business management sample paper 2
TRANSCRIPT
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Business Management
Sample Paper 2Questions and Suggested Solutions
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NOTES TO USERS ABOUT SAMPLE PAPERS
Sample papers are published by Accounting Technicians Ireland. They are intended to provide guidanceto students and their teachers regarding the style and type of question, and their suggested solutions, in
our examinations. They are not intended to provide an exhaustive list of all possible questions that may
be asked and both students and teachers alike are reminded to consult our published syllabus (seewww.AccountingTechniciansIreland.ie) for a comprehensive list of examinable topics.
There are often many possible approaches to the solution of questions in professional examinations. It
should not be assumed that the approach adopted in these solutions is the only correct approach,
particularly with discursive answers. Alternative answers will be marked on their own merits.
This publication is copyright 2011 and may not be reproduced without permission of Accounting
Technicians Ireland.
Accounting Technicians Ireland, 2011.
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INSTRUCTIONS TO CANDIDATES
Answer FOUR questions in total. QUESTION 1 IN SECTION A ISCOMPULSORY AND MUST BE ANSWERED. Answer ANY THREE questions in
Section B. If more than the requisite number of questions are answered,then only the requisite number, in the order filed, will be corrected.
Candidates should allocate their time carefully and should note that 1mark equates to 1.65 minutes.
Answers should be illustrated with examples, where appropriate.
Question 1 begins on page 2 overleaf.
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SECTION A
(COMPULSORY QUESTION)
QUESTION 1 (COMPULSORY)
(a) Explain the term Market Segmentation and describe four key market
segmentation variables, using examples where appropriate.
10 Marks
(b) You have recently been appointed marketing manager for a chain of pizza
delivery stores. Describe two segmentation variables that are likely to be
relevant to the opening of pizza stores in new locations. Outline two factors
you would consider in assessing the attractiveness of a location for a new
store.
10 Marks
(c) Distinguish between transaction and relationship marketing.
5 Marks
Total 25 Marks
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SECTION B
(ANSWER ANY THREE QUESTIONS IN THIS SECTION)
QUESTION 2
(a) Describe Vrooms expectancy theory of motivation.10 Marks
(b) Comment on its relevance in todays business environment, making
reference to organisations with which you are familiar.
10 Marks
(c) Explain what is meant by the term Corporate Social Responsibility and set
out two reasons for making it an integral component of normal business
operations.
5 Marks
Total 25 Marks
QUESTION 3
(a) Describe each of the five forces identified by Porter for analysing theintensity of competition in an industry.
10 Marks
(b) Explain what is meant by SWOT analysis and comment on its relevance to
the formulation of strategy in an organisation of your choice.
10 Marks
(b) Describe three characteristics of effective teams.5 Marks
Total 25 Marks
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QUESTION 4
(a) Explain what is meant by the term Organisational leadership and outline
Fiedlers contingency theory of leadership.
10 Marks
(c) Describe four stages in the process of recruitment of a new employee.10 Marks
(c) Distinguish between personal power and position power.
5 Marks
Total 25 Marks
QUESTION 5
(a) Four characteristics of Services differentiate the marketing of Services from
the marketing of products namely their intangibility, inseparability,
variability and perishability. Describe each of these characteristics and
briefly explain their impact on the design of marketing programmes.
10 Marks
(b) Comment on the merits and limitations of the Internet as a distribution
channel.
10 Marks
(d) Describe two factors you would take into consideration in setting the price ofa product.
5 Marks
Total 25 Marks
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QUESTION 6
(a) Distinguish between each of the following types of information system,giving examples where appropriate:
i) Transaction Processing Systemsii) Management Information Systemsiii) Decision Support Systems
10 Marks
(b) You have been requested recently to join a steering group set up to
undertake a feasibility study of an IT project in your organisation. Identify
three broad criteria the steering group should consider in assessing the
feasibility of the IT project. Give reasons for choosing these criteria.
10 Marks
(c) Distinguish between Direct Changeover, Parallel Conversion and Pilot
Changeovers.
5 Marks
Total 25 Marks
QUESTION 7
(a) Explain the role of budgeting and describe the budgetary process.
10 Marks
(b) Describe two long-term sources of finance available to organisations.
