DEMAND CURVE

What is a Demand Curve?

The demand curve is a downward sloping economic graph that shows the relationship between quantity of
product demanded by a market and the price the market is willing to pay. Quantity Demanded is always
graphed horizontally on the x-axis while Price is graphed vertically on the y-axis.

What is demand curve in economics?

In economics, a demand curve is a graph depicting the relationship between the price of a certain commodity
(the y-axis) and the quantity of that commodity that is demanded at that price (the x-axis). ... It is generally
assumed that demand curves are downward-sloping, as shown in the adjacent image.

What Does Demand Curve Mean?

The curve demonstrates the Law of Demand, which states that as prices for a product increase, the quantity
demanded by consumers decreases. In other words, as the product becomes more expensive, less consumers
will want or be able to purchase it. The opposite is true for decreasing prices.

Example

Let‘s take Apple computer for example. In the 1980s there was an increasing demand for personal computers
in business and home use. Apple had several successful computer lines and decided to release the Lisa in
1983. It was extremely expensive. As such, the demand for this product was very low because consumers
weren‘t willing to pay that much for a personal computer at the time. If Apple could have lowered the price on
the Lisa, the demand would have increased and the product would have sold better.

As you can see, demand and price have an inverse correlation. As price increase, demand decreases because
consumers are unwilling or unable to pay for the product.

This is even true if someone truly desires a good or service, but they can‘t afford it. A good example of this is a
rare medicine or treatment for an illness. If you can‘t afford the treatment, you can‘t purchase it no matter how
much you demand it.

Low prices affect demand in the opposite way. A low price might encourage you to buy to or try something you
ordinarily wouldn‘t be interested in. Like if you also eat name brand cereal then one day you noticed a sale for
the generic brand, you may purchase the generic cereal because the cost is so low.

The concept of demand plays a large role in our everyday lives and the goods and services we consume

WHAT IS THE DEMAND CURVE?

The demand curve is a graphical representation of the relationship between the price of a good or service and
the quantity demanded for a given period of time. In a typical representation, the price will appear on the left
vertical axis, the quantity demanded on the horizontal axis.

UNDERSTANDING THE DEMAND CURVE

The demand curve will move downward from the left to the right, which expresses the law of demand — as the
price of a given commodity increases, the quantity demanded decreases, all else being equal.

Note that this formulation implies that price is the independent variable, and quantity the dependent variable. In
most disciplines, the independent variable appears on the horizontal or x-axis, but economics is an exception
to this rule.
For example, if the price of corn rises, consumers will have an incentive to buy less corn and substitute it for
other foods, so the total quantity of corn consumers demand will fall.

DEMAND ELASTICITY
The degree to which rising price translates into falling demand is called demand elasticity or price elasticity of
demand. If a 50 percent rise in corn prices causes the quantity of corn demanded to fall by 50 percent, the
demand elasticity of corn is 1. If a 50 percent rise in corn prices only decreases the quantity demanded by 10
percent, the demand elasticity is 0.2. The demand curve is shallower (closer to horizontal) for products with
more elastic demand, and steeper (closer to vertical) for products with less elastic demand.

If a factor besides price or quantity changes, a new demand curve needs to be drawn. For example, say that
the population of an area explodes, increasing the number of mouths to feed. In this scenario, more corn will
be demanded even if the price remains the same, meaning that the curve itself shifts to the right (D 2) in the
graph below. In other words, demand will increase.

Other factors can shift the demand curve as well, such as a change in consumers' preferences. If cultural
shifts cause the market to shun corn in favor of quinoa, the demand curve will shift to the left (D3). If
consumers' income drops, decreasing their ability to buy corn, demand will shift left (D3). If the price of a
substitute – from the consumer's perspective – increases, consumers will buy corn instead, and demand will
shift right (D2). If the price of a complement, such as charcoal to grill corn, increases, demand will shift left
(D3). If the future price of corn is higher than the current price, the demand will temporarily shift to the right (D2),
since consumers have an incentive to buy now before the price rises.

