CIMA Paper E1 Organisational Management Study Text Published by: Kaplan Publishing UK Unit 2 The Business Centre, Molly Millars Lane, Wokingham, Berkshire RG41 2QZ Copyright © 2015 Kaplan Financial Limited. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means electronic, mechanical, photocopying, recording or otherwise without the prior written permission of the publisher. Acknowledgements We are grateful to the CIMA for permission to reproduce past examination questions. The answers to CIMA Exams have been prepared by Kaplan Publishing, except in the case of the CIMA November 2010 and subsequent CIMA Exam answers where the official CIMA answers have been reproduced. Notice The text in this material and any others made available by any Kaplan Group company does not amount to advice on a particular matter and should not be taken as such. No reliance should be placed on the content as the basis for any investment or other decision or in connection with any advice given to third parties. Please consult your appropriate professional adviser as necessary. Kaplan Publishing Limited and all other Kaplan group companies expressly disclaim all liability to any person in respect of any losses or other claims, whether direct, indirect, incidental, consequential or otherwise arising in relation to the use of such materials. Kaplan is not responsible for the content of external websites. The inclusion of a link to a third party website in this text should not be taken as an endorsement. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library. ISBN: 9781784152963 Printed and bound in Great Britain. ii Contents Page Chapter The different purposes of organisations Chapter Organisational structure 25 Chapter Governance, regulation, ethics and corporate social responsibility 67 Chapter The purpose of the finance function Chapter The contemporary transformation of the finance 143 function Chapter The purpose and management of the technology 159 and information function Chapter Emerging IS trends and their role in supporting organisational strategy and operations 207 Chapter The purpose of the operations function 229 Chapter Tools and techniques of operations management 261 Chapter 10 Introduction to marketing Chapter 11 The market planning process and the marketing 331 mix Chapter 12 Further aspects of marketing 389 Chapter 13 Introduction to human resource management 411 Chapter 14 Appraisal, training and development, motivation 455 and retention Chapter 15 Employment practices, HR roles and ethics 111 307 493 iii iv chapter Intro Introduction v How to use the materials These official CIMA learning materials have been carefully designed to make your learning experience as easy as possible and to give you the best chances of success in your Objective Test Examination. The product range contains a number of features to help you in the study process. They include: • • • a detailed explanation of all syllabus areas; extensive ‘practical’ materials; generous question practice, together with full solutions This Study Text has been designed with the needs of home study and distance learning candidates in mind. Such students require very full coverage of the syllabus topics, and also the facility to undertake extensive question practice. However, the Study Text is also ideal for fully taught courses. The main body of the text is divided into a number of chapters, each of which is organised on the following pattern: vi • Detailed learning outcomes. These describe the knowledge expected after your studies of the chapter are complete. You should assimilate these before beginning detailed work on the chapter, so that you can appreciate where your studies are leading • Stepbystep topic coverage. This is the heart of each chapter, containing detailed explanatory text supported where appropriate by worked examples and exercises. You should work carefully through this section, ensuring that you understand the material being explained and can tackle the examples and exercises successfully. Remember that in many cases knowledge is cumulative: if you fail to digest earlier material thoroughly, you may struggle to understand later chapters • Activities. Some chapters are illustrated by more practical elements, such as comments and questions designed to stimulate discussion • • Question practice. The text contains three styles of question: – Examstyle objective test questions (OTQs) – ‘Integration’ questions – these test your ability to understand topics within a wider context. This is particularly important with calculations where OTQs may focus on just one element but an integration question tackles the full calculation, just as you would be expected to do in the workplace – ‘Case’ style questions – these test your ability to analyse and discuss issues in greater depth, particularly focusing on scenarios that are less clear cut than in the Objective Test Examination, and thus provide excellent practice for developing the skills needed for success in the Operational Level Case Study Examination Solutions. Avoid the temptation merely to ‘audit’ the solutions provided. It is an illusion to think that this provides the same benefits as you would gain from a serious attempt of your own. However, if you are struggling to get started on a question you should read the introductory guidance provided at the beginning of the solution, where provided, and then make your own attempt before referring back to the full solution If you work conscientiously through this Official CIMA Study Text according