

1. Make Eye Contact
Lack of eye contact may be interpreted as disinterest or
disapproval. Making eye contact with the speaker focuses
attention, reduces the chance of distraction, and is
encouraging to the speaker.
2. Exhibit Affirmative Nods and Appropriate Facial
Expressions
The effective listener shows signs of being interested in what is
said through nonverbal signs. Together with good eye contact,
non-verbal expressions convey active listening.
3. Avoid Distracting Actions or Gestures
Do not look at other people, play with pens or pencils, shuffle
papers, or the like. These activities make the speaker feel like
the listener is not interested in what is being said.
 4. Ask Questions
Questioning helps ensure clarification of what the speaker is
saying, facilitates understanding, and lets the speaker know
that the listener is engaged.
5. Paraphrase
Paraphrasing means restating what the individual has said in
different words. This technique allows the listener to verify
that the message was received correctly.
6. Avoid Interrupting the Speaker
Allow the speaker to complete his or her thought before
responding, and do not anticipate what he/she will say.
7. Do Not Talk Too Much
Talking is easier than listening intently to someone else. An
active listener recognizes that it is impossible to talk and listen
acutely at the same time.

Types of listening
1-Discriminative listening
is the most basic type of listening, whereby the difference between
difference sounds is identified. If you cannot hear differences, then you
cannot make sense of the meaning that is expressed by such
differences. We learn to discriminate between sounds within our own
language early, and later are unable to discriminate between the
phonemes of other languages. This is one reason why a person from
one country finds it difficult to speak another language perfectly, as
they are unable distinguish the subtle sounds that are required in that
language. Likewise, a person who cannot hear the subtleties of
emotional variation in another person's voice will be less likely to be
able to discern the emotions the other person is experiencing. Listening
is a visual as well as auditory act, as we communicate much through
body language. We thus also need to be able to discriminate between
muscle and skeletal movements that signify different meanings.
2-Biased listening
happens when the person hears only what they want to hear, typically
misinterpreting what the other person says based on the stereotypes
and other biases that they have. Such biased listening is often very
evaluative in nature.
3-Evaluative listening
we make judgments about what the other person is saying. We seek to
assess the truth of what is being said. We also judge what they say
against our values, assessing them as good or bad, worthy or unworthy.
4-Appreciative listening
we seek certain information which will appreciate, for example that
which helps meet our needs and goals. We use appreciative listening
when we are listening to good music, poetry or maybe even the stirring
words of a great leader.
5-Sympathetic listening
we care about the other person and show this concern in the way we
pay close attention and express our sorrow for their ills and happiness
at their joys.
6-Empathetic listening
When we listen empathetically, we go beyond sympathy to seek a truer
understand how others are feeling. This requires excellent
discrimination and close attention to the nuances of emotional signals.
When we are being truly empathetic, we actually feel what they are
feeling. In order to get others to expose these deep parts of themselves
to us, we also need to demonstrate our empathy in our demeanor
towards them, asking sensitively and in a way that encourages self-
disclosure.
7-Therapeutic listening
the listener has a purpose of not only empathizing with the speaker but
also to use this deep connection in order to help the speaker
understand, change or develop in some way. This not only happens
when you go to see a therapist but also in many social situations, where
friends and family seek to both diagnose problems from listening and
also to help the speaker cure themselves, perhaps by some cathartic
process. This also happens in work situations, where managers, HR
people, trainers and coaches seek to help employees learn and
develop.
8-Relationship listening
sometimes the most important factor in listening is in order to develop
or sustain a relationship. This is why lovers talk for hours and attend
closely to what each other has to say when the same words from
someone else would seem to be rather boring. Relationship listening is
also important in areas such as negotiation and sales, where it is helpful
if the other person likes you and trusts you.
9-False listening
occurs where a person is pretending to listen but is not hearing
anything that is being said. They may nod, smile and grunt in all the
right places, but do not actually take in anything that is said. This is a
skill that may be finely honed by people who do a lot of inconsequential
listening, such as politicians and royalty. Their goal with their audience
is to make a good impression in very short space of time before they
move on, never to talk to that person again. It is also something
practiced by couples, particularly where one side does most of the
talking.
10-Initial listening
Sometimes when we listen we hear the first few words and then start
to think about what we want to say in return. We then look for a point
at which we can interrupt. We are also not listening then as we are
spending more time rehearsing what we are going to say about their
initial point.
11-Selective listening
involves listening for particular things and ignoring others. We thus
hear what we want to hear and pay little attention to 'extraneous'
detail. Partial listening.
12-Full listening
happens where the listener pays close and careful attention to what is
being said, seeking carefully to understand the full content that the
speaker is seeking to put across. This may be very active form of
listening, with pauses for summaries and testing that understanding is
complete. By the end of the conversation, the listener and the speaker
will probably agree that the listener has fully understood what was
said.

Communicating with Body Language

We are constantly communicating, even when we are not speaking.

Unspoken communication makes up over half of what we tell others
and they tell us. It affects our work and personal relationships.
Improves negotiating, management, and interpersonal skills by
correctly interpreting body language and important signals.

Power of Body Language

 It is honest: Body language conveys truth, even when words do not.

 Creates self‐awareness: Understanding body language helps you
identify your own actions that hinder success.
 Understand feelings: Body language shows feelings and motive such
as aggression, submission, deception, etc. Use these as cues to your
communication.
 Enhance listening and communication skills: Paying attention to body
language makes someone a better listener. Hear between the words
spoken to what is being said.

Body Language
 Proximity: The distance between people
 Positioning: Position of a body
 Facial expression: The eyes are particularly noticed.
 Touching: This includes objects, people, and themselves.
 Breathing: The rate of respiration is telling.

TYPES OF BODY LANGUAGE

(P) OSTURES & GESTURES

How do you use hand gestures? Stance?

(E) YE CONTACT
How’s your “Lighthouse”?

(O) RIENTATION
How do you position yourself?
(P) RESENTATION
How do you deliver your message?

(L) OOKS
Are your looks, appearance, and dress important?

(E) PRESSIONS OF EMOTION

Are you using facial expressions to express emotion?
 resentation Skills

1. Plan the structure and format of your presentation

(a) Clarify the aim
what is the aim (i.e. the exact purpose) of the presentation?
Spend time establishing the aim ·
what do you need to cover to ensure you fulfil the aim

(b) What do you know about the audience?

Who are you presenting to?
Analyze your audience and target your presentation to their knowledge
and understanding.

(c) What do you need to cover to ensure you fulfil the aim?
Ensure that what you are going to say is appropriate to both the aim
and the audience · Priorities your material. You
don’t have to say everything.

(d) How much time do you have?

Don’t go over the allotted time and remember to allow time at the end
for questions

(e) Venue and equipment

where will you be presenting?
What audio-visual equipment will you require and what is available?
Check the venue and equipment in advance, if possible. ·
If not, then allow yourself enough time on the day to have a look at the
set-up.
2. Plan the content
(a) Beginning
Introduce yourself and the others who are doing the presentation ·
Explain and put up the main points you will cover (e.g. as bullet-points)

(b) Middle
Go through your points logically and in sequence ·
Summarize (give sign-posts) as you go along

(c) End
you could use your original introductory summary of main points to
summarize · Give a conclusion.

3. Questions
Plan for questions; don’t be taken by surprise. Be prepared to clarify if
someone interrupts during the presentation.
Ask for them if none is forthcoming ·
If you don’t understand a question, ask for clarification ·
Don’t be afraid to admit you don’t know ·

4. Visual Aids ·
whatever you use, whether it is OHP or computer presentation, keep it
simple and clear. Visual aids should add to the impact of your
presentation. Learn to use a
software package like PowerPoint that is specifically designed to
produce presentation material (this is useful to produce slides - i.e.
even if you are not using a computer presentation on the day). ·
Bullet points are most effective keep to a large font size
Use 18 – 24 point font size, with up to 32 point for titles
Choose a clear font style (experiment!)
Keep diagrams and figures large and simple.
Where possible, use color to differentiate elements.
Label graphics, graphs and figures clearly.
5. Notes
You may want to use both notes and the prompts given by your slides
etc. Prepare a handout to circulate to the
audience. ·
If you use notes, make them easy to read.
Use brief notes as an “aide-memoire”. Don’t read out the text word for
word! Number the pages and clip them together.
Don’t fiddle with your notes whilst presenting!
6. Presenting
Vary the tone of your voice and the pace at which you speak (though
better slower than too fast). Be careful of little verbal tics
e.g. “um”, “er”, and “you know”. ·
Make eye contact with your audience, not the floor, your notes or the
OHP. Use pauses. It gives you
thinking time and the audience time to reflect.
7. Before the day
Check that you have everything you need sufficiently far in advance of
the presentation to allow you time to deal with any unforeseen
mishaps e.g. mislaid slides or notes.
PRACTICE your presentation ·
Ask you colleagues/peers to be a mock audience ·
Ask them to give honest, constructive feed-back ·
Revise bits that don’t work e.g. add an extra background/explanatory
slide · Practice it again…and again ·
And ENJOY yourself!
 Do’s during presentation
1. Think carefully before the event: what does this audience want to
hear? Hint: they are not interested in hearing how great you or your
company are, they want to learn new things that can make THEM more
successful.
2. Find a story about people (yourself and/or others) that illustrates your
message and tell it with passion.
Storytelling always beats lectures!
3. Start by urging the audience not to take notes, say that you will post
your presentation summary online immediately afterwards. Your
presentation summary should not be all your slides. Instead, put
together three (maximum 3!) slides that explains your key messages
with pictures and very short texts.
4. Keep an eye contact with the audience, and move around the stage,
don’t hold on to the speaker stand! Use a remote clicker to control your
presentation. Remember that 70% of your communication is in your
body language!
5. Engage the audience during your talk, at least every 10 minutes.
6. Speak slowly to enable the audience to take in what you are saying and
increase their understanding, it also gives you more respect. Never try
to cram a 30 minute speech into a 20 minute time slot that is a big no-
no!
7. Be visual, use pictures and videos that illustrate your points. Read my
lips: less text, more visuals! You can do great presentations without any
visuals, but then you have to me a master storyteller.
8. Design the slides so that they are easy to see from the back of the
room. This means very big text sizes and images that fill the whole
screen. The classic mistake is to sit in front of your computer screen
and designing the slides for that short distance, so step back 2-3 meters
and see if you still can see everything. Also, avoid using borders, they
are just wasted space. There are never any borders at the cinema.
9. Make your slides in the 16:9 format. The old standard 4:3 is outdated,
look at your TV at home!
10. Use a dark background on your slides, as it is easier to read for the
audience and much better for the video cameras. (Yes, black text on
white is considered easier to read, but that applies to large amounts of
texts and we are not using that here, are we?) Also, a large projection
of a white slide next to yourself in a dimly lit room will make you look
darker and remove the focus from you.
11. Avoid monotony by using variation and surprises in your slide
styles during your presentation.
12. Engage the audience! Ask questions and have them put their
hands up. But don’t insult them with silly game play.
13. Focus on 1, 2 or maybe 3 things that you want to talk about, never
more than 3 things. Explain the problem you are working with and
then tell the story and visualize the solution.
14. Construct your presentation based on the classic drama: Start
with a Set-up, then Present the problem(s), then proceed to the
Confrontation and finally the Resolution. This has worked for all of us
humans for thousands of years!
15. Hire a speaker coach that helps you improve your body language
and voice.
16. Use a spell checker on all your slides. Takes only a minute,
improves your image.
17. If you present in another language than your native, consult a
language tutor to improve your pronunciation as much as possible.
Getting your message out is about being understood and respected.
18. Test your presentation on other people beforehand and
videotape yourself. Listen to their feedback and watch yourself: would
you understand and appreciate your presentation?
19. End by showing a slide with a key question or action point aimed
at the audience, to encourage discussions afterwards. Also show you
contact details and the link to your presentation summary on your blog
or on an internet service like Slide share.
 Don’ts during presentation
1. Don’t talk for more than 10 minutes before you somehow engage the
audience.
2. Don’t read word by word from your script. You will sound like a robot
and miss the all-important eye contact with the audience. Instead use
stiff cue cards with key words and starter sentences.
3. Don’t speak with a too low or monotonous voice. If people can’t hear
you well at the back of the room, or if you don’t have any energy in
your voice, you will lose the attention of the audience in a minute.
Hire a voice coach!
4. Don’t talk too fast and try to cram a 45-minute presentation into a 30-
minute time slot by speaking at machine gun pace. You might just as
well stay at home.
5. Don’t use any acronyms without spelling them out and explaining what
they mean.
6. Don’t read from text bullets in your slides. If you absolutely have to use
text bullets, keep them very short and very few per slide, then first let
the audience read it and then expand on the subject using your own
words.
7. Don’t use complete sentences in your slides. Your voice shall tell the
story and the slides shall only support it.
8. Don’t start talking immediately on top of your slides. Let the audience
interpret the slide for a while, then add your insights.
9. Don’t use hard-to-read fonts or garish backgrounds that obscures the
text.
10. Don’t use cute or unusual photos that are not illustrating exactly
what you are talking about. It distracts the audience, nobody will hear
what you are saying.
11. Don’t use effects, such as texts that fly into the slide or ANY other
disturbing transitions. You’re not running an amusement park, the
interesting stuff should be in your content.
12. Don’t waste you audience’s time by presenting the history and
organization of your organization. Unless it is essential in order to
understand your presentation, which is very, very seldom.
13. Don’t use a corporate slide template that displays the logo on
each and every slide. Such templates should be banned everywhere,
they add no value for the audience. Remember, the audience is not
there to learn about your company. The only place you can put your
company logo is at the end, together with your name and contact
details.
14. Don’t mention tips verbally like “be sure to check out the website
www.fancynewstuff.com, it has great features” without displaying a
slide with both a picture of the web site and the URL in big letters + a
note stating that the URL will be in your posted presentation. All
essential facts mentioned need to also be visual.
15. Don’t hide behind the computer or speaker stand. Make sure the
audience see you and maintain eye contact with them.
 Time Management

What Is Time Management?

It is the way you choose to spend your time.
What this means is that you can choose between good time
management and bad time management. When you choose to engage
in productive or good time management, you are organizing the tasks
or actions you want to accomplish into a logical and cohesive
progression; this will allow you to complete each and every task within
an equitable time frame. At its best, this type of time management
does not create stress or drive up your blood pressure. Instead, it
makes the day run smoother, and empowers you to strike more action
items off your list.
Why even talk about Time Management?
Because most sales people spend only 10% of their available time
selling!!! Active selling – 10%
Prospecting – 10%
Problem Solving – 14%
Personal phone calls and e-mails – 17%
Travel time – 18%
Administration – 31%
Key to Successful Time Management for Sales people
Spend more time with high potential customers
Spend more time with qualified leads and referrals
spend more time identifying customer needs and creating solutions
Spend less time on administrative duties
Spend less time on non-revenue producing activities
16 Great Time Management Tips
1. Begin by defining your job purpose.
Write down the purpose of your job in 2 sentences. This is really
important. It helps you decide, as you go through your working day
whether the next thing you are about to do is moving you nearer to
achieving your job purpose or not. Time management is about making
choices. The most successful salespeople focus on activities that are
important and move them towards achieving their objectives
2. Set yourself objectives.
These should be short, medium and long term. Write them down
3. Write yourself a sales plan.
4. Understand the importance of opportunity cost.
Basically, this means you can only do one thing at once. To be a top
time manager you need to be good at setting priorities. What are the
really important parts of your job that you need to focus on? For some
salespeople prospecting is vital. Finding new contacts and customers.
For others, customer care is the major issue. Focus your time on the
important stuff
5. Do it now.
. It encourages us to get things done straight away, rather than
spending our lives shuffling piles of paper and writing lists. If it can be
done quickly, just do it. This particularly applies to the jobs people
avoid like planning and prospecting
6. Understand the Pareto principle.
80% of our effective work tends to be done in 20% of our time. We
waste a lot of time being busy. Here is another statistic. Most
salespeople spend only 5% of their time in productive selling situations.
In a study carried out across Europe, it was also found that 41% of the
average salesperson’s time is spent in the car. Our aim must be to
increase the time we spend productively selling our products
7. Prioritize tasks.
In time management terms we rank different tasks in terms of their
urgency and their importance.
8. Learn to say no.
If you are the sort of person who can’t say no, I can guarantee you are
spending too much time doing things that are not helping you move
towards achieving your objectives. Salespeople are measured by
results. This is one of the hardest lessons the average salesperson has
to learn and yet is one of the most effective ways of becoming more
productive
9. Start work earlier.
Work harder. Modern buyers don’t work 9.00 to 5.00. A sizeable
proportion of buyers are willing to meet with salespeople and accept
telephone calls between 8.00 and 6.00. Most salespeople try to contact
buyers between 10.30 and 12.00 and 2.00 and 4.00. Be different. Try to
fit in an extra appointment each day and you will be amazed at the
results
10. Do more prospecting.
Set yourself a prospecting target for each week and stick to it. In the
long term it will give you a regular supply of new business
11. Build time into your schedule to develop your sales skills.
Remember the old saying: The harder I practice the luckier I get.
12. Combine tasks.
Grouping tasks together makes for greater efficiency. This applies
particularly to prospecting, planning and telephoning activities
13. Use technology.
14. Put together systems for managing your administration.
Yes, I know this is the boring bit, but a well-planned admin system can
save you a lot of time
15. Ask yourself: Is this appointment worth it?
I know salespeople who will take out a full day of their time to go and
see one customer, due to travel time and distance. If it was your
business, or if you were spending your own money would you consider
this a good use of a day? People are happy to communicate by phone
and e-mail. Remember opportunity cost.
16. Challenge unrealistic deadlines and unnecessary projects.
The best time managers are assertive and understand the importance
of managing their manager. Without being negative or obstructive,
focus on your job purpose and point out the impact of changing your
planned schedule
 Territory Management

What Is a Territory?
A territory is a flexible collection of accounts and users where the users
have at least read access to the accounts, regardless of who owns the
account. By configuring territory settings, users in a territory can be
granted read, read/write, or owner-like access (that is, the ability to
view, edit, transfer, and delete records) to the accounts in that
territory. Both accounts and users can exist in multiple territories. You
can manually add accounts to territories, or you can define account
assignment rules that assign accounts to territories for you

Reasons Companies Develop and Use Sales Territories

1-Coverage of the market.
2-Establish each sales person’s responsibilities.
3-Evaulate performances.
4-Improve customer relationship.
5-Reduce cost.
6-Allow better matching of sales persons to customer needs.

Territory-Time Allocation

1. Number of accounts in the territory

2. Number of sales calls made on customers

3. Time required for each sales call

4. Frequency of customer sales calls

5. Travel time around the territory

6. Non-selling time

7. Return on time invested

 Interpersonal Skills

Definition
Interpersonal skills are the life skills we use every day to communicate
and interact with other people, both individually and in groups. People
who have worked on developing strong interpersonal skills are usually
more successful in both their professional and personal lives.

Interpersonal skills include

 Verbal Communication What we say and how we say it.

 Non-Verbal Communication what we communicate without words,

body language is an example.

 Listening Skills how we interpret both the verbal and non-verbal

messages sent by others.

 Negotiation Working with others to find a mutually agreeable

outcome.

 Problem Solving Working with others to identify, define and solve

problems.

 Decision Making Exploring and analyzing options to make sound

decisions.

 Assertiveness communicating our values, ideas, beliefs, opinions,

needs and wants freely.

How to improve and develop your interpersonal skills including

Listening is not the same as hearing. Take time to listen carefully
to what others are saying through both their verbal and non-verbal
communication.

Choose your words be aware of the words you are using when
talking to others. Could you be misunderstood or confuse the
issue? Practice clarity and learn to seek feedback to ensure your
message has been understood.

Relax when we are nervous we tend to talk more quickly and

therefore less clearly. Being tense is also evident in our body language
and other non-verbal communication. Instead, try to stay calm, make
eye contact and smile. Let your confidence shine.

Clarify Show an interest in the people you talk to. Ask questions and
seek clarification on any points that could be easily misunderstood.

Be positive Try to remain positive and cheerful. People are much more
likely to be drawn to you if you can maintain a positive attitude.

Empathies Understand that other people may have different points of

view. Try to see things from their perspective.

Understand stress Learn to recognize, manage and reduce stress in

yourself and others. Although stress is not always bad, it can have a
detrimental effect on your interpersonal communication.

Learn to be assertive you should aim to be neither passive nor

aggressive. Being assertive is about expressing your feelings and beliefs
in a way that others can understand and respect. Assertiveness is
fundamental to successful negotiation.
Reflect and improve Think about previous conversations and other
interpersonal interactions; learn from your mistakes and successes.
Always keep a positive attitude but realize that you can always improve
our communication skills.

Negotiate Learn how to effectively negotiate with others paving the

way to mutual respect, trust and lasting interpersonal relations

Working in groups We often find ourselves in group situations,

professionally and socially. Learn all about the different types of groups
and teams
 Negotiation Skills

Definition
Negotiation is a method by which people settle differences. It is a
process by which compromise or agreement is reached while
avoiding argument and dispute.

Why Negotiation?
It is inevitable that, from time-to-time, conflict and disagreement
will arise as the differing needs, wants, aims and beliefs of people
are brought together. Without negotiation, such conflicts may
lead to argument and resentment resulting in one or all of the
parties feeling dissatisfied. The point of negotiation is to try to
reach agreements without causing future barriers to
communications.

Stages of negotiation
1. Preparation
Before any negotiation takes place, a decision needs to be taken
as to when and where a meeting will take place to discuss the
problem and who will attend. Setting a limited time-scale can also
be helpful to prevent the disagreement continuing.
This stage involves ensuring all the pertinent facts of the situation
are known in order to clarify your own position.
2. Discussion
During this stage, individuals or members of each side put
forward the case as they see it, i.e. their understanding of the
situation.
Key skills during this stage
include questioning, listening and clarifying.
Sometimes it is helpful to take notes during the discussion stage
to record all points put forward in case there is need for further
clarification. It is extremely important to listen, as when
disagreement takes place it is easy to make the mistake of saying
too much and listening too little. Each side should have an equal
opportunity to present their case.

3. Clarifying Goals
From the discussion, the goals, interests and viewpoints of both
sides of the disagreement need to be clarified.
It is helpful to list these factors in order of priority. Through this
clarification it is often possible to identify or establish some
common ground. Clarification is an essential part of the
negotiation process, without it misunderstandings are likely to
occur which may cause problems and barriers to reaching a
beneficial outcome.

4. Negotiate Towards a Win-Win Outcome

This stage focuses on what is termed a 'win-win' outcome where
both sides feel they have gained something positive through the
process of negotiation and both sides feel their point of view has
been taken into consideration.
A win-win outcome is usually the best result. Although this may
not always be possible, through negotiation, it should be the
ultimate goal.
Suggestions of alternative strategies and compromises need to
be considered at this point. Compromises are often positive
alternatives which can often achieve greater benefit for all
concerned compared to holding to the original positions.

5. Agreement
Agreement can be achieved once understanding of both sides’
viewpoints and interests have been considered.
It is essential to for everybody involved to keep an open mind in
order to achieve an acceptable solution. Any agreement needs to
be made perfectly clear so that both sides know what has been
decided.

6. Implementing a Course of Action

From the agreement, a course of action has to be implemented to
carry through the decision.

Terminology
BATNA

Best Alternatives to Negotiation Agreement.

Buyer target point
Is the minimum price that buyer aim to reach.
Seller target point
Are the maximum prices or benefits that seller aim to reach.
Buyer reservation point
Is the point that buyer will not exceed it.
Seller reservation point
Is the point that seller will not go under it.
Strategies for negotiation
Strategy 1:
Assess your BATNA& Improve it.
“Having a great BATNA, getting a bigger slice of the pie”
Strategy 2:
Determine your reservation point, but don’t reveal
only if: 1) Very small or negative bargaining zone
2) Very attractive offer.
Strategy 3:
Research other’s BATNA& Estimate the reservation point.
Strategy 4:
Aspire High (Be realistic but Optimistic)
Strategy 5:
Make the 1st offer
• Not too much bargaining zone.
• No Fear of insulting.
Strategy 6:
Plan your concessions.
“Consider 3 things when formulating a concessions.
1) Concessions Pattern. (Unilateral or Bilateral)
2) Concessions Magnitude concessions.)
3) Concessions Timing.
“Fewer and smaller concessions maximize the pie slice.”
 Problem Solving

Definition of a Problem
A problem exists when there is a gap between what you expect to
happen and what actually happens.
Definition of Decision Making
Decision making is selecting a course of action from among
available alternatives.
STEPS IN THE PROBLEM SOLVING PROCESS

1-Define the Problem

Diagnose a situation so that the focus is on the real problem, not
just on its symptoms. Symptoms become evident before the
problem does.
Separate fact from opinion and speculation.
Avoid stating the problem as disguised solution.
State the problem explicitly.
Specify underlying causes.
Identify what standard is violated by the problem.
A useful tool to help problem solvers distinguish between
symptoms and causes of problems is using the “5 Whys” with
your work group.
2-Create Alternative Solutions
generating possible solutions is a creative process.
 Good alternative solutions take into account both short and long-
term issues.

 To effectively create solutions, postpone the process of selecting any

one solution to the problem.
3-Evaluate alternatives and select one
this step involves the careful weighing of the pros and cons of the
proposed alternatives in order to make a final selection. Decision
makers need to be sure that the alternatives are judged in terms of the
extent to which they will solve the problem without causing other
unanticipated problems. Judging alternatives means that people are
using criteria – standards or requirements that are important to solving
the problem – in order to select the best alternative(s).

4-Implement and follow up on the solution

implementing a solution to a problem introduces change into the
workplace. Since almost any change creates some resistance,
implementing a solution requires sensitivity to possible resistance from
those who will be affected by the solution.
The Importance of Marketing
The first decade of the 21st century challenged firms to prosper financially
and even survive in the face of an unforgiving economic environment.
Marketing is playing a key role in addressing those challenges. Finance,
operations, accounting, and other business functions won’t really matter
without sufficient demand for products and services so the firm can make a
profit. In other words, there must be a top line for there to be a bottom line.
Thus financial success often depends on marketing ability

Many now have a chief marketing officer (CMO) to put marketing on a more
equal footing with other C-level executives such as the chief financial officer
(CFO) or chief information officer (CIO).

Domino’s when two employees in Conover, North Carolina, posted a

YouTube video showing themselves preparing sandwiches while putting
cheese up their noses and violating other health-code standards, Domino’s
learned an important lesson about PR and brand communications in a
modern era. Once it found the employees—who claimed the video was just
a gag and the sandwiches were never delivered—the company fired them.
In just a few days, however, there had been more than a million downloads
of the video and a wave of negative publicity. When research showed that
perception of quality for the brand had turned from positive to negative in
that short time, the firm aggressively took action through social media such
as Twitter, YouTube, and others.

What Is Marketing?
The American Marketing Association offers the following formal definition:
Marketing is the activity, set of institutions, and processes for creating,
communicating, delivering, and exchanging offerings that have value for
customers, clients, partners, and society

Marketing management
The art and science of choosing target markets and getting, keeping, and
growing customers through creating, delivering, and communicating
superior customer value.

Many people are surprised when they hear that selling is not the most
important part of marketing! Selling is only the tip of the marketing iceberg

What Is Marketed?
GOODS

Physical goods constitute the bulk of most countries’ production and

marketing efforts. Each year, U.S. companies market billions of fresh,
canned, bagged, and frozen food products and millions of cars, refrigerators,
televisions, machines, and other mainstays of a modern economy.
SERVICES

As economies advance, a growing proportion of their activities focus on the

production of services. The U.S. economy today produces a 70–30 services-
to-goods mix. Services include the work of airlines, hotels, car rental firms,
barbers and beauticians, maintenance and repair people, and accountants,
bankers, lawyers, engineers, doctors, software programmers, and
management consultants. Many market offerings mix goods and services,
such as a fast-food meal.

EVENTS

Marketers promote time-based events, such as major trade shows, artistic

performances, and company anniversaries.

EXPERIENCES

By orchestrating several services and goods, a firm can create, stage, and
market experiences. Walt Disney World’s Magic Kingdom allows customers
to visit a fairy kingdom, a pirate ship, or a haunted house. There is also a
market for customized experiences, such as a week at a baseball camp with
retired baseball greats, a four-day rock and roll fantasy camp, or a climb up
Mount Everest

PERSONS

Artists, musicians, CEOs, physicians, high-profile lawyers and financiers, and

other professionals all get help from celebrity marketers. Some people have
done a masterful job of marketing themselves—David Beckham, Oprah
Winfrey, and the Rolling Stones. Management consultant Tom Peters, a
master at self-branding, has advised each person to become a “brand.”

PLACES
 Cities, states, regions, and whole nations compete to attract tourists,
residents, factories, and company headquarters.

PROPERTIES

Properties are intangible rights of ownership to either real property (real

estate) or financial property (stocks and bonds). They are bought and sold,
and these exchanges require marketing. Real estate agents work for
property owners or sellers, or they buy and sell residential or commercial
real estate. Investment companies and banks market securities to both
institutional and individual investors

ORGANIZATIONS

Organizations work to build a strong, favorable, and unique image in the

minds of their target publics.

IDEAS

Every market offering includes a basic idea.

Eight demand states

1. Ccvcv
Consumers dislike the product and may even pay to avoid it.
2. Nonexistent demand
Consumers may be unaware of or uninterested in the product.
3. Latent demand
Consumers may share a strong need that cannot be satisfied by an
existing product.
4. Declining demand
Consumers begin to buy the product less frequently or not at all.
5. Irregular demand
 Consumer purchases vary on a seasonal, monthly, weekly, daily, or
even hourly basis.
6. Full demand
Consumers are adequately buying all products put into the
marketplace.
7. Overfull demand
More consumers would like to buy the product than can be satisfied.
8. Unwholesome demand
Consumers may be attracted to products that have undesirable social
consequences. In each case, marketers.

MARKETS

Traditionally, a “market” was a physical place where buyers and sellers

gathered to buy and sell goods. Economists describe a market as a collection
of buyers and sellers who transact over a particular product or product class
(such as the housing market or the grain market).
Manufacturers go to resource markets (raw material markets, labor
markets, money markets), buy resources and turn them into goods and
services, and sell finished products to intermediaries, who sell them to
consumers. Consumers sell their labor and receive money with which they
pay for goods and services. The government collects tax revenues to buy
goods from resource, manufacturer, and intermediary markets and uses
these goods and services to provide public services. Each nation’s economy,
and the global economy, consists of interacting sets of markets linked
through exchange processes.

KEY CUSTOMER MARKETS

Consumer Markets

Companies selling mass consumer goods and services such as juices,

cosmetics, athletic shoes, and air travel spend a great deal of time
establishing a strong brand image by developing a superior product and
packaging, ensuring its availability, and backing it with engaging
communications and reliable service

Business Markets
 Companies selling business goods and services often face well-informed
professional buyers skilled at evaluating competitive offerings. Business
buyers buy goods to make or resell a product to others at a profit. Business
marketers must demonstrate how their products will help achieve higher
revenue or lower costs. Advertising can play a role, but the sales force, the
price, and the company’s reputation may play a greater one.

Global Markets

Companies in the global marketplace must decide which countries to enter;

how to enter each (as an exporter, licenser, joint venture partner, contract
manufacturer, or solo manufacturer); how to adapt product and service
features to each country; how to price products in different countries; and
how to design communications for different cultures. They face different
requirements for buying and disposing of property; cultural, language, legal
and political differences; and currency fluctuations.

Nonprofit and Governmental Markets

Companies selling to nonprofit organizations with limited purchasing power

such as churches, universities, charitable organizations, and government
agencies need to price carefully. Lower selling prices affect the features and
quality the seller can build into the offering.

Core Marketing Concepts

Needs, Wants, and Demands

Needs are the basic human requirements such as for air, food, water,
clothing, and shelter. Humans also have strong needs for recreation,
education, and entertainment these needs become wants when they are
directed to specific objects that might satisfy the need. A U.S. consumer
needs food but may want a Philly cheese steak and an iced tea. A person in
Afghanistan needs food but may want rice, lamb, and carrots. Wants are
shaped by our society.
Demands are wants for specific products backed by an ability to pay. Many
people want a Mercedes; only a few are able to buy one. Companies must
measure not only how many people want their product, but also how many
are willing and able to buy it.
” Marketers do not create needs: Needs preexist marketers. Marketers,
along with other societal factors, influence wants.

Types of customers need

1. Stated needs
The customer wants an inexpensive car.)
2. Real needs
The customer wants a car whose operating cost, not initial price, is
low.
3. Unstated needs
The customer expects good service from the dealer.
4. Delight needs
The customer would like the dealer to include an onboard GPS
navigation system.
5. Secret needs
The customer wants friends to see him or her as a savvy consumer.

Target Markets, Positioning, and Segmentation

Not everyone likes the same cereal, restaurant, college, or movie.
Therefore, marketers start by dividing the market into segments. They
identify and profile distinct groups of buyers who might prefer or require
varying product and service mixes by examining demographic,
psychographic, and behavioral differences among buyers. After identifying
market segments, the marketer decides which present the greatest
opportunities— which are its target markets. For each, the firm develops a
market offering that it positions in the minds of the target buyers as
delivering some central benefit(s). Volvo develops its cars for buyers to
whom safety is a major concern; positioning its vehicles as the safest a
customer can buy.