The terminology surrounding demand can be confusing. "Quantity" or "quantity demanded" refers to the
amount of the good or service, such as ears of corn, bushels of tomatoes, available hotel rooms or hours of
labor. In everyday usage, this might be called the "demand," but in economic theory, "demand" refers to the
curve shown above, denoting the relationship between quantity demanded and price per unit.

Exceptions to the Demand Curve

There are some exceptions to rules that apply to the relationship that exists between prices of goods and
demand. One of these exceptions is a Giffen good. This is one that is considered a staple food, like bread or
rice, for which there is no viable substitute. In short, the demand will increase for a Giffen good when the price
increases, and it will fall when the prices drops. The demand for these goods are on an upward-slope, which
goes against the laws of demand. Therefore, the typical response (rising prices triggering a substitution effect)
won‘t exist for Giffen goods, and the price rise will continue to push demand.

Other factors can shift the demand curve as well, such as a change in consumers' preferences. If cultural
shifts cause the market to shun corn in favor of quinoa, the demand curve will shift to the left (D3). If
consumers' income drops, decreasing their ability to buy corn, demand will shift left (D 3). If the price of a
substitute – from the consumer's perspective – increases, consumers will buy corn instead, and demand will
shift right (D2). If the price of a complement, such as charcoal to grill corn, increases, demand will shift left
(D3). If the future price of corn is higher than the current price, the demand will temporarily shift to the right (D2),
since consumers have an incentive to buy now before the price rises.

The terminology surrounding demand can be confusing. "Quantity" or "quantity

lesson
THE FUNDAMENTALS OF MANAGERIAL ECONOMICS
Managerial Economics is both conceptual and metrical. Before the substantive decision problems which fall
within the purview of managerial economics are discussed, it is useful to identify and understand some of the
basic concepts underlying the subject.
Managerial Economics can be defined as amalgamation of economic theory with business practices so
as to ease decision-making and future planning by management. Managerial Economics assists the
managers of a firm in a rational solution of obstacles faced in the firm‘s activities. It makes use of economic
theory and concepts. It helps in formulating logical managerial decisions. The key of Managerial Economics is
the micro-economic theory of the firm. It lessens the gap between economics in theory and economics in
practice. Managerial Economics is a science dealing with effective use of scarce resources. It guides the
managers in taking decisions relating to the firm‘s customers, competitors, suppliers as well as relating to the
internal functioning of a firm. It makes use of statistical and analytical tools to assess economic theories in
solving practical business problems.

Study of Managerial Economics helps in enhancement of analytical skills, assists in rational configuration as
well as solution of problems. While microeconomics is the study of decisions made regarding the allocation of
resources and prices of goods and services, macroeconomics is the field of economics that studies the
behavior of the economy as a whole (i.e. entire industries and economies). Managerial Economics applies
micro-economic tools to make business decisions. It deals with a firm.
The use of Managerial Economics is not limited to profit-making firms and organizations. But it can also be
used to help in decision-making process of non-profit organizations (hospitals, educational institutions, etc). It
enables optimum utilization of scarce resources in such organizations as well as helps in achieving the goals in
most efficient manner. Managerial Economics is of great help in price analysis, production analysis, capital
budgeting, risk analysis and determination of demand.
Managerial economics uses both Economic theory as well as Econometrics for rational managerial decision
making. Econometrics is defined as use of statistical tools for assessing economic theories by empirically
measuring relationship between economic variables. It uses factual data for solution of economic problems.
Managerial Economics is associated with the economic theory which constitutes ―Theory of Firm‖. Theory of
firm states that the primary aim of the firm is to maximize wealth. Decision making in managerial economics
generally involves establishment of firm‘s objectives, identification of problems involved in achievement of
those objectives, development of various alternative solutions, selection of best alternative and finally
implementation of the decision.