to the guidelines above you will be giving yourself an excellent chance of success in your Objective Test Examination. Good luck with your studies! Quality and accuracy are of the utmost importance to us so if you spot an error in any of our products, please send an email to mykaplanreporting@kaplan.com with full details, or follow the link to the feedback form in MyKaplan. Our Quality Coordinator will work with our technical team to verify the error and take action to ensure it is corrected in future editions. Icon Explanations Definition – These sections explain important areas of knowledge which must be understood and reproduced in an assessment environment Key point – Identifies topics which are key to success and are often examined. Supplementary reading – These sections will help to provide a deeper understanding of core areas. The supplementary reading is NOT optional reading. It is vital to provide you with the breadth of knowledge you will need to address the wide range of topics within your syllabus that could feature in an assessment question Reference to this text is vital when self studying Test your understanding – Following key points and definitions are exercises which give the opportunity to assess the understanding of these core areas vii Illustration – To help develop an understanding of particular topics. The illustrative examples are useful in preparing for the Test your understanding exercises. Exclamation mark – This symbol signifies a topic which can be more difficult to understand. When reviewing these areas, care should be taken Study technique Passing exams is partly a matter of intellectual ability, but however accomplished you are in that respect you can improve your chances significantly by the use of appropriate study and revision techniques. In this section we briefly outline some tips for effective study during the earlier stages of your approach to the Objective Test Examination. We also mention some techniques that you will find useful at the revision stage. Planning To begin with, formal planning is essential to get the best return from the time you spend studying. Estimate how much time in total you are going to need for each subject you are studying. Remember that you need to allow time for revision as well as for initial study of the material. With your study material before you, decide which chapters you are going to study in each week, and which weeks you will devote to revision and final question practice. Prepare a written schedule summarising the above and stick to it! It is essential to know your syllabus. As your studies progress you will become more familiar with how long it takes to cover topics in sufficient depth. Your timetable may need to be adapted to allocate enough time for the whole syllabus. Students are advised to refer to the notice of examinable legislation published regularly in CIMA’s magazine (Financial Management), the students enewsletter (Velocity) and on the CIMA website, to ensure they are uptodate. The amount of space allocated to a topic in the Study Text is not a very good guide as to how long it will take you. The syllabus weighting is the better guide as to how long you should spend on a syllabus topic. viii Tips for effective studying (1) Aim to find a quiet and undisturbed location for your study, and plan as far as possible to use the same period of time each day. Getting into a routine helps to avoid wasting time. Make sure that you have all the materials you need before you begin so as to minimise interruptions (2) Store all your materials in one place, so that you do not waste time searching for items every time you want to begin studying. If you have to pack everything away after each study period, keep your study materials in a box, or even a suitcase, which will not be disturbed until the next time (3) Limit distractions. To make the most effective use of your study periods you should be able to apply total concentration, so turn off all entertainment equipment, set your phones to message mode, and put up your ‘do not disturb’ sign (4) Your timetable will tell you which topic to study. However, before diving in and becoming engrossed in the finer points, make sure you have an overall picture of all the areas that need to be covered by the end of that session. After an hour, allow yourself a short break and move away from your Study Text. With experience, you will learn to assess the pace you need to work at. Each study session should focus on component learning outcomes – the basis for all questions (5) Work carefully through a chapter, making notes as you go. When you have covered a suitable amount of material, vary the pattern by attempting a practice question. When you have finished your attempt, make notes of any mistakes you made, or any areas that you failed to cover or covered more briefly. Be aware that all component learning outcomes will be tested in each examination (6) Make notes as you study, and discover the techniques that work best for you. Your notes may be in the form of lists, bullet points, diagrams, summaries, ‘mind maps’, or the written word, but remember that you will need to refer back to them at a later date, so they must be intelligible. If you are on a taught course, make sure you highlight any issues you would like to follow up with your lecturer (7) Organise your notes. Make sure that all your notes, calculations etc. can be effectively filed and easily retrieved later ix Objective Test Objective Test questions require you to choose or provide a response