10Marks
(c) Distinguish between zero based budgeting and incremental budgeting.
5 Marks
Total 25 Marks
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Suggested Solutions
Section A
Question 1
Part A
Market segmentation consists of breaking the total market into segments that
share common properties, such as the common wants of consumers, or their
purchasing power, geographical location, or buying attitudes or practices. The
ultimate degree of segmentation is customised marketing where sellers design a
separate product for individual buyers. Airline manufacturers such as Boeing
customise products. However for smaller businesses it is not profitable to customise
products at the individual level, so manufacturers identify classes of buyers who
differ in their broad requirements.
Typical segmentation variables include;
Demographic
Age range 18 to 30, Gender male or female
Geographic
Location urban, rural, national or international
Family life cycle
single, married no children, married young children, etc.
Socio- economic status
professional, managerial, skilled workers, unskilled etc.
Psychographic
Activities (leisure, sports, entertainment, shopping behaviour)
Interests (role perceptions, levels of social interaction)
Opinions (on topics such as politics, sports, social and moral issues)
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Benefits include a better matching of customer needs, targeting of customer
groups, tailoring of strategies and opportunities for growth.
Part B
A number of market segmentation variables would be relevant to the market in
question The demographic set of variables would be relevant at a number of levels.
There are probably a number of age profiles within this set of variables that arelikely to consume pizzas more than others (e.g. teenagers, and possible 18 to 30
age group etc.)
The family life cycle grouping is also likely to be relevant (e.g. single) as indeed is
the socio-economic status grouping (e.g. busy professional etc.)
The size and potential growth of the target segments outlined above would be
relevant. The nature and extent of the competition in the market and the distinctive
features of your service offerings relative to current offerings (e.g. location,
delivery, parking, quality and price).
Part C
Relationship marketing is a customer-centric strategy with the goal of maximising
profitability, revenue and customer satisfaction. It involves building and
maintaining profitable customer relationships by delivering enhanced customer
value and satisfaction. Customers perceive value when they evaluate the
difference between all the benefits and all the costs of a marketing offer. Customer
satisfaction depends on the products perceived performance relative to a buyers
expectations. The key is to match customer expectations with company
performance.
In this regard companies should strive to institute customer loyalty and retention
programmes in order to build relationships. These include:
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1. Offering financial benefits, such as frequency programmes which can includeair-miles, loyalty cards or money off vouchers.
2. Offering social benefits, such as club marketing programmes.
3. Offering structural ties such as offering free printers with computers or freeCDs with newspapers.
Transactional marketing delivers the rational and functional basic components of
value delivery. This type of marketing generates passive, transitory, and reactive
relationships with the customer and tends to be short term in nature.
The characteristics of each approach may be summarised below:
Characteristic Transactional
Marketing
Relationship
Marketing
1. Time orientation Short Term Long Term
2. Organisational goal Make the Sale Retain the Customer
3. Customer Service Priority Relatively low Key Component
4. Customer Contact Low to moderate Frequent
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5. Degree of Customer Commitment Low High
6. Buyer Seller Interactions Conflict &
Manipulation
Co-operation & Trust
7. Source of Quality Primarily from
Production
Company-wide
commitment
Question 2
Part A
Expectancy theory holds that people make conscious choices about their
motivation. The three factors that affect those choices are valance, expectancy,
and instrumentality.
Valance is simply the attractiveness or desirability of various rewards or outcomes.
Expectancy theory recognizes that the same reward or outcome, say, a promotion,
will be highly attractive to some people, will be highly disliked by others, and will
not make much difference one way or the other to still others.
Accordingly, when people are deciding how much effort to put forth, expectancy
theory says that they will consider the valance of all possible rewards and outcomes
that they can receive from their jobs. The greater the sum of those valences, each
of which can be positive, negative, or neutral, the more effort people will choose to
put forth on the job.
Expectancy is the perceived relationship between effort and performance. When
expectancy is strong, employees believe that their hard work and effort will result
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in a good performance, so they work harder. By contrast, when expectancy is
weak, employees figure that no matter what they do or how hard they work, they
won't be able to perform their jobs successfully, so they don't work as hard.
Instrumentality is the perceived relationship between performance and rewards.