Offerings and Brands

Companies address customer needs by putting forth a value proposition, a
set of benefits that satisfy those needs. The intangible value proposition is
made physical by an offering, which can be a combination of products,
services, information, and experiences. A brand is an offering from a known
source. A brand name such as McDonald’s carries many associations in
people’s minds that make up its image: hamburgers, cleanliness,
convenience, courteous service, and golden arches. All companies strive to
build a brand image with as many strong, favorable, and unique brand
associations as possible.

Value and Satisfaction

The buyer chooses the offerings he or she perceives to deliver the most
value, the sum of the tangible and intangible benefits and costs to her.
Value, a central marketing concept, is primarily a combination of quality,
service, and price , called the customer value triad. Value perceptions
increase with quality and service but decrease with price. We can think of
marketing as the identification, creation, communication, delivery, and
monitoring of customer value. Satisfaction reflects a person’s judgment of a
product’s perceived performance in relationship to expectations. If the
performance falls short of expectations, the customer is disappointed. If it
matches expectations, the customer is satisfied. If it exceeds them, the
customer is delighted.
Marketing Channels
To reach a target market, the marketer uses three kinds of marketing
channels.
Communication channels
Deliver and receive messages from target buyers and include newspapers,
magazines, radio, television, mail, telephone, billboards, posters, fliers, CDs,
audiotapes, and the Internet. Beyond these, firms communicate through the
look of their retail stores and Web sites
Distribution channels
To display, sell, or deliver the physical product or service(s) to the buyer or
user. These channels may be direct via the Internet, mail, or mobile phone
or telephone, or indirect with distributors, wholesalers, retailers, and agents
as intermediaries.
Service channels
That includes warehouses, transportation companies, banks, and insurance
companies.
Supply Chain
The supply chain is a longer channel stretching from raw materials to
components to finished products carried to final buyers.
Competition
Competition includes all the actual and potential rival offerings and
substitutes a buyer might
Consider
Marketing Environment
The marketing environment consists of the task environment and the broad
environment. The task environment includes the actors engaged in
producing, distributing, and promoting the offering. These are the company,
suppliers, distributors, dealers, and target customers. In the supplier group
are material suppliers and service suppliers, such as marketing research
agencies, advertising agencies, banking and insurance companies,
transportation companies, and telecommunications companies. Distributors
and dealers include agents, brokers, manufacturer representatives, and
others who facilitate finding and selling to customers.
The broad environment consists of six components: demographic
environment, economic environment, social-cultural environment, natural
environment, technological environment, and political-legal environment.

Marketing Concepts

The production concept

is one of the oldest concepts in business. It holds that consumers prefer
products that are widely available and inexpensive. Managers of production-
oriented businesses concentrate on achieving high production efficiency,
low costs, and mass distribution. This orientation makes sense in developing
countries such as China, where the largest PC manufacturer, Legend
(principal owner of Lenovo Group)

The product concept

proposes that consumers favor products offering the most quality,
performance, or innovative features

The selling concept

holds that consumers and businesses, if left alone, won’t buy enough of the
organization’s products. It is practiced most aggressively with unsought
goods—goods buyers don’t normally think of buying such as insurance

The marketing concept

emerged in the mid-1950s41 as a customer-centered, sense-and-respond
philosophy. The job is to find not the right customers for your products, but
the right products for your customers. Dell doesn’t prepare a perfect
computer for its target market. Rather, it provides product platforms on
which each person customizes the features he or she desires in the
computer. The marketing concept holds that the key to achieving
organizational goals is being more effective than competitors in creating,
delivering, and communicating superior customer value to your target
markets.

The holistic marketing

concept is based on the development, design, and implementation of
marketing programs, processes, and activities that recognize their breadth
and interdependencies. Holistic marketing acknowledges that everything
matters in marketing—and that a broad, integrated perspective is often
necessary.

Relationship marketing
aims to build mutually satisfying long-term relationships with key
constituents in order to earn and retain their business. Four key constituents
for relationship marketing are customers, employees, marketing partners
(channels, suppliers, distributors, dealers, agencies), and members of the
financial community (shareholders, investors, analysts). To develop strong
relationships with them requires understanding their capabilities and
resources, needs, goals, and desires
Integrated Marketing
Integrated marketing occurs when the marketer devises marketing activities
and assembles marketing programs to create, communicate, and deliver
value for consumers such that “the whole is greater than the sum of its
parts.” Two key themes are that (1) many different marketing activities can
create, communicate, and deliver value and (2) marketers should design and
implement any one marketing activity with all other activities in mind.

Internal Marketing
Internal marketing, an element of holistic marketing, is the task of hiring,
training, and motivating able employees who want to serve customers well.
It ensures that everyone in the organization embraces appropriate
marketing principles, especially senior management.

Performance marketing
Requires understanding the financial and nonfinancial returns to business
and society from marketing activities and programs. Top marketers are
increasingly going beyond sales revenue to examine the marketing
scorecard and interpret what is happening to market share, customer loss
rate, customer satisfaction, product quality, and other measures. They are
also considering the legal, ethical, social, and environmental effects of
marketing activities and programs.

Development of Marketing Mix

Marketing Management Tasks

Developing Marketing Strategies and Plans

must develop concrete marketing plans that specify the marketing strategy
and tactics going forward.

Capturing Marketing Insights

Marketers needs a reliable marketing information system to closely monitor
its marketing environment so it can continually assess market potential and
forecast demand. Its microenvironment consists of all the players who affect
its ability to produce and sell suppliers, marketing intermediaries,
customers, and competitors. Its microenvironment includes demographic,
economic, physical, technological, political-legal, and social-cultural forces
that affect sales and profits

Connecting with Customers

Marketers must consider how to best create value for its chosen target
markets and develop strong, profitable, long-term relationships with
customers. To do so, it needs to understand consumer markets who buys
and why? What features and prices are they looking for, and where do they
shop?

Building Strong Brands

Marketers must also pay close attention to competitors, anticipating their
moves and knowing how to react quickly and decisively. It may want to
initiate some surprise moves, in which case it needs to anticipate how its
competitors will respond.

Shaping the Market Offerings

At the heart of the marketing program is the product—the firm’s tangible
offering to the market, which includes the product quality, design, features,
and packaging. A
critical marketing decision relates to price Marketers must decide on
wholesale and retail prices, discounts, allowances, and credit terms. Its price
should match well with the offer’s perceived value; otherwise, buyers will
turn to competitors’ products.

Delivering Value
Marketers must also determine how to properly deliver to the target market
the value embodied in its products and services. Channel activities include
those the company undertakes to make the product accessible and available
to target customers. Marketers must identify, recruit, and link various
marketing facilitators to supply its products and services efficiently to the
target market. It must understand the various types of retailers,
wholesalers, and physical-distribution firms and how they make their
decisions.

Communicating Value
Marketers must also adequately communicate to the target market the
value embodied by its products and services. It will need an integrated
marketing communication program that maximizes the individual and
collective contribution of all communication activities. Marketers need to
set up mass communication programs consisting of advertising, sales
promotion, events, and public relations. They also needs to plan more
personal communications, in the form of direct and interactive marketing,
as well as hire, train, and motivate salespeople

Creating Successful Long-Term Growth

Based on product positioning, Marketer must initiate new-product
development, testing, and launching as part of its long-term view the
strategy should take into account changing global opportunities and
challenges.
Marketing and customer values

The task of any business is to deliver customer value at a profit. In a

hypercompetitive economy with increasingly informed buyers faced with
abundant choices, a company can win only by fine-tuning the value delivery
process and choosing, providing, and communicating superior value.

The Value Delivery Process

The traditional view of marketing is that the firm makes something and then
sells it, with marketing taking place in the selling process. Companies that
subscribe to this view have the best chance of succeeding in economies
marked by goods shortages where consumers are not fussy about quality,
features, or style—for example, basic staple goods in developing markets.
This traditional view will not work, however, in economies with many
different types of people, each with individual wants, perceptions,
preferences, and buying criteria. The smart competitor must design and
deliver offerings for well-defined target markets.

We can divide the value creation and delivery sequence into three phases.2
first, choosing the value represents the “homework” marketing must do
before any product exists. Marketers must segment the market, select the
appropriate target, and develop the offering’s value positioning. The
formula “segmentation, targeting, positioning (STP)” is the essence of
strategic marketing. The second phase is providing the value. Marketing
must determine specific product features, prices, and distribution. The task
in the third phase is communicating the value by utilizing the sales force,
Internet, advertising, and any other communication tools to announce and
promote the product. The value delivery process begins before there is a
product and continues through development and after launch. Each phase
has cost implications.
Core Competencies

Traditionally, companies owned and controlled most of the resources that

entered their businesses— labor power, materials, machines, information,
and energy—but many today outsource less-critical resources if they can
obtain better quality or lower cost. The key, then, is to own and nurture the
resources and competencies that make up the essence of the business.
Many textile, chemical, and computer/electronic product firms do not
manufacture their own products because offshore manufacturers are more
competent in this task. Instead, they focus on product design and
development and marketing, their core competencies.
A core competency has three characteristics: (1) it is a source of competitive
advantage and makes a significant contribution to perceived customer
benefits. (2) It has applications in a wide variety of markets. (3) It is difficult
for competitors to imitate.

Corporate and Division Strategic Planning

Some corporations give their business units freedom to set their own sales
and profit goals and strategies. Others set goals for their business units but
let them develop their own strategies. Still others set the goals and
participate in developing individual business unit strategies. All corporate
headquarters undertake four planning activities:
1. Defining the corporate mission

2. Establishing strategic business units

3. Assigning resources to each strategic

4. Assessing growth opportunities

 1. Defining the corporate mission
An organization exists to accomplish something: to make cars, lend
money, provide a night’s lodging. Over time, the mission may change,
to take advantage of new opportunities or respond to new market
conditions. Amazon.com changed its mission from being the world’s
largest online bookstore to aspiring to become the world’s largest
online store.
To define its mission, a company should address Peter Ducker’s classic
questions: What is our business? Who is the customer? What is of
value to the customer? What will our business be? What should our
business be? These simple-sounding questions are among the most
difficult a company will ever have to answer.
Successful companies continuously raise and answer them.
1. They focus on a limited number of goals. The statement “We want
to produce the highest quality products, offer the most service,
achieve the widest distribution, and sell at the lowest prices” claims
too much.
2. They stress the company’s major policies and values. They narrow
the range of individual discretion so employees act consistently on
important issues.
3. They define the major competitive spheres within which the
company will operate.
4. They take a long-term view. Management should change the
mission only when it ceases to be relevant.
5. They are as short, memorable, and meaningful as possible.

2- Establishing Strategic Business Units

Companies often define themselves in terms of products: They are in the

“auto business” or the “clothing business.” Market definitions of a business,
however, describe the business as a customer satisfying process. Products
are transient; basic needs and customer groups endure forever.
Transportation is a need: the horse and carriage, automobile, railroad,
airline, ship, and truck are products that meet that need.
A target market definition tends to focus on selling a product or service to a
current market. Pepsi could define its target market as everyone who drinks
carbonated soft drinks, and competitors would therefore be other
carbonated soft drink companies. A strategic market definition, however,
also focuses on the potential market. If Pepsi considered everyone who
might drink something to quench their thirst, its competition would include
noncarbonated soft drinks, bottled water, fruit juices, tea, and coffee.
An SBU has three characteristics: 1. it is a single business, or a collection of
related businesses, that can be planned separately from the rest of the
company. 2. It has its own set of competitors. 3. It has a manager
responsible for strategic planning and profit performance, who controls
most of the factors affecting profit.

3-Assigning Resources to Each SBU

Once it has defined SBUs, management must decide how to allocate
corporate resources to each. Several portfolio-planning models provide
ways to make investment decisions.

4-Assessing Growth Opportunities

Assessing growth opportunities includes planning new businesses,
downsizing, and terminating older businesses. If there is a gap between
future desired sales and projected sales, corporate management will need
to develop or acquire new businesses to fill it.
Business Unit Strategic Planning

The Business Mission

Each business unit needs to define its specific mission within the broader
company mission. Thus, a television-studio-lighting-equipment company
might define its mission as, “To target major television studios and become
their vendor of choice for lighting technologies that represent the most
advanced and reliable studio lighting arrangements.”

SWOT Analysis
The overall evaluation of a company’s strengths, weaknesses, opportunities,
and threats is called SWOT analysis. It’s a way of monitoring the external
and internal marketing environment. EXTERNAL
ENVIRONMENT (OPPORTUNITY AND THREAT)
ANALYSIS A business unit must monitor key microenvironment forces and
significant microenvironment factors that affect its ability to earn profits. It
should set up a marketing intelligence system to track trends and important
developments and any related opportunities and threats.
INTERNAL ENVIRONMENT (STRENGTHS AND WEAKNESSES)
ANALYSIS It’s one thing to find attractive opportunities, and another to be
able to take advantage of them. Each business needs to evaluate its internal
strengths and weaknesses.

Goal Formulation
Once the company has performed a SWOT analysis, it can proceed to goal
formulation, developing specific goals for the planning period. Goals are
objectives that are specific with respect to magnitude and time. Most
business units pursue a mix of objectives, including profitability, sales
growth, market share improvement, risk containment, innovation, and
reputation. The business unit sets these objectives and then manages by
objectives (MBO).
For an MBO system to work, the unit’s objectives must meet four criteria:
1. They must be arranged hierarchically, from most to least important.
2. Objectives should be quantitative whenever possible.
3. Goals should be realistic.
4. Objectives must be consistent. It’s not possible to maximize sales and
profits simultaneously.

Strategic Formulation
Goals indicate what a business unit wants to achieve; strategy is a game plan
for getting there. Every business must design a strategy for achieving its
goals, consisting of a marketing strategy and a compatible technology
strategy and sourcing strategy.
Overall cost leadership.
Firms work to achieve the lowest production and distribution costs so they
can under price competitors and win market share. They need less skill in
marketing. The problem is that other firms will usually compete with still-
lower costs and hurt the firm that rested its whole future on cost.
Differentiation
The business concentrates on achieving superior performance in an
important customer benefit area valued by a large part of the market. The
firm seeking quality leadership, for example, must make products with the
best components, put them together expertly, inspect them carefully, and
effectively communicate their quality.
Focus.
The business focuses on one or more narrow market segments, gets to
know them intimately, and pursues either cost leadership or differentiation
within the target segment

Program Formulation and Implementation

Even a great marketing strategy can be sabotaged by poor implementation.
If the unit has decided to attain technological leadership, it must strengthen
its R&D department, gather technological intelligence, develop leading-edge
products, train its technical sales force, and communicate its technological
leadership.

Feedback and Control

A company’s strategic fit with the environment will inevitably erode,
because the market environment changes faster than the company’s seven
Ss. Thus, a company might remain efficient yet lose effectiveness.

Marketing plan
is a written document that summarizes what the marketer has learned
about the marketplace and indicates how the firm plans to reach its
marketing objectives

Contents of a Marketing Plan

Executive summary and table of contents

The marketing plan should open with a table of contents and brief summary
for senior management of the main goals and recommendations.
Situation analysis
This section presents relevant background data on sales, costs, the market,
competitors, and the various forces in the microenvironment. How do we
define the market, how big is it, and how fast is it growing? What are the
relevant trends and critical issues? Firms will use all this information to carry
out a SWOT analysis.

Marketing strategy
Here the marketing manager defines the mission, marketing and financial
objectives, and needs the market offering is intended to satisfy as well as its
competitive positioning. All this requires inputs from other areas, such as
purchasing, manufacturing, sales, finance, and human resources.

Financial projections
Financial projections include a sales forecast, an expense forecast, and a
break-even analysis. On the revenue side is forecasted sales volume by
month and product category, and on the expense side the expected costs of
marketing, broken down into finer categories.

Implementation controls
The last section outlines the controls for monitoring and adjusting
implementation of the plan. Typically, it spells out the goals and budget for
each month or quarter, so management can review each period’s results
and take corrective action as needed. Some organizations include
contingency plans.

Sample Marketing Plan

1.0 Executive Summary

Pegasus Sports International is a start-up aftermarket inline skating
accessory manufacturer. In addition to the aftermarket products,
Pegasus is developing Skate Tours, a service that takes clients out, in
conjunction with a local skate shop, and provides them with an
afternoon of skating using inline skates and some of Pegasus’ other
accessories such as Skate Sails. The aftermarket skate accessory
market has been largely ignored. Although there are several major
manufacturers of the skates themselves, the accessory market has not
been addressed. This provides Pegasus with an extraordinary
opportunity for market growth. Skating is a booming sport. Currently,
most of the skating is recreational. There are, however, a growing
number of skating competitions, including team-oriented competitions
such as skate hockey as well as individual competitions such as speed
skate racing. Pegasus will work to grow these markets and develop the
skate transportation market, a more utilitarian use of skating. Several
of Pegasus’ currently developed products have patents pending, and
local market research indicates that there is great demand for these
products. Pegasus will achieve fast, significant market penetration
through a solid business model, long-range planning, and a strong
management team that is able to execute this exciting opportunity.
The three principals on the management team have over 30 years of
combined personal and industry experience. This extensive experience
provides Pegasus with the empirical information as well as the passion
to provide the skating market with much-needed aftermarket
products. Pegasus will sell its products initially through its Web site.
This “Dell” direct-to-the-consumer approach will allow Pegasus to
achieve higher margins and maintain a close relationship with the
customers, which is essential for producing products that have a true
market demand. By the end of the year, Pegasus will have also
developed relationships with different skate shops and will begin to
sell some of its products through retailers.

2.0 Situation Analysis

Pegasus is entering its first year of operation. Its products have been
well received, and marketing will be key to the development of brand
and product awareness as well as the growth of the customer base.
Pegasus International offers several different aftermarket skating
accessories, serving the growing inline skating industry.
2.1 Market Summary
Pegasus possesses good information about the market and knows a
great deal about the common attributes of the most prized customer.
This information will be leveraged to better understand who is served,
what their specific needs are, and how Pegasus can better
communicate with them.
Target Markets
■ Recreational
■ Fitness
■ Speed
■ Hockey
■ Extreme
2.1.1 Market Demographics
The profile for the typical Pegasus customer consists of the following
geographic, demographic, and behavior factors:
Geographic
■ Pegasus has no set geographic target area. By leveraging the
expansive reach of the Internet and multiple delivery services, Pegasus
can serve both domestic and international customers. ■ The total
targeted population is 31 million users.
Demographics
■ There is an almost equal ratio between male and female users.
■ Ages 13–46, with 48% clustering around ages 23–34. The
recreational users tend to cover the widest age range, including young
users through active adults. The fitness users tend to be ages 20–40.
The speed users tend to be in their late twenties and early thirties. The
hockey players are generally in their teens through their early
twenties. The extreme segment is of similar age to the hockey players.
■ Of the users who are over 20, 65% have an undergraduate degree or
substantial undergraduate coursework.
■ The adult users have a median personal income of $47,000.
Behavior Factors
■ Users enjoy fitness activities not as a means for a healthy life, but as
an intrinsically enjoyable activity in itself.
■ Users spend money on gear, typically sports equipment.
■ Users have active lifestyles that include some sort of recreation at
least two to three times a week.
2.1.2 Market
Needs Pegasus is providing the skating community with a wide range
of accessories for all variations of skating. The company seeks to fulfill
the following benefits that are important to its customers:
■ Quality craftsmanship. The customers work hard for their money
and do not enjoy spending it on disposable products that work for only
a year or two. ■
Well-thought-out designs. The skating market has not been addressed
by well-thought-out products that serve skaters’ needs. Pegasus’
industry experience and personal dedication to the sport will provide it
with the needed information to produce insightfully designed
products. ■ Customer service. Exemplary service
is required to build a sustainable business that has a loyal customer
base.
2.1.3 Market Trends
Pegasus will distinguish itself by marketing products not previously
available to skaters. The emphasis in the past has been to sell skates
and very few replacement parts. The number of skaters is not
restricted to any one single country, continent, or age group, so there
is a world market. Pegasus has products for virtually every group of
skaters. The fastest-growing segment of this sport is the fitness skater.
Therefore, the marketing is being directed toward this group. Blade
Boots will enable users to enter establishments without having to
remove their skates. Blade Boots will be aimed at the recreational
skater, the largest segment. Skate Aids, on the other hand, are great
for everyone. The sport of skating will also grow through Skate Sailing.
This sport is primarily for the medium-to-advanced skater, and its
growth potential is tremendous. The sails that Pegasus has
manufactured have been sold in Europe, following a pattern similar to
windsurfing. Windsailing originated in Santa Monica but did not take
off until it had already grown big in Europe.
2.1.4 Market Growth
With the price of skates going down due to competition by so many
skate companies, the market has had steady growth throughout the
world, although sales had slowed down in some markets. The growth
statistics for 2007 were estimated to be over 35 million units. More
and more people are discovering— and in many cases rediscovering—
the health benefits and fun of skating.
2.2 SWOT Analysis
The following SWOT analysis captures the key strengths and
weaknesses within the company and describes the opportunities and
threats facing Pegasus.
2.2.1 Strengths
■ In-depth industry experience and insight
■ Creative, yet practical product designers
■ The use of a highly efficient, flexible business model utilizing direct
customer sales and distribution
2.2.2 Weaknesses
■ The reliance on outside capital necessary to grow the business
■ A lack of retailers who can work face-to-face with the customer to
generate brand and product awareness
■ The difficulty of developing brand awareness as a start-up company
2.2.3 Opportunities
■ Participation within a growing industry
■ Decreased product costs through economy of scale
■ The ability to leverage other industry participants’ marketing efforts
to help grow the general market
2.2.4 Threats
■ Future/potential competition from an already established market
participant ■ A slump in the economy
that could have a negative effect on people’s spending of discretionary
income on fitness/ recreational products
■ The release of a study that calls into question the safety of skating or
the inability to prevent major skating induced traumas.
2.3 Competition
Pegasus Sports International is forming its own market. Although there
are a few companies that do make sails and foils that a few skaters are
using, Pegasus is the only brand that is truly designed for and by
skaters. The few competitors’ sails on the market are not designed for
skating, but for windsurfing or for skateboards. In the case of foils,
storage and carrying are not practical. There are different indirect
competitors who are manufacturers of the actual skates. After many
years in the market, these companies have yet to become direct
competitors by manufacturing accessories for the skates that they
make.
2.4 Product Offering
Pegasus Sports International now offers several products:
■ The first product that has been developed is Blade Boots, a cover for
the wheels and frame of inline skates, which allows skaters to enter
places that normally would not allow them in with skates on. Blade
Boots come with a small pouch and belt that converts to a well-
designed skate carrier.
■ The second product is Skate Sails. These sails are specifically
designed for use while skating. Feedback that Pegasus has received
from skaters indicates skate sailing could become a very popular sport.
Trade marking this product is currently in progress.
■ The third product, Skate Aid, will be in production by the end of the
year. Other ideas for products are under development, but will not be
disclosed until Pegasus can protect them through pending patent
applications.
2.5 Keys to Success
The keys to success are designing and producing products that meet
market demand. In addition, Pegasus must ensure total customer
satisfaction. If these keys to success are achieved, it will become a
profitable, sustainable company.
2.6 Critical Issues
As a start-up business, Pegasus is still in the early stages. The critical
issues are for Pegasus to: ■ Establish itself as the premier
skating accessory company.
■ Pursue controlled growth that dictates that payroll expenses will
never exceed the revenue base. This will help protect against
recessions.
■ Constantly monitor customer satisfaction, ensuring that the growth
strategy will never compromise service and satisfaction levels.
3.0 Marketing Strategy
The key to the marketing strategy is focusing on the speed, health and
fitness, and recreational skaters. Pegasus can cover about 80% of the
skating market because it produces products geared toward each
segment. Pegasus is able to address all of the different segments
within the market because, although each segment is distinct in terms
of its users and equipment, its products are useful to all of the
different segments.
3.1 Mission
Pegasus Sports International’s mission is to provide the customer with
the finest skating accessories available. “We exist to attract and
maintain customers. With a strict adherence to this maxim, success
will be ensured. Our services and products will exceed the
expectations of the customers.”
3.2 Marketing Objectives
■ Maintain positive, strong growth each quarter (notwithstanding
seasonal sales patterns). ■ Achieve a steady increase in market
penetration.
■ Decrease customer acquisition costs by 1.5% per quarter.
3.3 Financial Objectives
■ Increase the profit margin by 1% per quarter through efficiency and
economy-of-scale gains. ■ Maintain a significant research
and development budget (as a percentage relative to sales) to spur
future product developments.
■ Achieve a double- to triple-digit growth rate for the first three years.
3.4 Target Markets
With a world skating market of over 31 million that is steadily growing
(statistics released by the Sporting Goods Manufacturers Association),
the niche has been created. Pegasus’ aim is to expand this market by
promoting Skate Sailing, a new sport that is popular in both Santa
Monica and Venice Beach in California. The Sporting Goods
Manufacturers Association survey indicates that skating now has more
participation than football, softball, skiing, and snowboarding
combined. The breakdown of participation in skating is as follows: 1+%
speed (growing), 8% hockey (declining), 7% extreme/aggressive
(declining), 22% fitness (nearly 7 million—the fastest growing), and
61% recreational (first-timers). Pegasus’ products are targeting the
fitness and recreational groups, because they are the fastest growing.
These groups are gearing themselves toward health and fitness, and
combined, they can easily grow to 85% (or 26 million) of the market in
the next five years.
3.5 Positioning
Pegasus will position itself as the premier aftermarket skating
accessory company. This positioning will be achieved by leveraging
Pegasus’ competitive edge: industry experience and passion. Pegasus
is a skating company formed by skaters for skaters. Its management is
able to use its vast experience and personal passion for the sport to
develop innovative, useful accessories for a broad range of skaters.
3.6 Strategies
The single objective is to position Pegasus as the premier skating
accessory manufacturer, serving the domestic market as well as the
international market. The marketing strategy will seek to first create
customer awareness concerning the offered products and services and
then develop the customer base. The message that Pegasus will seek
to communicate is that it offers the best-designed, most useful skating
accessories. This message will be communicated through a variety of
methods. The first will be the Pegasus Web site, which will provide a
rich source of product information and offer consumers the
opportunity to purchase. A lot of time and money will be invested in
the site to provide the customer with the perception of total
professionalism and utility for Pegasus’ products and services. The
second marketing method will be advertisements placed in numerous
industry magazines. The skating industry is supported by several
different glossy magazines designed to promote the industry as a
whole. In addition, a number of smaller periodicals serve the smaller
 market segments within the skating industry. The last method of
communication is the use of printed sales literature. The two
previously mentioned marketing methods will create demand for the
sales literature, which will be sent out to customers. The cost of the
sales literature will be fairly minimal, because it will use the already-
compiled information from the Web site.
3.7 Marketing Program
Pegasus’ marketing program is comprised of the following approaches
to pricing, distribution, advertising and promotion, and customer
service. •
Pricing. This will be based on a per-product retail price.
• Distribution. Initially, Pegasus will use a direct-to-consumer
distribution model. Over time, it will use retailers as well.
• Advertising and promotion. Several different methods will be used
for the advertising effort.
• Customer service. Pegasus will strive to achieve benchmarked levels
of customer care.

3.8 Marketing Research

Pegasus is blessed with the good fortune of being located in the center of
the skating world: Venice, California. It will be able to leverage this
opportune location by working with many of the different skaters that live in
the area. Pegasus was able to test all of its products not only with its
principals, who are accomplished skaters, but also with the many other
dedicated and “newbie” users located in Venice. The extensive product
testing by a wide variety of users provided Pegasus with valuable product
feedback and has led to several design improvements.

4.0 Financials
This section will offer the financial overview of Pegasus related to marketing
activities. Pegasus will address break-even analysis, sales forecasts, expense
forecast, and indicate how these activities link to the marketing strategy.
4.1 Break-Even Analysis
The break-even analysis indicates that $7,760 will be required in monthly
sales revenue to reach the break-even point.
4.2 Sales Forecast
Pegasus feels that the sales forecast figures are conservative. It will steadily
increase sales as the advertising budget allows. Although the target market
forecast listed all of the potential customers divided into separate groups,
the sales forecast group’s customers into two categories: recreational and
competitive. Reducing the number of categories allows the reader to quickly
discern information, making the chart more functional.
4.3 Expense Forecast
The expense forecast will be used as a tool to keep the department on
target and provide indicators when corrections/modifications are needed
for the proper implementation of the marketing plan.

5.0 Controls
The purpose of Pegasus’ marketing plan is to serve as a guide for the
organization. The following areas will be monitored to gauge performance:
■ Revenue: monthly and annual
■ Expenses: monthly and annual
■ Customer satisfaction
■ New-product development
Marketing information system (MIS)

Consists of people, equipment, and procedures to gather, sort, analyze,

evaluate, and distribute needed, timely, and accurate information to
marketing decision makers.
It relies on internal company records, marketing intelligence activities, and
marketing research.

Information Needs Probes

1. What decisions do you regularly make?
2. What information do you need to make these decisions?
3. What information do you regularly get?
4. What special studies do you periodically request?
5. What information would you want that you are not getting now?
6. What information would you want daily? Weekly? Monthly? Yearly?
7. What online or offline newsletters, briefings, blogs, reports, or magazines
would you like to see on a regular basis?
8. What topics would you like to be kept informed of?
9. What data analysis and reporting programs would you want?

The Marketing Intelligence System

is a set of procedures and sources that managers use to obtain everyday
information about developments in the marketing environment. The
internal records system supplies results data, but the marketing intelligence
system supplies happenings data.
Marketing managers collect marketing intelligence in a variety of different
ways, such as by reading books, newspapers, and trade publications; talking
to customers, suppliers, and distributors; monitoring social media on the
Internet; and meeting with other company managers
a company can take eight possible actions to improve the quantity and
quality of its marketing intelligence. After describing the first seven, we
devote special attention to the eighth, collecting marketing intelligence on
the Internet.

• Train and motivate the sales force to spot and report new developments.
The company must “sell” its sales force on their importance as intelligence
gatherers.

• Motivate distributors, retailers, and other intermediaries to pass along

important intelligence. Marketing intermediaries are often closer to the
customer and competition and can offer helpful insights.
• Hire external experts to collect intelligence.
Many companies hire specialists to gather marketing intelligence. Service
providers and retailers send mystery shoppers to their stores to assess
cleanliness of facilities, product quality, and the way employees treat
customers.

• Network internally and externally.

The firm can purchase competitors’ products, attend open houses and trade
shows, read competitors’ published reports, attend stockholders’ meetings,
talk to employees, collect competitors’ ads, consult with suppliers, and look
up news stories about competitors.
• Set up a customer advisory panel.
Members of advisory panels might include the company’s largest, most
outspoken, most sophisticated, or most representative customers. For
example, GlaxoSmithKline sponsors an online community devoted to weight
loss and says it is learning far more than it could have gleamed from focus
groups on topics from packaging its weightless pill to where to place in-store
marketing.

• Take advantage of government-related data resources.

• Purchase information from outside research firms and vendors.
Well-known data suppliers include firms such as the A.C. Nielsen Company
and Information Resources Inc. They collect information about product sales
in a variety of categories and consumer exposure to various media.

Collecting Marketing Intelligence on the Internet

• Independent customer goods and service review forums.
Independent forums include Web sites such as Epinions.com, RateItAll.com,
ConsumerReview.com, and Bizrate.com. Bizrate.com collects millions of
consumer reviews of stores and products each year from two sources: its
1.3 million volunteer members, and feedback from stores that allow
Bizrate.com to collect it directly from their customers as they make
purchases.

• Distributor or sales agent feedback sites.

Feedback sites offer positive and negative product or service reviews, but
the stores or distributors have built the sites themselves. Amazon.com
offers an interactive feedback opportunity through which buyers, readers,
editors, and others can review all products on the site, especially books.
Elance.com is an online professional services provider that allows
contractors to describe their experience and level of satisfaction with
subcontractors.
• Customer complaint sites.
Customer complaint forums are designed mainly for dissatisfied customers.
PlanetFeedback.com allows customers to voice unfavorable experiences
with specific companies. Another site, Complaints.com, lets customers vent
their frustrations with particular firms or offerings.
• Public blogs.
Tens of millions of blogs and social networks exist online, offering personal
opinions, reviews, ratings, and recommendations on virtually any topic.
Marketing Research
Systematic design, collection, analysis, and reporting of data and findings
relevant to a specific marketing situation facing the company.

Marketing research firms fall into three categories:

1. Syndicated-service research firms
these firms gather consumer and trade information, which they sell for a
fee.
2. Custom marketing research firms
these firms are hired to carry out specific projects. They design the study
and report the findings.

3. Specialty-line marketing research firms

These firms provide specialized research services. The best example is the
field-service firm, which sells field interviewing services to other firms.

The Marketing Research Process

Effective marketing research follows the six steps:-
Step 1: Define the Problem, the Decision Alternatives, and the Research
Objectives

Marketing managers must be careful not to define the problem too broadly
or too narrowly for the marketing researcher. A marketing manager who
says, “Find out everything you can about first-class air travelers’ needs,” will
collect a lot of unnecessary information. One who says, “Find out whether
enough passengers aboard a B747 flying direct between Chicago and Tokyo
would be willing to pay $25 for an Internet connection for American Airlines
to break even in one year on the cost of offering this service,” is taking too
narrow a view of the problem.
Step 2: Develop the Research Plan
the second stage of marketing research is where we develop the most
efficient plan for gathering the needed information and what that will cost.
Observational Research

Researchers can gather fresh data by observing the relevant actors and
settings unobtrusively as they shop or consume products.
Ethnographic research
is a particular observational research approach that uses concepts and tools
from anthropology and other social science disciplines to provide deep
cultural understanding of how people live and work.