to a question whose correct answer is predetermined. The most common types of Objective Test question you will see are: • Multiple choice, where you have to choose the correct answer(s) from a list of possible answers. This could either be numbers or text • Multiple choice with more choices and answers, for example, choosing two correct answers from a list of eight possible answers. This could either be numbers or text • Single numeric entry, where you give your numeric answer, for example, profit is $10,000 • • Multiple entry, where you give several numeric answers • Matching pairs of text, for example, matching a technical term with the correct definition • Other types could be matching text with graphs and labelling graphs/diagrams True/false questions, where you state whether a statement is true or false In every chapter of this Study Text we have introduced these types of questions, but obviously we have had to label answers A, B, C etc rather than using click boxes. For convenience we have retained quite a few questions where an initial scenario leads to a number of subquestions. There will be questions of this type in the Objective Test Examination but they will rarely have more than three subquestions. Guidance re CIMA onscreen calculator As part of the CIMA Objective Test software, candidates are now provided with a calculator. This calculator is onscreen and is available for the duration of the assessment. The calculator is available in each of the Objective Test Examinations and is accessed by clicking the calculator button in the top left hand corner of the screen at any time during the assessment. All candidates must complete a 15minute tutorial before the assessment begins and will have the opportunity to familiarise themselves with the calculator and practise using it. Candidates may practise using the calculator by downloading and installing the practice exam at http://www.vue.com/athena/. The calculator can be accessed from the fourth sample question (of 12). x The different purposes of organisations Test your understanding – OTQ Which of the following are usually seen as the primary objectives of companies? (i) To maximise the wealth of shareholders (ii) To protect the environment (iii) To make a profit A (i), (ii) and (iii) B (i) and (ii) only C (ii) and (iii) only D (i) and (iii) only Test your understanding – OTQ Which one of the following organisations is most likely to be classified as part of the public sector? A A charity B A social club C A school D A public limited company 4 Mission, vision and objectives We have already discussed the different objectives of organisations. We are now going to introduce two important terms regarding objectives. 4.1 Mission Mission is the most generalised type of objective and can be seen as an expression of the organisation’s reason for being. Mission is neither quantifiable or within timeconstrained targets. 10 chapter Elements of mission • • Purpose – why does the organisation exist and who does it exist for? • Policies and culture – how does the organisation expect its staff to behave/act? • Values – What are the core principles of the organisation? Strategy – what does the organisation provide (goods/services) and how are these provided? Illustration – Examples of mission 'Our mission is: • • • to refresh the world in mind, body and spirit, to inspire moments of optimism through our brands and actions and to create value and make a difference everywhere we engage.' (Coca Cola) 'To produce cars and trucks that people will want to buy, enjoy driving and will want to buy again.' (Chrysler) 'To create lasting solutions to poverty, hunger and social injustice.' (Oxfam) Test your understanding What are the potential benefits and drawbacks to an organisation of setting a mission statement? 4.2 Vision An organisation may also have a vision which sets out how they see the organisation in the future. This is closely linked to the mission of the organisation. 11 The different purposes of organisations Illustration – Examples of vision ‘To be the most respected and successful car company in America.’ (Toyota) ‘To be the company that best understands and satisfies the product, service and selffulfilment needs of womenglobally.’ (Avon) 'To make Merseyside a safer, stronger and healthier community.' (Merseyside Fire and Rescue Service) Distinction between mission and vision Vision and mission should not be confused. The terms are often used interchangeably but mission statements are presentbased statements designed to convey a sense of why the organisation exists to all of its interested parties. Vision statements, on the other hand, are future based and meant to inspire and give direction to the employees of the organisation, not those outside the organisation. 4.3 Objectives The mission establishes what the organisation wants to achieve overall. However, in order to achieve the mission, an organisation should establish a number of detailed objectives. Objectives should be SMART, i.e. specific, measurable, achievable, relevant and timeconstrained. 5 Creating value for stakeholders 5.1 Introduction An organisation has many different interested parties or stakeholders, each with different objectives and degrees of influence. Stakeholders are virtually everybody who has anything to do with an organisation. It is vital for managers to understand the varying needs of the different stakeholders in the organisation. Failure to do so could mean that important stakeholders do not have their needs met, which could be disastrous for the organisation. 