The following figure tells the primary ways in which Managerial Economics correlates to managerial
decision-making.
lesson
DEMAND AND SUPPLY
Supply and demand are economic are the economic forces of the free market that control what suppliers are
willing to produce and what consumers are willing and able to purchase.
The term supply refers to how much of a certain product, item, commodity, or service suppliers are willing to
make available at a particular price. Demand refers to how much of that product, item, commodity, or service
consumers are willing and able to purchase at a particular price.
In other words, supply pertains to how much the producers of a product or service are willing to produce and
can provide to the market with limited amount of resources available. Whereas, demand is how much of that
product or service the buyers desire to have from the market.

Law of Supply and Demand

Demand and supply play a key role in setting price of a particular product in the market economy. Since
demands of buyers are endless, not all that is demanded can be supplied due to scarcity of resources. This is
where the relationship of demand and supply plays a significant role, allowing efficient allocation of resources
and determining a market price for the product or service, known as equilibrium price. This price reflects the
price at which suppliers are willing to supply and the buyers are willing to buy from the market.
The mechanism of determining market price through demand and supply can be better understood by
observing the market economic theories.

Demand Curve
The quantity of a commodity demanded depends on the price of that commodity and potentially on many other
factors, such as the prices of other commodities, the incomes and preferences of consumers, and seasonal
effects. In basic economic analysis, all factors except the price of the commodity are often held constant; the
analysis then involves examining the relationship between various price levels and the maximum quantity that
would potentially be purchased by consumers at each of those prices. The price-quantity combinations may be
plotted on a curve, known as a demand curve, with price represented on the vertical axis and quantity
represented on the horizontal axis. A demand curve is almost always downward-sloping, reflecting the
willingness of consumers to purchase more of the commodity at lower price levels. Any change in non-price
factors would cause a shift in the demand curve, whereas changes in the price of the commodity can be traced
along a fixed demand curve.

Supply Curve
The quantity of a commodity that is supplied in the market depends not only on the price obtainable for the
commodity but also on potentially many other factors, such as the prices of substitute products, the production
technology, and the availability and cost of labor and other factors of production. In basic economic analysis,
analyzing supply involves looking at the relationship between various prices and the quantity potentially offered
by producers at each price, again holding constant all other factors that could influence the price. Those price-
quantity combinations may be plotted on a curve, known as a supply curve, with price represented on the
vertical axis and quantity represented on the horizontal axis. A supply curve is usually upward-sloping,
reflecting the willingness of producers to sell more of the commodity they produce in a market with higher
prices. Any change in non-price factors would cause a shift in the supply curve, whereas changes in the price
of the commodity can be traced along a fixed supply curve.

Supply & Demand means the amount of goods or services companies are willing to produce and the amount of
goods or services that consumers are willing to purchase.
lesson
Costs of Production and the Organization of the Firm
The firm's primary objective in producing output is to maximize profits. The production of output, however,
involves certain costs that reduce the profits a firm can make. The relationship between costs and profits is
therefore critical to the firm's determination of how much output to produce.
Cost of production refers to the total sum of money needed for the production of a particular quantity of output.
As defined by Gulhrie and Wallace, ―In Economics, cost of production features a special meaning. It is all about
the payments or expenditures essential to get the factors of production of land, labor, capital and management
needed to produce a commodity. It signifies the money costs which are to be incurred for acquisition of the
factors of production.‖ In the words of Campbell, ―Production Costs are the costs which should be essentially
received by resource owners so as to presume that they will continue to supply them in a specific period of
time.‖
Types of Costs of Production
To analyze and understand firms‘ production decisions it is important to know the different types of costs they
face during this process. There are a number of different types of costs of production that you should be aware
of: fixed costs, variable costs, total cost, average cost, and marginal cost. We will look at each of them in more
detail below.
Fixed Costs
Fixed costs are costs that don‘t change with the quantity of output produced. That is, they have to be paid even
if there is no production output at all.
Variable Costs
Variable costs are costs that change with the quantity of output produced. That is, they usually increase as
output increases and vice versa. Unlike fixed costs, variable costs are not incurred if there is no production.
Total Cost
Total cost describes the sum of total fixed costs and total variable costs. It includes all costs that are incurred
during the production process.
Average Cost
The average cost is defined as total cost divided by the quantity of output (i.e. the number of units produced).
This is an important factor when it comes to making production decisions because it tells us how much a
typical unit of output costs.
Marginal Cost
Marginal cost is defined as the cost of producing one more unit of output. That is, it tells us how much total cost
increases if an additional unit is produced.