When instrumentality is strong, employees believe that improved performance will
lead to better and more rewards, so they choose to work harder. When
instrumentality is weak, employees don't believe that better performance will result
in more or better rewards, so they choose not to work as hard.
Expectancy theory holds that for people to be highly motivated, all three variables
valance, expectancy, and instrumentality - must be high. Thus, expectancy
theory can be represented by the following simple equation
Motivation = Valance * Expectancy * Instrumentality
If any one of these variables declines overall motivation will decline too.
Part B
Motivation is a complex concept. There are a variety of factors which influence the
meanings people give to a situation and which prompt them to act in particular
ways.
Similarly, there is no one universally accepted theory of motivation. Broadly
speaking the theories, may be categorised into two groups, need and cognitive
theories of motivation.
Vrooms theory falls into the latter category. It takes a rational individualistic
perspective towards motivation. It assumes people make conscious decisions about
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the value of discharging their effort. It argues that clarity and belief in the effort,
performance and reward relationships enhances motivation.
The model certainly has intuitive appeal and there is a body of evidence to suggest
it has wide applicability in practice. For example, most bonus, piecework and
performance related pay systems are based on the logic underlying expectancy
theory.
The model like most theoretical frameworks does not necessarily hold for all peoplein all situations. Peoples valances vary from individual to individual, from culture to
culture and there is a temporal dimension to motivation in that a persons valances
themselves will vary at different stages of their lives.
The nature of the task environment also influences the appropriateness of the
framework. The tangibility of the outputs impacts its adoption. (e.g. making sales is
quite a tangible act and provides a clear basis for reward via sales commissions,
but taking care of the elderly is a completely different matter).
The system for measuring performance must also be fair and robust. The outcome
/ input ratios must be seen to fair and applied in an equitable manner, otherwise
the system risks loosing credibility.
Overall, no one framework can be used to deal with the complexities of reality, but
in appropriate conditions and circumstances, expectancy theory has a significant
role to play in contributing to motivation in work environments.
Part C
Corporate Social Responsibility (CSR) refers to the voluntary actions that
businesses may undertake over and above compliance with the minimum legal
requirements to address both its competitive interests and the interests of the
wider community. It can be characterised as the concept whereby companies
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integrate social and environmental concerns into their business operations and in
their interaction with their stakeholders on a voluntary basis.
A firms obligation to its publics is seen to extend beyond the legal responsibility to
comply with legislation. Instead firms voluntarily take further steps to improve the
quality of life for employees and their families as well as for the local community
and society at large.
Firms should engage in CSR to ensure they gain social acceptance throughethically responsible behaviour. Not engaging sufficiently with CSR is not only
potentially damaging to the firms reputation but also to the sustainability of long
term growth and development.
Question 3
Part A
Porter identified five forces that assist the organisation in analysing the intensity of
competition and the profitability and attractiveness of an industry.
Understanding these forces gives managers the necessary insights to facilitate
them to develop relevant strategies to be successful in their market. The five forces
are:
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Threat of new entrants
The more uncomplicated it is for new companies to enter the industry, the more
aggressive the competition will be. Factors that can limit the threat of new entrants
are known as barriers to entry. Some examples include:
- Existing loyalty to major brands
- Incentives for using a major brand- High fixed costs-
Scarcity of resources- High cost of switching brands / companies- Government restrictions or legislation
Threat of new
entrants
Bargaining power
of suppliers
Bargaining power
of buyers
Threat of
substitutes
Competitive
rivalry
within the
industry
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Power of Suppliers
The focuses on the amount of pressure suppliers can place on a business entity. If
one supplier has a large enough impact to affect a companys margins and
volumes, then it holds considerable power. Reasons that suppliers might have this
power include:
- Few suppliers of a particular product exist- No substitute products are available- Switching to another competitive product is costly- The product is very important to buyers- The supplying industry has a higher profitability than the buying industry
Power of Buyers
This relates to the amount of pressure customers can place on a business. If one
customer has a large enough purchasing power to affect a companys margins and
volumes, then the customer holds considerable power. Reasons that customers
might have this power include:
- Small number of buyers exist- These buyers purchase large volumes of the product- Switching to another competing product is simple- The product is not important to buyers; they can do without the product
for a period of time
- Customers are price sensitive
Availability of substitutes
If the cost of switching to competitive products is low, then brand switching could
be a serious threat. Factors that can affect the threat of substitutes include:
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- if substitutes are similar, it can be viewed in the same light as a newentrant
- if the substitutes are perceived to have the same benefits- if significant price differentials emerge and- if products are equally available and accessible
Competitive rivalry
This depicts the intensity of competition between existing firms within an industry.