12 chapter Value for stakeholders can be created in a number of ways, including notably: • • • control and coordination of resources to achieve goals and outcomes efficient production of goods and services facilitating innovation Stakeholders will be discussed in more detail in Section 1 of Chapter 3. 5.2 Control and coordination of resources to achieve goals and outcomes Controls are activities undertaken within an organisation that will increase the chance of an organisation achieving its objectives. They monitor whether the organisation is on track to achieve its goals and if not, corrective action can be taken. Typical controls include: • • • direct supervision of staff • the culture of the organisation should support managers and employees in pursuit of the organisation's goals. The culture of the organisation will be impacted by factors such as the organisaton's ownership and the leadership style in place. These factors will influence, say, the degree of autonomy, risk taking and selfcontrol of employees planning processes to ensure correct procedures are followed targets these should be aligned with the goals that the organisation is trying to achieve Coordination Coordination means bringing together all the activities of an organisation. The capacity of an organisation to coordinate human resources and physical, financial and technological resources is linked to its overall effectiveness and achievement of goals. Test your understanding Explain the benefits of coordination for an organisation. 13 The different purposes of organisations 5.3 Efficient production of goods and services In producing goods and providing services an organisation should strive to minimise the wastage of resources The concept of lean production was developed by the Japanese car manufacturer, Toyota. It is a philosophy that aims to systematically reduce waste, i.e. through minimising: • • • • • • • inventory waiting (idle time) defective units effort transportation overprocessing and overproduction The efficient production of goods and services can be facilitated through the use of technology and innovation. Technology will enable an organisation to maximise asset usage. For example: • There has been a move towards a paperless office in the service industry (i.e. a work environment in which the use of paper is eliminated or greatly reduced). This has been done by converting documents into digital forms thus boosting productivity, saving space, making documentation sharing easier and helping the environment. • Although it is nothing new to put robots on the assembly line, technology innovation has resulted in more recent steps to revolutionise the role of robots. Robots are now working alongside humans on car production lines Illustration 10 – Use of robots at BMW In the United States, BMW’s factory in Spartanburg employs more than 7,000 people, making an average of about 1,000 vehicles each day. It also employs robots, which work alongside humans, to help make car doors. BMW says the plan isn’t to replace people on the assembly line, but instead to keep the skilled workforce healthy and in work for longer; an important consideration given the increase in the retirement age in the United States (and many other countries). 14 chapter 5.4 Facilitating innovation In the modern business environment, the ability to innovate is becoming a competency in itself. The idea that ‘what is good today, will not be tomorrow’ has never been so relevant. Innovation can be used to: • • reduce costs provide a basis for differentiation An organisation will need to exploit its creative ideas. This can be done via certain organisational dimensions: • • • Structure – a flexible structure to avoid the stifling of innovation • People – a teambased approach creating ownership and participation • Communication – creating awareness within the organisation of the ideas created Culture – sees failure as a learning experience to be expected Leadership – to lead the organisation via communication and the creation of vision Illustration 11 – Innovation at Google The most successful internet company of our time, Google, is known for its deceptively simple search function but the company continues to pursue projects that could reinvent the company and society. Many of its current projects aim to be life changing, for example: • • • Calico – a spinoff company working to extend human lifespan • Google Now – an intelligent personal assistant available within the Google search application. It reminds users, for example, when their favourite band or author has a new release and when the last train is leaving – before it’s too late Glass – which is making wearables the next computer trend Express – offering sameday delivery with national and local retailers. Customers subscribe on a monthly or annual basis. Is attempting to combat Amazon Prime. 