Focus Group Research

A focus group is a gathering of 6 to 10 people carefully selected by
researchers based on certain demographic, psychographic, or other
considerations and brought together to discuss various topics of interest at
length. Participants are normally paid a small sum for attending. A
professional research moderator provides questions and probes based on
the marketing managers’ discussion guide or agenda. In focus groups,
moderators try to discern consumers’ real motivations and why they say and
do certain things.
SAMPLING PLAN
After deciding on the research approach and instruments, the marketing
researcher must design a sampling plan. These calls for three decisions:
1. Sampling unit: Whom should we survey?
2. Sample size: How many people should we survey?
3. Sampling procedure: How should we choose the respondents?
CONTACT METHODS
Now the marketing researcher must decide how to contact the subjects: by
mail, by telephone, in person, or online.
Step 3: Collect the Information
the data collection phase of marketing research is generally the most
expensive and the most prone to error. Marketers may conduct surveys in
homes, over the phone, via the Internet, or at a central interviewing location
like a shopping mall.
Step 4: Analyze the Information
the next-to-last step in the process is to extract findings by tabulating the
data and developing summary measures. The researchers now compute
averages and measures of dispersion for the major variables and apply some
advanced statistical techniques and decision models in the hope of
discovering additional findings. They may test different hypotheses and
theories, applying sensitivity analysis to test assumptions and the strength
of the conclusions.
Step 5: Present the Findings
as the last step; the researcher presents findings relevant to the major
marketing decisions facing management.

Step 6: Make the Decision

The Seven Characteristics of Good Marketing Research

1. Scientific method
Effective marketing research uses the principles of the scientific method:
careful observation, formulation of hypotheses, prediction, and testing.
2. Research creativity
3. Multiple methods
Marketing researchers shy away from overreliance on any one method.
They also recognize the value of using two or three methods to increase
confidence in the results.

4. Interdependence of models and data

Marketing researchers recognize that data are interpreted from underlying
models that guide the type of information sought.
5. Value and cost of information
Marketing researchers show concern for estimating the value of information
against its cost. Costs are typically easy to determine, but the value of
research is harder to quantify. It depends on the reliability and validity of
the findings and management’s willingness to accept and act on those
findings.

6. Healthy skepticism
Marketing researchers show a healthy skepticism toward glib assumptions
made by managers about how a market works. They are alert to the
problems caused by “marketing myths.”
7. Ethical marketing research
Marketing researcher benefits both the sponsoring company and its
customers. The misuse of marketing research can harm or annoy
consumers, increasing resentment at what consumers regard as an invasion
of their privacy or a disguised sales pitch.

Creating Long-term Loyalty Relationships

Today, companies face their toughest competition ever. Moving from a
product-and-sales philosophy to a holistic marketing philosophy, however,
gives them a better chance of outperforming the competition. The
cornerstone of a well-conceived holistic marketing orientation is strong
customer relationships. Marketers must connect with customers—
informing, engaging, and maybe even energizing them in the process.
Customer centered companies are adept at building customer relationships,
not just products; they are skilled in market engineering, not just product
engineering. A pioneer in customer relationship management techniques is
Harrah’s Entertainment.

Building Customer Value, Satisfaction, and Loyalty

The only value your company will ever create is the value that comes from
customers— the ones you have now and the ones you will have in the
future. Businesses succeed by getting, keeping, and growing customers.
Customers are the only reason you build factories, hire employees, schedule
meetings, lay fiber-optic lines, or engage in any business activity. Without
customers, you don’t have a business.
Customer Perceived Value
Consumers are better educated and informed than ever, and they have the
tools to verify companies’ claims and seek out superior alternatives.
Dell road to success by offering low-priced computers, logistical efficiency,
and after-sales service. The firm’s maniacal focus on low costs has been a
key ingredient in its success. When the company shifted its customer-service
call centers to India and the Philippines to cut costs, however, understaffing
frequently led to 30-minute waits for customers. Almost half the calls
required at least one transfer. To discourage customer calls, Dell even
removed its toll-free service number from its Web site. With customer
satisfaction slipping, and competitors matching its product quality and
prices and offering improved service, Dell’s market share and stock price
both declined sharply. Dell ended up hiring more North American call center
employees. “The team was managing cost instead of managing service and
quality.

Customer-perceived value (CPV)

is the difference between the prospective customer’s evaluation of all the
benefits and all the costs of an offering and the perceived alternatives.

Customer value analysis

1. Identify the major attributes and benefits customers’ value.
Customers are asked what attributes, benefits, and performance levels they
look for in choosing a product and vendors. Attributes and benefits should
be defined broadly to encompass all the inputs to customers’ decisions.
2. Assess the quantitative importance of the different attributes and
benefits.

Customers are asked to rate the importance of different attributes and

benefits. If their ratings diverge too much, the marketer should cluster them
into different segments.
3. Assess the company’s and competitors’ performances on the different
customer values against their rated importance.
Customers describe where they see the company’s and competitors’
performances on each attribute and benefit.
4. Examine how customers in a specific segment rate the company’s
performance against a specific major competitor on an individual attribute
or benefit basis.

If the company’s offer exceeds the competitor’s offer on all important

attributes and benefits, the company can charge a higher price (thereby
earning higher profits), or it can charge the same price and gain more
market share.
5. Monitor customer values over time.
The company must periodically redo its studies of customer values and
competitors’ standings as the economy, technology, and features change.

Totals Customer Satisfaction

In general, satisfaction is a person’s feelings of pleasure or disappointment
that result from comparing a product’s perceived performance (or outcome)
to expectations. If the
performance falls short of expectations, the customer is dissatisfied. If it
matches expectations, the customer is satisfied. If it exceeds expectations,
the customer is highly satisfied or delighted. Customer assessments of
product performance depend on many factors, especially the type of loyalty
relationship the customer has with the brand. Consumers often form more
favorable perceptions of a product with a brand they already feel positive
about.

Customer relationship management (CRM)

is the process of carefully managing detailed information about individual
customers and all customer “touch points” to maximize loyalty.
A customer touch point is any occasion on which a customer encounters the
brand and product— from actual experience to personal or mass
communications to casual observation. For a hotel, the touch points include
reservations, check-in and checkout, frequent-stay programs, room service,
business services, exercise facilities, laundry service, restaurants, and bars.
The Four Seasons relies on personal touches, such as a staff that always
addresses guests by name, high-powered employees who understand the
needs of sophisticated business travelers, and at least one best-in-region
facility, such as a premier restaurant or spa.

Building Loyalty
Creating a strong, tight connection to customers is the dream of any
marketer and often the key to long-term marketing success. Companies that
want to form such bonds should heed some specific considerations: -
• Create superior products, services, and experiences for the target market.
• Get cross-departmental participation in planning and managing the
customer satisfaction and retention process.
• Integrate the “Voice of the Customer” to capture their stated and
unstated needs or requirements in all business decisions.
• Organize and make accessible a database of information on individual
customer needs, preferences, contacts, purchase frequency, and
satisfaction.
• Make it easy for customers to reach appropriate company staff and
express their needs, perceptions, and complaints.
• Assess the potential of frequency programs and club marketing programs.
• Run award programs recognizing outstanding employees.
Apple encourages owners of its computers to form local Apple-user groups.
By 2009, there were over 700, ranging in size from fewer than 30 members
to over 1,000. The groups provide Apple owners with opportunities to learn
more about their computers, share ideas, and get product discounts. They
sponsor special activities and events and perform community service. A visit
to Apple’s Web site will help a customer find a nearby user group.
Analyzing Consumer Markets
The aim of marketing is to meet and satisfy target customers’ needs and
wants better than competitors. Marketers must have a thorough
understanding of how consumers think, feel, and act and offer clear value to
each and every target consumer.
Successful marketing requires that companies fully connect with their
customers. Adopting a holistic marketing orientation means understanding
customers— gaining a 360-degree view of both their daily lives and the
changes that occur during their lifetimes so the right products are always
marketed to the right customers in the right way.

Consumer behavior
is the study of how individuals, groups, and organizations select, buy, use,
and dispose of goods, services, ideas, or experiences to satisfy their needs
and wants.2 Marketers must fully understand both the theory and reality of
consumer behavior.

Cultural Factors
Culture, subculture, and social class are particularly important influences on
consumer buying behavior. Culture
is the fundamental determinant of a person’s wants and behavior. Through
family and other key institutions, a child growing up in the United States is
exposed to values such as achievement and success, activity, efficiency and
practicality, progress, material comfort, individualism, freedom, external
comfort, humanitarianism, and youthfulness.
Each culture consists of smaller subcultures that provide more specific
identification and socialization for their members. Subcultures include
nationalities, religions, racial groups, and geographic regions. When
subcultures grow large and affluent enough, companies often design
specialized marketing programs to serve them.
Social Factors
In addition to cultural factors, social factors such as reference groups,
family, and social roles and statuses affect our buying behavior.
Personal Factors
Personal characteristics that influence a buyer’s decision include age and
stage in the life cycle, occupation and economic circumstances, personality
and self-concept, and lifestyle and values.

Model of Consumer Behavior

Maslow’s Hierarchy of Needs

The Buying Decision Process:

1-Problem Recognition
the buying process starts when the buyer recognizes a problem or need
triggered by internal or external stimuli. With an internal stimulus, one of
the person’s normal needs.
2-Information Search
consumers often search for limited amounts of information. Surveys have
shown that for durables, half of all consumers look at only one store, and
only 30 percent look at more than one brand of appliances. INFORMATION
SOURCES
Major information sources to which consumers will turn fall into four
groups:

• Personal. Family, friends, neighbors, acquaintances

• Commercial. Advertising, Web sites, salespersons, dealers, packaging,
displays

• Public. Mass media, consumer-rating organizations.

• Experiential. Handling, examining, uses the product.
3-Evaluation of Alternatives.
4- Purchase Decision
In the evaluation stage, the consumer forms preferences among the brands
in the choice set and may also form an intention to buy the most preferred
brand. In executing a purchase intention, the consumer may make up to five
sub decisions: brand (brand A), dealer (dealer 2), quantity (one computer),
timing (weekend), and payment method (credit card).
5- Post purchase
Behavior After the purchase, the consumer might experience dissonance
from noticing certain disquieting features or hearing favorable things about
other brands and will be alert to information that supports his or her
decision. Marketing communications should supply beliefs and evaluations
that reinforce the consumer’s choice and help him or her feel good about
the brand. The marketer’s job therefore doesn’t end with the purchase.
Marketers must monitor post purchase satisfaction, post purchase actions,
and post purchase product uses and disposal.
Identifying Market Segments and Targets
Companies cannot connect with all customers in large, broad, or diverse
markets. But they can divide such markets into groups of consumers or
segments with distinct needs and wants. A company then needs to identify
which market segments it can serve effectively. This decision requires a
keen understanding of consumer behavior and careful strategic thinking. To
develop the best marketing plans, managers need to understand what
makes each segment unique and different. Identifying and satisfying the
right market segments is often the key to marketing success.
Companies are now embracing target marketing. Instead of scattering their
marketing efforts, they’re focusing on those consumers they have the
greatest chance of satisfying. Effective target marketing requires that
marketers: 1. Identify and profile distinct groups of buyers who differ in
their needs and wants (market segmentation). 2. Select one or more market
segments to enter (market targeting). 3. For each target segment, establish
and communicate the distinctive benefit(s) of the company’s market
offering (market positioning).
A market segment
consists of a group of customers who share a similar set of needs and wants.
The marketer’s task is to identify the appropriate number and nature of
market segments and decide which one(s) to target. We use two broad
groups of variables to segment consumer markets. Some researchers try to
define segments by looking at descriptive characteristics: geographic,
demographic, and psychographic. Then they examine whether these
customer segments exhibit different needs or product responses. For
example, they might examine the differing attitudes of “professionals,”“blue
collars,” and other groups toward, say, “safety” as a product benefit.
Other researchers try to define segments by looking at behavioral
considerations, such as consumer responses to benefits, usage occasions, or
brands.
Geographic Segmentation
divides the market into geographical units such as nations, states, regions,
counties, cities, or neighborhoods. The company can operate in one or a few
areas, or it can operate in all but pay attention to local variations.
Demographic Segmentation
In demographic segmentation, we divide the market on variables such as
age, family size, family life cycle, gender, income, occupation, education,
religion, race, generation, nationality, and social class. One reason
demographic variables are so popular with marketers is that they’re often
associated with consumer needs and wants.
Behavioral Segmentation
In behavioral segmentation, marketers divide buyers into groups on the
basis of their knowledge of, attitude toward, use of, or response to a
product.

Behavioral Segmentation Breakdown

Market Targeting
There are many statistical techniques for developing market segments.
Once the firm has identified its market-segment opportunities, it must
decide how many and which ones to target. Marketers are increasingly
combining several variables in an effort to identify smaller, better-defined
target groups.
Possible Levels of Segmentation

Creating Brand Equity

One of the most valuable intangible assets of a firm is its brands, and it is
incumbent on marketing to properly manage their value. Building a strong
brand is both an art and a science. It requires careful planning, a deep long-
term commitment, and creatively designed and executed marketing. A
strong brand commands intense consumer loyalty—at its heart is a great
product or service. Strategic brand management
process. Strategic brand management combines the design and
implementation of marketing activities and programs to build, measure, and
manage brands to maximize their value. The strategic brand management
process has four main steps:

• Identifying and establishing brand positioning

• Planning and implementing brand marketing
• Measuring and interpreting brand performance
• Growing and sustaining brand value deals with brand positioning.

What Is Brand Equity?

Brand as “a name, term, sign, symbol, or design, or a combination of them,
intended to identify the goods or services of one seller or group of sellers
and to differentiate them from those of competitors.” A brand is thus a
product or service whose dimensions differentiate it in some way from
other products or services designed to satisfy the same need. These
differences may be functional, rational, or tangible—related to product
performance of the brand. They may also be more symbolic, emotional, or
intangible—related to what the brand represents or means in a more
abstract sense.
The Role of Brands
Brand identify the source or maker of a product and allow consumers—
either individuals or organizations—to assign responsibility for its
performance to a particular manufacturer or distributor. Consumers may
evaluate the identical product differently depending on how it is branded.
Brands also perform valuable functions for firms.
First, they simplify product handling or tracing.
Brands help to organize inventory and accounting records.
A brand also offers the firm legal protection for unique features or aspects
of the product. The brand name can be protected
through registered trademarks; manufacturing processes can be protected
through patents; and packaging can be protected through copyrights and
proprietary designs.

Branding
is endowing products and services with the power of a brand. It’s all about
creating differences between products. Marketers need to teach consumers
“who” the product is—by giving it a name and other brand elements to
identify it—as well as what the product does and why consumers should
care. Branding creates mental structures that help consumers organize their
knowledge about products and services in a way that clarifies their decision
making and, in the process, provides value to the firm. For branding
strategies to be successful.
For branding strategies to be successful and brand value to be created,
consumers must be convinced there are meaningful differences among
brands in the product or service category. Brand differences often relate to
attributes or benefits of the product itself.
Brand equity
is the added value endowed on products and services. It may be reflected in
the way consumers think, feel, and act with respect to the brand, as well as
in the prices, market share, and profitability the brand commands.

Marketing Advantages of Strong Brands

Improved perceptions of product performance
Greater trade cooperation and support
Greater loyalty Increased marketing communications effectiveness
Possible licensing opportunities
Less vulnerability to marketing crises
Additional brand extension opportunities
Larger margins Improved employee recruiting and retention
More inelastic consumer response to price increases
Greater financial market returns

BRAND ELEMENT CHOICE CRITERIA

1. Memorable
How easily do consumers recall and recognize the brand element, and
when—at both purchase and consumption?
2. Meaningful
Is the brand element credible? Does it suggest the corresponding category
and a product ingredient or the type of person who might use the brand?
3. Likable
How aesthetically appealing is the brand element? A recent trend is for
playful names.
4. Transferable
Can the brand element introduce new products in the same or different
categories?

5. Adaptable
How adaptable and updatable is the brand element?
6. Protectable
How legally protectable is the brand element?

Internal branding
consists of activities and processes that help inform and inspire employees
about brands.

When employees care about and believe in the brand, they’re motivated to
work harder and feel greater loyalty to the firm. Some important principles
for internal branding are

1. Choose the right moment.

Turning points are ideal opportunities to capture employees’ attention and
imagination. After it ran an internal branding campaign to accompany its
external repositioning.

2. Link internal and external marketing.

Internal and external messages must match. IBM’s e-business campaign not
only helped to change public perceptions of the company in the
marketplace, it also signaled to employees that IBM was determined to be a
leader in the use of Internet technology.
3. Bring the brand alive for employees.
Internal communications should be informative and energizing.

Measuring Brand Equity

An indirect approach assesses potential sources of brand equity by
identifying and tracking consumer brand knowledge structures.
A direct approach assesses the actual impact of brand knowledge on
consumer response to different aspects of the marketing.

Setting Product Strategy

Marketing planning begins with formulating an offering to meet target
customers’ needs or wants. The customer will judge the offering by three
basic elements: product features and quality, services mix and quality, and
price

Product Characteristics and Classifications

core benefit
the service or benefit the customer is really buying. A hotel guest is buying
rest and sleep.

Basic product
Thus a hotel room includes a bed, bathroom, towels, desk, dresser, and
closet.

Expected product
a set of attributes and conditions buyers normally expect when they
purchase this product. Hotel guests minimally expect a clean bed, fresh
towels, working lamps, and a relative degree of quiet.
Augmented product
that exceeds customer expectations.
Potential product
which encompasses all the possible augmentations and transformations the
product or offering might undergo in the future. Here is where companies
search for new ways to satisfy customers and distinguish their offering.

Product Classifications
1. Nondurable goods
Are tangible goods normally consumed in one or a few uses, such as beer
and shampoo. Because these goods are purchased frequently, the
appropriate strategy is to make them available in many locations, charge
only a small markup, and advertise heavily to induce trial and build
preference.

2. Durable goods
Are tangible goods that normally survive many uses: refrigerators, machine
tools, and clothing. Durable products normally require more personal selling
and service, command a higher margin, and require more seller guarantees.
3. Services are intangible
Inseparable, variable, and perishable products that normally require more
quality control, supplier credibility, and adaptability. Examples include
haircuts, legal advice, and appliance repairs.

CONSUMER-GOODS CLASSIFICATION
Convenience goods
frequently, immediately, and with minimal effort. Examples include soft
drinks, soaps, and newspapers.

Shopping goods
are those the consumer characteristically compares on such bases as
suitability, quality, price, and style. Examples include furniture, clothing, and
major appliances.
Specialty goods

have unique characteristics or brand identification for which enough buyers

is willing to make a special purchasing effort. Examples include cars, stereo
components, and men’s suits.

Product Differentiation
FORM
many products can be differentiated in form the size, shape, or physical
structure of a product. Consider the many possible forms of aspirin.
FEATURES
most products can be offered with varying features that supplement their
basic function. A company can identify and select appropriate new features
by surveying recent buyers and then calculating customer value versus
company cost for each potential feature.
CUSTOMIZATION
marketers can differentiate products by customizing them. As companies
have grown proficient at gathering information about individual customers
and business partners (suppliers, distributors, retailers), and as their
factories are being designed more flexibly, they have increased their ability
to individualize market offerings, messages, and media.
PERFORMANCE QUALITY
most products occupy one of four performance levels: low, average, high, or
superior. Performance quality is the level at which the product’s primary
characteristics operate. Quality is increasingly important for differentiation
as companies adopt a value model and provide higher quality for less
money.
CONFORMANCE QUALITY
Buyers expect a high conformance quality, the degree to which all produced
units are identical and meet promised specifications.
Durability
a measure of the product’s expected operating life under natural or stressful
conditions is a valued attribute for vehicles, kitchen appliances, and other
durable goods.

RELIABILITY
buyers normally will pay a premium for more reliable products. Reliability is
a measure of the probability that a product will not malfunction or fail
within a specified time period.
Reparability
measures the ease of fixing a product when it malfunctions or fails. Ideal
reparability would exist if users could fix the product themselves with little
cost in money or time. Some products include a diagnostic feature that
allows service people to correct a problem over the telephone or advise the
user how to correct it.
Style
describes the product’s look and feel to the buyer. It creates distinctiveness
that is hard to copy. Car buyers pay a premium for Jaguars because of their
extraordinary looks.

Services Differentiation
When the physical product cannot easily be differentiated, the key to
competitive success may lie in adding valued services and improving their
quality. The main service differentiators are ordering ease, delivery,
installation, customer training, customer consulting, and maintenance and
repair.

Ordering ease
refers to how easy it is for the customer to place an order with the
company.

Delivery
refers to how well the product or service is brought to the customer. It
includes speed, accuracy, and care throughout the process.
Installation
refers to the work done to make a product operational in its planned
location. Ease of installation is a true selling point for buyers of complex
products like heavy equipment and for technology novices. Customer
training
helps the customer’s employees use the vendor’s equipment properly and
efficiently. General Electric not only sells and installs expensive X-ray
equipment in hospitals; it also gives extensive training to users.
Customer consulting
includes data, information systems, and advice services the seller offers to
buyers. Technology firms such as IBM, Oracle, and others have learned that
such consulting is an increasingly essential and profitable part of their
business.
Maintenance and

repair programs help customers keep purchased products in good working

order.

Packaging, Labeling

Packaging
the package is the buyer’s first encounter with the product. A good package
draws the consumer in and encourages product choice. In effect, they can
act as “five-second commercials” for the product. Packaging also affects
consumers’ later product experiences when they go to open the package
and use the product at home.
Packaging must achieve a number of objectives:
1. Identify the brand.
2. Convey descriptive and persuasive information.
3. Facilitate product transportation and protection.
4. Assist at-home storage.
5. Aid product consumption
The Color Wheel of Branding and Packaging
Red
is a powerful color, symbolizing energy, passion or even danger. Red works
best for action-oriented products or brands, products associated with speed
or power, or dominant or iconic brands. Orange often connotes adventure
and fun. Like red, it’s an attention-grabber and is thought to stimulate
appetites, but it’s less aggressive than red can be.
Orange
has been used to convey value and discounts, and recently has earned
young, stylish associations thanks to the fashion industry.
Yellow
is equated with sunny warmth and cheeriness. Its more vibrant shades elicit
feelings of wellbeing and are said to stimulate mental activity, so yellow is
often associated with wisdom and intellect. Yellow works well for products
or brands tied to sports or social activities, or for products or content
looking to garner attention.
Green
connotes cleanliness, freshness and renewal and, of course, environmental
friendliness but experts warn that green now is overused in the
marketplace. It is one of the most predominant, naturally occurring colors,
so it often is associated with wholesome attributes. It works well for organic
or recycled products, or for brands associated with health and wellness.
Blue
another naturally predominant color is regularly associated with security,
efficiency, productivity and a clearness of mind. It has become a popular
color in the corporate world and particularly in the high-tech industry. Blue
also symbolizes cleanliness, openness and relaxation, and works well for
everything from cleaning and personal care products to spas and vacation
destinations.
Purple
for centuries, has symbolized nobility and wealth, and those associations
hold true today. Purple is a powerful color for luxury brands and products,
or for companies that want to lend an air of mystery or uniqueness to their
wares. Purple is particularly popular with females of all ages.
Pink
is a stereotypically girly color associated with frilliness and warmth, and is
considered to have soft, peaceful, comforting qualities. Pink works well for
personal care products and baby-related brands. Pink also is associated with
sweetness and works well for food marketers touting sugary treats.
Brown
is a strong, earthy color that connotes honesty and dependability. Brown
often is cited as a favorite color among men. Its darker shades are rich and
solid, while other shades work well as a foundational color. Brown often
works best in conjunction with other colors Black is classic and strong, and is
a regular fixture in marketers’ color schemes as either a primary component
or an accent color for font or graphics.
Black
can convey power, luxury, sophistication and authority, and can be used to
market everything from cars and electronics to high-end hotels and financial
services. White
the color of puffy clouds and fresh snow logically connotes purity and
cleanliness. It often is used as a background or accent color to brighten a
color scheme, but also it can be used liberally to create clean associations
for organic foods or personal care products. White also can symbolize
innovation and modernity.

Warranties and Guarantees

Warranties are formal statements of expected product performance by the
manufacturer. Products under warranty can be returned to the
manufacturer or designated repair center for repair, replacement, or refund.
Whether expressed or implied, warranties are legally enforceable.

Developing Pricing Strategies and Programs

Price is the one element of the marketing mix that produces revenue; the
other elements produce costs. Prices are perhaps the easiest element of the
marketing program to adjust; product features, channels, and even
communications take more time. Price also communicates to the market the
company’s intended value positioning of its product or brand. A well-
designed and marketed product can command a price premium and reap
big profits. But new economic realities have caused many consumers to
pinch pennies, and many companies have had to carefully review their
pricing strategies as a result. Pricing decisions are clearly
complex and difficult, and many marketers neglect their pricing strategies.
Holistic marketers must take into account many factors in making pricing
decisions—the company, the customers, the competition, and the
marketing environment. Pricing decisions must be consistent with the firm’s
marketing strategy and its target markets and brand positioning.

Setting the Price

A firm must set a price for the first time when it develops a new product,
when it introduces its regular product into a new distribution channel or
geographical area, and when it enters bids on new contract work. The firm
must decide where to position its product on quality and price.
Step 1: Selecting the Pricing Objective
The Company first decides where it wants to position its market offering.
The clearer a firm’s objectives, the easier it is to set price. Five major
objectives are
SURVIVAL
Companies pursue survival as their major objective if they are plagued with
overcapacity, intense competition, or changing consumer wants. As long as
prices cover variable costs and some fixed costs, the company stays in
business. Survival is a short-run objective; in the long run, the firm must
learn how to add value or face extinction.
MAXIMUM CURRENT PROFIT
Many companies try to set a price that will maximize current profits. They
estimate the demand and costs associated with alternative prices and
choose the price that produces maximum current profit, cash flow, or rate
of return on investment.
MAXIMUM MARKET SHARE
Some companies want to maximize their market share. They believe a
higher sales volume will lead to lower unit costs and higher long-run profit.
They set the lowest price, assuming the market is price sensitive.
MAXIMUM MARKET SKIMMING
Companies unveiling a new technology favor setting high prices to maximize
market skimming.

PRODUCT-QUALITY LEADERSHIP
A company might aim to be the product-quality leader in the market. Many
brands strive to be “affordable luxuries”—products or services characterized
by high levels of perceived quality, taste, and status with a price just high
enough not to be out of consumers’ reach.
OTHER OBJECTIVES
Nonprofit and public organizations may have other pricing objectives. A
university aims for partial cost recovery, knowing that it must rely on private
gifts and public grants to cover its remaining costs. A nonprofit hospital may
aim for full cost recovery in its pricing.
Step 2: Determining Demand
Each price will lead to a different level of demand and have a different
impact on a company’s marketing objectives. The normally inverse
relationship between price and demand is captured in a demand curve. The
higher the price, the lower the demand. For prestige goods, the demand
curve sometimes slopes upward. One perfume company raised its price and
sold more rather than less! Some consumers take the higher price to signify
a better product. However, if the price is too high, demand may fall.
Step 3: Estimating Costs
Demand sets a ceiling on the price the company can charge for its product.
Costs set the floor. The company wants to charge a price that covers its cost
of producing, distributing, and selling the product, including a fair return for
its effort and risk. Yet when companies price products to cover their full
costs, profitability isn’t always the net result.
TYPES OF COSTS AND LEVELS OF PRODUCTION
Fixed costs
also known as overhead, are costs that do not vary with production level or
sales revenue. A company must pay bills each month for rent, heat, interest,
salaries, and so on regardless of output. Variable costs
vary directly with the level of production. For example, each hand calculator
produced by Texas Instruments incurs the cost of plastic, microprocessor
chips, and packaging. These costs tend to be constant per unit produced,
but they’re called variable because their total varies with the number of
units produced. Total costs consist of the sum of the fixed and variable costs
for any given level of production.
Average cost
is the cost per unit at that level of production; it equals total costs divided
by production. Management wants to charge a price that will at least cover
the total production costs at a given level of production. Step 4: Analyzing
Competitors’
Costs, Prices, and Offers Within the range of possible prices determined by
market demand and company costs, the firm must take competitors’ costs,
prices, and possible price reactions into account. If the firm’s offer contains
features not offered by the nearest competitor, it should evaluate their
worth to the customer and add that value to the competitor’s price. If the
competitor’s offer contains some features not offered by the firm, the firm
should subtract their value from its own price. Now the firm can decide
whether it can charge more, the same, or less than the competitor.
Step 5: Selecting a Pricing Method
given the customers’ demand schedule, the cost function, and competitors’
prices, the company is now ready to select a price.
Companies select a pricing method that includes one or more of these three
considerations. We will examine six price-setting methods
MARKUP PRICING

The most elementary pricing method is to add a standard markup to the

product’s cost. Construction companies submit job bids by estimating the
total project cost and adding a standard markup for profit. Lawyers and
accountants typically price by adding a standard markup on their time and
costs.
Variable cost per unit $10
Fixed costs $300,000
Expected unit sales 50,000 Suppose a toaster manufacturer has the
following costs and sales expectations: The manufacturer’s unit cost is given
by: Unit cost =
variable cost + fixed cost /unit sales = $10 + ($300,00 /50,000) = $16.
Now assume the manufacturer wants to earn a 20 percent markup on sales.
The manufacturer’s markup price is given by
Markup price = unit cost/ (1 - desired return on sales) = $16 /(1 - 0.2) = $20.
TARGET-RETURN PRICING
In target-return pricing, the firm determines the price that yields its target
rate of return on investment. Public utilities, which need to make a fair
return on investment, often use this method. Suppose the toaster
manufacturer has invested $1 million in the business and wants to set a
price to earn a 20 percent ROI, specifically $200,000. The target-return price
is given by the following formula: Target-return
price = unit cost + (desired return * invested capital /unit sales)
= $16 + (.20 * $1,000,000/ 50,000) = $20. Step
6: Selecting the Final Price
pricing methods narrow the range from which the company must select its
final price. In selecting that price, the company must consider additional
factors, including the impact of other marketing activities, company pricing
policies, gain-and-risk-sharing pricing, and the impact of price on other
parties.

IMPACT OF OTHER MARKETING ACTIVITIES

The final price must take into account the brand’s quality and advertising
relative to the competition.

COMPANY PRICING POLICIES

The price must be consistent with company pricing policies. Yet companies
are not averse to establishing pricing penalties under certain circumstances.
Airlines charge $150 to those who change their reservations on discount
tickets. Banks charge fees for too many withdrawals in a month or early
withdrawal of a certificate of deposit.

Price Discounts and Allowances

Discount
a price reduction to buyers who pay bills promptly. A typical example is
“2/10, net 30,” which means that payment is due within 30 days and that
the buyer can deduct 2 percent by paying the bill within 10 days.

Quantity Discount
a price reduction to those who buy large volumes. A typical example is “$10
per unit for fewer than 100 units; $9 per unit for 100 or more units.”
Quantity discounts must be offered equally to all customers and must not
exceed the cost savings to the seller. They can be offered on each order
placed or on the number of units ordered over a given period.
Functional Discount
(also called trade discount) offered by a manufacturer to trade channel
members if they will perform certain functions, such as selling, storing, and
record keeping. Manufacturers must offer the same functional discounts
within each channel.
Seasonal Discount
A price reduction to those who buy merchandise or services out of season.
Hotels, motels, and airlines offer seasonal discounts in slow selling periods.
Allowance
An extra payment designed to gain reseller participation in special
programs. Trade-in allowances are granted for turning in an old item when
buying a new one. Promotional allowances reward dealers for participating
in advertising and sales support programs.
Developing and Managing Advertising Program
Advertising can be a cost-effective way to disseminate messages, whether
to build a brand preference or to educate people. Even in today’s
challenging media environment, good ads can pay off. P&G has also enjoyed
double-digit sales gains in recent years from ads touting the efficacy of Olay.
1-Setting the Objectives
The advertising objectives must flow from prior decisions on target market,
brand positioning, and the marketing program. An advertising objective (or
goal) is a specific communications task and achievement level to be
accomplished with a specific audience in a specific period of time.
• Informative advertising
aims to create brand awareness and knowledge of new products or new
features of existing products.

• Persuasive advertising
aims to create liking, preference, conviction, and purchase of a product or
service. Some persuasive advertising uses comparative advertising, which
makes an explicit comparison of the attributes of two or more brands.
• Reminder advertising
aims to stimulate repeat purchase of products and services.
• Reinforcement advertising
aims to convince current purchasers that they made the right choice.
Automobile ads often depict satisfied customers enjoying special features of
their new car.

2-Deciding on the Advertising Budget

How does a company know it’s spending the right amount? Although
advertising is treated as a current expense, part of it is really an investment
in building brand equity and customer loyalty
FACTORS AFFECTING BUDGET DECISIONS
Here are five specific factors to consider when setting the advertising
budget

a. Stage in the product life cycle

New products typically merit large advertising budgets to build awareness
and to gain consumer trial. Established brands usually are supported with
lower advertising budgets, measured as a ratio to sales.

b. Market share and consumer base

High-market-share brands usually require less advertising expenditure as a
percentage of sales to maintain share. To build share by increasing market
size requires larger expenditures.

c. Competition and clutter

In a market with a large number of competitors and high advertising
spending, a brand must advertise more heavily to be heard. Even simple
clutter from advertisements not directly competitive to the brand creates a
need for heavier advertising.
d. Advertising frequency
The number of repetitions needed to put the brand’s message across to
consumers has an obvious impact on the advertising budget.
e. Product substitutability
Brands in less-differentiated or commodity-like product classes (beer, soft
drinks, banks, and airlines) require heavy advertising to establish a unique
image.