Companies that are highly competitive generally earn low returns because the cost
of competition is high. A highly competitive market may result from:
- Players within an industry that are similar in size; there is no dominantfirm
- Little differentiation between competitors products and services- A mature industry with very little growth; companies can only grow by
encouraging customers to switch from competitors.
Part B
SWOT Analysis is a strategic planning tool used to evaluate the Strengths,
Weaknesses, Opportunities, and Threats involved in a business venture. It involves
specifying the objective of the business venture or project and identifying the
internal and external factors that are favourable and unfavourable to achieving that
objective. The analysis can include
STRENGTHS
Competitive advantage?
Resources, Assets, People?
Experience, knowledge, data?
WEAKNESSES
Lack of competitive strength?
Reputation, presence & reach?
Financials?
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Accreditations, qualifications?
Philosophy, Values?
Marketing awareness, reach,
distribution?
Financial reserves?
Cultural, attitudinal behaviours?
Innovative aspects?
Price, Value, Quality?
Reputation?Location?
Cash flow?
Reliability of data?
Staff Morale & staff turnover?
Innovative aspects?
Locations?
Facilities?
Marketing awareness?
OPPORTUNITIES
Market developments?
Competitors vulnerabilities?
Industry or lifestyle trends?
Technology development or
innovations?
Global influences?
New markets?
New USPs?
Tactics major contracts?
Information & research?
Partnerships, agencies & distribution?
Niche target markets?
Business & Product development?
THREATS
Political effects?
Legislation effects?
Environmental effects?
IT developments?
Competitor intentions?
Market demand?
New technologies?
Sustaining internal capabilities?
High staff turnover / loss of key staff?
Sustainable financial backing?
Economy home & abroad?
Changing consumer tastes/lifestyles?
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Part C
Team cohesiveness can be related to the strength of the bond between members of
the team. If the team is cohesive, then members are motivated to achieve the
teams goals and are enthusiastic about working with other people in the team.
Managing team cohesiveness and effectiveness is emerging as an important
organisational phenomenon that brings together many aspects of management,from effective organisational structure to employee motivation, from management
control to participative management. The focus on teams stems from the need for
organisations to be flexible and responsive to customer requirements in an
increasingly competitive business environment, while at the same time ensuring
that management and staff work together to meet these changing needs.
Over the last number of decades there has been a fundamental movement away
from a hierarchical and adversarial management culture to one based on co-
operative relationships in order to achieve a strong customer orientation, improved
operation processes and an acceptance of the need for continuous improvement.
The effectiveness of a work team is highly dependent on the organisation in
question, in terms of its existing structures, changes in its external business
environment, its underlying culture, its past, present and future strategy, and its
reward/control systems within which teamwork is to be established.
Teams fulfill a number of functions in organisations. They tend to be established to
fulfill specific ends. However they actually may become cohesive units that outlive
their original purpose and in that sense they can take on a life of their own.
Effective work teams tend to display a number of the following characteristics
1 A clear unity of purpose
2. A feeling of mutual trust and dependency3. Clear or concrete milestones against which it measure itself
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4. Supportive, informal and relaxed atmosphere5. Free flow of information and communication6. An ability to resolve conflict constructively
Question 4
Part A
Organisational leadership is an interpersonal process whereby the firm attempts to
influence employees in accomplishing an objective. It can be demonstrated by any
employee at any level of an organisation. Opportunities generally occur in
supervisory and managerial positions rather than non managerial positions as it is
expected of those in supervisory and managerial positions.
Fiedler suggests matching relationship orientated leadership styles and task
orientated leadership styles to situation favourableness improves overall group
performance. He argues that leader-member relations, task structure and position
power give rise to different levels of situation favourableness. He suggests task
orientated styles are most appropriate when situations are highly unfavourable or
highly favourable. He further suggests that relationship orientated styles are likely
to be suitable when situations are moderately favourable.