The Organization of Firms

The purpose of this section is to discuss how firms are organized. Firm organization may affect the ability of
the firm to fulfill its goals by its impact upon financial capital and upon business choices of the firm.

Three different types of Firms:

1. Single Proprietorship
A single proprietorship is a firm that is owned by a single individual. Legally, the firm has no existence
apart from the individual. Hence, we can all become such a firm by simply declaring our existence as a
firm. Single proprietorships may have multiple employees but the single owner controls the firm.

2. Partnership
A partnership occurs when two or more individuals pool their assets and become joint owners of a firm.
Such a firm does require some form of partnership agreement between the joint owners but is relatively
easy to create. In a partnership, all owners make binding decisions for the firm.

3. Corporation
Corporations are firms that legally exist separate from their owners. Corporation scan legally do many
of the same things that individuals can do – sue and be sued, enter into contracts, and so forth. Of
course, there exist a few things that individuals can do that corporations cannot – marriage is one such
.

lesson
Goals of the Firm
Managerial economics is that part of economics applied to the decisions that managers must make. When
managers make decisions that maximize firm profits, they simultaneously maximize shareholder wealth and
promote efficient allocation of resources. Sometimes managers aim at objectives other than profit, such as their
own security. To avoid non-profit maximizing behavior, a growing number of firms are structuring compensation
plans for managers that promote long-term profitability.
A. Shareholder Wealth Maximization
1. To align the interests of the shareholders of Salomon Brothers with the interests of its chairman, Deryck
Maughn, most of the chairman's compensation is based on the performance of the company relative to its
five major competitors.
2. Executive compensation is based on Salomon Brothers' return on equity and return on equity of their
competitors. The bonus can be as large as $24 million.

B. Managerial Economics and Economic Theory

1. Managerial Economics extracts the parts of economics, particularly microeconomics, useful for making
decisions faced by managers: pricing, production, cost analysis, market structure, and strategy.
2. Microeconomics--deals with economics of micro units: individuals, households, firms or industries.
3. Macroeconomics--studies market aggregates, such as whole countries, the market for all labor, inflation,
business cycles, and unemployment.
4. The traditional definition of economics: "The science of allocating scarce resources among competing
ends." For-profit firms as well as not-for-profit (NFP) organizations face a variety of trade-offs.
5. Steps in decision making include: Establish and identify objectives, define the problem, find possible
alternative solutions, select the best solution, and implement that choice.

C. The Role of Profits

1. Economic cost (or opportunity cost) is the highest valued benefit that must be sacrificed as a result of
choosing an alternative.
2. Economic profit is the difference between revenues and total economic cost (including the economic or
opportunity cost of owner supplied resources such as time and capital).
3. Theories of why profit varies across industries:
a. RISK-BEARING THEORY. A compensation for investing in riskier endeavors. Example: investing in the
stock of Circus Circus.
b. DYNAMIC EQUILIBRIUM (OR FRICTIONAL) THEORY OF PROFIT. Industries earning above normal profits
(economic profits) will eventually find more competition. Added competition will bring profits back to
normal (zero economic profits) over time. Competition directs resources to industries with the greatest
profit.
c. MONOPOLY THEORY OF PROFIT. Barriers, such as governmental regulations, are the source of higher
than normal profits.
d. INNOVATION THEORY OF PROFIT. There is a reward for developing new ideas, new construction
technologies, and for finding new markets.
e. MANAGERIAL EFFICIENCY THEORY OF PROFIT. Exceptional managerial skills can produce superior profits.
4. Circus Circus, a Las Vegas casino and hotel, earned exceptionally high returns in 1994, but a similar firm,
Bally's, earned rather low returns. High average returns tend to occur in industries with high risk.
D. Objective of the Firm
1. Profit maximization as a goal implies that decisions that raise revenues more than costs or lower costs
more than reduce revenues should be selected. This is a short term objective.
2. Shareholder wealth maximization as a goal implies that decisions that increase the present value of
expected future profits should be selected. Even decisions that reduce today's profits, yet substantially
raise future profits, may be appropriate decisions. This is a long-term business goal.