3-Developing the Advertising Campaign

In designing and evaluating an ad campaign, marketers employ both art and
science to develop the message strategy or positioning of an ad—what the
ad attempts to convey about the brand—and its creative strategy—how the
ad expresses the brand claims. Advertisers go through three steps: message
generation and evaluation, creative development and execution, and social-
responsibility review.

4-Deciding on Reach, Frequency, and Impact

Media selection is finding the most cost-effective media to deliver the
desired number and type of exposures to the target audience. What do we
mean by the desired number of exposures?

• Reach (R)
The number of different persons or households exposed to a particular
media schedule at least once during a specified time period
• Frequency (F)
The number of times within the specified time period that an average
person or household is exposed to the message
• Impact (I)
The qualitative value of an exposure through a given medium.
Deciding on Media Timing and Allocation
In choosing media, the advertiser has both a macro scheduling and a micro
scheduling decision.

The macro scheduling

decision relates to seasons and the business cycle. Suppose 70 percent of a
product’s sales occur between June and September. The firm can vary its
advertising expenditures to follow the seasonal pattern, to oppose the
seasonal pattern, or to be constant throughout the year.
The micro scheduling

decision calls for allocating advertising expenditures within a short period to

obtain maximum impact. Suppose the firm decides to buy 30 radio spots in
the month of September.

5-Evaluating Advertising Effectiveness

Most advertisers try to measure the communication effect of an ad—that is,
its potential impact on awareness, knowledge, or preference. They would
also like to measure the ad’s sales effect.

Communication-effect research
called copy testing, seeks to determine whether an ad is communicating
effectively. Marketers should perform this test both before an ad is put into
media and after it is printed or broadcast.

SALES-EFFECT RESEARCH
What sales are generated by an ad that increases brand awareness by 20
percent and brand preference by 10 percent? The fewer or more
controllable other factors such as features and price are, the easier it is to
measure advertising’s effect on sales. The sales impact is easiest to measure
in direct marketing situations and hardest in brand or corporate image-
building advertising.

The five Ms in advertising

Tapping into Global Markets
With ever faster communication, transportation, and financial flows, the
world is rapidly shrinking. Countries are increasingly multicultural, and
products and services developed in one country are finding enthusiastic
acceptance in others. A German businessman may wear an Italian suit to
meet an English friend at a Japanese restaurant, who later returns home to
drink Russian vodka and watch a U.S. movie on a Korean TV. Emerging
markets that embrace capitalism and consumerism are especially attractive
targets. They are also creating marketing powerhouses all their own.

Deciding Whether to Go Abroad

Most companies would prefer to remain domestic if their domestic market
were large enough. Managers would not need to learn other languages and
laws, deal with volatile currencies, face political and legal uncertainties, or
redesign their products to suit different customer needs and expectations.
Business would be easier and safer. Yet several factors can draw companies
into the international arena: • some international markets present better
profit opportunities than the domestic market. • The
company needs a larger customer base to achieve economies of scale.
• The company wants to reduce its dependence on any one market.
• The company decides to counterattack global competitors in their home
markets. • Customers are going abroad and
require international service.

Before making a decision to go abroad, the company must also weigh

several risks:
• The company might not understand foreign preferences and could fail to
offer a competitively attractive product.
• The company might not understand the foreign country’s business culture.
• The company might underestimate foreign regulations and incur
unexpected costs.
• The company might lack managers with international experience.
• The foreign country might change its commercial laws, devalue its
currency, or undergo a political revolution and expropriate foreign property.

Internationalization process typically has four stages

1. No regular export activities
2. Export via independent representatives (agents)
3. Establishment of one or more sales subsidiaries
4. Establishment of production facilities abroad

Deciding How to Enter the Market

Once a company decides to target a particular country, it must determine
the best mode of entry

1-Indirect and Direct Export

Companies typically start with export, specifically indirect exporting—that is,
they work through independent intermediaries.

2-Licensing
is a simple way to engage in international marketing. The licensor issues a
license to a foreign company to use a manufacturing process, trademark,
patent, trade secret, or other item of value for a fee or royalty. The licensor
gains entry at little risk; the licensee gains production expertise or a well-
known product or brand name.
3-Joint Ventures
Historically, foreign investors have often joined local investors in a joint
venture company in which they share ownership and control. To reach more
geographic and technological markets and to diversify its investments and
risk.
4-Direct Investment
the ultimate form of foreign involvement is direct ownership: the foreign
company can buy part or full interest in a local company or build its own
manufacturing or service facilities.

Globally Standardized Marketing Pros and Cons

Advantages
Economies of scale in production and distribution
Lower marketing costs
Power and scope
Consistency in brand image
Ability to leverage good ideas quickly and efficiently
Uniformity of marketing practices
Disadvantages
Ignores differences in consumer needs, wants, and usage patterns for
products

Ignores differences in consumer response to marketing programs and

activities

Ignores differences in brand and product development and the competitive

environment

Ignores differences in the legal environment

Ignores differences in marketing institutions
Ignores differences in administrative procedures.

Marketing Adaptation
Because of all these differences, most products require at least some
adaptation. Even Coca-Cola is sweeter or less carbonated in certain
countries. Rather than assuming it can introduce its domestic product “as is”
in another country, the company should review the following elements and
determine which add more revenue than cost if adapted:
• Product features
• Labeling
• Colors
• Materials
• Sales promotion
• Advertising media
• Brand name
• Packaging
• Advertising execution
• Prices
• Advertising themes
McDonald’s allows countries and regions to customize its basic layout and
menu staples. In China, corn replaces fries in Happy Meals.

Global Product Strategies

Developing global product strategies requires knowing what types of
products or services are easily standardized and appropriate adaptation
strategies.

PRODUCT STANDARDIZATION
Some products cross borders without adaptation better than others. While
mature products have separate histories or positions in different markets,
consumer knowledge about new products is generally the same everywhere
because perceptions have yet to be formed. Many leading Internet brands—
Google, eBay, Amazon.com—made quick progress in overseas markets.
PRODUCT ADAPTATION STRATEGIES
alters the product to meet local conditions or preferences. Flexible
manufacturing makes it easier to do so on several levels.
BRAND ELEMENT ADAPTATION
When they launch products and services globally, marketers may need to
change certain brand elements

Global Pricing Strategies

Companies have three choices for setting prices in different countries:
1. set a uniform price everywhere
PepsiCo might want to charge 75 cents for Pepsi everywhere in the world,
but then it would earn quite different profit rates in different countries.
2. Set a market-based price in each country
PepsiCo would charge what each country could afford, but this strategy
ignores differences in the actual cost from country to country. It could also
motivate intermediaries in low-price countries to reship their Pepsi to high-
price countries.
3. Set a cost-based price in each country
Here PepsiCo would use a standard markup of its costs everywhere, but this
strategy might price it out of markets where its costs are high.
 2015

Accounting and Financial

Management
 Financial Statements
and Business Decisions

1
 Financial statements summarize the financial activities of the business.

The Four Basic Financial Statements

1. Balance Sheet
2. Income Statement
3. Statement of Retained Earnings
4. Statement of Cash Flows

The Balance Sheet

 The Balance Sheet reports the financial position of an entity at a particular

point in time.

 Basic Accounting Equation

Assets = Liabilities + Stockholders’ Equity

 Assets are economic resources owned by the business as a result of past

transactions.

 Examples for Assets:

 Cash Amount of cash in the company’s bank
accounts.
 Accounts receivable Amounts owed by customers from prior sales.
 Inventories Parts and completed but unsold products.
 Plant and equipment Factories and production machinery.
 Land Land on which factories are built.

 N.B: Assets are listed by their ease of conversion into cash (Liquidity)

2
 Liabilities are debts or obligations of the business that result from past
transactions.

 Examples for Liabilities:

 Accounts payable Amounts owed to suppliers for prior purchases.
 Notes payable Amounts owed on written debt contracts
(Promise note).

 Stockholders' Equity is the amount of financing provided by owners of the

business and earnings.

 Examples for Stockholders' Equity:

 Capital (Stock) Amounts invested in the business by
stockholders.
 Retained earnings Past earnings not distributed to stockholders

3
 Balance Sheet Example

MAXIDRIVE CORP.
Balance Sheet
2014
At December 31, 2006
(in thousands of dollars)
Assets
Cash $ 4,895
Accounts receivable 5,714
Inventories 8,517
Plant and equipment 7,154
Land 981
Total assets $ 27,261
Liabilities and Stockholders' Equity
Liabilities
Accounts payable $ 7,156
Notes payable 9,000
Total liabilities $ 16,156
Stockholders' Equity
Contributed capital $ 2,000
Retained earnings 9,105
Total stockholders' equity 11,105
Total liabilities and stockholders' equity $ 27,261

Solvency Ratios:
1. Debt Ratio (D2A)
= Total Liabilities / Total Assets X 100%

2. Debt to Equity Ratio (D2E)

= Total Liabilities / Stockholders' Equity X 100%

3. Financial Leverage or Leverage Multiplier

= Total Assets / Stockholders' Equity

4
 The Income Statement

 The Income Statement reports the revenues minus expenses of the

accounting period.
 Revenues: the amount of earned revenues from the sale of goods or
providing services to customers. Revenue is recognized in the period in
which goods are sold (services rendered), not necessarily the period in
which cash is received.
 Examples for Revenues:
 Sales revenue
The amount of earned revenues from sales during a period of time
regardless whether cash is collected or not

 Expenses: the amount of expenses incurred to earn revenues during a

period. Expense is recognized in the period in which goods and services are
used, not necessarily the period in which cash is paid.
 Examples for Expenses:
 COGS (Cost of goods sold)
The amount of expenses incurred in order to generate revenues during
a period of time regardless whether cash is paid or not.
 SGA (Selling, general and administrative)
Operating expenses not directly related to production.
 Research and development
Expenses incurred to develop new products.
 Interest expense
the cost of using borrowed funds.
 Income tax expense
Income taxes on current period’s pretax income.
 N.B:
1. If expenses exceed revenues, we report Net Loss
2. Accrual Accounting
Assets, liabilities, revenues, and expenses should be recognized
when the transaction that causes them occurs, not necessarily
when cash is paid or received.

5
 3. The Revenues Recognition Principle:
Recognize revenues when delivery has occurred or services have
been rendered, regardless of when cash is collected.
4. The Matching Principle:
Resources consumed to earn revenues in an accounting period
should be recorded in that period, regardless of when cash is paid.

Income Statement Example

MAXIDRIVE CORP.
Income Statement
2014
For the Year Ended December 31, 2006
(in thousands of dollars)

Revenues
Sales revenue $ 37,436
Expenses
Cost of goods sold $ 26,980
Selling, general and administrative 3,624
Research and development 1,982
Interest expense 450
Total expenses 33,036
Pretax income $ 4,400
Income tax expense 1,100
Net income $ 3,300

6
 There are four criteria to meet " The Revenues Recognition Principle ":
1. Delivery has occurred or services have been rendered.
2. There is persuasive evidence of an arrangement for customer
payment.
3. The price is fixed or determinable.
4. Collection is reasonably assured. Cash does not need to be received
to recognize revenue.

Statement of Retained Earnings

 The Statement of Retained Earnings reports the way that net income and
the distribution of dividends affect the financial position of the company
during a period.
Statement of Retained Earnings Example

Statement of Retained Earnings

2014
For the Year Ended December 31, 2006
(in thousands of dollars)

Retained earnings, January

December 31,1, 2006
2014 $ 6,805
Net income for 2006 3,300
Dividends for 2006 (1,000)
Retained earnings, December 31, 2006 2014 $ 9,105

7
 Statement of Cash Flows

 The Statement of Cash Flows reports the inflows and outflows of cash
during the period in the categories of Operating Activities, Investing
Activities, and Financing Activities.
1) The Operating Section:
Cash flows directly related to earning income are shown in the
operating section.
 Examples for cash flows from Operating Activities:
 Cash collected from customers (+)
 Cash paid to suppliers and employees (-)
 Cash paid for interest (-)
 Cash paid for taxes (-)

2) The Investing Section:

Cash flows related to the acquisition or sale of productive assets are
shown in the investing section.
 Examples for cash flows from Investing Activities:
 Selling old furniture (+)
 Purchase equipment or land (-)
 Purchased investments (-)
 Lent funds to franchisees (-)

3) The Financing Section:

Cash flows from or to investors or creditors are shown in the financing
section.
 Examples for cash flows from Financing Activities:
 Cash received from bank loan (+)
 Issued common stock (+)
 Cash paid for bank loan (-)
 Cash paid for dividends (-)

 The statement ends with a reconciliation of Cash.

8
 Statement of Cash Flows Example

MAXIDRIVE CORP.
Statement of Cash Flows
2014
For the Year Ended December 31, 2006
(in thousands of dollars)

Cash flows from operating activities:

Cash collected from customers $ 33,563
Cash paid to suppliers and employees (30,854)
Cash paid for interest (450)
Cash paid for taxes (1,190)
Net cash flow from operating activities $ 1,069
Cash flow from investing activities:
Cash paid to purchase equipment $ (1,625)
Net cash flow from investing activities (1,625)
Cash flow from financing activities:
Cash received from bank loan $ 1,400
Cash paid for dividends (1,000)
Net cash flow from financing activities 400
Net decrease in cash during the year $ (156)
Cash at beginning of the year 5,051
Cash at end of the year $ 4,895

9
 Relationships among the "Financial Statements"

1. The order of preparing Financial Statements

1) Preparing of "Income Statement"
2) Preparing of "Statement of Retained Earnings"
3) Preparing of "Balance Sheet"
4) Preparing of "Statement of Cash Flows" (Check Cash in item
"Balance sheet/Assets" with the Ending Cash on the "Statement of
Cash Flows")

2. Net Income from the "Income Statement" added to the "Statement of

Retained Earnings" on item named "Net Income".

3. "Ending Retained Earnings" from the "Statement of Retained Earnings"

added to the "Balance Sheet" on item named "Stockholders’
Equity/Retained Earnings".

4. "Ending Cash" from the "Statement of Cash Flows" checked to be equal

to the item named "Assets/Cash" on the "Balance Sheet".

 N.B:
1. GAAP: Generally Accepted Accounting Principles are used to
identify accounting roles in determining the content of financial
statements.
2. To ensure the accuracy of the company’s financial information,
management:
a. Maintains a system of controls.
b. Hires outside independent auditors.
c. Forms a board of directors to review these two safeguards.

10
3. Independent Auditors express an opinion as to the fairness of the
financial statement.

11
 How are Financial Statements Prepared?

Income
Statement Revenues – Expenses = Net Income

Beginning Retained Earnings

Statement of
Retained + Net Income
Earnings - Dividends Declared
= Ending Retained Earnings

Balance
Assets = Liabilities + Stockholders’ Equity
Sheet
Contributed Capital
Retained Earnings

Statement Change Cash from Operating Activities

of in = + Cash from Investing Activities
Cash Flows Cash ` + Cash from Financing Activities

+ Cash at Beginning of the year

= Cash at Ending of the year

12
 The Balance Sheet

Assets: Liabilities
Current or Short Term Assets Current or Short Term Liabilities
 Cash  Accounts Payable
 Short-Term Investment  Notes Payable
 Marketable Securities  Accrued Expenses
 Accounts Receivable  Taxes Payable
 Notes Receivable  Unearned Revenue
 Inventory  Short-Term Bank Loan Payable
 Supplies
 Prepaid Expenses Non Current or Long Term Liabilities
 Bank Loan Payable
Non Current or Long Term Assets  Bonds Payable
 Land
 Buildings Stockholders’ Equity
 Equipment  Contributed Capital (Stock)
 Furniture  Additional Paid in Capital
 Trucks  Retained Earnings
 Long-Term Investments
 Intangibles

Assets are classified into two types according to its ability to be

liquidated:
1. Current or Short Term Assets
These assets will be easy to be liquidated within one year
2. Non Current or Long Term Assets
These assets will be difficult to be liquidated within one year
Also Liabilities are classified into two types according to its due
date of payment:
1. Current or Short Term Liabilities
The due date of payment of these liabilities is less than year
2. Non Current or Long Term Liabilities
The due date of payment of these liabilities is greater than year

13
 What Does Liquidity Ratios Mean?
A class of financial metrics that is used to determine a company's ability
to pay off its short-terms debts (obligations). Generally, the higher the
value of the ratio, the larger the margin of safety that the company
possesses to cover short-term debts.
 Principles of Transaction Analysis
 Every transaction affects at least two accounts (duality of effects).
 The accounting equation must remain in balance after each
transaction.
Assets = Liabilities + Stockholders’ Equity

 Balancing the Accounting Equation

 Accounts and effects:
 Identify the accounts affected and classify them by type of
account (A, L, SE).
 Determine the direction of the effect (increase or decrease)
on each account.
 Balancing:
 Verify that the accounting equation (A = L + SE) remains in
balance.

 N.B:
1. Accounts Receivable: If cash is received after the company
delivers goods or services, an asset "Accounts Receivable" is
recorded.
2. Prepaid Expense: If cash is paid before the company receives
goods or services, an asset "Prepaid Expense" is recorded.
3. Unearned Revenue: If cash is received before the company
delivers goods or services, the liability "Unearned Revenue" is
recorded
4. Expenses Payable: If cash is paid after the company receives
goods or services, a liability "Expenses Payable" is recorded.

14
  Elements on the Income Statement
1. Revenues : Increases in assets or settlement of liabilities from
ongoing operations
2. Expenses: Decreases in assets or increases in liabilities from ongoing
operations.
3. Gains: Increases in assets or settlement of liabilities from peripheral
transactions.
4. Losses: Decreases in assets or increases in liabilities from peripheral
transactions.

Income Statement is classified into two types according to its way

for preparation:
(1) Single-Step Income Statement
Income statement format that eliminates most intermediate subtotals
such as "Gross Profit" and "Operating Income" by accumulating and
showing first all ordinary revenues and gains items and then all ordinary
expenses and losses items.
Net income is then displayed as their difference plus considerations for
discontinued operations and extraordinary gains and losses.

15
Single Step Income Statement Example:

16
(2) Multiple-Step Income Statement
Multiple-Step Income Statement provides multiple classifications and
multiple intermediate differences. The multiple-Step format reports
amounts for the following income captions:
(1) Gross Profit
(2) Income from Operations
(3) Pretax Income
(4) Net Income

 Steps for preparing Multiple-Step Income Statement:

Sales
- COGS (Cost of Good Sold)
--------------------------------
Gross Profit
- Operating expenses
--------------------------------
Income from operations
+ Other revenues and Gains
- Other expenses and losses
--------------------------------
Pretax Income
- Net of tax
--------------------------------
Net income

17
 Multiple-Step Income Statement Example:
Vertical
Analysis

100 %
67.5 %
32.5 %

15.5 %
2.75 %
0.25 %
20.6 %
12 %

0.3 %
0.25 %
0.55 %
0.06 %
12 %
4.75 %
7.25 %

 Accounting Cycle:

 During the period:

1. Analyzing transactions
2. Recording in General Journal entries
3. Posting to General Ledger

 At the end of the period:

1. Preparing Trial Balance
2. Adjusting revenues and expenses and
related balance sheet accounts
3. Preparing adjusted Trial Balance
4. Preparing financial statements
5. Disseminating statements to users
6. Closing revenues, gains, expenses,
and losses to Retained Earnings

18
 General Journal
 A T-account is a tool used to represent an account.
 The left side of the T-account is always Account Name
the Debit Side. Left Right
 The right side of the T-account is always Debit Credit
the Credit Side.

 Debits and credits affect the Balance Sheet Model as follows:

Assets = Liabilities + Stockholders’ Equity
ASSETS LIABILITIES Stockholders’ Equity

+ - - + - +
Debit for Credit for Debit for Credit for Debit for Credit for
Increase Decrease Decrease Increase Decrease Increase


 Increases in assets are shown as debits (on the left side of the
account) and decreases are shown as credits (on the right side of the
account).
 Increases in liabilities, contributed capital and retained earnings are
shown as credits (on the right side of the account) and decreases are
shown as debits (on the left side of the account).
 Expanded Transaction Analysis Model

Dividends decrease RETAINED Net Income increases

Retained Earnings EARNINGS Retained Earnings.

- +
Debit for Credit for
Decrease Increase

REVENUES EXPENSES
- + + -
Debit for Credit for Debit for Credit for
Decrease Increase Increase Decrease
19
 Two principles underlie the transaction analysis process:
(1)Every transaction affects at least two accounts
(2)The accounting equation must remain in balance after each
transaction
 When a transaction involves more than two accounts, the journal
entry to record the transaction is called a compound entry

 General Ledger
After journal entries are prepared, the accountant posts (transfers)
the amounts to each account affected by the transaction into
separate paper(s) in General Ledger.
 Trial Balance
The Trial Balance report is a basic report that lists all active accounts
for company with ending balances at the end of the period.

 N.B: Total Debits = Total Credits

If total debits do not equal total credits on the trial balance, errors
may be occurred in:
1. Preparing balanced journal entries
2. Posting the correct mount effects of a transaction
3. Copying ending balances from the ledger to the trial balance

Trial Balance Example:

20
 Adjustments
Most of the time, when a company prepares its trial balance sheet
,the company should analyze it for potential adjustments, and develop
a list of necessary adjusting entries to consider the actual revenues
and expenses and related balance sheet accounts.

 Adjusted Trial Balance

The adjusted trial balance is ordinarily sufficient to facilitate preparation of
financial statements which lists all active accounts for company with
ending balances at the end of the period after adjustments.

 Depreciation
Buildings, machinery, equipment, furniture, fixtures, computers, outdoor
lighting, parking lots, cars, and trucks are examples of assets that will be
used up for more than one year, but will not last indefinitely.
During each accounting period (year, quarter, month, etc.) a portion of the
cost of these assets is being used up. The portion being used up is reported
as Depreciation Expense on the income statement.
In effect: Depreciation is the transfer of a portion of the asset's cost from
the balance sheet to the income statement during each year of the asset's
life.
In simple words we can say that depreciation is the reduction in the value
of an asset due to usage, passage of time. The asset is depreciated until
the book value equals scrap value.

Accumulated depreciation is a contra-asset account. It is directly related

to an asset account but has the opposite balance.

 Depreciation Example:
Q: What is the effect on the Income Statement & Balance Sheet for an
Asset depreciated after 4 years; Given that Asset Cost =$200,000 ?

A: Depreciation Expense/Year = =$200,000/4 = $50,000

Book Value = Original Cost - Accumulated Depreciation

21
This table illustrates the method of calculating the effect of Asset depreciated on
the Income Statement & Balance Sheet at the end of each year
Balance Sheet
Income Statement Book Value (Original
Year Depreciation Assets Cost Accumulated Cost -
Expense (Original Cost) Depreciation Accumulated
Depreciation)
1st Year $50,000 $200,000 $50,000 $150,000
nd
2 Year $50,000 $200,000 $100,000 $100,000
rd
3 Year $50,000 $200,000 $150,000 $50,000
th
4 Year $50,000 $200,000 $200,000 $0,000

Scrap value

 Disposal of Property, Plant, and Equipment

 If Selling Cash > Book Value , record a Gain (credit).
 If Selling Cash < Book Value, record a Loss (debit).
 If Selling Cash = Book Value, No Gain Or Loss.

 Inventory Types:
 Raw Materials Inventory
 Work in Process Inventory
 Finished Goods Inventory } Manufacturing

 Merchandise Inventory Merchandizing

 The cost principle requires that inventory be recorded at the price paid
or the consideration given
 Invoice Price
 Freight
 Inspection Costs
 Preparation Costs

Merchandiser

Merchandise Merchandise Cost of

Purchases Inventory Goods Sold

22
 Manufacturer

Raw Work in Finished

Raw
Materials Process Goods
Materials
Inventory Inventory Inventory

Direct
Cost of
Labor
Goods Sold
Factory
Overhead

 The Cost of Goods Sold can be calculated from Inventory physical

counting by using the following Equations:

1) Beginning inventory + Purchases = Goods Available for Sale

2) Goods Available for Sale – Ending Inventory = Cost of Goods Sold

 Inventory Costing Methods

 Specific Identification:
When units are sold, the specific cost of the unit sold is known & added
to cost of goods sold (Such as: Luxury cars & Diamond... etc).

 FIFO (First In First Out)

The costs of most recent purchases are in ending inventory.
Ending Inventory = Quantity (Units) X Unit Price (Recent Costs)

 LIFO (Last In First Out)

The costs of oldest purchases are in ending inventory.
Ending Inventory = Quantity (Units) X Unit Price (Old Costs)

 Weighted Average
When a unit is sold, the average cost of each unit in inventory is
assigned to cost of goods sold
Ending Inventory = Quantity (Units) X Unit Price (Average Costs)

Average Cost = Cost of Goods Available for Sale / Number of Units

Available for Sale

23
 Valuation at Lower of Cost or Market (LCM)
 Report inventory at the lower of cost or market (LCM)
 The company will recognize a “holding” loss in the current period rather
than the period in which the item is sold. This practice is conservative.

24
 Analyzing
Financial Statements

25
 Investment Decision Issues:
 In considering an investment decision in the stock of a corporation,
potential investors should evaluate the company’s future income and
growth potential on the basis of industry factors and economy-wide
factors as well as individual company factors.
 Importatnt Investment Factors:
 Economy Factors "Macro Level Thinking" (Such as: political
stability,…etc)
 Industry Factors "Micro Level Thinking"(Such as: raw material
existence, trained labors, demand vs. supply, competitions…etc)
 Company’s Factors (Such as: company’s financial statements ,
companies’ future earnings and stock prices….etc)

 Return on an equity investment:

 Earning dividends (Long-Term Investment)
 Increase in share price (Short-Term Investment)

 Three types of financial statement information:

1. Past Performance (Such as: Income, sales volume, cash flows,
return- on-investments, EPS…..etc)
2. Present Condition (Such as: Assets, debt, inventory, various ratios
…..etc)
3. Future Performance (Such as: Sales and earnings trends are good
indicators of future performance …..etc)

 Financial Statement Analysis

 Financial statement analysis is based on comparisons

1. Comparison with similar companies or major competitors (Cross

Sectional analysis)
2. Comparison with industry average
3. Comparison with previous years for single company to identify
trends over time (Time series analysis)

26
  Tools of Financial Statement Analysis

1. Horizontal Analysis (Trend Analysis)

2. Vertical Analysis (Component Percentages)
3. Ratio and Percentage Analysis

 Horizontal Analysis

 It is a comparison of the same company with previous year only

to identify trends over time

- Change in amount = current (recent) year amount – base (oldest) year amount

- Change in precentage = Change in amount / base (oldest) year

Net Sales Change

2009 2008 Amount precentage
$ 200,000 $ 160,000 $ 40,000 25 %

 Trend Analysis (Gross Rate)

 It is a special case of Horizontal Analysis by comparing company's values

with previous years (5 or 6 years) to identify trends over time. We take
oldest year amount as a base (100%) and dividing each year over the
base to get gross presentage as shown in this example
(Comparison of Net Sales from 2004 to 2009)

2009 2008 2007 2006 2005 2004

$ 200,000 $ 160,000 $ 152,000 $ 145,000 $ 130,000 $ 120,000
167 % 133 % 127 % 121 % 108 % 100 %
The Gross Rate in Sales
between 2004 & 2005 is 8%

27
  For the previous Trend Analysis (Net Sales from 2004 - 2009) ,we can
draw gross percentage results to identify trends over time graphically

200% 167%
133% 127%
121%
150% 108%
100%

100%

50%

0%
2009 2008 2007 2006 2005 2004

 Applying Trend Analysis on 1st Example

Net Sales Change
2009 2008 Amount precentage
$ 200,000 $ 160,000 $ 40,000 25 %
125% 100%

 Vertical Analysis (Component Percentages)

 Express each item on a particular statement as a percentage of a single
base amount.
 On the income statement, the base amount is Net Sales
 On the balance sheet, the base amount is Total Assets
As we discussed before:
 Vertical analysis of the income statement expresses each item as a
percentage of the net sales figure. In each column the net sales figure is
used as the base, or 100 percent.
 Every amount in the column is expressed as a percentage of net sales.
To compute an item’s percentage of net sales, divide the amount of
that item by the amount of net sales.

28
 Example, the income statement for the month ended 31/3/ 2007:
- Given that: cost of goods sold = $ 270,000 & Net Sales = $ 400,000
- The percentage of COGS per Sales is = (COGS / Net sales) *100 % =
67.5 %
- Gross Profit Margin= (Gross Profit / Net sales) *100 % = 32.5 %
- Profit Margin (ROS)= (Net Income / Net sales) *100 % = 7.25 %

Vertical
Analysis

100 %
67.5 %
32.5 %

15.5 %
2.75 %
0.25 %
20.6 %
12 %

0.3 %
0.25 %
0.55 %
0.06 %
12 %
4.75 %
7.25 %

29
 Ratio and Percentage Analysis

 Solvency Ratios (Long-Run Tests):

4. Debt Ratio (D2A)
= (Total Liabilities / Total Assets) X 100%

5. Debt to Equity Ratio (D2E)

= (Total Liabilities / Stockholders' Equity) X 100%

6. Financial Leverage or Leverage Multiplier

= Total Assets / Stockholders' Equity

 Liquidity Ratios (Short-Run Tests):

1. Current Ratio
= Current Assets / Current Liabilities

2. Quick Ratio (ACID Test)

= Quick Assets / Current Liabilities

= (Cash & Cash Equivalent + Marketable Securities

+ Account Receivable) / Current Liabilities

3. Cash Ratio
= Cash & Cash Equivalent / Current Liabilities

4. Working Capital
= Current Assets – Current Liabilities

30
 Profitability Ratios:
1. Return on Sales (ROS) or Net Profit Margin
= (Net Income / Net Sales) X 100%

2. Return on Equity (ROE)

= (Net Income / Average Owners' Equity) X 100%

3. Return on Assets (ROA)

= (Net Income / Average Total Assets) X 100%

4. Gross Profit Margin (GPM)

= (Gross Profit / Net Sales) X 100%

5. Earnings Per Share (EPS)

= Net Income / No. Of Shares

 ROE Profit Driver Analysis:

Net Profit Asset Financial

ROE = X X
Margin (ROS) Turnover Leverage

 Market Tests Ratios:

1. Price/Earnings Ratio
= Current Market Price Per Share/ Earnings Per Share

2. Dividend Yield Ratio

= Dividends Per Share / Market Price Per Share

31
 Efficiency (Assets Management) Ratios:
1. Total Assets Turnover
= Net Sales / Average Total Assets

2. Fixed Assets Turnover

= Net Sales / Average Fixed Assets

3. Accounts Receivables Turnover

=Net Credit Sales/ Average Net Accounts Receivables
= ----- times

4. Accounts Receivables Turnover in days

(Average Collection Period or Average Age of Receivables)
= 365/ Accounts Receivables Turnover
= ----- days

5. Accounts Payable Turnover

= COGS / Average Accounts Payable
= ----- times

6. Accounts Payables Turnover in days

(Average Age of Payables)
= 365/ Accounts Payables Turnover
= ----- days

7. Inventory Turnover
= Net Sales or COGS/ Average Inventory
= ----- times

8. Inventory Turnover in days

(Average Days’ Supply in Inventory)
= 365/ Inventory Turnover
= ----- days

9. Quality of Income (Quality of Earning)

= Cash Flow from Operating Activities/ Net Income

32
Financial Management

33
 The Basic Ideas, Scope and Tools of Finance

 Financial Management
Financial management refers to how businesses raise, use and monitor funds. It
involves the processes of planning, monitoring and controlling the business's financial
position and performance.
A market is a method of exchanging one asset (usually cash) for another asset.

 What are types of financial markets?

1. Capital Market (Long Term – Finance)
2. Money Market (Short Term – Finance)
 Capital Market:
The Capital Market is a market for securities (long-term debt or equity), where
business enterprises (companies) and governments can raise long-term funds. It is
defined as a market in which money is provided for periods longer than a year. The
capital market includes the stock market (equity securities) and the bond market
(long–term debt).

Capital of firm = Stockholders' Equity (Stocks) + Long-Term Debts (Bonds)

 Money Market:
The Money Market is the global financial market for short-term borrowing and
lending. It provides short-term liquidity (short–term debt) funding for the global
financial system. The money market is where short-term obligations such as Treasury
bills, commercial paper and bankers' acceptances are bought and sold.
 Some other types of markets:
o Physical Assets Markets versus Financial Assets Markets

o Spot Markets versus Future Markets

The spot market (or cash market) is a securities market in which goods are sold
for cash and delivered immediately.

34
 The future market is a central financial exchange where people can trade
standardized futures contracts; that is, a contract to buy specific quantities of a
commodity or financial instrument at a specified price with delivery set at a
specified time in the future.

o Primary Markets versus Secondary Markets

The primary market is the financial market where deals with the issuance of new
securities. Companies, governments or public sector institutions can obtain
funding through the sale of a new stock or bond issue
The secondary market is the financial market where previously issued securities
and financial instruments (such as stock, bonds… etc) are bought and sold.

o Over the Counter (OTC) Markets

Over-the-counter (OTC) (or off-exchange) trading is to trade financial instruments
(such as stocks, bonds, commodities or derivatives) directly between two parties
(buyer and seller) without dealing with exchange-market.