Fiedler defined situation favourableness as the degree to which a particular
situation either permits or denies the leader the chance to influence the behaviour
of group members. In a highly favourable situations, leaders find that their actions
influence followers, but in highly unfavourable situations leaders have little or no
success influencing the people they are trying to lead.
Three situational factors determine the favourability of a situation; leader member
relations, task structure and position power. The most important situational factor
is leader-member relations, which refers to how well followers respect, trust and
like their leaders. When leader member relations are good, followers trust their
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leader, and there is a friendly work atmosphere. Task structure is the degree to
which the requirements of subordinates tasks are clearly specified. With highly
structured tasks, employees have clear job responsibilities, goals and procedures.
Position power is the degree to which leaders are able to hire, fire, reward and
punish workers. The more influence leaders have over hiring, firing rewards and
punishments, the greater their power.
In general, this theory suggests that leadership styles can be matched to
situations. Empirical evidence would seem to provide some support for the theory,although it is still a generalization and each situation is unique and has to be dealt
with on a case by case basis.
Part B
Employee recruitment is the process of obtaining a sufficient number of the right
people at the right time to best meet the needs of the organisation. It involves
finding, hiring and holding onto people who can satisfy the technical, educational
and social needs of the organisation. Recruitment relies on a number of sources,
including internal promotions, advertisements, employment agencies, management
consultants, and so on. The process is comprised of a number of distinct stages
1. Manpower planning / Needs analysis
2. Job description responsibilities defined
3. Attributes & aptitudes required
4. Conditions established terms and conditions
5. Job advertisement drawn up
6. Advertised internally
7. Advertised externally
8. Short listing
9. Interview and other selection procedures
10. Offer made
11. If accepted unsuccessful candidates notified
12. Induction and training
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A short description of a selection of stages is set out below.
Need Analysis
This stage of the process is concerned with estimating the quantity and quality of
human resources required to meet the objectives of the organisation. It is based on
a thorough understanding of organisations strategy and its implications for the
workforce, planned technological changes, a detailed inventory of employee
characteristics (age, sex, martial status, tenure, skill level, qualifications, promotion
potential and performance levels) and attrition rate.
Job Description
This involves specifying the job and what the job demands in terms of employee
behaviour. It is a statement of the main tasks of the job. It is clearly an important
aspect of the background stage of recruitment, because the ideal individual is
derived from the contents of the job description. If an inaccurate job description is
prepared, then the individual characteristics subsequently specified may also be
inaccurate or inappropriate.
Attribute and Aptitudes required
The may also be called the person specification. It details the skills, qualification,
knowledge and experience the individual should possess in order to best match the
job. The person specification may often distinguish between those characteristics
considered essential and those considered desirable. Among the things it might
take account of are:
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- attainments, education/ qualifications / experience- general intelligence- special aptitudes- interests- motivation- adjustment
Advertising
Equipped with a job description and a person specification, the task now becomes
one of attracting a pool of potential candidates. In considering possible sources of
labour, we must consider internal and external sources. Internal sources may come
from transfers or promotions. Potential external sources include colleges, Institutes
of Technology, Universities, employment agencies and management consultancies
and executive search agencies.
Each of these sources should be evaluated, particularly with respect to their
suitability to yield the right candidate, and costs involved.
Selection
The selection process effectively begins when application forms / CVs are received.
Selection tools available to organisations range from the more traditional methods
of interviews and references, through to the more sophisticated techniques, such as
biographical data, aptitude tests and psychological tests.
The interview is widely held to be the most commonly used selection technique.
Often described as a conversation with the purpose, it may take a number of
different forms. The three most common types are one-to-one interviews, panel
interviews and group interviews / assessment.
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Part C
Power is generally described as the capacity or ability of a person to influence
another. Position power is based on a mangers rank in an organizational structure.
Personal power is based on a persons individual characteristics.
Position power may be subdivided into legitimate power, reward power and
coercive power. Legitimate power originates from the managers position within the
organization hierarchy. The power is inherent in the hierarchical position the
manager occupies. It is evident at the various levels of the organization and
assumes that all employees are compliant with requests from their managers. If
employees feel managers do not deserve his/her position this may lower a
managers ability to exercise legitimate power.