15 The different purposes of organisations 6 Chapter summary 16 chapter 7 Practice questions Question – OTQ The public sector is normally concerned with: A making profit from the sale of goods B providing services to specific groups funded from charitable donations C the provision of basic government services D raising funds by subscriptions from members to provide common services Question – OTQ Which one of the following statements regarding limited companies is correct? A Public limited companies have access to a wider pool of finance than partnerships or sole traders B Both public and private limited companies are allowed to sell shares to the public C Companies are always owned by many different investors D Shareholders are liable for any debts the company may incur 17 The different purposes of organisations Question – OTQ Consider the following list of different organisations: (i) Government departments (ii) Partnerships (iii) Charities (iv) Companies Which of these organisations would normally be classified as BOTH a notforprofit organisation AND a private sector organisation? A (i) and (iii) only B (iii) only C (i) only D (ii) and (iii) only Question – OTQ Westeros is an organisation which imports computers into country A and sells them to the public in order to make a profit. It is owned by ten individual investors, each of whom owns an equal number of shares in Westeros. Westeros is not a public limited company. Which of the following is likely to be the most appropriate source of finance for Westeros? A Central government funding B The existing owners of Westeros C Issue of shares to the public D Donations from the public Note on case style questions The E1 text includes a number of ‘case style’ questions. These are longer questions with a time guidance and are aimed at giving a flavour of the types of areas that may be examined in the operational level case study. These questions will serve as excellent question practise before sitting the case study but will also enhance your knowledge and understanding which will be of benefit when sitting the OT exam. 18 chapter Question – C (Case style) Background C is a company which is engaged in synthetic fibre production. It is situated in Home country where it operates two production plants. C pipes raw material from an oil refinery (which it does not own) to its own production plant where it manufactures a single product which is a special grade of polymer. The polymer is then transferred to a second production site which produces two products, ‘Synfib’ and ‘Thetfib’. As the polymer is of a special grade and manufactured specifically for the production of Synfib and Thetfib, there is no intermediate market for it. The transfer price for the polymer has been set at $40 per litre. Mission and objectives C's Chairman has declared that the firm's mission is to ‘provide its customers with the highest quality product at a reasonable price’. The organisational objectives are to: • • • • satisfy the demands of the shareholders reduce pollution to a minimum maintain secure employment and to sell a product of high quality which satisfies customer requirements The objectives also make reference to maximisation of shareholder wealth while at the same time keeping the shareholders' exposure to financial risk to a minimum. Approximately 75% of the shares are held by large financial institutions. The remainder are held by individual investors including employees and the Directors. Task: Produce a critical appraisal of the content of the mission statement and objectives of C as they are presented to you in the scenario. Recommend what changes should be made to their content. (20 minutes) 19 The different purposes of organisations Test your understanding answers Test your understanding – OTQ The correct answer is A Statement (iv) would not be true, as organisations (which this committee could be classified as) allow for specialisation. Not all of the members would have to be skilled at performing all of the necessary tasks. Test your understanding The correct answer is B – False Schools run fundraising activities to help pay for extra books, e.g. to improve the quality of education given to pupils. The primary objective is educational, not profit. The money made at the fête is thus a means not an end. Test your understanding – OTQ The correct answer is D While protecting the environment is to be encouraged and is reinforced within statute to some degree, it is not a primary objective of the company. Companies exist primarily to maximise the return to their owners. Test your understanding – OTQ The correct answer is C Public sector organisations will be controlled by the central government. This is unlikely to be a charity, a company or a social club – which are typical examples of the private sector. Note that a privately owned and operated school could be part of the private sector, but schools are still the most likely from the list to be public. 20 chapter Test your understanding Benefits • Provides strategic direction thereby assisting in the formation of acceptable policies Drawbacks • They may be unclear or vague. • • They may be unrealistic. • Provides a framework within which managerial decisions can be made • Assists in communicating key • cultural values to employees and other stakeholders • Helps to prevent potential misinterpretations of the organisation's reason for being • Assists in resolving conflict between stakeholder groups. • There may be inconsistencies between the different elements of the mission statement. They may be inconsistent with management action. They may lack sufficient external focus. Test your understanding Coordination is necessary for a number of reasons: • It makes optimum utilisation of resources – coordination brings together different organisational resources and focuses on minimising wastage in order to achieve organisational goals • It encourages team spirit by arranging work in such a way to minimise conflicts and rivalries • • It gives proper direction to all departments of an organisation. • It helps achieve objectives quickly by minimising conflicts, rivalries, wastage, delays and other organisational problems • It