 What are types of Banks?

1. Commercial Banks (such as: Al-Ahly Bank, Misr Bank, HSBC….)
A Commercial bank is also known as business bank. It is a bank that provides
checking accounts, savings accounts, and money market accounts and that
accepts deposits from public.

2. Investment Banks (such as: EFG Herms)

An investment bank is a financial institution that raises capital, trades securities
(Stocks & Bonds) and manages corporate mergers and acquisitions. Another term
for investment banking is corporate finance.
Investment banks work for, and profit from, companies and governments, by
raising money through issuing and selling securities in capital markets (both
equity and long - term debts) and providing advice on transactions such as
mergers and acquisitions.

35
 What are the differences between stocks and bonds?
Stocks represent partial ownership of a corporation. Stocks are EQUITY. They
represent shares of ownership in a Corporation. A Stockholder is actually one of many
owners of a Corporation.
Bonds represent a loan you make to a corporation or government. Bonds are DEBT.
They are sold by the Corporation in order to raise money for various purposes for use
by the company. Bonds offer an interest rate to the Bondholder for the period of time
that the Bondholder owns the bonds.
 The following table summarizes the main differences between Stocks & Bonds:

Differences Stocks Bonds

Market Capital Market Capital Market

Increase or Decrease Increase or Decrease
Price
(Depend on Market) (Depend on Market)
Dividends Coupon
Return
sent by General Authority (GA) with fixed interest rate
Who issuing? Corporation Corporation or Government
Stockholder Bondholder
Rights
(Equity) (Debt)
Default Nothing Bankruptcy

 NOTE:
Preferred stock is a special equity security that resembles properties of both
equity and debt instrument and generally considered a hybrid instrument.
Preferred stocks are senior (i.e. higher ranking) to common stock, but are
subordinate to bonds.
Preferred stock usually carries no voting rights, but may carry priority over
common stock in the payment of dividends and upon liquidation.

36
 What are forms of business organization?
 Sole proprietorship:
A type of business entity which is owned and run by one individual and where
there is no legal distinction between the owner and the business. All profits and all
losses accrue to the owner
 Partnership:
A partnership is a type of business entity in which partners (owners) share with
each other the profits or losses of the business. Partnerships are often favored
over corporations for taxation purposes, as the partnership structure does not
generally incur a tax on profits before it is distributed to the partners. However,
depending on the partnership structure and the jurisdiction in which it operates,
owners of a partnership may be exposed to greater personal liability than they
would as shareholders of a corporation.
 Corporation:
A corporation is an institution that is granted a charter recognizing it as a separate
legal entity having its own rights, privileges, and liabilities distinct from those of its
members. There are many different forms of corporations, most of which are used
to conduct business. A corporation is a legal entity separate from its owners and
managers.

 Initial Public Offering (IPO)

An Initial Public Offering (IPO) referred to simply as an "offering" or "flotation," is
when a company issues common stock or shares to the public for the first time.

37
 Leveraged Buyout (LBO)
LBO occurs when a financial sponsor acquires a controlling interest in a company's
equity and where a significant percentage of the purchase price is financed through
leverage (borrowing).

NOTE:
Underwriting refers to the process that a large financial service provider
(bank, insurer, investment house) uses to assess the eligibility of a customer to
receive their products (equity capital, insurance, mortgage or credit).
Financial bankers, who would accept some of the risk on a given venture in
exchange for a premium, would literally write their names under the risk
information that was written on a Lloyd's slip created for this purpose.

 What three aspects of cash flows affect an investment’s value?

(1) Amount of expected cash flows (bigger is better)
(2) Timing of the cash flow stream (sooner is better)
(3) Risk of the cash flows (less risk is better)
 What are “free cash flows (FCF)”
Free cash flows are the cash flows that are available (or free) for distribution to all
investors (stockholders and creditors) after paying current expenses, taxes, and
making the investments necessary for growth.
 What is the weighted average cost of capital (WACC)?
The weighted average cost of capital (WACC) is the average rate of return required
by all of the company’s investors (stockholders and creditors)

 What factors affect the weighted average cost of capital?

(1) Capital structure (the firm’s relative amounts of debt and equity)
(2) Interest rates
(3) Risk of the firm
(4) Stock market investors’ overall attitude toward risk

38
 What determines a firm’s value?
A firm’s value is the sum of all the future expected free cash flows when converted
into today’s dollars
 What are financial assets?
A financial asset is a contract that entitles the owner to some type of payoff.
o Debt
o Equity
o Derivatives
In General, each financial asset involves two parties, a provider of cash (i.e.,
capital)
and a user of cash.

 Some of financial instruments:

o Common stocks o Government T-notes and T-bonds
o Corporate bonds o Mortgages
o Preferred stocks o Municipal bonds
o Government T-bills o Negotiable CDs
o Banker’s acceptances o Eurodollar deposits
o Commercial paper o Commercial loans
 Who are the providers (savers) and users (borrowers) of capital?
o Households: Net savers
o Financial corporations: Slightly net borrowers, but almost breakeven
o Non-financial corporations: Net users (borrowers)
o Governments: Net borrowers
 What four factors affect the cost of money?
o Production opportunities
o Time preferences for consumption
o Risk
o Expected inflation

39
 Some of financial intermediaries
o Commercial banks
o Savings & Loans, mutual savings banks, and credit unions
o Life insurance companies
o Mutual funds
A mutual fund is a professionally managed type of collective investment
scheme that pools money from many investors and invests it in stocks, bonds,
short-term money market instruments, and/or other securities.

o Pension funds
A pension fund is a pool of assets forming an independent legal entity that are
bought with the contributions to a pension plan for the exclusive purpose of
financing pension plan benefits

 Real versus Nominal Rates

The "Real Rate of Return (RRR)" is approximately the "Nominal Rate of Return"
minus the "Inflation Rate". Since the inflation rate over the loan is not known
initially, volatility in inflation represents a risk to both the lender and the borrower.

Real Rate of Return (RRR) = Nominal Rate of Return _ Inflation Rate

 Relation between Inflation Rate and Interest Rate

Interest Rate will increase when Inflation Rate increases and vesa versa Interest
Rate will decrease when Inflation Rate decreases.

 Consumer Price Index (CPI) is a measure estimating the average price of consumer
goods and services purchased by households. A consumer price index measures a
price change for a constant market basket of goods and services from one period
to the next within the same area (city, region, or nation).

40
 Evaluating Cash Flows:
 Capital Budgeting (or Investment Appraisal) is the planning process used to
determine whether a firm's long term investments such as new machinery,
replacement machinery, new plants, new products, and research
development projects are worth pursuing. It is budget for major capital, or
investment, expenditures.

 Projects Types: Independent Projects & Mutually Exclusive Projects

 Independent Projects, if the cash flows of one are unaffected by the
acceptance of the other
Example: If we have two Independent Projects to compare between
them, we can choose one of them (or both) depending on situation and
criteria of selection (we will discuss later)

 Mutually Exclusive Projects, if the cash flows of one can be adversely

impacted by the acceptance of the other.
Example: If we have two Mutually Exclusive Projects to compare between
them, we MUST choose one of them ONLY (or none) depending on
situation and criteria of selection (we will discuss later)

 Many methods are used in capital budgeting, including the techniques such
as:
1. Payback Period
2. Discounted Payback Period
3. Net present value (NPV)
4. Profitability index (PI)
5. Internal Rate of Return (IRR)
6. Modified Internal Rate of Return (MIRR)

41
Time Value of Money

42
 Time Value of Money:
The time value of money is the value of money figuring in a given amount of interest
earned over a given amount of time.

 Example:
100 dollars of today's money invested for one year and earning 5 percent interest will
be worth 105 dollars after one year. Therefore, 100 dollars paid now or 105 dollars
paid exactly one year from now both have the same value to the recipient assuming 5
percent interest.
0 1
i
5%

PV FV
$100 $ 105

Example Time Line

 Tick marks at ends of periods, so Time 0 is today; Time 1 is the end of Period 1;
or the beginning of Period 2.

In all "Time Value of Money" problems we deal with one or more of the following
parameters:
(1) PV : Present value
(2) FV : Future value
(3) N : No. of periods (Years or Months or Quarters…..etc )
(4) I : Interest Rate per period (usually explained as a percentage)
(5) PMT : Payment or Installment value

43
1. Future Value (FV): The value of an asset or cash at a specified date in the future that is
equivalent in value to a specified sum today.
General Future Value Equation:

n
FVn = PV(1 + i)
2. Present Value (PV): The value on a given date of a future payment or series of future
payments, discounted to reflect the time value of money and other factors such as
investment risk.
We can get Present Value (PV) Equation from Future Value Equation:

n
FVn  1 
PV = = FVn  
1 + i n  1 + i 

3. No. of periods (N): The total number of payment periods in an annuity.

For example, if you get a four-year car loan and make monthly payments, your loan
has 4*12 (or 48) periods.

4. Interest Rate (I): The interest rate per period.

For example, if you obtain an automobile loan at a 10 percent annual interest rate and
make monthly payments, your interest rate per month is 10%/12, or 0.83%. You would
enter 10%/12, or 0.83%, or 0.0083, into the formula as the rate.

5. Payment (PMT): The payment made each period and cannot change over the life of
the annuity. Typically, PMT includes principal and interest but no other fees or taxes.
If PMT is omitted, you must include the FV argument.

44
 Introduction to Human Resource Management

Human Recourse Management

(HRM) is concerned with all aspects of how people are employed and
managed in organizations. It covers activities such as strategic HRM,
human capital management, corporate social responsibility, knowledge
management, organization development, resourcing (human resource
planning, recruitment and selection, and talent management),
performance management, learning and development, reward
management, employee relations, employee well-being and health and
safety and the provision of employee services. HRM practice has a
strong conceptual basis drawn from the behavioral sciences and from
strategic management, human capital and industrial relations theories.
This foundation has been built with the help of a multitude of research
projects.
Human resource management involves all management decisions and
action that affect the nature of the relationship between the
organization and its employees – its human resources. (Beer et al,
1984)
HRM comprises a set of policies designed to maximize organizational
integration, employee commitment, flexibility and quality of work.
(Guest, 1987).
Human resource management is a distinctive approach to employment
management which seeks to achieve competitive advantage through
the strategic deployment of a highly committed and capable workforce,
using an integrated array of cultural, structural and personnel
techniques. (Storey, 1995)
HRM is: ‘The management of work and people towards desired ends.’
(Boxall etal, 2007).
HRM is concerned with how organizations manage their workforce
(Grimshaw and Rubery, 2007)
Personnel aspect of Manager
Conducted job analyses.
Planning labor needs and recruiting job candidates.
Selecting job candidates.
Orienting and training new employees.
Managing wages and salaries.
Providing incentives and benefits.
Apprising performances.
Communicating (interviewing, counseling, disciplining).
Training and develop managers.
Building employee commitment.
Personnel Mistakes
Hire wrong person for the job.
High turnover.
Have your people not doing their best.
Waste time with useless interviews.
Discriminations.
Unsafe practices with employees.
Some employees think their salaries are unfair relative to others in the
organization. Lack of training.
Human Resource Manager Duties
1. Line Function
Direct the activities of the people in his or her own department
and perhaps in related area.
2. A coordinative Function
coordinates personnel activities to ensure that line managers are
implementing the firm human resource policies.
3. Staff Function
Assisting and advising line managers is the heart of the human
 resources manager job so line managers can better understand
the personnel aspects of the company strategic options. Hr. help
in hiring, training, evaluating, rewarding, counseling, promoting
and firing.

The objectives of HRM

The overall purpose of human resource management is to ensure
that the organization is able to achieve success through people.
HRM aims to increase organizational effectiveness and capability –
the capacity of an organization to achieve its goals by making the
best use of the resources available to it. Ulrich and Lake (1990)
remarked that: ‘HRM systems can be the source of organizational
capabilities that allow firms to learn and capitalize on new
opportunities.’
But HRM has an ethical dimension which means that it must also be
concerned with the rights and needs of people in organizations
through the exercise of social responsibility.
Dyer and Holder (1998) analyzed management’s HR goals under the
headings of contribution (what kind of employee behavior is
expected?), composition (what headcount, staffing ratio and skill
mix?), competence (what general level of ability is desired?) and
commitment (what level of employee attachment and
identification?).

HRM policy goals, David Guest (1987, 1989a, 1989b, 1991)

1. Strategic integration:
the ability of the organization to integrate HRM issues into its strategic
plans, ensure that the various aspects of HRM cohere, and provide for
line managers to incorporate an HRM perspective into their decision
making.
2. High commitment:
behavioral commitment to pursue agreed goals, and attitudinal
commitment reflected in a strong identification with the enterprise.
3. High quality:
this refers to all aspects of managerial behavior that bear directly on
the quality of goods and services provided, including the management
of employees and investment in high quality employees.
4. Flexibility:
functional flexibility and the existence of an adaptable organization
structure with the capacity to manage innovation.

Theories of HRM, David Guest (1997)

1. Strategic theories
in the UK the implicit but untested hypothesis is that good fit (between
HR practice and the internal and external context) will be associated
with superior performance. In the United States the focus has been
more on classifying types of HR strategy. The hypothesis is that firms
that have a fit between business strategy, structure and HRM policy will
have superior performance.
2. Descriptive theories
these either list areas of HR policy and outcomes (Beer et al, 1984) or
adopt a systems approach, describing the relationships between levels
(Kochan et al, 1986). They are largely non-prescriptive.
3. Normative theories
these are normative in the sense that they establish a norm or standard
pattern in the form of prescribed best practice. These take a
considerable risk in implying ‘one best way’.

Theories of HRM, Boselie et al (2005)

1. Contingency theory
HRM is influenced by the organization’s environment and
circumstances (Legge, 1978).
2. The resource-based view
HRM delivers added value through the strategic development of the
organization’s rare, hard to imitate and hard to substitute human
resources (Barney, 1991, 1995).
3. AMO theory
the formula Performance = Ability + Motivation +Opportunity to
Participate provides the basis for developing HR systems that attend to
employees’ interests, namely their skill requirements, motivations and
the quality of their job (Appelbaum et al, 2000; Bailey et al,
2001; Boxall and Purcell, 2003).

Characteristics of HRM
HRM was regarded by Storey (1989) as a ‘set of interrelated policies
with an ideological and philosophical underpinning’. He listed four
aspects that constitute the meaningful version of HRM:
1. A particular constellation of beliefs and assumptions.
2. A strategic thrust informing decisions about people management.
3. The central involvement of line managers.
4. Reliance upon a set of ‘levers’ to shape the employment relationship.
Unitary and pluralist employee relations
HRM is characterized by a unitary rather than a pluralist view of
employee relations with the emphasis on individual contracts, not
collective agreements. A unitary view expresses the belief that people
in organizations share the same goals and work as members of one
team. The pluralist view recognizes that the interests of employees will
not necessarily coincide with their employers and suggests that the
unitary view is naïve, unrealistic and against the interest of employees.

Treating people as assets or human capital

The notion that people should be regarded as assets rather than
variable costs, in other words, treated as human capital, was originally
advanced by Beer et al (1984). HRM philosophy, as mentioned by Legge
(1995), holds that ‘human resources are valuable and a source of
competitive advantage’. Armstrong and Baron (2002) stated that:

People and their collective skills, abilities and experience, coupled with
their ability to deploy these in the interests of the employing
organization, are now recognized as making a significant contribution
to organizational success and as constituting a major source of
competitive advantage.

Focus on business values

The concept of hard HRM is based on a management- and business-
oriented philosophy. It is concerned with the total interests of the
organization – the interests of the members of the organization are
recognized but subordinated to those of the enterprise. Hence the
importance attached to strategic integration and strong cultures, which
flow from top management’s vision and leadership, and which require
people who will be committed to the strategy, who will be adaptable to
change and who fit the culture.

Factors that influence HR policies and practices are the external and
internal environments of the organization.

The external environment

The external environment consists of social, political, legal and
economic developments and competitive pressures. Global competition
in mature production and service sectors is increasing.
This is assisted by easily transferable technology and reductions in
international trade barriers.
The internal environment
 The following aspects of the internal environment will affect HR
policy and practice:
• The type of business or organization – private, public or voluntary
sector; manufacturing or service.
• The size of the organization;
• The age or maturity of the organization;
• The technology or key activities of the business will determine
how work is organized, managed and carried out.
• The type of people employed, professional staff, knowledge
workers, technicians, administrators, production workers, sales and
customer service staff.
• The organization’s culture – the established pattern of values,
norms, beliefs, attitudes and assumptions that shape the ways in
which people behave and things get done.
 Strategic Human Resource Management
Strategic HRM
‘is the interface between HRM and strategic management’.
Strategic management is the set of decisions and actions resulting in
the formulation and implementation of strategies designed to achieve
the objectives of an organization.’
Strategic HRM is an approach that defines how the organization’s goals
will be achieved through people by means of HR strategies and
integrated HR policies and practices.

Aims of strategic HRM

First objective
integration the vertical alignment of HR strategies with business
strategies and the horizontal integration of HR strategies.
The second objective
is to provide a sense of direction in an often turbulent environment so
that the business needs of the organization and the individual and
collective needs of its employees can be met by the development and
implementation of coherent and practical HR policies and programs.

Three strategies aimed at achieving competitive advantage have been

identified by Porter (1985):
1. Innovation
• High degree of creative behavior
• A longer-term focus
• A relatively high level of cooperation and interdependent behavior
• A moderate degree of concern for quantity
• An equal degree of concern for process and results
• A greater degree of risk taking
• A high tolerance of ambiguity and unpredictability
2. Quality •
• A more long-term or intermediate focus
• A modest amount of cooperative, interdependent behavior
• A high concern for quality
• A modest concern for quantity of output
• High concern for process (how the goods or services are made or
delivered)
• Low risk-taking activity
• Commitment to the
3. Cost leadership
• A rather short-term focus
• Primarily autonomous or individual activity
• Modest concern for quality
• High concern for quantity of output
• Primary concern for results
• Low risk-taking activity
The significant features of strategic HRM
• Creating sustained competitive advantage depends on the unique
resources and capabilities that a firm brings to competition in its
environment.
• Competitive advantage is achieved by ensuring that the firm has
higher quality people than its competitors.
• The challenge is to achieve organizational capability, ensuring that
businesses are able to find, assimilate, reward and retain the talented
individuals they need.
 HR Strategies

What are HR strategies?

HR strategies set out what the organization intends to do about its
human resource management policies and practices and how they
should be integrated with the business strategy and each other.

General HR strategies
General strategies describe the overall system or bundle of
complementary HR practices that the organization proposes to adopt
or puts into effect in order to improve organizational performance.
The three main approaches are summarized below.
1. High-performance management
High-performance management or high-performance working aims to
make an impact on the performance of the organization in such areas
as productivity, quality, and levels of customer service, growth and
profits. High-performance management practices include rigorous
recruitment and selection procedures, extensive and relevant training
and management development activities, incentive pay systems and
performance management processes.
2. High-commitment management
• job design as something management consciously does in order to
provide jobs that have a considerable level of intrinsic satisfaction;
• A policy of no compulsory lay-offs or redundancies and permanent
employment guarantees with the possible use of temporary workers to
cushion fluctuations in the demand for labor.
• New forms of assessment and payment systems and, more
specifically, merit pay and profit sharing.
• A high involvement of employees in the management of quality.
3.High-involvement management
High-involvement work practices are a specific set of human resource
practices that focus on employee decision making, power, access to
information, training and incentives.’

Specific HR strategies
Specific HR strategies set out what the organization intends to do in
areas such as:
• Human capital management – obtaining, analyzing and reporting on
data that inform the direction of value-adding people management,
strategic, investment and operational decisions.
• Corporate social responsibility – a commitment to managing the
business ethically in order to make a positive impact on society and the
environment. •
Organization development – the planning and implementation of
programs designed to enhance the effectiveness with which an
organization functions and responds to change.
• Engagement – the development and implementation of policies
designed to increase the level of employees’ engagement with their
work and the organization.
• Knowledge management – creating, acquiring, capturing, sharing and
using knowledge to enhance learning and performance.
• Resourcing attracting and retaining high quality people.
• Talent management how the organization ensures that it has the
talented people it needs to achieve success.
• Learning and development – providing an environment in which
employees are encouraged to learn and develop.
• Reward defining what the organization wants to do in the longer term
to develop and implement reward policies, practices and processes that
will further the achievement of its business goals and meet the needs
of its stakeholders.
• Employee relations – defining the intentions of the organization
about what needs to be done and what needs to be changed in the
ways in which the organization manages its relationships with
employees and their trade unions.
• Employee well-being – meeting the needs of employees for a healthy,
safe and supportive work environment.

Criteria for an effective HR strategy

• It will satisfy business needs.
• It is founded on detailed analysis and study, not just wishful thinking.
• It can be turned into actionable programs that anticipate
implementation requirements and problems.
• It is coherent and integrated, being composed of components that fi t
with and support each other.

Issues in developing HR strategies

Five fundamental questions that need to be asked in developing HR
strategies have been posed
1. What are the firm’s strategic objectives?
2. How are these translated into unit objectives?
3. What do unit managers consider are the ‘performance drivers’ of
those objectives?
4. How do the skills, motivation and structure of the firm’s workforce
influence these performance drivers?
5. How does the HR system influence the skills, motivation and
structure of the workforce?

Typical areas that may be covered in a written HR strategy

• Basic considerations – business needs in terms of the key elements of
the business strategy; environmental factors and analysis
(SWOT/PESTLE) and cultural factors – possible helps or hindrances to
implementation.
• Content – details of the proposed HR strategy.
• Rationale – the business case for the strategy against the background
of business needs and environmental/cultural factors.
• Implementation plan – an action program, definitions of
responsibilities and resource requirements and arrangements for
communication, consultation, involvement and training.
• Costs and benefits analysis – an assessment of the resource
implications of the plan (costs, people and facilities) and the benefits
that will accrue, for the organization as a whole, for line managers and
for individual employees. (So far as possible these benefits should be
quantified in terms of added value or return on investment.)
 Human Capital Management
Human capital management defined
HCM is concerned with obtaining, analyzing and reporting on data that
inform the direction of value-adding people management, strategic,
investment and operational decisions at corporate level and at the level
of front line management.

The concept of human capital

Individuals generate, retain and use knowledge and skill (human
capital) and create intellectual capital. Their knowledge is enhanced by
the interactions between them (social capital) and generates the
institutionalized knowledge possessed by an organization
(organizational capital). These concepts of human, intellectual, social
and organizational capital are explained below.

Human capital
Human capital consists of the knowledge, skills and abilities of the
people employed in an organization.
Human capital represents the human factor in the organization; the
combined intelligence, skills and expertise that gives the organization
its distinctive character.
The human elements of the organization are those that are capable of
learning, changing, innovating and providing the creative thrust which if
properly motivated can ensure the long-term survival of the
organization.

The constituents of human capital

Human capital consists of intellectual, social and organizational capital.
1. Intellectual capital
which is defined as the stocks and flows of knowledge available to an
organization. These can be regarded as the intangible resources
associated with people which, together with tangible resources (money
and physical assets), comprise the market or total value of a business.
2. Social capital
the features of social life – networks, norms and trust – that enable
participants to act together more effectively to pursue shared
objectives’. It is important to take into account social capital
considerations, which is the ways in which knowledge is developed
through interaction between people.
3. Organizational capital
Organizational capital is the institutionalized knowledge possessed by
an organization that is stored in databases.

Questions on people management raised by human capital theory

• What are the key performance drivers that create value?
• What skills do we have?
• What skills do we need now and in the future to meet our strategic
aims?
• How are we going to attract, develop and retain these skills?
• How can we develop a culture and environment in which
organizational and individual learning takes place that meets both our
needs and the needs of our employees?
• How can we provide for both the explicit and tacit knowledge created
in our organization to be captured, recorded and used effectively?

Human capital theory helps to:

• determine the impact of people on the business and their
contribution to shareholder value;
• demonstrate that HR practices produce value for money in terms, for
example, of return on investment;
• provide guidance on future HR and business strategies;
• provide data that will inform strategies and practices designed to
improve the effectiveness of people management in the organization.
 The Role and Organization of the HR Function

The role of the HR function

The role of the HR function is to take initiatives and provide guidance,
support and services on all matters relating to the organization’s
employees. Essentially, the HR function is in the delivery business
providing the advice and services that enable organizations to get
things done through people.
The function ensures that HR strategies, policies and practices are
introduced and maintained that cater for everything concerning the
employment, development and well-being of people and the
relationships that exist between management and the workforce.

Guidelines on organizing the HR function

• The head of the function should report directly to the chief executive
and be a member of the top management team involved in the
formulation of business strategy.
• In a decentralized organization, operational units should be
responsible for their own HR management affairs within the framework
of broad strategic and policy guidelines from the center.
• The professional members of the function should have ‘strategic
capability’ in the sense of understanding the strategic imperatives of
the organization and having the skills required to contribute to the
formulation and achievement of strategic goals and ‘act as catalysts for
change, anticipating problems and making things happen.
• Increased responsibility for HR matters should be devolved to line
managers where appropriate.

Standard approaches to organizing the HR function

There is no such thing as a typical HR department might consist of a
team of 12 people serving a workforce of around 1,200 (on average,
there was one HR practitioner or assistant for every 100 employees).
The team would have a director, three managers, one supervisor, three
HR officers and four assistants. Such a team would typically include a
number of professionally qualified practitioners, particularly at senior
level, and would enjoy good access to the company’s most senior
executives.

Evaluating the HR function

It is necessary to evaluate the contribution of the HR function in order
to ensure that it is effective at both the strategic level and in terms of
service delivery and support. The prime criteria for evaluating the work
of the function are its ability to operate strategically and its capacity to
deliver the levels of services required.
Research conducted by the Institute of Employment Studies (Hirsh,
2008) discovered that the factors that correlated most strongly with
line managers’ and employees’ satisfaction with HR were:

• being well supported in times of change;

• HR giving good advice to employees;
• being well supported when dealing with difficult people or situations;
• HR getting the basics right.

The dimensions of HR effectiveness, Huselid et al (1997)

• Strategic HRM the delivery of services in a way that supports the
implementation of the firm’s strategy.
• Technical HRM – the delivery of HR basics such as recruitment,
compensation and benefits.

The methods that can be used to evaluate these dimensions

are described below.
1. Quantitative criteria
• Organizational: added value per employee, profit per employee, sales
value per employee, costs per employee and added value per £ of
employment costs.
• Employee behavior: retention and turnover rates, absenteeism,
sickness, accident rates, grievances, disputes, references to
employment tribunals, successful suggestion scheme outcomes.
• HR service levels and outcomes: time to fill vacancies, time to
respond to applicants, ratio of acceptances to offers made, cost of
replies to advertisements, training days per employee, time to respond
to and settle grievances, measurable improvements in organizational
performance as a result of HR practices, ratio of HR costs to total costs,
ratio of HR staff to employees, the achievement of specified goals.
2. User reactions
The internal customers of HR (the users of HR services) can provide
important feedback on
HR effectiveness. Users can be asked formally to assess the extent to
which the members of the
HR function demonstrate their abilities in the following ways.
3. Service level agreements
A service level agreement (SLA) is an agreement between the provider
of HR services and the customers who use the service on the level of
service that should be provided. It sets out the nature of the service
provided, the volume and quality to be achieved by the service and the
response times the provider must attain after receiving requests for
help. The agreement provides the basis for monitoring and evaluating
the level of service.
4. Employee satisfaction measures
The degree to which employees are satisfied with HR policies and
practices can be measured by attitude surveys. These can obtain
opinions on such matters as their work, their pay, how they are treated,
their views about the company and their managers, how well they are
kept informed, the opportunities for learning and career development
and their working environment and facilities.
5. Benchmarking
In addition to internal data it desirable to benchmark HR services. This
means comparing what the HR function is doing with what is happening
in similar organizations. This may involve making direct comparisons
using quantified performance data or exchanging information on ‘good
practice’ that can be used to indicate where changes are required to
existing
HR practices or to provide guidance on HR innovations.

How members of the HR function can demonstrate their effectiveness

• Understand the business strategy and act in ways that support its
achievement.
• Anticipate business needs and produce realistic proposals on how HR
can help to meet them.
• Show that they are capable of meeting performance standards and
deadlines for the delivery of HR initiatives and projects.
• Provide relevant, clear, convincing and practical advice.
• Provide efficient and effective services with regard to response,
delivery times and quality.
• Generally reveal their understanding and expertise.

The HR scorecard
The HR scorecard developed by Beatty et al (2003) follows the same
principle as the balanced scorecard, i.e. it emphasizes the need for a
balanced presentation and analysis of data. The four headings of the HR
scorecard are:
1. HR competencies administrative expertise, employee advocacy,
strategy execution and change agency.
2. HR practices communication, work design, selection, development,
measurement and rewards.
3. HR systems alignment, integration and differentiation.
4. HR deliverables workforce mindset, technical knowledge, and
workforce behavior.
Stages in the preparation of HR budgets
1. Define functional objectives and plans.
2. Forecast the activity levels required to achieve objectives and plans
in the light of company budget guidelines and assumptions on future
business activity levels and any targets for reducing overheads or for
maintaining them at the same level.
3. Assess the resources (people and finance) required to enable the
activity levels to be achieved.
4. Cost each activity area – the sum of these costs will be the total
budget.
 The Role of the HR Practitioner

The four roles of HR professionals

1. Managing strategic human resources.
2. Managing employee contribution.
3. Managing transformation and change.
4. Managing HR infrastructures to support line managers.

The strategic roles of HR specialists

• To formulate and implement in conjunction with their management
colleagues forward-looking HR strategies that are aligned to business
objectives and integrated with one another. • To contribute to
the development of business strategies.
• They work alongside their line management colleagues to provide on
an everyday basis continuous support to the implementation of the
business or operational strategy of the organization, function or unit.

To carry out these roles, they need to:

• understand the strategic goals of the organization or unit and
appreciate the business imperatives and performance drivers relative to
these goals;
• comprehend how sustainable competitive advantage can be obtained
through the human capital of the organization or unit and know how
HR practices can contribute to the achievement of strategic goals;
• contribute to the development for the business of a clear vision and a
set of integrated values;
• ensure that senior management understands the HR implications of
its business strategy;
• be aware of the broader context (the competitive environment and
the business, economic, social and legal factors that affect it) in which
the organization operates;
• understand the kinds of employee behavior required successfully to
execute the business strategy;
• think in terms of the bigger and longer-term picture of where HR
should go and how it should get there;
• be capable of making a powerful business case for any proposals on
the development of
HR strategies;
• Act as a change agent in developing the organization and its culture
and as an internal consultant in advising on what needs to be done and
how to do it (these two aspects of the strategic role are considered at
the end of this section);
• understand how the ethical dimensions of HR policy and practice fi t
into the present and future picture;
• believe in and practice evidence-based management
(recommendations on strategy and its implementation are always
backed up by hard data).

Guidelines for HR innovations

• Be clear on what has to be achieved and why.
• Ensure that what you do fits the strategy, culture and circumstances
of the organization.
• Don’t follow fashion – do your own thing as long as it is relevant and
fits the organization’s needs.
• Keep it simple – over-complexity is a common reason for failure.
• Don’t rush – it will take longer than you think.
• Don’t try to do too much at once – an incremental approach is
generally best.
• Assess resource requirements and costs.
• Pay close attention to project planning and management.
• Remember that the success of the innovation rests as much on the
effectiveness of the process of implementation (line manager buy-in
and skills are crucial) as it does on the quality of the concept, if not
more so.
• Pay close attention to change management approaches –
communicate, involve and train.

HR specialists as change agents

1. Transformational change
A major change that has a dramatic effect on HR policy and
practice across the whole organization.
2. Incremental change
Gradual adjustments of HR policy and practices that affect single
activities or multiple functions.
3. HR vision
A set of values and beliefs that affirm the legitimacy of the HR
function as a strategic business partner.
4. HR expertise
The knowledge and skills that define the unique contribution the
HR professional can make to effective people management.

Conflicts in the HR contribution can arise in the following ways:

• A clash of values line managers may simply regard their workers as
factors of production to be used, exploited and dispensed with in
accordance with organizational imperatives.
• Different priorities management’s priority may be to add value make
more out of less and if this involves getting rid of people that’s too bad.
HR people may recognize the need to add value but not at the expense
of employees.
• Freedom versus control line managers may want the freedom to get
on with things their own way, interpreting company policies to meet
their needs; and the thrust for devolution has encouraged such
feelings. But HR specialists will be concerned about the achievement of
a consistent and equitable approach to managing people and
implementing HR policies. They will also be concerned with the
attainment of a proper degree of compliance to employment and
health and safety law. They may be given the responsibility for
exercising control, and conflict is likely if they use this authority too
rigidly.
• Disputes if unions are recognized, HR specialists may be involved in
conflict during the process of resolution. Even when there are no
unions, there may be conflict with individuals or groups of employees
about the settlement of grievances.