Reward power originates from a managers ability to withhold rewards from others.
The more valuable the reward available to a manager, the greater the level of
power derived from controlling it. Ignoring people or awarding insignificant rewards
can decrease the motivation of the workers affected by these actions.
Coercive power is concerned emotional or physical threats to ensure compliance. It
is the power to administer penalties that are not desired by an employee. (e.g. a
negative review of their work). It is not used very often and may sometimes be
implied than direct and can often result in a loss of motivation, hidden behaviour
and retaliation.
Personal power is a characteristic of the individual that stays with the individual
regardless of the position he/ she holds.
Expert power derives from the expert knowledge or information that an individual /
manager has amassed. It may arise at all levels of the organization.
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Referent power originates from the charisma or identification that a manger has
developed. It is visible through the actions of those who admire the manager, for
example, they may talk, and dress and act like the manager. Attempts to generate
this type of power can fail if it is viewed as manipulative.
Question 5
Part A
Services are intangible. Unlike physical products they cannot be seen, tasted, felt,
heard or touched before they are bought. To reduce uncertainty, buyers will look
for signs or evidence of their service quality. These are tangible cues. They will
draw inferences about quality from the place, people, equipment, communication
material, symbols and price they see. The marketers task is to manage the
evidence and to add tangibles to the intangibles. Service providers are challenged
to add physical evidence and imagery to their intangibles.
Services also have the characteristic of inseparability. Buyer provider interaction is
a special feature of services marketing. Services cannot be separated from their
providers. Customers participate in and affect the transaction. Customers affect
each other. Word of mouth is very important in the services industry. Employees
also play an important part in the service outcome.
Services also have a degree of perishability. Services cannot be stored. The
perishability of services is not a problem when demand is steady. When demand
fluctuates, service firms may have problems. It may be difficult to synchronise
supply and demand. Services cannot be returned or resold. This aspect of services
can be managed by good demand practice. For example, an airline will take off
whether or not the plane is full.
Services are also heterogeneous / variable in nature. Because they depend on who
provides them and when and where they are provided, services are highly variable.
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Service users are aware of this variability and often talk to others before selecting a
service provider. Many services cannot be provided by machines and therefore the
human factor is of great importance in delivering service quality humans cannot
function at peak efficiency at all times therefore service quality will vary from
customer to customer.
Also what one customer will perceive as good service, another will perceive as only
moderate. Service delivery and customer satisfaction also depend on employee
actions. Service quality depends on many uncontrollable factors. There is no sureknowledge that the service delivered matches what was planned and promoted.
Part B
Some of the benefits of the Internet as a distribution channel include; low cost of
distribution, customization, new market opportunities and to some extent better
relationship building.
The internet does transform industries and their business models and increases
competition.
There are also security, privacy, accessibility and legal issues associated with using
the Internet as a distribution medium.
Further some customers are wedded habitually to conventional approaches to
shopping and purchasing, whilst others may suffer from technophobia.
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Part C
Product pricing is influenced by a number of factors:
The costs of production
Costs set the floor price for a product. Costs include the cost of labour, rawmaterials and overheads. There is no way an organisation can sell products below
cost and stay in business in the long run.
The customer
The customer determines the highest price that can be charged; this is referred to
as the ceiling price. Market research must be undertaken to find out what
customers will be willing to pay for products
The competition
The competition that exists in the marketplace determines the actual level at which
the price will be set. If the customer sees an organisations product or service as
identical to the competitions product or service, he / she will be unwilling to pay a
higher price. Higher prices can only be charged if additional benefits are offered to
customers to justify the higher prices.
The organisations objectives
The objectives set by the organisation may also influence pricing policy. For
example, to obtain a quick return on investment, a higher price may be charged in
the early stages of the product life cycle. (Market skimming) If increased market
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share is the objective a lower price may be charged to penetrate the market
(Market penetration)
Government regulations and controls
Governments may interfere in the pricing decisions if they feel the company is
acting against the public interest, or abusing its market position (monopolies)
Question 6
Part A
Transaction processing systems (TPS) are information systems which exist to
support the day to day, or week to week, processing and recording of routine
business transactions such as Orders, Despatch Notes and Invoices. (e.g. cash
registers, atms , sales order processing systems etc.). Transaction processing
systems are primarily used by operational managers. However as TPS store the
pool of information in databases which may be accessed and manipulated in a
manner which provides meaningful insights that guide management decision-
making, they may be used indirectly by all levels of management.