improves relations between different levels within the organisation It encourages employees to show initiative thus increasing motivation 21 The different purposes of organisations Question – OTQ The correct answer is C C is the correct answer because this is the main activity in the public sector. Options A and B relate to the private sector and D to a mutual organisation. Question – OTQ The correct answer is A As public limited companies are able to sell their shares to the public, they will often find it easier to raise large amounts of capital for growth, if needed. This may be much harder for partnerships and sole traders. Only public companies can sell shares to the public, companies may be owned by only one shareholder and shareholders enjoy limited liability. Question – OTQ The correct answer is B Partnerships and companies would both usually be profit seeking. While government departments are likely to be notforprofit, they would be part of the public sector. Therefore only charities would be likely to be both public AND notforprofit. Question – OTQ The correct answer is B Westeros is a profitseeking organisation – given that its ten owners own ‘shares’, it must be a private limited company. As such, only B is likely to be appropriate from the options provided. Central government funding is usually for public sector organisations, donations would usually be the major source of funding for charities and Westeros cannot issues shares to the public as it is a private limited company. 22 chapter Question – C (Case style) A mission statement is directed primarily towards the employees of an organisation, and should help the company towards achieving its objectives. It might provide a statement of the company's culture, and also state the aims of the company and the business areas within which the company will operate. An alternative view is that a mission statement should include a statement of the business areas in which the company will operate and in addition, its reason for existence and the stakeholder groups who will be served by the company. The mission statement of C is 'to provide its customers with the highest quality product at a reasonable price'. This can be criticised as a mission statement for a number of reasons. • It does not state the business areas in which the company intends to operate. Presumably, the company means synthetic fibre products, but the statement does not make this clear • It does not give a reason for the company's existence. In particular, the statement fails to give any indication why the company will be better than its competitors in what it does • It appears to focus on customer requirements only, and has nothing to say about other groups, particularly employees and shareholders. It does not actually define who its customers are or who it wants its customers to be • • It is dull. Short mission statements should be inspiring The terms 'highest quality' and 'reasonable price' are unclear in their meaning. It is not clear what is meant by 'quality', nor what 'reasonable' is in terms of price. Assuming that it will be expensive to achieve the highest quality, how high might a reasonable price be? Objectives might be phrased in general terms, as in the case of C, but to be of much value they should be more specific. It has been suggested that objectives should be 'SMART', i.e. specific, measurable, achievable, relevant and timeconstrained. From the information provided, it seems that the objectives of C fail to meet these criteria. • The stated aim is to 'satisfy the demands' of shareholders. Although there is reference to maximising shareholder wealth, and to setting limits to acceptable risk, there is no clear statement of what these objectives mean. They must be stated more specifically and put within a time frame. For example, an objective might be to increase profits and dividends over the next five years at the rate of at least x% each year. The risk limits would also have to be specified 23 The different purposes of organisations • The aim of reducing pollution to a minimum is also inadequate, because it fails to state what 'minimum' means or the time frame within which the objective should be met • The objective of maintaining secure employment is also vague and meaningless, except perhaps to indicate that the company will be reluctant to make members of its work force redundant, and this might be an unrealistic target. Again, a more specific objective is required • The objective of selling a high quality product to satisfy customer requirements has a link to the mission statement, but is also vague and so meaningless. Actual achievements cannot be monitored against such a vague objective Both the mission statement and the objectives should therefore be re formulated along the guidelines suggested above. 24 ... published regularly in CIMA s magazine (Financial Management) , the students enewsletter (Velocity) and on the CIMA website, to ensure they are uptodate. The amount of space allocated to a topic in the Study Text is not a very ... We are grateful to the CIMA for permission to reproduce past examination questions. The answers to CIMA Exams have been prepared by Kaplan Publishing, except in the case of the CIMA November 2010 and subsequent CIMA Exam answers where the official CIMA answers have been reproduced. ... relationships with other parts management to the efficient production and of the organisation delivery of fit-for-purpose goods and services E1 – D OPERATIONS MANAGEMENT (15%) chain management • • • • •