Effective HR practitioners:
• Operate strategically they have the ability to see the big picture and
take, and implement, a strategic and coherent view of the whole range
of HR policies, processes and practices in relation to the business as a
whole; they ensure that their innovations and services are aligned to
business needs and priorities while taking account of the needs of
employees and other stakeholders.
• Have the capability to facilitate change, initiating it when necessary
and acting as a stabilizing force in situations where change would be
damaging.
• Appreciate organizational and individual needs; against a background
of their knowledge of organizational behavior, they understand how
organizations function and the factors affecting individual motivation
and commitment, they are capable of analyzing and diagnosing the
people requirements of the organization and proposing and
implementing appropriate action.
• Are business-like – they have to demonstrate that they can make
value-added contributions?
• Are persuasive – they present the proposals and recommendations
emerging from their interventions persuasively, making out a
compelling business case.
• Deliver their services efficiently and effectively.

Competencies for HR professionals

1. Business Awareness
(a) the business environment, the competitive pressures the
 organization faces and the impact of external events on
organizational policies and practices.
(b) The drivers of high performance and the business strategy.
(c) The business’s key activities and processes and how these
affect business strategies. (d) How HR
policies and practices impact on business performance, and puts
this to good use.
2. Strategic capability
(a)Seeks involvement in business strategy formulation and
contributes to the development of the strategy.
(b) Contributes to the development for the business of a clear
vision and a set of integrated values. (c) Develops and
implements coherent HR strategies which are aligned to the
business strategy and integrated with one another.
(d) Works closely with line management to support the
achievement of corporate, unit or functional strategies.
(f) Understands the importance of human capital measurement,
introduces measurement systems and ensures that good use is
made of them.
3. Organizational effectiveness
(a) Contributes to the analysis and diagnosis of people issues and
proposes practical solutions.
(b) Helps to develop resource capability by ensuring that the
business has the skilled, committed and engaged workforce it
needs.
(c) Helps to develop process capability by influencing the design of
work systems to make the best use of people.
(d) Pursues an ‘added value’ approach to innovation and service
delivery.
4. Acts in the interests of employees
Takes action to advance and protect the interests and well-being
of employees.
5. Continuous professional development
(1) Continually develops professional knowledge and skills,
(2) Benchmarks good HR practice.
(3) Keeps in touch with new HR concepts, practices and
techniques.
(4) Keeps up-to-date with HR research and its practical
implications
 Job Analysis

Job analysis
is the procedure through which you determine the duties of these
positions and the characteristics of the people to hire for them. Job
analysis produces information used for writing job descriptions (a list of what
the job entails) and job specifications (what kind of people to hire for the job).

HR specialist normally collects one or more of the following types

of information via the job analysis:
Work activities
First, he or she collects information about the job’s actual work
activities, such as cleaning, selling, teaching, or painting. This list may
also include how, why, and when the worker performs each activity.
Human behaviors
the specialist may also collect information about human behaviors like
sensing, communicating, deciding, and writing. Included here would be
information regarding job demands such as lifting weights or walking
long distances.
Machines, tools
equipment, and work aids. This category includes information regarding
tools used, materials processed, knowledge dealt with or applied (such
as finance or law), and services rendered (such as counseling or
repairing).
Performance standards
the employer may also want information about the job’s performance
standards (in terms of quantity or quality levels for each job duty, for
instance). Management will use these standards to appraise
employees.
Job context
Included here is information about such matters as physical working
conditions, work schedule, and the organizational and social context for
instance, the number of people with whom the employee would
normally interact.
Information regarding incentives might also be included here.
Human requirements
this includes information regarding the job’s human requirements, such
as job-related knowledge or skills (education, training, work
experience) and require.

Uses of Job Analysis Information

Recruitment and Selection
Job analysis provides information about what the job entails and what
human characteristics are required to perform these activities.
This information, in the form of job descriptions and specifications,
helps management decide what sort of people to recruit and hire.
Compensation
Job analysis information is crucial for estimating the value of each job
and its appropriate compensation. Compensation (such as salary and
bonus) usually depends on the job’s required skill and education level,
safety hazards, degree of responsibility, and so on—all factors you can
assess through job analysis. Furthermore, many employers group jobs
into classes (say, secretary III and IV). Job analysis provides the
information to determine the relative worth of each job—and thus its
appropriate class.
Performance Appraisal
A performance appraisal compares each employee’s actual
performance with his or her performance standards. Managers use job
analysis to determine the job’s specific activities and performance
standards.
Training
The job description should show the activities and skills—and therefore
the training—that the job requires.

Steps in Job Analysis

Step 1
Decide how you’ll use the information, since this will determine the
data you collect and how you collect them. Some data collection
techniques—like interviewing the employee and asking what the job
entails—are good for writing job descriptions and selecting employees
for the job. Other techniques, like the position analysis questionnaire
described later, do not provide qualitative information for job
descriptions. Instead, they provide numerical ratings for each job; these
can be used to compare jobs for compensation purposes.
Step 2
Review relevant background information such as organization charts,
process charts, and job descriptions. Organization charts show the
organization wide division of work, how the job in question relates to
other jobs, and where the job fits in the overall organization. The chart
should show the title of each position and, by means of interconnecting
lines, who reports to whom and with whom the job incumbent
communicates.
A process chart provides a more detailed picture of the work flow. In its
simplest form a process chart shows the flow of inputs to and outputs
from the job you’re analyzing.
Step 3
Select representative positions. Why? Because there may be too many
similar jobs to analyze. For example, it is usually unnecessary to analyze
the jobs of 200 assembly workers when a sample of 10 jobs will do.
Step 4
Actually analyze the job by collecting data on job activities, required
employee behaviors, working conditions, and human traits and abilities
needed to perform the job.
Step 5
Verify the job analysis information with the worker performing the job
and with his or her immediate supervisor. This will help confirm that
the information is factually correct and complete. This review can also
help gain the employee’s acceptance of the job analysis data and
conclusions, by giving that person a chance to review and modify your
description of the job activities.
Step 6
Develop a job description and job specification. These are two tangible
products of the job analysis. The job description is a written statement
that describes the activities and responsibilities of the job, as well as its
important features, such as working conditions and safety hazards. The
job specification summarizes the personal qualities, traits, skills, and
background required for getting the job done.

METHODS OF COLLECTING JOB ANALYSIS INFORMATION

There are various ways to collect information on the duties,
responsibilities, and activities of a job, and we’ll discuss the most
important ones in this section. In practice, you could use any one of
them, or you could combine the techniques that best fit your purpose.

1. The Interview
Managers use three types of interviews to collect job analysis data
individual interviews with each employee, group interviews with groups
of employees who have the same job, and supervisor interviews with
one or more supervisors who know the job. They use group interviews
when a large number of employees are performing similar or identical
work, since it can be a quick and inexpensive way to gather
information. As a rule, the workers’ immediate supervisor attends the
group session; if not, you can interview the supervisor separately to get
that person’s perspective on the job’s duties and responsibilities.
Pros and Cons
the interview is probably the most widely used method for identifying a
job’s duties and responsibilities, and its wide use reflects its
advantages. It’s a relatively simple and quick way to collect information,
including information that might never appear on a written form. A
skilled interviewer can unearth important activities that occur only
occasionally, or informal contacts that wouldn’t be obvious from the
organization chart. The interview also provides an opportunity to
explain the need for and functions of the job analysis. And the
employee can vent frustrations that might otherwise go unnoticed by
management.
Distortion of information is the main problem—whether due to
outright falsification or honest misunderstanding. Job analysis is often a
prelude to changing a job’s pay rate. Employees therefore may
legitimately view the interview as an efficiency evaluation that may
affect their pay. They may then tend to exaggerate certain
responsibilities while minimizing others. Obtaining valid information
can thus be a slow process, and prudent analysts get multiple inputs.
Typical Questions
Despite their drawbacks, interviews are widely used. Some typical
interview questions include:
What is the job being performed?
What are the major duties of your position? What exactly do you do?
What physical locations do you work in?
What are the education, experience, skill, and [where applicable]
certification and licensing requirements?
In what activities do you participate?
What are the job’s responsibilities and duties?
What are the basic accountabilities or performance standards that
typify your work?
What are your responsibilities? What are the environmental and
working conditions involved?
What are the job’s physical demands? The emotional and mental
demands?
What are the health and safety conditions?
Are you exposed to any hazards or unusual working conditions?
Interview Guidelines
First the job analyst and supervisor should work together to identify the
workers who know the job best and preferably those who’ll be most
objective in describing their duties and responsibilities.
Second, quickly establish rapport with the interviewee. Know the
person’s name, speak in easily understood language, briefly review the
interview’s purpose, and explain how the person was chosen for the
interview.
Third follow a structured guide or checklist, one that lists questions and
provides space for answers.
Fourth when duties are not performed in a regular manner for instance,
when the worker doesn’t perform the same job over and over again
many times a day ask the worker to list his or her duties in order of
importance and frequency of occurrence.
2. Questionnaires
Having employees fill out questionnaires to describe their job-related
duties and responsibilities is another good way to obtain job analysis
information.
You have to decide how structured the questionnaire should be and
what questions to include.
3. Observation
Direct observation is especially useful when jobs consist mainly of
observable physical activities assembly-line worker
4. Participant Diary/Logs
Another approach is to ask workers to keep a diary/log of what they do
during the day. For every activity he or she engages in, the employee
records the activity (along with the time) in a log. This can produce a
very complete picture of the job, especially when supplemented with
subsequent interviews with the worker and the supervisor.
WRITING JOB DESCRIPTIONS
A job description is a written statement of what the worker actually
does, how he or she does it, and what the job’s working conditions are.
You use this information to write a job specification; this lists the
knowledge, abilities, and skills required to perform the job
satisfactorily.
1. Job identification
2. Job summary
3. Responsibilities and duties
4. Authority of incumbent
5. Standards of performance
6. Working conditions
7. Job specifications
Job enlargement
means assigning workers additional same level activities, thus
increasing the number of activities they perform. Thus, the worker who
previously only bolted the seat to the legs might attach the back as
well.
Job rotation
means systematically moving workers from one job to another.
Job enrichment
means redesigning jobs in a way that increases the opportunities for
the worker to experience feelings of responsibility, achievement,
growth, and recognition for instance, by letting the worker plan and
control his or her own work instead of having it controlled by outsiders.
DE jobbing
broadening the responsibilities of the company’s jobs, and encouraging
employees not to limit themselves to what’s on their job descriptions is
a result of the changes taking place in business today. Organizations
need to grapple with trends like rapid product and technological
change, global competition, deregulation, political instability,
demographic changes, and a shift to a service economy. This has
increased the need for firms to be responsive, flexible, and generally
more competitive.

Flatter Organizations
Instead of traditional pyramid-shaped organizations with seven or more
management layers, flat organizations with just three or four levels are
becoming more prevalent.
 Acquisition

The purpose of Human Resource Planning is to have the right people,

with the right skills, in the right place, at the right time to meet business
objectives. A key component in being able to fulfill the purpose is
attracting and retaining people.

To be an employer of choice an organization

proactively support its employees through effective human resource
management practices and processes.
Promote activities that support employees.
Identify and correct issues that impact successful attraction and
retention of employees.

Employment categories
Probation
most employees are placed on probation when beginning employment
with the organization or changing duties within the organization.
Indeterminate
employment on a continuing basis, unless another period of
employment is specified. Part-time
employment on a continuing basis for hours less than the standard
workday, week or month.
Casual
employment on a casual basis with no set work hours. Employees are
called to work as required.
Term
employment for a fixed period of time. At the end of the specified
period, the term employee ceases to be employed.
Job share
when two employees share the hours of work of one full time position.
 Contractors
are not employees. Contractors are independent employers that must
meet the test of being a contractor. Contractors should be awarded by
a Request for Proposal process.

Salary Administration
All aspects of salary administration for all employment types should
have detailed policies and procedures. This information provides clear
direction and rules for all aspects of paying employees. The policies
should include:
salary rates.
Allowances.
Overtime pay periods.
Increments.
Deductions.

The steps involved in a typical talent acquisition

1) Identify the manpower requirement and establish job description
and job specification for the position.
2) Develop strategy to attract and acquire the required talent. The
strategy involves identification of target group, mode of
advertising the position, compensation to be offered as per
market etc.
3) Notify the position to suitable candidates through various
channels like recruitment consultancy firm, job portals, reference
hunting or cold calling.
4) Shortlist the profiles.
5) Call the short listed candidates and put the through the selection
process. The selection process typically involves a Cognitive Ability
Test, Psychometric Testing, followed by the interviewing process.
6) The selection process yields a shortlist of probable candidates
against each position.
7) The most suitable candidate identified though the selection
process is called for salary negotiation. If the negotiations fail, the
other probable candidates may be considered sequentially based
on their position in the merit list and an agreement is reached
regarding compensation and date of reporting.
8) The candidate is then formally offered the position by way of an
offer letter, which broadly explains the position; compensation
offered and expected date of reporting of the candidate. The offer
is however contingent upon candidate’s medical fitness.
9) A satisfactory medical fitness report validates the offer and the
candidate is issued a formal appointment letter upon joining the
organization.
 Recruitment and Selection

Preparing to Recruit
A) Consider Both External and Internal Environment
• Understand the external environment
• Develop a plan to adjust the internal business environment
B) Know What You Want
• Assess your situation and identify competencies
• Develop or update organizational chart
• Develop or update job descriptions
• Match positions to job descriptions
• Hire employees who fit job descriptions or who can be trained.
C) Make Time to Recruit and Hire
You can’t hire well if you don’t take the time to recruit well
D) Writing Effective Job Descriptions
• Title
Use a title that most clearly describes the primary duties of the
job.
• Job objective
this one or two sentence statement should summarize the general
nature and duties of the job.
• List of duties or tasks to be performed
Make an item by item list of primary responsibilities that are
included in this position. Include all job duties that are required
for the successful performance of the job.
• Description of relationships and roles
it is important that managers identify the lines of communication
and authority within the business, indicate who in the
organization the employee will report to, as well as any
supervisory roles included in the position.
• Job standards and requirements
indicate the minimum qualifications for key job responsibilities.
 For example: Must be able to use Windows applications on a PC;
or must have a working knowledge of Spanish.
• Salary range
if appropriate, provide the pay range for the position being
described.

Recruitment Defined
Recruitment is the process of attracting individuals on a timely
basis, in sufficient numbers, with appropriate qualifications, to apply for
jobs within a business.

Recruitment Methods
1. Recommendations from current employees
Advantages:

• can be fast and efficient.

• Can be effective because the employee has a vested interest.
Disadvantages .
• Limits scope of the job search.
• May not get the most qualified applicants.
• May not work in a tight job market.
2. Word of mouth
Advantages
• Can be fast.
• Eliminates time consuming search for applicants.
• Allows manager more control over the candidate pool.
Disadvantages
• Limits scope of the job search.
• May not get the most qualified applicants.
• May not work in a tight job market.
3. Want ads
Advantages
• Allows you to reach a larger applicant pool.
• Creates an opportunity to attract more highly qualified candidates.
Disadvantages
• Can be time consuming.
• Requires careful screening process.
4. Government job services
Advantages
• Staffed by qualified professionals.
• Provides job announcement writing service.
• Provides screening assistance.
Disadvantages
• May not have the best applicant pools.
• Not highly regarded by some managers.
5. College placement office
Advantages
• Source of highly qualified applicants.
• May reduce need for training.
6. The internet
Advantages
• Fast.
• Inexpensive.
• Wide coverage.
Disadvantages
• some candidates cannot reach.

Writing a “Help Wanted” Ad That Sells the Position

• Step 1. Give the appropriate job title.
• Step 2. Say something positive about the organization.
• Step 3. Describe the job.
• Step 4. Highlight positive working conditions.
• Step 5. If appropriate, provide information on wages and benefits.
• Step 6. Indicate how to apply.
Selection Defined
Employee selection is the process of choosing from a group of
candidates the individual or individuals who will be offered a position.
Selection Tools
1. Application forms.
2. Interviews.
3. Reference checks.
4. Pre-employment tests.
5. Trial period.

Selection Bias
1) Stereotyping
is the tendency to attribute certain characteristics to particular groups
of people. For example, you might think that the work ethic of an
immigrant worker is much better than the work ethic of local workers
and have a tendency to hire immigrant workers for that reason. This
bias could influence your thinking and prevent you from selecting a
local worker with an excellent worth ethic. 2) Halo Effect
is the tendency to regard highly an individual who has a personal or
work characteristic that you particularly like. The halo effect might
cause an interviewer to disregard some negative qualities of an
applicant. Assume, for example, that an applicant shows up for a job
interview well-groomed and neatly dressed. The halo error tendency
would be to assume that the person is competent in a number of job
areas for which you are recruiting simply because personal appearance
created a favorable impression. 3) First Impression
is the tendency to distort or ignore additional information about an
individual to fit your first impression. The first impression an
interviewer receives of a job applicant can greatly influence the entire
assessment of that person. For example, if an applicant impresses the
interviewer in the first few minutes of the interview, the remainder of
the interview is positively influenced. In the case of a positive or
negative first impression, there is a chance to be so influenced that the
primary interview purpose of predicting future performance becomes a
secondary issue.
4) Discrimination Issues
our employment laws make it illegal to discriminate against an
applicant because of: age, sex, marital status, ethnic origin, religious
preference or sexual.

The purpose of the interview

• To provide a two-way exchange of information.
• To sell your organization.
• To sell/market your position.
• To meet and personally evaluate the candidate.
• To answer the applicants’ questions and address any concerns.
How to Ensure Interview Reliability
1) Identify job characteristics.
2) Write a list of questions based on job characteristics.
3) Plan to ask each applicant the same questions.
4) Plan to score responses.
The Interview Process
1 – Interview Preparation
• Review the job description
• If appropriate, check with H.R. regarding organizational procedures or
equal opportunity procedures • Review all relevant information
you have on the applicant, including application form, resume, etc.
• Decide if the interview will be conducted by one individual or a group
of people • Screen applications down to
several most qualified
• Develop a set of interview questions
2 – Setting the Tone
• Be on time
• Choose a quiet and private room with appropriate tables and chairs
• Avoid interruptions
• Greet the applicant and put them at ease
• Create a friendly, relaxed atmosphere
• Provide introductory information to the applicant, i.e., job
description, mission statement • Explain the interview
process, who the candidate will meet, how long it will take, testing
procedures.
• Allow adequate time for interview and short tour of facilities if
appropriate
3 – General Interview Format
• Ask your pre-prepared questions focus on the candidate’s ability to
do the job • Complete the interview scoring sheet and note any
positive or negative issues.
• Ask follow-up and probing questions
• When appropriate, allow silence to give the applicant time to think
and compose an answer • Use reflective listening –
listen to the applicants answer and repeat it back in your own words.
• Allow time to review notes after interview
• Keep all information organized and available for use in making the
final decision • Allow the applicant to ask
questions
• Follow up on any of the applicant’s questions that could not be
answered in the interview • Check references on
finalists use a list of questions.
4 – Legal vs. Discriminatory Questions
• Ask questions in a non-discriminatory fashion
• Focus on job requirements.
5 – Closing the Interview
• Thank the applicant for their time and interest in the position.
• Communicate any next steps to the applicant
• Using all the information you have gathered, make a final decision
• Offer the position to the top candidate
• Complete any final negotiations
• Inform all other candidates of your decision in a timely and
professional manner.
Types of tests
A. Skills tests
measures the individual’s ability to perform certain tasks; i.e. word
processing ability, equipment operation.
B. Personality tests
used to provide insight on personality traits that may help your
organization or hurt your organization. These are often administered by
consulting firms and the skill level of the evaluator is important to using
them effectively.
C. Drug tests
used to measure presence of illegal drugs or controlled substances in
urine. Usually done the final step before hiring. Applicants should be
given advance written notice that you intend to test for drugs.
Applicants must be notified of a positive result. Test only for what you
say you are testing for and seek the advice of an attorney.

Checking References
Employers increasingly have developed policies against releasing
information about former employees other than dates of employment
and job titles. However, it is still important to make a sincere attempt
to get reference information. Like the interview, it is good to have a list
of questions to ask a candidate’s former employers. Example questions
include:
How long did you work with this person?
What were his/her responsibilities?
What strengths did he/she bring to the job?
What skills does this person need to work on?
Would you hire this person again?
 Performance Management System

Performance Management
Is a goal-oriented process directed toward ensuring that organizational
processes are in place to maximize the productivity of employees,
teams, and ultimately, the organization It is a major player in
accomplishing organizational strategy in that it involves measuring and
improving the value of the workforce. PM includes incentive goals and
the corresponding incentive values so that the relationship can be
clearly understood and communicated. There is a close relationship
between incentives and performance.
Performance management systems are one of the major focuses in
business today. Although every HR function contributes to performance
management, training and performance appraisal play a more
significant role. Whereas performance appraisal occurs at a specific
time, performance management is a dynamic, ongoing, continuous
process.
Every person in the organization is a part of the PM system. Each part
of the system, such as training, appraisal, and rewards, is integrated
and linked for the purpose of continuous organizational effectiveness.

Performance Appraisal
Is a formal system of review and evaluation of individual or team task
performance. A critical point in the definition is the word formal,
because in actuality, managers should be reviewing an individual’s
performance on a continuing basis.
PA is especially critical to the success of performance management.
Although performance appraisal is but one component of performance
management, it is vital, in that it directly reflects the organization’s
strategic plan.
Uses of Performance Appraisal
For many organizations, the primary goal of an appraisal system is to
improve individual and organizational performance.
In fact, PA data are potentially valuable for virtually every human
resource functional area. 1. Human Resource Planning
In assessing a firm’s human resources, data must be available to
identify those who have the potential to be promoted or for any area of
internal employee relations. Through performance appraisal it may be
discovered that there is an insufficient number of workers who are
prepared to enter management. Plans can then be made for greater
emphasis on management development. 2.
Recruitment and Selection
Performance evaluation ratings may be helpful in predicting the
performance of job applicants.
For example, it may be determined that a firm’s successful employees
(identified through performance evaluations) exhibit certain behaviors
when performing key tasks. These data may then provide benchmarks
for evaluating applicant responses obtained through behavioral
interviews. 3. Training and Development
Performance appraisal should point out an employee’s specific needs
for training and development. 4. Career Planning and Development
Career planning is an ongoing process whereby an individual sets career
goals and identifies the means to achieve them. On the other hand,
career development is a formal approach used by the organization to
ensure that people with the proper qualifications and experiences are
available when needed. Performance appraisal data is essential in
assessing an employee’s strengths and weaknesses and in determining
the person’s potential.
5. Compensation Programs
Performance appraisal results provide a basis for rational decisions
regarding pay adjustments.
Most managers believe that you should reward outstanding job
performance tangibly with pay increases. They believe that the
behaviors you reward are the behaviors you get. Rewarding behaviors
necessary for accomplishing organizational objectives is at the heart of
a firm’s strategic plan. To encourage good performance, a firm should
design and implement a reliable performance appraisal system and
then reward the most productive workers and teams accordingly.
6. Internal Employee Relations
Performance appraisal data are also used for decisions in several areas
of internal employee relations, including promotion, demotion,
termination, layoff, and transfer. For example, an employee’s
performance in one job may be useful in determining his or her ability
to perform another job on the same level, as is required in the
consideration of transfers. When the performance level is
unacceptable, demotion or even termination may be appropriate.

Performance Appraisal Process

1. Identify Specific Performance Appraisal Goals.
2. Establish Performance Criteria and communicate them to employees.
3. Examine Work Performed.
4. Appraise Performance.
5. Discuss Appraisal with Employee.

Establish Performance Criteria (Standards)

1.Traits
certain traits may relate to job performance and, if this connection is
established, using them may be appropriate. Traits such as adaptability,
judgment, appearance, and attitude may be used when shown to be
job-related.
2. Behaviors
When an individual’s task outcome is difficult to determine,
organizations may evaluate the person’s task-related behavior or
competencies. For example, an appropriate behavior to evaluate for a
manager might be leadership style. For individuals working in teams,
developing others, teamwork and cooperation, or customer service
orientation might be appropriate.
Desired behaviors may be appropriate as evaluation criteria because if
they are recognized and rewarded, employees tend to repeat them. If
certain behaviors result in desired outcomes, there is merit in using
them in the evaluation process.
3. Competencies
Competencies include a broad range of knowledge, skills, traits, and
behaviors that may be technical in nature, relate to interpersonal skills,
or are business-oriented. 4.
Goal Achievement
If organizations consider ends more important than means, goal
achievement outcomes become an appropriate factor to evaluate. The
outcomes established should be within the control of the individual or
team and should be those results that lead to the firm’s success. At
upper levels, the goals might deal with financial aspects of the firm such
as profit or cash flow, and market considerations such as market share
or position in the market. At lower organizational levels, the outcomes
might be meeting the customer’s quality requirements and delivering
according to the promised schedule.
Responsibility for Appraisal
Often the human resource department is responsible for coordinating
the design and implementation of performance appraisal programs.
However, it is essential that line managers play a key role from
beginning to end. These individuals usually conduct the appraisals, and
they must directly participate in the program if it is to succeed. Several
possibilities exist with regard to the person who will actually rate the
employee.
1. Immediate Supervisor
An employee’s immediate supervisor has traditionally been the most
logical choice for evaluating performance and this continues to be the
case. The supervisor is usually in an excellent position to observe the
employee’s job performance and the supervisor has the responsibility
for managing a particular unit. When someone else has the task of
evaluating subordinates, the supervisor’s authority may be
undermined. Also, subordinate training and development is an
important element in every manager’s job and, as previously
mentioned, appraisal programs and employee development are usually
closely related.
On the negative side, the immediate supervisor may emphasize certain
aspects of employee performance and neglect others. Also, managers
have been known to manipulate evaluations to justify pay increases
and promotions and vice versa.
2. Subordinates
Historically, our culture has viewed evaluation by subordinates
negatively. However, this thinking has changed somewhat. Some firms
conclude that evaluation of managers by subordinates is both feasible
and needed. They reason that subordinates are in an excellent position
to view their superiors’ managerial effectiveness.
3. Peers and Team Members
A major strength of using peers to appraise performance is that they
work closely with the evaluated employee and probably have an
undistorted perspective on typical performance, especially in team
assignments. Organizations are increasingly using teams, including
those that are self-directed. The rationale for evaluations conducted by
team members includes the following:
_ Team members know each other’s performance better than anyone
and can, therefore, evaluate performance more accurately.
_ Peer pressure is a powerful motivator for team members.
_ Members who recognize that peers within the team will be evaluating
their work show increased commitment and productivity.
_ Peer review involves numerous opinions and is not dependent on one
individual. 4. Self-Appraisal
If employees understand their objectives and the criteria used for
evaluation, they are in a good position to appraise their own
performance. Many people know what they do well on the job and
what they need to improve. If they have the opportunity, they will
criticize their own performance objectively and take action to improve
it.
5. Customer Appraisal
Customer behavior determines a firm’s degree of success. Therefore,
some organizations believe it is important to obtain performance input
from this critical source. Organizations use this approach because it
demonstrates a commitment to the customer, holds employees
accountable, and fosters change. Customer-related goals for executives
generally are of a broad, strategic nature, whereas targets for lower-
level employees tend to be more specific.

Appraisal Period
Formal performance evaluations are usually prepared at specific
intervals. Although there is nothing magical about the period for formal
appraisal reviews, in most organizations they occur either annually or
semiannually.
Some organizations use the employee’s date of hire to determine the
rating period. At times a subordinate’s first appraisal may occur at the
end of a probationary period, anywhere from 30 to 90 days after his or
her start date.

Performance Appraisal Methods

Managers may choose from among a number of appraisal methods.
The type of performance appraisal system used depends on its
purpose. If the major emphasis is on selecting people for promotion,
training, and merit pay increases, a traditional method, such as rating
scales, may be appropriate. Collaborative methods, including input
from the employees themselves, may prove to be more suitable for
developing employees.
1. The 360-degree feedback evaluation method
is a popular performance appraisal method that involves evaluation
input from multiple levels within the firm as well as external sources.
The 360-degree method is unlike traditional performance reviews,
which provide employees with feedback only from supervisors. In this
method, people all around the rated employee may provide ratings,
including senior managers, the employee himself or herself,
supervisors, subordinates, peers, team members, and internal or
external customers.
Unlike traditional approaches, 360-degree feedback focuses on skills
needed across organizational boundaries. Also, by shifting the
responsibility for evaluation to more than one person, many of the
common appraisal errors can be reduced or eliminated. Software is
available to permit managers to give the ratings quickly and
conveniently. The 360-degree feedback method may provide a more
objective measure of a person’s performance.
Having multiple raters also makes the process more legally defensible.
However, it is important for all parties to know the evaluation criteria,
the methods for gathering and summarizing the feedback, and the use
to which the feedback will be put. An appraisal system involving
numerous evaluators will naturally take more time and, therefore, be
more costly.
2. Rating Scales Method
The rating scales method is a performance appraisal method that rates
employees according to defined factors.
Using this approach, evaluators record their judgments about
performance on a scale. The scale includes several categories, normally
5–7 in number, defined by adjectives such as outstanding, meets
expectations, or needs improvement. Although systems often provide
an overall rating, the method generally allows for the use of more than
one performance criterion.
One reason for the popularity of the rating scales method is its
simplicity, which permits quick evaluations of many employees.
The factors chosen for evaluation are typically of two types: job-related
and personal characteristics. 3. Critical Incident Method
The critical incident method is a performance appraisal method that
requires keeping written records of highly favorable and unfavorable
employee work actions.
When such an action, a “critical incident,” affects the department’s
effectiveness significantly, either positively or negatively, the manager
writes it down. At the end of the appraisal period, the rater uses these
records along with other data to evaluate employee performance.
With this method, the appraisal is more likely to cover the entire
evaluation period and not focus on the past few weeks or months.
4. Essay Method
The essay method is a performance appraisal method in which the rater
writes a brief narrative describing the employee’s performance.
This method tends to focus on extreme behavior in the employee’s
work rather than on routine day-to-day performance. Ratings of this
type depend heavily on the evaluator’s writing ability. Supervisors with
excellent writing skills, if so inclined, can make a marginal worker sound
like a top performer. Comparing essay evaluations might be difficult
because no common criteria exist. However, some managers believe
that the essay method is not only the most simple but also an
acceptable approach to employee evaluation.
5. Work Standards Method
The work standards method is a performance appraisal method that
compares each employee’s performance to a predetermined standard
or expected level of output.
Standards reflect the normal output of an average worker operating at
a normal pace. Firms may apply work standards to virtually all types of
jobs, but production jobs generally receive the most attention. An
obvious advantage of using standards as appraisal criteria is objectivity.
However, in order for employees to perceive that the standards are
objective, they should understand clearly how the standards were set.
Management must also explain the rationale for any changes to the
standards.
6. Ranking Method
The ranking method is a performance appraisal method in which the
rater ranks all employees from a group in order of overall performance.
For example, the best employee in the group is ranked highest, and the
poorest is ranked lowest. You follow this procedure until you rank all
employees. A difficulty occurs when all individuals have performed at
comparable levels (as perceived by the evaluator).
Paired comparison is a variation of the ranking method in which the
performance of each employee is compared with that of every other
employee in the group. A single criterion, such as overall performance,
is often the basis for this comparison. The employee who receives the
greatest number of favorable comparisons receives the highest ranking.
Problems in Performance Appraisal
1. Appraiser Discomfort
Conducting performance appraisals is often a frustrating human
resource management task. 2. Lack of Objectivity
A potential weakness of traditional performance appraisal methods is
that they lack objectivity.
In the rating scales method, for example, commonly used factors such
as attitude, appearance, and personality are difficult to measure. In
addition, these factors may have little to do with an employee’s job
performance.
3. Halo/Horn
A halo error occurs when a manager generalizes one positive
performance feature or incident to all aspects of employee
performance, resulting in a higher rating.
4. Central Tendency
Central tendency error is an evaluation appraisal error that occurs
when employees are incorrectly rated near the average or middle of a
scale. This practice may be encouraged by some rating scale systems
that require the evaluator to justify in writing extremely high or
extremely low ratings.
5. Personal Bias (Stereotyping)
This pitfall occurs when managers allow individual differences to affect
the ratings they give. If these are factors to avoid such as gender, race,
or age, not only is this problem detrimental to employee morale, but it
is blatantly illegal and can result in costly litigation.
6. Manipulating the Evaluation
In some instances, managers control virtually every aspect of the
appraisal process and are therefore in a position to manipulate the
system. For example, a supervisor may want to give a pay raise to a
certain employee or the supervisor may just “favor” one worker more
than another. 7. Employee Anxiety
The evaluation process may also create anxiety for the appraised
employee.