They are generally designed to work with high volumes on a real time basis. (e.g.
online cinema seat sales, or on line airline ticket sales). They form the backbone of
the entities information processing systems and need to be fully secure andfunctional at all times.
Management information system (MIS) are systems which produce and
present information in order to satisfy the information needs of managers at
various levels in the organisation. They are systems that analyse/summarise
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existing data (usually from a database) and produce reports for management-level
staff. The reports generated by an MIS are usually:
- Periodic (e.g. a monthly sales report for the Galway branch)- Demand (e.g. an updated class attendance sheet showing all registered
students)
- Exception ( e.g. a report showing all rejected / refused credit card transactionsfor the last month; or a report showing all accounts more than two months
overdue)
Management are tasked with making the decisions that will decide how the
business will operate in the foreseeable future. They need to be able to drill down
into existing data sources to the level of detail required for the purpose. (e.g. to be
able to view sales by product, region, salesperson or some combination of these).
Decision support systems are complex systems used to help managers make
non-routine decisions. They generally consist of a model based on past
experience. Users can then use expected data (e.g. projected sales for next year),
to generate estimates for other factors (e.g. projected profits, etc.)
DSSs use various types of analysis, like what if (i.e. change in one element of
the model and see what happens to the result), and sensitivity (i.e. make small
changes to one element and see what happens to another element).
A spreadsheet model can be used as a simple but effective Decision Support
System.
Part B
Three broad criteria for undertaking feasibility studies include
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Economic feasibility
This involves assessing the economic/financial case for the proposal. It
encompasses an assessment of the tangible and intangible benefits and costs, and
an evaluation of the justifications.
Operational and Organizational feasibility
This involves assessing whether the organization has the necessary skills and
capabilities available to operate the system on a day to day basis. It involves
assessing the degree of fit of the programme and the level of disruption that will be
involved in implementing any change.
Technical feasibility
The main issue here is whether the organization is technically capable of developing
and operating the system (i.e. do they have the correct IT infrastructure, etc).
Part C
Direct Changeover
This is when the old system is turned off and the new system goes live straight
away. There is no change over period. This is fast and appears cheap, but has a
number of problems;
- there is no time to identify remaining problems with the new system. Ifsomething goes wrong, there is no fall back.
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- It will take time for users to get to know the new system, and this will meanthat productivity drops.
- When problems occur, it is often expensive to fix them.
Parallel Conversion
This is when both old and new systems run in parallel for a certain period of time
(the changeover period). This allows problems in the new system to be identified,and also allows time for users to familiarize themselves with the new system. But:
- running two systems in parallel is very resource intensive and can be complex
- there is a danger that users will just keep using the old system and neverengage with the old system.
Pilot Changeover
This is where the system is introduced in one location (or one department) only.
This can be viewed almost as a trial run, and once problems have been ironed out
the system will be rolled out to the rest of the company. The pilot location still has
to follow either a direct or parallel changeover method.
Question 7
Part A
Budgetary control refers to the analysis, recording and reporting on the activities
and financial well being of the organisation. It involves forecasting likely outcomes
of plans in an attempt to control the future for the organisation. It is a bread and
butter activity for the financial team, in that it ensures effective monitoring of
current activities, and gives invaluable information about performance in relation to
plans.
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Financial control of activities is vital to all organisations. Many smaller firms, for a
variety of reasons, such as lack of expertise or over-trading, opt for informal rather
than formal systems of control. This can be catastrophic for the small firm as the
true performance or profitability cannot be gauged.
Budgetary control requires that realistic profit and loss and cash flow forecasts are
prepared at the beginning of the period and that they be updated normally on a
quarterly basis as the year progresses. Due care and consideration is required ininterpreting variances from budget to ensure managers are held accountable for all
those matters that fall within their sphere of control
The cash flow forecast may be used to determine if company borrowing is required
or if surplus funds are likely to be available for re-investment. Comparing actual
performance against forecasted profit and loss account projections allows
management to monitor margins on a regular basis and to take appropriate
corrective action before deviations become too serious.