Inflated Ratings
_ The belief that accurate ratings would have a damaging effect on the
subordinate’s motivation
and performance.
_ The desire to improve an employee’s eligibility for merit.
_ The desire to avoid airing the department’s dirty laundry.
_ The wish to avoid creating a negative permanent record of poor
performance that might hound
the employee in the future.
_ The need to protect good performers whose performance was
suffering because of personal problems
_ The wish to reward employees displaying great effort even though
results are relatively low
_ The need to avoid confrontation with certain hard-to-manage
employees
_ The desire to promote a poor or disliked employee up and out of the
department

Lowered Ratings
_ To scare better performance out of an employee
_ To punish a difficult or rebellious employee
_ To encourage a problem employee to quit
_ To create a strong record to justify a planned firing
_ To minimize the amount of the merit increase a subordinate receives
_ To comply with an organization edict that discourages managers from
giving high ratings

Characteristics of an Effective Appraisal System

1. Job-Related Criteria
Job-relatedness is perhaps the most basic criterion needed in employee
performance appraisals.
2. Performance Expectations
Managers and subordinates must agree on performance expectations
in advance of the appraisal period. How can employees function
effectively if they do not know what they are being measured against?
On the other hand, if employees clearly understand the expectations,
they can evaluate their own performance and make timely adjustments
as they perform their jobs, without having to wait for the formal
evaluation review.
3. Standardization
Firms should use the same evaluation instrument for all employees in
the same job category who work for the same supervisor. Supervisors
should also conduct appraisals covering similar periods for these
employees. Regularly scheduled feedback sessions and appraisal
interviews for all employees are essential.
Formal documentation of appraisal data serves several purposes,
including protection against possible legal action. Employees should
sign their evaluations. If the employee refuses to sign, the manager
should document this behavior. Records should also include a
description of employee responsibilities, expected performance results,
and the role these data play in making appraisal decisions.
4. Trained Appraisers
A common deficiency in appraisal systems is that the evaluators seldom
receive training on how to conduct effective evaluations. Unless
everyone evaluating performance receives training in the art of giving
and receiving feedback, the process can lead to uncertainty and
conflict. The training should be an ongoing process in order to ensure
accuracy and consistency. The training should cover how to rate
employees and how to conduct appraisal interviews. Instructions
should be rather detailed and the importance of making objective and
unbiased ratings should be emphasized.
5. Continuous Open Communication
Most employees have a strong need to know how well they are
performing. A good appraisal system provides highly desired feedback
on a continuing basis. There should be few surprises in the
performance review. Managers should handle daily performance
problems as they occur and not allow them to pile up for six months or
a year and then address them during the performance appraisal
interview. Continuous feedback is vitally important to help direct,
coach, and teach employees to grow and improve performance.
6. Conduct Performance Reviews
In addition to the need for continuous communication between
managers and their employees, a special time should be set for a
formal discussion of an employee’s performance. Since improved
performance is a common goal of appraisal systems, withholding
appraisal results is absurd. Employees are severely handicapped in their
developmental efforts if denied access to this information.
Appraisal Interview
1. Scheduling the Interview
Supervisors usually conduct a formal appraisal interview at the end of
an employee’s appraisal period. It should be made clear to the
employee as to what the meeting is about.46 Employees typically know
when their interview should take place, and their anxiety tends to
increase if their supervisor delays the meeting. Interviews with top
performers are often pleasant experiences for all concerned.
2. Interview Structure
A successful appraisal interview should be structured in a way that
allows both the supervisor and the subordinate to view it as a problem-
solving rather than a fault-finding session. The manager should consider
three basic purposes when planning an appraisal interview:
1. Discuss the employee’s performance. Focus on specific
accomplishments.
2. Assist the employee in setting goals and personal-development plans
for the next appraisal period.
3. Suggest means for achieving established goals, including support
from the manager and firm.
3. Employees’ Role
From the employees’ side, two weeks or so before the review, they
should go through their diaries or files and make a note of all projects
worked on, regardless of whether or not they were successful.

4. Concluding the Interview

Ideally, employees will leave the interview with positive feelings about
management, the company, the job, and themselves. If the meeting
results in a deflated ego, the prospects for improved performance will
be bleak. Although you cannot change past behavior, future
performance is another matter. The interview should end with specific
and mutually agreed upon plans for the employee’s development.
Managers should assure employees who require additional training
that it will be forthcoming and that they will have the full support of
their supervisor. When management does its part in employee
development, it is up to the individual to perform in an acceptable
manner.
 Training and development

Need and Rationale of Training

Training is important, not only from the point of view of the
organization, but also for the employees. It gives them greater job
security and an opportunity for career advancement. A skill acquired
through training is an asset for the organization and the employee. The
benefits of training stay for a very long time. Training can become
obsolete only when there is a complete elimination of the desired for
that skill and knowledge, which may happen because of the
technological changes. In general terms, the need for training can arise
because of the following reasons:
1. Changing Technology.
Technology is changing at a fast pace. Be it any industry, technological
changes are changing the way in which operations were done. Newer
machines are being used for automation of the processes. Computers
have made the controls very easy. Advances in information technology
have enabled greater degree of coordination between various business
units, spread far across the globe.
In order to keep themselves abreast with the changes, the employees
must learn new techniques to make use of advances in the technology.
Training needs to be treated as a continuous process to update the
employees in new methods and procedures.
2. Demanding Customers.
As the free markets become stronger, customers are becoming more
and more demanding. They are much more informed about the
products. They have many sources of information. Intensified
competition forces the organizations to provide better and better
products and services to them. Added to the customer conscious, their
requirements keep on changing. In order to satisfy the customers and
to provide best of the quality of products and services, the skills of
those producing them need to be continuously improved through
training.
3. Thrust on Productivity.
In the competitive times, organizations cannot afford the extravaganza
of lethargy. They have to be productive in order to survive and grow.
Continuous improvement of the employees’ skills is an essential
requirement for maintaining high standards of productivity.
Productivity in the present times stems from knowledge, which has to
be relearned continuously.
4. Improved motivation.
Training is a source of motivation for the employees as well. They find
themselves more updated while facing the challenging situations at job.
Such skill development contributes to their career development as well.
Motivated employees have lesser turnover, providing an organization
with a stable work force, which has several advantages in the long run.
5. Accuracy of output
Trained workers handle their job better. They run their machines safely.
They achieve greater accuracy is whatever job they do. This reduces
accidents in the organizations.
6. Better Management.
Training can be used as an effective tool of planning and control. It
develops skills of the workers for future and also prepares them for
promotion. It helps them in reducing the costs of supervision, wastages
and industrial accidents. It also helps increase productivity and quality.

Definition of Training
Training is often looked upon as an organized activity for increasing the
knowledge and skills of people for a definite purpose. It involves
systematic procedures for transferring technical know-how to the
employees so as to increase their knowledge and skills for doing
specific jobs with proficiency. In other words, the trainees acquire
technical knowledge, skills and problem solving ability by undergoing
the training program.
Training is the act of increasing the knowledge and skills of an
employee for doing a particular job.
Training involves the development of skills that are usually necessary to
perform a specific job. Its purpose is to achieve a change in the
behavior of those trained and to enable them to do their jobs better.

Elements of training
There are three elements of training purpose, place and time.
Training without a purpose is useless because nothing would be
achieved out of it.
After having identified the purpose of a training program, its place must
be decided i.e. whether it has to be on the job or off the job.
The next element is the time. Training must be provided at the right
time. A late training would provide outdated knowledge, which would
be useless for the employees. The timing has also to be specified in
physical terms, i.e. which month/week of the year and at what time of
the day.

Objectives of Training
The objectives of training can vary, depending upon a large number of
factors. The objectives depend on the nature of the organization where
training has to be provided, the skills desired and the current skill
levels. It is difficult to draw generalizations of the objectives of training;
still they can be stated as under:

1. To increase the knowledge of workers in doing specific jobs.

2. To systematically impart new skills to the human resources so
that they learn quickly.
3. To bring about change in the attitudes of the workers towards
fellow workers, supervisor and the organization.
4. To improve the overall performance of the organization.
 5. To make the employees handle materials, machines and
equipment efficiently and thus to check wastage of time and
resources.
6. To reduce the number of accidents by providing safety training
to employees.
7. To prepare employees for higher jobs by developing advanced
skills in them.
Training, Development and Education

Training it is concerned with increasing knowledge and skills in doing

a particular job.

Education generally refers to the formal learning in a school or a

college,

Development is career-centered in nature.

Benefits of Training to Employers

1. Faster learning of new skills
Training helps the employers to reduce the learning time of their
employees and achieve higher standards of performance.
2. Increased productivity
Training increases the skill of the new employee in while performing a
particular job. An increased skill level usually helps in increasing both
quantity and quality of output.
3. Standardization of procedures
Training can help the standardization of operating procedures, which
can be learnt by the employees. Standardization of work procedures
makes high levels of performance rule rather than exception.
4. Lesser need for supervision.
As a generalization, it can be stated safely that trained employees need
lesser supervision. Training does not eliminate the need for supervision,
but it reduces the need for detailed and constant supervision.
5. Economy of operations.
Trained personnel will be able to make better and economical use of
the materials and the equipment and reduce wastage.
6. Higher morale.
The morale of employees is increased if they are given proper training.
A good training program employees’ attitudes towards organizational
activities and generates better cooperation and greater loyalty. With
the help of training, dissatisfactions, complaints, absenteeism and
turnover can also be reduced among the employees. Thus, training
helps in building an efficient and co-operative work force.
7. Managerial Development
The top management can identify the talent, who can be groomed for
handling positions of responsibility in the organizations.

Benefits of Training to Employees

1. Increasing Confidence.
Training creates a feeling of confidence in the minds of employees, who
feel comfortable while handling newer challenges. It gives a feeling of
safety and security to them at the work place.
2. New Skills.
Training develops skills, which serves as a valuable personal asset of a
worker. It remains permanently with the worker himself.
3. Career advancement.
The managers can develop their skills to take up higher challenges and
work in newer job dimensions. Such an exercise leads to the career
development of the employees, who can move up the corporate
hierarchy faster.
4. Higher Earnings.
Higher earnings are a consequence of career development. A highly
trained employee can command high salary in the job market and feel
more contended.
5. Increased Safety.
Trained workers handle the machines safely. They also know the use of
various safely devices in the factory, thus, they are less prone to
accidents.

Designing a Training Program

1. Identification of Training Needs
• Organizational Analysis
• Task Analysis
• Human Resource Analysis
2. Setting Training Objectives
3. Organization of Training Program
• Trainee and Instructor
• Period of Training
• Training Methods and Material
4. Evaluation of Training Results

Essentials of Good Training

a) Training program should be chalked out after identifying the

training needs or goals. It should have relevance to the job
requirements.
(b) It must be flexible and should make due allowance for the
differences among the individuals as regards ability,
aptitude, learning capacity, emotional make-up, etc.
(c) It should prepare the trainees mentally before they are
imparted any job knowledge or skill.
 (d) It must be conducted by well-qualified and experienced
trainers.

e) An effective training program should emphasize both theory

and practice. It should help in acquiring knowledge and its
practical applications.
(f) It should have the support of the top management as it can
greatly influence the quality of training.
(g) Lastly, an effective training program should be supported by a
system of critical appraisal of the outcome of the training
efforts.

Methods of Training

1. On-The-Job Training
On-the-job training is considered to be the most effective method of
training the operative personnel. Under this method, the worker is
given training at the work place by his immediate supervisor.
2. off-The-Job Training
The biggest merit of on-the-job training methods is that they do not
require the worker to be absent from his work place. There is no
disruption in the normal activities. However, when the training is
specialized, or needs the use of sophisticated equipment, or needs a
specialist trainer, it might not be feasible to provide the training while
on job. For such situations, off-the-job training methods are used by the
organizations.
Criteria for evaluating training effectiveness
1. Reactions
Trainees’ reactions to the objectives, contents and methods of training
are good indicators of effectiveness. In case the trainees considered the
program worthwhile and liked it, the training can be considered
effective.
2. Learning.
The extent to which the trainees have gained the desired knowledge
and skills during the training period is a useful basis of evaluating
training effectiveness.
3. Behavior.
Improvement in the job behavior of the trainees reflects the manner
and extent, to which, the learning has been put to practice.
4. Results.
Productivity improvement, quality improvement, cost reduction,
accident reduction, reduction in labor turnover and absenteeism are
the outcomes of training which can be used for evaluating
effectiveness.

Post Training Evaluation

1. Immediate effect of training
This relates to changes in knowledge, skill or behavior immediately
after a training experience. Such an evaluation attempts to assess
whether or not training has been effective in communicating the
message.
2. Intermediate
This phase of evaluation is conducted after some time period has
elapsed after the training. During this period, the trainees would have
put the skills learnt during training into practice.
3. Long term
This refers to the long-term effectiveness of the training on an
individual, the unit and/or even the organization.

Training Evaluation Techniques

1. Post-course assessments.
2. Pre- and post-course tests.
3. Management briefing.
4. Management debriefing.
5. Questionnaires.
6. Appraisals.
7. Training for promotion.
8. Assessment/development centers.
9. Repertory grids.
10. Surveys.
11. Trainer interviews.
12. Trainer-observed behavior.
13. Participant observation.
14. Records of performance.
15. Action plan follow-up.
 COMPENSATION MANAGEMENT

DEFINING COMPENSATION
Traditionally compensation meant the remuneration in terms of money
for services rendered by an employee to an organization. This has
changed during the last decade1. Now compensation includes both
tangible and intangible benefits given to an employee. Tangible
Benefits are financial in nature and includes basic pay, variable pay,
retrial benefits, stock options, interest free loans, etc. Tangible Benefits
are essential for attracting and recruiting employees. But on the flip
side, competitors can easily copy it. Intangible Benefits includes work
environment, job responsibilities, opportunities of professional
development, etc., which essentially supplements tangible benefits.
Intangible Benefits needs and helps in retaining employees. Hay Group
combines both Tangible and Intangible Benefits and calls it ‘Total
Rewards’ approach.

OBJECTIVES OF COMPENSATION MANAGEMENT

The basic objectives of compensation management are mentioned
below:

(a) Acquiring right talent Compensation needs to be high enough to

attract right talents. Pay levels must be decided on the basis of available
supply and demand of the required skill in the market.

(b) Retain competent employees – Compensation must be based on the

contribution of an employee. A high performing employee should be
protected with competitive compensation package. Introducing
performance based variable pay in the pay structure, which ensures
that high performers get compensation higher than the average or low
performers, usually does this. Another way of doing it is to keep the
compensation of high performers between 66th to 75th percentile in
their respective pay grade and low performers below 50th percentile.

(c) Ensure equity – Internal as well as external equity should be

maintained in terms of relative worth of the jobs and their value in the
outside market. Organizations do this by developing pay grades and
fixing salary bands (pay range) for each pay grades. This ensures that all
the employees at a particular grade will have compensation within a
particular range. The process of developing pay grades and pay ranges
are discussed in detail in next section i.e. ‘Phases of compensation
management’.

(d) Reward desired behaviors – Compensation structure should reinforce

desired behaviors and act as an incentive for those behaviors to be
continuously repeated. Designing the appraisal system, which evaluates
employees on the desired behaviors, and gives incentives accordingly,
does this.

(e) Control cost – A high manpower cost can reduce an organization’s

competitiveness. Compensation management helps in obtaining and
retaining workers at reasonable cost. The jobs requiring rare skill sets
are priced higher than the jobs, which require skills, which are easily
available in the market. So a Product Manager of a commodity (which is
a specialist role) will get higher incentive than a Marketing Manager, as
this skill is easily available in the market.

(f) Legal compliance – Compliance to the legal challenges imposed by

the various labor laws is a necessary part of compensation
management.
(g) Facilitate understanding – Last but not the least a compensation
structure must be easily understood by employees at all the levels of an
organization. Employees should understand what amount they will be
getting in hand at the end of the month, what amount is deducted for
retrial benefits, insurance, or med claim, how incentive is linked to
performance and how is it calculated. A simple compensation structure,
which can be easily understood by the employees, can be a useful tool
for hiring and retaining employees.

PHASES OF COMPENSATION MANAGEMENT

1 Job Analysis

Job Analysis collects information about jobs to produce job and position
description. This information also helps to provide the basis for job
standards.
 With the job analysis information provided as part of the department’s
information system, compensation specialists have the minimum
information they need to begin the next phase of compensation
management i.e. job evaluations.

2 Job Evaluations

Job evaluations are systematic procedures used to determine the

relative worth of jobs. Each approach to job evaluation considers the
responsibilities, skills, efforts, and the working condition of the job.

3 Wage and Salary Surveys

To determine a fair rate of compensation, most firms rely on wage and

salary surveys. These surveys discover what the market worth for
specific key jobs is. The survey information can be obtained from
various sources like department of labor (sometimes these surveys are
out of date, so not used often), employer associations (a group of
company of the same industry form this associations and conduct the
survey within their organization. But less used as in today’s competitive
talent market, organizations are not ready to share data with the
competitors), professional associations (like Hewitt Associates,
Mercers, etc., which are independent organizations).
4 Pricing jobs

In pricing jobs, the job evaluation worth is matched with market worth.
Two activities are involved in pricing jobs: establishing appropriate pay
grades for each jobs and then developing the pay range for each grade.

Components of Employee Compensation are

A. Cash Components- is the components, which are being paid to an

employee in cash. They include-
 Basic salary
 Provident Fund contribution
 House rent allowance
 Leave travel allowance
B. Non- Cash Direct benefits- these are allowances or entitlement of an
employee. These include: -
 Accommodation
 Car
 Paid vacation
 Medical benefits
 Telephone…etc.
MANAGEMENT AND ORGANIZATIONS
 Section (1)
Introduction to Management and Organizations

The 21st century has brought with it a new workplace, one in which everyone
must adapt to a rapidly changing society with constantly shifting demands
and opportunities. The economy has become global and is driven by
innovations and technology and organizations have to transform themselves
to serve new customer expectations. Today’s economy presents challenging
opportunities as well as dramatic uncertainty. The new economy has become
knowledge-based and is performance driven. The themes in the present
context area ‘respect’, participation, empowerment, teamwork and self-
management. In the light of the above challenges, a new kind of leader is
needed to guide business through turbulence. Managers in organizations do
this task.

A manager is someone who coordinates and oversees the work of other

people so that organizational goals can be accomplished. It is not about
personal achievement but helping others do their job. Managers may also
have additional work duties not related to coordinating the work of others.

Managers can be classified by their level in the organization, particularly in

traditionally structured organizations—those shaped like a pyramid

1) First-line managers (often called supervisors) are located on the lowest

level of management.
2) Middle managers include all levels of management between the first-
line level and the top level of the organization.
3) Top managers include managers at or near the top of the organization
who are responsible for making organization-wide decisions and
establishing plans and goals that affect the entire organization.
The changing nature of organizations and work often requires employees in
formerly non-managerial jobs to perform managerial activities. Non-
managerial jobs are those where one works directly on a job and had no one
reporting to him.

Organization is a social entity that is goal directed and well structured.

Management is defined as, “The art of getting things done through people”

Management involves coordinating and overseeing the work activities of

others so that their activities are completed efficiently and effectively.
1) Coordinating and overseeing the work of others is what distinguishes a
managerial position from a non-managerial one.
2) Effectiveness is completing activities so that organizational goals are
attained and is often described as “doing the right things”
3) Efficiency is getting the most output from the least amount of inputs in
order to minimize resource costs. Efficiency is often referred to as
“doing things right”

Management Functions
No two managers’ jobs are exactly alike. All managers perform certain
function, enact certain roles and display a set of skills in their jobs.
According to the functions approach managers perform certain activities to
efficiently and effectively coordinate the work of others. They can be
classified as
1) Planning involves defining goals, establishing strategies for achieving
those goals, and developing plans to integrate and coordinate activities.
2) Organizing involves arranging and structuring work to accomplish the
organization’s goals.
3) Leading involves working with and through people to accomplish
organizational goals.
4) Controlling involves monitoring, comparing, and correcting work
performance.

Since these four management functions are integrated into the activities of
managers throughout the workday, they should be viewed as an ongoing
process and they need not the done in the above sequence.
Management Roles
In the late 1960s, Henry Mintzberg conducted a precise study of managers at
work. He concluded that managers perform 10 different roles, which are
highly interrelated.
Management roles refer to specific categories of managerial behavior.
Overall there are ten specific roles performed by managers which are
included in the following three categories.
1) Interpersonal roles include figurehead, leadership, and liaison activities.
2) Informational roles include monitoring, disseminating, and spokesperson
activities.
3) Decisional roles include entrepreneur, disturbance handler, resource
allocator, and negotiator.

Although the functions approach represents the most useful way to describe
the manager’s job, Mintzberg’s roles give additional insight into managers’
work. Some of the ten roles do not fall clearly into one of the four functions,
since all managers do some work that is not purely managerial.

Management Skills
Managers need certain skills to perform the challenging duties and activities
associated with being a manager. Robert L. Katz found through his research
in the early 1970s that managers need three essential skills
1) Technical skills are job-specific knowledge and techniques needed to
proficiently perform specific tasks.
2) Human skills are the ability to work well with other people individually
and in a group.
3) Conceptual skills are the ability to think and to conceptualize about
abstract and complex situations.
These skills reflect a broad cross-section of the important managerial
activities that are elements of the four management functions
Significant changes in the internal and external environments have a
measurable impact on management. Security threats, corporate ethics
scandals, global economic and political uncertainties, and technological
advancements have had a great impact on the manager’s job.
Two significant changes facing today’s managers are importance of
customers to the manager’s job and Importance of innovation to the
manager’s job

Organizations need managers. An organization is a deliberate arrangement of

people to accomplish some specific purpose. Organizations share three
common characteristics:
(1) Each has a distinct purpose (2) Each is composed of people (3) Each
develops some deliberate structure so members can do their work.
Although these three characteristics are important in defining what an
organization is, the concept of an organization is changing. The characteristic
of new organizations of today include: flexible work arrangements, employee
work teams, open communication systems, and supplier alliances.
Organizations are becoming more open, flexible, and responsive to changes.
Organizations are changing because the world around them has changed and
is continuing to change. These societal, economic, global, and technological
changes have created an environment in which successful organizations must
embrace new ways of getting their work done.
The importance of studying management in today’s dynamic global
environment can be explained by looking at the universality of management,
the reality of work, and the rewards and challenges of being a manager.
The Universality of Management: Management is needed in all types and
sizes of organizations, at all organizational levels, and in all organizational
work areas throughout the world.
The Reality of Work: All employees of an organization either manage or are
managed.
Rewards and Challenges of Being a Manager

Challenges
a) Managers may have difficulty in effectively blending the knowledge,
skills, ambitions, and experiences of a diverse group of employees.
b) A manager’s success typically is dependent on others’ work
performance.

Rewards
a) Managers have an opportunity to create a work environment in which
organizational members can do their work to the best of their ability and
help the organization achieve its goals.
b) Managers often receive recognition and status in the organization and in
the larger community; influence organizational outcomes; and receive
appropriate compensation.
c) Knowing that their efforts, skills, and abilities are needed by the
organization gives many managers great satisfaction.

The manager of today must integrate management skills with new

approaches that emphasize the human touch, enhance flexibility, and involve
employees.
 Section (2)
Management Yesterday and Today

Organizations and managers have existed for thousands of years. The

Egyptian pyramids and the Great Wall of China were projects of tremendous
scope and magnitude, and required good management. Regardless of the
titles given to managers throughout history, someone has always had to plan
what needs to be accomplished, organize people and materials, lead and
direct workers, and impose controls to ensure that goals were attained as
planned.

Two historical events significant to the study of management are work of

Adam Smith, in his book,’ The Wealth of Nations’, in which he argued
brilliantly for the economic advantages of division of labor (the breakdown of
jobs into narrow, repetitive tasks). The Industrial Revolution is second
important pre-twentieth-century influence on management. The

introduction of machine powers combined with the division of labor made

large, efficient factories possible. Planning, organizing, leading, and
controlling became necessary activities.
There are six major approaches to management. They are explained as follows
1) SCIENTIFIC MANAGEMENT
Scientific management is defined as the use of the scientific method to
determine the “one best way” for a job to be done. The most important
contributor in this field was Frederick W. Taylor who is known as the
“father” of scientific management. Using his principles of scientific
management, Taylor was able to define the “one best way” for doing
each job.
Frank and Lillian Gilbreth were inspired by Taylor’s work and proceeded
to study and develop their own methods of scientific management.
They devised a classification scheme to label 17 basic hand motions
called therbligs in order to eliminate wasteful motions
Guidelines devised by Taylor and others to improve production
efficiency are still used in today’s organizations. However, current
management practice is not restricted to scientific management
practices alone. Elements of scientific management still used include:
1. Using time and motion studies
2. Hiring best qualified workers
3. Designing incentive systems based on output

2) GENERAL ADMINISTRATIVE THEORISTS

This group of writers, who focused on the entire organization,
developed more general theories of what managers do and what
constitutes good management practice.
Henri Fayol and Max Weber were the two most prominent proponents
of the general administrative approach. Fayol focused on activities
common to all managers. He described the practice of management as
distinct from other typical business functions.
 He stated 14 principles of management, which are as follows:
1. Division of Work
2. Authority
3. Discipline
4. Unity of Command
5. Unity of Direction
6. Subordination of individual interest to group interest
7. Remuneration
8. Centralization
9. Scalar Chain
10. Order
11. Equity
12. Stability
13. Initiative
14. Espirit de corps

Max Weber was a German sociologist who developed a theory of

authority structures and described organizational activity based on
authority relations. He described the ideal form of organization as a
bureaucracy marked by division of labor, a clearly defined hierarchy,
detailed rules and regulations, and impersonal relationships
Some current management concepts and theories can be traced to the
work of the general administrative theorists. The functional view of a
manager’s job relates to Henri Fayol’s concept of management. Weber’s
bureaucratic characteristics are evident in many of today’s large
organizations—even in highly flexible organizations that employ talented
professionals. Some bureaucratic mechanisms are necessary in highly
 innovative organizations to ensure that resources are used efficiently and
effectively.

3) QUANTITATIVE APPROACH TO MANAGEMENT

The quantitative approach to management, sometimes known as
operations research or management science, uses quantitative
techniques to improve decision making. This approach includes
applications of statistics, optimization models, information models, and
computer simulations. The quantitative approach originated during
World War II as mathematical and statistical solutions to military
problems were developed for wartime use.

The relevance of quantitative approach today is that it has contributed

most directly to managerial decision making, particularly in planning
and controlling. The availability of sophisticated computer software
programs has made the use of quantitative techniques more feasible
for managers.

4) ORGANIZATIONAL BEHAVIOR
The field of study concerned with the actions (behaviors) of people at
work is organizational behavior. Organizational behavior (OB) research
has contributed much of what we know about human resources
management and contemporary views of motivation, leadership, trust,
teamwork, and conflict management.

The early advocates of OB approach were Robert Owen, Hugo

Munsterberg, Mary Parker Follett, and Chester Barnard. Their ideas
served as the foundation for employee selection procedures,
motivation programs, work teams, and organization-environment
 management techniques. The Hawthorne Studies were the most
important contribution to the development of organizational behavior.

This series of experiments conducted from 1924 to the early 1930s at

Western Electric Company’s Hawthorne Works in Cicero, Illinois, were
initially devised as a scientific management experiment to assess the
impact of changes in various physical environment variables on
employee productivity.

After Harvard professor Elton Mayo and his associates joined the study
as consultants, other experiments were included to look at redesigning
jobs, make changes in workday and workweek length, introduce rest
periods, and introduce individual versus group wage plans.
The researchers concluded that social norms or group standards were
key determinants of individual work behavior.
Although not without criticism (concerning procedures, analyses of
findings, and the conclusions), the Hawthorne Studies stimulated
interest in human behavior in organizational settings.
In the present day context behavioral approach assists managers in
designing jobs that motivate workers, in working with employee teams,
and in facilitating the flow of communication within organizations. The
behavioral approach provides the foundation for current theories of
motivation, leadership, and group behavior and development.

5) THE SYSTEMS APPROACH

During the 1960s researchers began to analyze organizations from a
systems perspective based on the physical sciences. A system is a set of
interrelated and interdependent parts arranged in a manner that
produces a unified whole. The two basic types of systems are open and
 closed. A closed system is not influenced by and does not interact with
its environment. An open system interacts with its environment.
Using the systems approach, managers envision an organization as a
body with many interdependent parts, each of which is important to
the well-being of the organization as a whole. Managers coordinate the
work activities of the various parts of the organization, realizing that
decisions and actions taken in one organizational area will affect other
areas.
The systems approach recognizes that organizations are not self-
contained; they rely on and are affected by factors in their external
environment.

6) THE CONTINGENCY APPROACH

The contingency approach recognizes that different organizations
require different ways of managing. The contingency approach to
management is a view that the organization recognizes and responds to
situational variables as they arise.

CURRENT TRENDS AND ISSUES

The following are the current concepts and practices are changing the way
managers do their jobs today.
 Globalization: Organizational operations are no longer limited by
national borders. Managers throughout the world must deal with new
opportunities and challenges inherent in the globalization of business.

 Ethics: Cases of corporate lying, misrepresentations, and financial

manipulations have been widespread in recent years. Managers of
firms such as Enron, ImClone, Global Crossing, and Tyco International
have placed their own self-interest ahead of other stakeholders’
welfare. While most managers continue to behave in a highly ethical
 manner, abuses suggest a need to “upgrade” ethical standards. Ethics
education is increasingly emphasized in college curricula today.
Organizations are taking a more active role in creating and using codes
of ethics, ethics training programs, and ethical hiring procedures.

 Workforce diversity: It refers to a workforce that is heterogeneous in

terms of gender, race, ethnicity, age, and other characteristics that
reflect differences. Accommodating diverse groups of people by
addressing different lifestyles, family needs, and work styles is a major
challenge for today’s managers.

 Entrepreneurship: It is the process whereby an individual or group of

individuals use organized efforts to pursue opportunities to create
value and grow by fulfilling wants and needs through innovation and
uniqueness, no matter what resources the entrepreneur currently has.

Three important themes stand out in this definition:

a. The pursuit of opportunities
b. Innovation
c. Growth

Entrepreneurship will continue to be important to societies around the

world.
 Managing in an E-Business World: E-business (electronic business) is a
comprehensive term describing the way an organization does its work
by using electronic (Internet-based) linkages with its key constituencies
in order to efficiently and effectively achieve its goals.
 Knowledge Management and Learning Organizations: Change is
occurring at an unprecedented rate. To be successful, today’s
organization must become a learning organization—one that has
developed the capacity to continuously learn, adapt, and change.
Knowledge management involves cultivating a learning culture where
organizational members systematically gather knowledge and share it
with others in the organization so as to achieve better performance.

 Quality Management: Quality management is a philosophy of

management that is driven by continual improvement and response to
customer needs and expectations. The objective of quality
management is to create an organization committed to continuous
improvement in work
 Section (3)
Organization Culture and Environment: The Constraints

The components of an organization’s culture are as complex as the different

aspects of an individual’s personality. Today’s managers must understand
how the forces of an organization’s internal and external environment
influence, and sometimes constrain, its productivity. Managers must realize
that organizational culture and organizational environment have important
implications for the way an organization is managed.
Two perspectives concerning the role that managers play in an organization’s
success or failure have been proposed.

The omnipotent view of management maintains that managers are directly

responsible for the success or failure of an organization. This view of
managers as being omnipotent is consistent with the stereotypical picture of
the “take-charge” executive who can overcome any obstacle in carrying out
the organization’s objectives. When organizations perform poorly, someone
must be held accountable and according to the omnipotent view, that
“someone” is management.

The symbolic view of management upholds the view that much of an

organization’s success or failure is due to external forces outside managers’
control. The influence that managers do have is seen mainly as a symbolic
outcome. Organizational results are influenced by factors outside of the
control of managers, including the economy, market changes, governmental
policies, competitors’ actions, the state of the particular industry, the control
of proprietary technology, and decisions made by previous managers in the
organization. The manager’s role is to create meaning out of randomness,
confusion, and ambiguity. According to the symbolic view, the actual part
that management plays in the success or failure of an organization is
minimal.
Reality suggests a synthesis; managers are neither helpless nor all powerful.
Instead, the more logical approach is to see the manager as operating within
constraints imposed by the organization’s culture and environment

THE ORGANIZATION’S CULTURE

Just as individuals have a personality, so, too, do organizations. We refer to

an organization’s personality as its culture.

Organizational culture is the shared values, principles, traditions, and ways of

doing things that influence the way organizational members act. This
definition implies:

Individuals perceive organizational culture based on what they see, hear, or

experience within the organization.
Organizational culture is shared by individuals within the organization.
Organizational culture is a descriptive term. It describes, rather than
evaluates.
Seven dimensions of an organization’s culture have been proposed
1) Innovation and risk taking (the degree to which employees are
encouraged to be innovative and take risks)
2) Attention to detail (the degree to which employees are expected to
exhibit precision, analysis, and attention to detail)
3) Outcome orientation (the degree to which managers focus on results or
outcomes rather than on the techniques and processes used to achieve
those outcomes)
4) People orientation (the degree to which management decisions take into
consideration the effect on people within the organization)
5) Team orientation (the degree to which work activities are organized
around teams rather than individuals)
6) Aggressiveness (the degree to which people are aggressive and
competitive rather than easygoing and cooperative)
7) Stability (the degree to which organizational activities emphasize
maintaining the status quo in contrast to growth)

Strong versus Weak Cultures

Strong cultures are found in organizations where key values are intensely
held and widely shared. Whether a company’s culture is strong, weak, or
somewhere in between depends on organizational factors such as size, age,
employee turnover rate, and intensity of original culture. A culture has
increasing impact on what managers do as the culture becomes stronger.
Most organizations have moderate-to-strong cultures. In these organizations,
high agreement exists about what is important and what defines “good”
employee behavior.
Culture is transmitted and learned by employees principally through stories,
rituals, material symbols, and language.
An innovative culture should have these characteristics:
• Challenge and involvement
• Freedom
• Trust and openness
• Idea time
• Playfulness/humor
• Conflict resolution
• Debates
• Risk taking

The Organization’s Environment

The general environment includes these broad external conditions that may
affect the organization: economic, political/legal, sociocultural, demographic,
technological, and global conditions.
 Economic conditions include interest rates, inflation rates, changes in
disposable income, stock market fluctuations, and the general business
cycle.
 Political/legal conditions include the general political stability of
countries in which an organization does business and the specific
attitudes that elected officials have toward business.
 Sociocultural conditions include the changing expectations of society.
Societal values, customs, and tastes can change, and managers must
be aware of these changes.
 Demographic conditions, including physical characteristics of a
population (e.g., gender, age, level of education, geographic location,
income, composition of family) can change, and managers must adapt
to these changes.
  Technological conditions, which have changed more rapidly than any
other element of the general environment.
 Global factors include global competitors and global consumer

markets.