The process of budget formulation typically goes through the following stages:
- communication of details of budget policy and guidelines to the peopleresponsible for the preparation of budgets
- initial preparation of various budgets- negotiation of budgets with superiors- co-ordination and review of budgets- final acceptance of budgets- ongoing review of budgets
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Part B
Ordinary share capital
Ordinary shareholders are members of the company holding voting rights. They
own a share of the companys assets and a share of any profits earned after all
prior claims have been met.
Ordinary shares or Equity, as they are termed, are a permanent source of finance.
Ordinary shareholders provide seed capital to allow the business to develop and
grow. There are no fixed repayment or interest charges to be paid in the case of
equity. Equity also provides the owners with authority to influence policy and
direction.
Equity may be raised through offers for sale, public issues, placing, tender or rights
issues
Equity is generally regarded as an expensive source of finance when compared to
loan finance, as the dividends to equity holders are not tax deductible like loan
interest. Another disadvantage of equity is the potential change in the balance of
control between existing and new shareholders.
Debentures:
A debenture is a written acknowledgement of indebtedness by a company. Interest
is paid at a fixed rate, normally at half- yearly intervals. Debentures are not part of
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the share capital of a company and debenture holders are not members of the
company. A debenture holder is a creditor of the company. His interest is a debt
of the company, payable irrespective of whether there are profits or not.
Debentures may be redeemable or irredeemable. Redeemable debentures may be
an appropriate source of finance where a companys needs are temporary.
Redeemable debentures must be redeemed by a fixed date or within a given time
period. Irredeemable debentures are repayable only in the event of some specified
contingency, such as the winding-up of a company or default in the payment ofinterest.
Debentures may be secured or unsecured. Most debentures are secured by a
charge on the assets of the company. This charge may be fixed or floating. In the
case of a fixed charge, the security relates specifically to a particular asset or group
of assets. The company is not permitted to dispose of the asset or assets without
providing equivalent security, or without the prior approval of the debenture
holders.
The terms of the debenture and the rights and responsibilities of the parties
involved are set out in the Debenture Trust Deed. Matters outlined in this deed
must be complied with by the company. The Debenture Trust Deed will contain,
amongst others, the following:-
(1) Restrictions on additional lending.
(2) Matters pertaining to the disposal of assets on which the loan is secured.
(3) Insurance relating to the property on which the loan is secured.
(4) Provisions relating to the retention of title deeds of properties on which theloan is secured.
Preference Shares:
Preference shareholders have the right to a fixed dividend rate which is paid before
anything can be distributed to ordinary shareholders. They may be cumulative or
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non-cumulative. With non-cumulative preference shares, when profits are poor and
no preference dividend is paid in the year, the dividend is foregone forever. In the
case of cumulative preference shares previously unpaid dividends can be recouped
in future years. In order to make the preference shares more attractive, they may
be entitled to some further participation in the profits over and above their fixed
rate of dividend, after a certain rate of dividend has been paid to the ordinary
shareholders. This type of preference share is called a participating preference
share. Preference shares may also carry the right to priority with regard to
repayment of capital in the event of a company being wound up. A company mayissue redeemable preference shares which it can redeem at some future date. In
setting the dividend rate applicable to preference shares attention should be given
to current and anticipated future interest rates. Unlike interest payments,
preference dividends are not allowable expenses for taxation purposes. For this
reason they hold few attractions for the majority of companies and tend not to be
used as a source of finance.
Part C
Incremental Budgeting
An incremental approach to budgeting concentrates on the marginal change from
one period to another. The current year's estimates of expenditure and income are
used as the starting point for next year's budget. Obviously, new activities will be
incorporated in the new budget but the main weakness of this approach is its
failure to critically appraise the larger components of expenditure and to justify
continued funding support. A counter argument could be put forward that a
substantial part of the activities are mandatory or statutorily required and there is
no merit in undertaking a costly justification of the expenditure.
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Zero Based Budgeting
Zero based budgeting (ZBB) is the preparation of budgets from a zero base and
involves starting from scratch and building up a budget from knowledge of the
planned activities for the coming period. Nothing within the budget is sacrosanct
and this approach is radically different from incremental budgeting.