Environments differ in their amount of environmental uncertainty,

which relates to (1) the degree of change in an organization’s
environment and (2) the degree of complexity in that environment
Degree of change is characterized as being dynamic or stable. In a
dynamic environment, components of the environment change
frequently. If change is minimal, the environment is called a stable
environment.
The degree of environmental complexity is the number of
components in an organization’s environment and the extent of an
organization’s knowledge about those components. If the number
of components and the need for sophisticated knowledge is
minimal, the environment is classified as simple. If a number of
dissimilar components and a high need for sophisticated knowledge
exist, the environment is complex.
As uncertainty is a threat to organizational effectiveness, managers
try to minimize environmental uncertainty.
 Section (4)
Managing in a Global Environment

Managers in all types and sizes of organizations must constantly monitor

changes and consider the particular characteristics of their own location as
they plan, organize, lead, and control in this dynamic environment.
Managers might have one of three perspectives or attitudes toward
international business
1. An ethnocentric attitude is the parochialistic belief that the best work
approaches and practices are those of the home country (the country in
which the company’s headquarters are located).
2. A polycentric attitude is the view that the managers in the host country
(the foreign country where the organization is doing business) know the
best work approaches and practices for running their business.
3. A geocentric attitude is a world-oriented view that focuses on using the
best approaches and people from around the globe. To be a successful
global manager, an individual needs to be sensitive to differences in
national customs and practices

Several significant forces are reshaping today’s global environment.

Important features of the global environment include regional trading
alliances and different types of global organizations.

A. Regional Trading Alliances

Regional trading alliances are reshaping global competition. Competition is
no longer limited to country versus country, but region versus region.
1. The European Union (EU) is a union of 25 European nations created as a
unified economic and trade entity
a. The primary motivation for the creation of the EU in February 1992 was to
allow member nations to reassert their position against the industrial
strength of the United States and Japan.
b. All member states of the EU participate in the EMU (Economic and
Monetary Union). The EMU consists of three stages for coordinating
economic policy. Twelve member states of the European Union have
entered the third stage of the EMU, in which participating countries share
a single currency, the euro.
c. In 2004 the EU added 10 new members (Cyprus, Malta, the Czech
Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia, and
Slovenia. Two additional counties may join the EU by the year 2007.
2. The North American Free Trade Agreement (NAFTA) is an agreement
among the Mexican, Canadian, and U.S. governments in which barriers
to trade have been eliminated.
a. NAFTA went into effect on January 1, 1994.
b. The signing of NAFTA was both criticized and supported.
c. Eliminating barriers to free trade (tariffs, import licensing requirements,
customs user fees) has resulted in a strengthening of the economic
power of all three countries.
d. Colombia, Mexico, and Venezuela signed an economic pact eliminating
import duties and tariffs in 1994.
e. Thirty-four countries in the Western Hemisphere continue to negotiate a
Free Trade Area of the Americas (FTAA) agreement. FTAA was to have
been in effect no later than 2005, but has not yet become operational;
its future is still undetermined.
3. The Association of Southeast Asian Nations (ASEAN) is a trading alliance of
10 Asian nations
a. In the future, the Southeast Asian region promises to be one of the
fastest-growing and increasingly influential economic regions of the
world.
b. The future economic impact of the Southeast Asian region could rival
that of both NAFTA and the EU.
4. Other Trade Alliances
The 53-nation African Union came into existence in July 2002. Members plan
to achieve greater economic development and unity among Africa’s
nations.

B. The World Trade Organization (WTO)

Formed in 1995 and evolving from GATT, the WTO is the only global
organization dealing with the rules of trade among nations.
1. Membership consists of 149 countries and 32 observer
governments as of January 2006.
2. The WTO appears to play an important role even though critics
are vocal and highly visible.

Different Types of Global Organizations

Business has been conducted internationally for many years Multinational
corporations did not become popular until the mid-1960s. Global
organizations can be classified in the following categories:
1. The term multinational corporation (MNC) is a broad term that refers to
any and all types of international companies that maintain operations in
multiple countries.
2. A transnational corporation (TNC), sometimes called a borderless
organization, is a type of international company in which artificial
geographical barriers are eliminated.
Stages of Internationalization
An organization that goes international typically progresses through three
stages. Companies that go international may begin by using global sourcing
(also called global outsourcing). In this stage of going international,
companies purchase materials or labor from around the world, wherever the
materials or labor are least expensive. Beyond the stage of global sourcing,
each successive stage to become more international involves more
investment and risk.
In the next stage, companies may go international by exporting (making
products domestically and selling them abroad) or importing (acquiring
products made abroad and selling the products domestically). Both exporting
and importing require minimal investment and risk.
In the early stages of going international, managers may also use licensing
(giving another organization the right to make or sell its products using its
technology or product specifications) or franchising (giving another
organization the right to use its name and operating methods
After an organization has done international business for a period of time,
managers may decide to make more of a direct investment in international
markets by forming a strategic alliance, which is a partnership between an
organization and a foreign company partner(s). In a strategic alliance,
partners share resources and knowledge in developing new products or
building production facilities.
A joint venture (a specific type of strategic alliance) may be undertaken to
allow partners to form a separate, independent organization for some
business purpose.

Managers may decide to make a direct investment in a foreign country by

establishing a foreign subsidiary, in which a company sets up a separate and
independent production facility or office. Establishing a foreign subsidiary
involves the greatest commitment of resources and the greatest risk of all of
the stages in going international.
Managing in a global environment entails the following challenges.
The Legal-Political Environment: The legal-political environment does not
have to be unstable or revolutionary to be a challenge to managers. The fact
that a country’s political system differs from that of the United States is
important to recognize.

The Economic Environment: The economic environment also presents many

challenges to foreign-based managers, including fluctuations in currency
rates, inflation, and diverse tax policies. In a market economy, resources are
primarily owned by the private sector. In a command economy, all economic
decisions are planned by a central government.

The Cultural Environment: Countries have different cultures, just as

organizations do.
National culture is the values and attitudes shared by individuals from a
specific country that shape their behavior and their beliefs about what is
important.
A framework developed by Geert Hofstede serves as a valuable framework
for understanding differences between national cultures.
1. Hofstede studied individualism versus collectivism. Individualism is the
degree to which people in a country prefer to act as individuals rather
than as members of groups. Collectivism is characterized by a social
framework in which people prefer to act as members of groups and
expect others in groups of which they are a part (such as a family or an
organization) to look after them and to protect them.
2. Another cultural dimension is power distance, which describes the
extent to which a society accepts the fact that power in institutions and
organizations is distributed unequally.
3. Uncertainty avoidance describes a cultural measure of the degree to
which people tolerate risk and unconventional behavior.
4. Hofstede identified the dimension of achievement versus nurturing.
Achievement is the degree to which values such as assertiveness, the
acquisition of money and material goods, and competition prevail.
Nurturing emphasizes sensitivity in relationships and concern for the
welfare of others.
5. Long-term and short-term orientation. People in countries having
long-term orientation cultures look to the future and value thrift and
persistence. Short-term orientation values the past and present and
emphasizes a respect for tradition and social obligations.
6. Countries have different rankings on Hofstede’s cultural dimensions,
and managers should be aware of the cultural differences present in
countries in which they do business

The Global Leadership and Organizational Behavior Effectiveness (GLOBE)

research program is an assessment that updates Hofstede’s studies. GLOBE
began in 1993 and identified nine dimensions on which national cultures
differ: Assertiveness, future orientation, gender differentiation, uncertainty
avoidance, power distance, individualism / collectivism, in-group collectivism,
performance orientation, and humane orientation.
In today’s world the openness that is necessary to conduct business
successfully in a global environment poses great challenges. The increased
threat of terrorism, economic interdependence of trading countries, and
significant cultural create a complicated environment in which to manage.
Successful global managers need to have great sensitivity and understanding.
Managers must adjust leadership styles and management approaches to
accommodate culturally diverse views.
 Section (5)
Social Responsibility and Managerial Ethics

This chapter discusses issues involving social responsibility and managerial

ethics and their effect on managerial decision making. Both social
responsibility and ethics are responses to a changing environment and are
influenced by organizational culture
Managers regularly face decisions that have dimensions of social
responsibility. Examples include employee relations, philanthropy, pricing,
resource conservation, product quality, and doing business in countries that
violate human rights

SOCIAL RESPONSIBILITY
Two opposing views of social responsibility are presented:
 The classical view is the view that management’s only social
responsibility is to maximize profits.
 The socioeconomic view is the view that management’s social
responsibility goes beyond the making of profits to include protecting
and improving society’s welfare.

A four stage model shows how social responsibility progresses in

organizations Social responsibility may progress from the stance of obeying
all laws and regulations while caring for stockholders’ interests (Stage 1) to
the point of demonstrating responsibility to society as a whole (Stage 4),
which characterizes the highest socioeconomic commitment.
Social Obligations to Responsiveness to Responsibility: Social obligation
occurs when a firm engages in social actions because of its obligation to meet
certain economic and legal responsibilities. Social responsiveness is seen
when a firm engages in social actions in response to some popular social
need. Social responsibility is a business’s intention, beyond its legal and
economic obligations, to do the right things and act in ways that are good for
society

The Greening of Management

A number of highly visible ecological problems and environmental disasters
(e.g., Exxon Valdez oil spill, mercury poisoning in Japan, Three Mile Island,
Chernobyl) brought about a new spirit of environmentalism. Recognizing the
close link between an organization’s decisions and activities and its impact on
the natural environment is called the greening of management.

Values-based management is an approach to managing in which managers

are guided by the organization’s shared values in their management
practices. Purposes of Shared Values are:
1) They act as guideposts for managerial decisions and actions.
2) Shared values serve to shape employee behavior and to communicate
what the organization expects of its members.
3) Shared corporate values can influence an organization’s marketing
efforts.
4) Shared values are a way to build team spirit in organizations.

MANAGERIAL ETHICS
The term ethics refers to principles, values, and beliefs that define what is
right and wrong behavior.

Factors That Affect Employee Ethics

1. Stages of Moral Development. Research confirms three levels of moral
development. Each level has two stages.
 a) The first level is called pre-conventional. At this level, the individual’s
choice between right or wrong is based on personal consequences
involved.
b) At the second stage, which is labeled conventional, moral values reside
in maintaining expected standards and living up to the expectations of
others.
c) The third level—the principled level—the individual makes a clear
effort to define moral principles apart from the authority of the groups
to which the person belongs.
d) Research on the stages of moral development indicates that people
proceed sequentially through the six stages of these three levels, with
no guarantee of continued development at any stage. The majority of
adults are at Stage 4. The higher the stage an employee reaches, the
more likelihood that he or she will behave ethically.

2. Individual Characteristics: A person joins an organization with a relatively

entrenched set of values.
a) Values are basic convictions about what is right and wrong. Values
are broad and cover a wide variety of issues.
b) Ego strength is a personality measure of the strength of a person’s
convictions. Individuals who score high on ego strength are likely to
resist impulses to act unethically and are likely do what they think is
right.
c) Locus of control is a personality attribute that measures the degree to
which people believe they control their own fate. Individuals with an
internal locus of control think that they control their destiny, while
persons with an external locus of control are less likely to take
personal responsibility for the consequences of their behavior and
are more likely to rely on external forces. Externals believe that what
happens to them is due to luck or chance.
3. A third factor influencing managerial ethics is structural variables. The
existence of structural variables such as formal rules and regulations, job
descriptions, written codes of ethics, performance appraisal systems,
and reward systems can strongly influence ethical behavior.

4. The content and strength of an organization’s culture influences ethical

behavior.
a) An organizational culture most likely to encourage high ethical
standards is one that is high in risk tolerance, control, and conflict
tolerance.
b) A strong culture exerts more influence on managers than does a
weak one.
c) However, in organizations with weak cultures, work groups and
departmental standards strongly influence ethical behavior.

5. Finally, the intensity of an issue can affect ethical decisions. Six

characteristics determine issue intensity
a) Greatness of harm
b) Consensus of wrong
c) Probability of harm
d) Immediacy of consequences
e) Proximity to victim
f) Concentration of effect
Improving Ethical Behavior
Organizations can take a number of actions to cultivate ethical behavior
among members. Some of those are”
1) The selection process for bringing new employees into organizations
should be viewed as an opportunity to learn about an individual’s level of
moral development, personal values, ego strength, and locus of control.
2) A code of ethics is a formal statement of an organization’s primary values
and the ethical rules it expects employees to follow. In addition, decision
rules can be developed to guide managers in handling ethical dilemmas in
decision making.
3) Top management’s leadership and commitment to ethical behavior is
extremely important since the cultural tone for an organization is
established by its top managers
4) Employees’ job goals should be tangible and realistic, because clear and
realistic goals reduce ambiguity and motivate rather than punish. Job
goals are usually a key issue in the performance appraisal process.
5) If an organization wants employees to uphold high ethical standards, this
dimension must be included in the appraisal process. Performance
appraisals should include this dimension, rather than focusing solely on
economic outcomes.
6) Ethics training should be used to help teach ethical problem solving and
to present simulations of ethical situations that could arise. At the least,
ethics training should increase awareness of ethical issues.
7) Independent social audits evaluate decisions and management practices
in terms of the organization’s code of ethics and can be used to deter
unethical behavior.
8) Organizations can provide formal protective mechanisms so that
employees with ethical dilemmas can do what is right without fear of
reprisal.
Social Entrepreneurship: A social entrepreneur is an individual or
organization who seeks out opportunities to improve society by using
practical, innovative, and sustainable approaches.

Social impact management: Managers are increasingly expected to act

responsibly in the way they conduct business. Managers using a social impact
management approach examine the social impacts of their decisions and
actions. When they consider how their actions in planning, organizing,
leading and controlling will work in light of the social context within which
business operates, managers become more aware of whether they are
leading in a responsible manner.
 Section (6)
Decision Making: The Essence of the Manager’s Job

Everyone in an organization makes decisions, but decision making is

particularly important in a manager’s job. Decision making is such an
important part of all four managerial functions that decision making is said to
be synonymous with managing.

The Decision-Making Process

A decision is a choice made from two or more alternatives. The decision-
making process is a set of eight steps that include the following:

1) Identifying a problem: A problem is a discrepancy between an existing

state and a desired state of affairs. In order to identify a problem, a manager
should be able to differentiate the problem from its symptom; he should be
under pressure to taken action and must have the authority and resources to
take action.

2) Identifying decision criteria: Decision criteria are criteria that define what
is relevant in a decision.

3) Allocating weights to the criteria: The criteria identified in the previous

step of the decision-making process may not have equal importance. So he
decision maker must assign a weight to each of the items in order to give
each item accurate priority in the decision.

4) Developing alternatives: The decision maker should then identify viable

alternatives that could resolve the problem.
5) Analyzing alternatives: Each of the alternatives are then critically analyzed
by evaluating it against the criteria established in Steps 2 and 3.

6) Selecting an alternative: The next step is to select the best alternative

from among those identified and assessed. If criteria weights have been
used, the decision maker would select the alternative that received the
highest score in Step 5.

7) Implementing the alternative: The selected alternative is implemented by

effectively communicating the decision to the individuals who would be
affected by it and their commitment to the decision is acquired.

8) Evaluating decision effectiveness: The last step in the decision-making

process is to assess the result of the decision in order to determine whether
or not the problem has been resolved.

Managers can make decisions on the basis of rationality, bounded rationality,

or intuition.
1. Rational decision making. Managerial decision making is assumed to be
rational—that is, making choices that are consistent and value-maximizing
within specified constraints. A rational manager would be completely
logical and objective. Rational decision making assumes that the manager
is making decisions in the best interests of the organization, not in his/her
own interests. The assumptions of rationality can be met if the manager is
faced with a simple problem in which (1) goals are clear and alternatives
limited, (2) time pressures are minimal and the cost of finding and
evaluating alternatives is low, (3) the organizational culture supports
innovation and risk taking, and (4) outcomes are concrete and
measurable.
2. Bounded rationality. As the perfectly rational model of decision making
isn’t realistic, managers tend to operate under assumptions of bounded
rationality, which is decision-making behavior that is rational, but limited
(bounded) by an individual’s ability to process information.
Under bounded rationality, managers make satisficing decisions, in which
they accept solutions that are “good enough.” Managers’ decision making
may be strongly influenced by the organization’s culture, internal politics,
power considerations, and by a phenomenon called escalation of
commitment— an increased commitment to a previous decision despite
evidence that it may have been wrong.

3. Intuitive decision making. Managers also regularly use their intuition.

Intuitive decision making is a subconscious process of making decisions on
the basis of experience and accumulated judgment. Although intuitive
decision making will not replace the rational decision-making process, it
does play an important role in managerial decision making.

Types of Problems and Decisions

Managers encounter different types of problems and use different types of
decisions to resolve them. Problems can be structured problems or
unstructured problems and decisions can be programmed decisions or non
programmed decisions.

 Structured problems are straightforward, familiar, and easily defined. In

dealing with structured problems, a manager may use a programmed
decision, which is a repetitive decision that can be handled by a routine
approach. Managers rely on three types of programmed decisions:
a. A procedure is a series of interrelated sequential steps that can be used
to respond to a structured problem.
 b. A rule is an explicit statement that tells managers what they can or
cannot do.
c. A policy is a guideline for making decisions.

 Unstructured problems are problems that are new or unusual and for
which information is ambiguous or incomplete. These problems are best
handled by a non programmed decision that is a unique decision that
requires a custom made solution.

At higher levels in the organizational hierarchy, managers deal more often

with difficult, unstructured problems and make non programmed decisions in
attempting to resolve these problems and challenges. Lower-level managers
handle routine decisions, using programmed decisions.

Decision-Making Conditions
Decision can be made under conditions of certainty, uncertainty and risk.
Certainty is a situation in which a manager can make accurate decisions
because all outcomes are known. Few managerial decisions are made under
the condition of certainty.
More common is the situation of risk, in which the decision maker is able to
estimate the likelihood of certain outcomes.

Uncertainty is a situation in which the decision maker is not certain and

cannot even make reasonable probability estimates concerning outcomes of
alternatives. In such a situation, the choice of alternative is influenced by the
limited amount of information available to the decision maker. It’s also
influenced by the psychological orientation of the decision maker.
1) An optimistic manager will follow a maxi-max choice, maximizing the
maximum possible payoff.
2) A pessimistic manager will pursue a maxi-min choice, maximizing the
minimum possible payoff.
3) The manager who desires to minimize the maximum regret will opt for a
mini-max choice.

Decision-Making Styles: Managers have different styles in making decisions

and solving problems. One perspective proposes that people differ along two
dimensions in the way they approach decision making. One dimension is an
individual’s way of thinking—rational or intuitive. The other is the individual’s
tolerance for ambiguity—low or high. Diagramming these two dimensions
lead to a matrix showing four different decision-making styles.
a. The directive style is characterized by low tolerance for ambiguity and a
rational way of thinking.
b. The analytic style is one characterized by a high tolerance for ambiguity
and a rational way of thinking.
c. The conceptual style is characterized by a high tolerance for ambiguity
and an intuitive way of thinking.
d. The behavioral style is characterized by a low tolerance for ambiguity and
an intuitive way of thinking.
In reality, most managers have both a dominant style and alternate styles,
with some managers relying almost exclusively on their dominant style and
others being more flexible, depending on the particular situation.
Decision-Making Biases and Errors: Managers use different styles and “rules
of thumb” (heuristics) to simply their decision making. Some of decision
making biases and errors are:
1. Overconfidence bias occurs when decision makers tend to think that
they know more than they do or hold unrealistically positive views of
themselves and their performance.
2. Immediate gratification bias describes decision makers who tend to
want immediate rewards and avoid immediate costs.
3. The anchoring effect describes when decision makers fixate on initial
information as a starting point and then, once set, fail to adequately
adjust for subsequent information.
4. Selective perception bias occurs when decision makers selectively
organize and interpret events based on their biased perceptions.
5. Confirmation bias occurs when decision makers seek out information
that reaffirms their past choices and discount information that
contradicts their past judgments.
6. Framing bias occurs when decision makers select and highlight certain
aspects of a situation while excluding others.
7. Availability bias is seen when decision makers tend to remember events
that are the most recent and vivid in their memory.
8. Decision makers who show representation bias assess the likelihood of
an event based on how closely it resembles other events or sets of
events.
9. Randomness bias describes the effect when decision makers try to
create meaning out of random events.
10. The sunk costs error is when a decision maker forgets that current
choices cannot correct the past. Instead of ignoring sunk costs, the
decision maker cannot forget them. In assessing choices, the individual
fixates on past expenditures rather than on future consequences.
11. Self-serving bias is exhibited by decision makers who are quick to take
credit for their successes and blame failure on outside factors.
12. Hindsight bias is the tendency for decision makers to falsely believe,
once the outcome is known, that they would have accurately predicted
the outcome.
 Section (7)
Foundations of Planning

Planning is one of the four functions of management. Planning involves

defining the organization’s goals, establishing an overall strategy for

achieving these goals, and developing plans for organizational work activities.
The term planning as used in this chapter refers to formal planning.

Purposes of Planning
Planning serves a number of significant purposes.
1. Planning gives direction to managers and non-managers of an
organization.
2. Planning reduces uncertainty.
3. Planning minimizes waste and uncertainty.
4. Planning establishes goals or standards used in controlling.
Planning and Performance
Although organizations that use formal planning do not always outperform
those that do not plan, most studies show positive relationships between
planning and performance. Effective planning and implementation play a
greater part in high performance than does the amount of planning done.
Studies have shown that when formal planning has not led to higher
performance, the external environment is often the reason.

The Role of Goals and Plans in Planning

Planning is often called the primary management function because it
establishes the basis for all other functions. Planning involves two important
elements: goals and plans.

Goals (often called objectives) are desired outcomes for individuals, groups,
or entire organizations.

Types of goals
a. Financial goals versus strategic goals
Financial goals related to the financial performance of the organization
while strategic goals are related to other areas of an organizations
performance.

b. Stated goals versus real goals

Stated goals are official statements of what an organization says and what
it wants its various stakeholders to believe its goals are. Real goals are
those that an organization actually pursues, as defined by the actions of its
members.
Types of Plans
Plans can be described by their breadth, time frame, specificity, and
frequency of use
o Based on Breadth plans can be Strategic or operational plans. Strategic
plans (long-term plans) are plans that apply to the entire organization,
establish the organization’s overall goals, and seek to position the
organization in terms of its environment. Operational plans (short-term
plans) are plans that specify the details of how the overall goals are to be
achieved.

o Based on Time frame plans can be Short-term or long-term plans. Short

term plans are plans that cover one year or less. Long-term plans are plans
with a time-frame beyond three years.

o Based on Specificity plans can be Specific or directional plans. Specific

plans are plans that are clearly defined and leave no room for
interpretation. Directional plans are flexible plans that set out general
guidelines.

o Based on Frequency of use plans can be Single-use or standing plans. A

single-use plan is a one-time plan specifically designed to meet the needs
of a unique situation. Standing plans are ongoing plans that provide
guidance for activities performed repeatedly.

Approaches to Establishing Goals

Goals can be established through the process of traditional goal setting or
through MBO (management by objectives).
Traditional goal setting is an approach to setting goals in which goals are set
at the top level of the organization and then broken into sub goals for each
level of the organization.
Traditional goal setting assumes that top managers know what is best
because of their ability to see the “big picture.” Employees are to work to
meet the goals for their particular area of responsibility.
This traditional approach requires that goals must be made more specific as
they flow down to lower levels in the organization. In striving to achieve
specificity, however, objectives sometimes lose clarity and unity with goals
set at a higher level in the When the hierarchy of organizational goals is
clearly defined, it forms an integrated means end chain—an integrated
network of goals in which the accomplishment of goals at one level serves as
the means for achieving the goals, or ends, at the next level.

Management by objectives (MBO) is a process of setting mutually agreed-

upon goals and using those goals to evaluate employee performance. Studies
of actual MBO programs
confirm that MBO can increase employee performance and organizational
productivity. However, top management commitment and involvement are
important contributions to the success of an MBO program. The following
steps are involved in a typical MBO program:

The organizations overall objectives and strategies are formulated Major

objectives are allocated among divisional and departmental units.
Unit managers collaboratively set specific objectives for their units with their
managers
Specific objectives are collaboratively set with all department members
Action plans, defining how objectives are to be achieved, are specified and
agreed upon by managers and employee
The action plans are implemented
Progress toward objectives is periodically reviewed, and feedback is
provided
Successful achievement of objectives is reinforced by performance based
rewards
Whether an organization uses a more traditional approach to establishing
objectives, uses some form of MBO, or has its own approach, managers must
define objectives before they can effectively and efficiently complete other
planning activities.
Characteristics of Well-Designed Goals
1 Written in terms of outcomes
2. Measurable and quantifiable
3. Clear as to a time frame
4. Challenging, but attainable
5. Written down
6. Communicated to all organizational members

Five Steps in Goals Setting

1. Review the organization’s mission (the purpose of the organization).
2. Evaluate available resources.
3. Determine the goals individually or with input from others
4. Write down the goals and communicate them to all who need to know.
5. Review results and whether goals are being met. Make changes as
needed.

Developing Plans
The process of developing plans is influenced by three contingency factors
and by the particular planning approach used by the organization.
Three Contingency Factors in Planning are
 Manager’s level in the organization: Operational planning usually
dominates the planning activities of lower-level managers. As managers
move up through the levels of the organization, their planning becomes
more strategy oriented.

 Degree of environmental uncertainty: The greater the environmental

uncertainty, the more directional plans should be, with emphasis placed
on the short term. When uncertainty is high, plans should be specific, but
flexible. Managers must be prepared to rework and amend plans, or even
to abandon their plans if necessary.

 Length of future commitments: According to the commitment concept,

plans should extend far enough to meet those commitments made today.
Planning for too long or for too short a time period is inefficient and
ineffective.

Approaches to Planning
In the traditional approach, planning was done entirely by top-level managers
who were often assisted by a formal planning department.
Another approach to planning is to involve more members of the
organization in the planning process. In this approach, plans are not handed
down from one level to the next, but are developed by organizational
members at various levels to meet their specific needs.

Criticisms of Planning
Although planning is an important managerial function with widespread use,
five major arguments have been directed against planning:
 Planning may create rigidity.
 Plans can’t be developed for a dynamic environment.
 Formal plans can’t replace intuition and creativity.
 Planning focuses managers’ attention on today’s competition, not on
tomorrow’s survival.
 Formal planning reinforces success, which may lead to failure.

The external environment is constantly changing. Therefore managers should

develop plans that are specific, but flexible. Managers must also recognize
that planning is an ongoing process, and they should be willing to change
directions if environmental conditions warrant. Flexibility is particularly
important. Managers must remain alert to environmental changes that could
impact the effective implementation of plans, and they must be prepared to
make changes as needed.
 Section (8)
Strategic Management

The present day news is filled with examples of changing organizational

strategies like Mergers, Strategic alliances, Downsizing, Spin-offs and Global
expansion. This chapter examines the strategic management process as it
relates to the planning function.
Managers must carefully consider their organization’s internal and external
environments as they develop strategic plans. They should have a systematic
means of analyzing the environment, assessing their organization’s strengths
and weaknesses, identifying opportunities that would give the organization a

competitive advantage, and incorporating these findings into their planning.

The value of thinking strategically has an important impact on organization
performance.
Strategic management is what managers do to develop the organization’s
strategies. Strategic management involves all four of the basic management
functions—planning, organizing, leading, and controlling.

Strategic management is important for organizations as it has a significant

impact on how well an organization performs. In today’s business world,
organizations of all types and sizes must manage constantly changing
situations. Today’s companies are composed of diverse divisions, units,
functions, and work activities that must be coordinated. Strategic
management is involved in many of the decisions that managers make.
The strategic management process is a six-step process that encompasses
strategic planning, implementation, and evaluation.

Identifying the Organization’s Current Mission, Objectives, and Strategies:

Every organization needs a mission, which is a statement of the purpose of an
organization. The mission statement addresses the question: What is the
organization’s reason for being in business? The organization must identify its
current objectives and strategies, as well.

External Analysis: Managers in every organization need to conduct an

external analysis. Influential factors such as competition, pending legislation,
and labor supply are included in the external environment. After analyzing
the external environment, managers must assess what they have learned in
terms of opportunities and threats. Opportunities are positive trends in
external environmental factors; threats are negative trends in environmental
factors. Because of different resources and capabilities, the same external
environment can present opportunities to one organization and pose threats
to another
Internal Analysis: Internal analysis should lead to a clear assessment of the
organization’s resources and capabilities. Any activities the organization does
well or any unique resources that it has are called strengths. Weaknesses are
activities the organization does not do well or resources it needs but does
not possess. The organization’s major value-creating skills and capabilities
that determine its competitive weapons are the organization’s core
competencies. Organizational culture is important in internal analysis; the
company’s culture can promote or hinder its strategic actions. SWOT analysis
is an analysis of the organization’s strengths, weaknesses, opportunities, and
threats.

Formulating Strategies: After the SWOT, managers develop and evaluate

strategic alternatives and select strategies that are appropriate. Strategies
need to be established for corporate, business, and functional levels.

Implementing Strategies
Evaluating Results to know how effective the strategies have been and if any
adjustments are necessary.

Types of Organizational Strategies

Strategic planning takes place on three different and distinct levels:
corporate, business, and functional

Corporate strategy
It is an organizational strategy that determines what businesses a company is
in, should be in, or wants to be in, and what it wants to do with those
businesses. There are three main types of corporate strategies:
a. A growth strategy is a corporate strategy that is used when an
organization wants to grow and does so by expanding the number of
 products offered or markets served, either through its current business)
or through new businesses.
b. A stability strategy is a corporate strategy characterized by an absence of
significant change in what the organization is currently doing.
c. A renewal strategy is a corporate strategy designed to address
organizational weaknesses that are leading to performance declines. Two
such strategies are retrenchment strategy and turnaround strategy.

Corporate Portfolio Analysis is used when an organization’s corporate

strategy involves a number of businesses. Managers can manage this
portfolio of businesses using a corporate portfolio matrix, such as the BCG
matrix. The BCG matrix is a strategy tool that guides resource allocation
decisions on the basis of market share and growth rate of Strategic Business
Units (SBUs).

Business (Competitive) Strategy

A business strategy (also known as a competitive strategy) is an organizational
strategy focused on how the organization will compete in each of its
businesses. Competitive advantage plays an important role in formulating the
business strategy. A competitive advantage is what sets an organization
apart, that is, its distinctive edge. An organization’s competitive advantage
can come from its core competencies.

If implemented properly, quality can be one way for an organization to

create a sustainable competitive advantage. An organization must be able to
sustain its competitive advantage; it must keep its edge despite competitors’
action and regardless of major changes in the organization’s industry.

Michael Porter’s work explains how managers can create and sustain a
competitive advantage that will give a company above-average profitability.
Industry analysis is an important step in Porter’s framework. He says there
are five competitive forces at work in an industry; together, these five forces
determine industry attractiveness and profitability. Porter proposes that the
following five factors can be used to assess an industry’s attractiveness:
i. Threat of new entrants. How likely it is that new competitors will come
into the industry? Managers should assess barriers to entry, which are
factors that determine how easy or difficult it would be for new
competitors to enter the industry.
ii. Threat of substitutes. How likely is it that products of other industries
could be substituted for a company’s products?
iii. Bargaining power of buyers. How much bargaining power do buyers
(customers) have?
iv. Bargaining power of suppliers. How much bargaining power do a
company’s suppliers have?
v. Current rivalry. How intense is the competition among firms that are
currently in the industry?
According to Porter, managers must choose a strategy that will give their
organization a competitive advantage. Porter identifies three generic
competitive strategies. Which strategy managers select depends on the
organization’s strengths and core competencies and the particular
weaknesses of its competitor(s). Based on the above analysis, only three
types of generic strategies are available to organizations to choose from.
They are:

a. A cost leadership strategy is a business or competitive strategy in which

the organization competes on the basis of having the lowest costs in its
industry.

b. A differentiation strategy is a business or competitive strategy in which a

company offers unique products that are widely valued by customers.
c. A focus strategy is a business or competitive strategy in which a company
pursues a cost or differentiation advantage in a narrow industry segment.

An organization that has been not been able to develop either a low cost or a
differentiation competitive advantage is said to be “stuck in the middle.”

Functional Strategy
These are strategies used by an organization’s various functional
departments to support the business or competitive strategy
New Directions in Organizational Strategies
 E-Business Strategies. Using the Internet, companies have created
knowledge bases that employees can tap into anytime, anywhere. E-
business as a strategy can be used to develop a sustainable competitive
advantage; it can also be used to establish a basis for differentiation or
focus.

 Customer Service Strategies. These strategies give customers what they

want, communicate effectively with them, and provide employees with
customer service training.

 Innovation Strategies. These strategies focus on breakthrough products

and can include the application of existing technology to new uses.