E. Managerial Actions to Influence Shareholder Wealth

1. Some determinants of profits are outside the direct control of managers. Economic Environment Factors
include the level of economic activity (recession or boom), tax rates, competition, governmental regulations,
unionization, and international economic exposure. Also Conditions in Financial Markets such as interest
rates, investor sentiment, and anticipated inflation affect profitability.
2. Other determinants of profits are within the direct control of managers. Major Policy Decisions include
product mix, production technology, marketing network, investment strategies, employment policies and
compensation, form of organization, capital structure (use of debt versus equity), working capital
management, and dividend policies.

F. Agency Problems and Alternative Objectives for the Firm

1. Modern corporations allow the managers to have no, or limited, ownership participation in the profitability of
the firm. Shareholders may want profits, but managers may wish to relax. The shareholders are principals,
whereas the managers are agents. Conflicting motivations between these groups are called agency
problems.
2. Solutions to agency problems involve compensation that is based on the performance of agents. Some
firms are experimenting with compensation plans by extending to all worker‘s stock options, bonuses, and
grants of stock, so that employees have added incentives to increase their company's value.

G. Implications of Shareholder Wealth Maximization

1. Critics claim that aligning compensation with shareholder interests leads to short run objectives.
2. Maximization of the present value of expected cash flows works well if the following conditions are met:
a. COMPLETE MARKETS -- there are liquid markets to buy and sell the firm's inputs, contaminants (including
polluting by-products), and common property resources.
b. NO SIGNIFICANT ASYMMETRIC INFORMATION -- buyers and sellers all know the same things.
c. KNOWN RECONTRACTING COSTS -- future input costs are part of the present value of expected cash
flows. The existence of future and forward markets in inputs can help lock-in future input costs.

3. The Saturn Corporation offers an example of an initially successful new car company that faced meager
profits over time. Its low price provided low profit margins for Saturn. Low returns lead to less reinvestment
into new models. Middle-aged Saturn buyers traded up to larger Japanese imports.

H. Goals in the Public Sector and the Not-For-Profit (NFP) Enterprise

1. NFP organizations such as performing arts groups, most hospitals, universities, and volunteer organizations
receive a substantial portion of their financial support from contributions, and some support from "clients"
who use their services.
2. Instead of profit, NFP organizations may have as their goals:
a. Maximization of the quantity of output, subject to a breakeven constraint.
b. Maximization of the utility (happiness) of NFP administrators.
c. Maximization of cash flows.
d. Maximization of the utility of contributors to the NFP organization.
 3. Which goal that the NFP manager selects affects the types of decisions made. A manager of a food shelter
may decide to maximize the utility of contributors or donors by selecting only "healthy foods" to give to
clients; or may decide that the objective is to give out the greatest volume of food possible (not necessarily
the most nutritious).
4. Public sector managers are frequently monitored with regard to how they perform their jobs. If reducing the
cost per bed over a year rewards a VA hospital administrator, then the administrator may become quite
efficient with respect to costs. However, the "friendliness" of the hospital staff is harder to measure, so
friendliness will tend not be a high priority of the public sector manager.
5. In contrast, in the for-profit hotel business, perceptions about the friendliness of the hotel staff have a direct
effect on repeat business and profits.

I. Managing a Globally Competitive Economy

1. Managerial innovations, such as "just-in-time" inventory methods, efficient transfer pricing, and total quality
management concepts can be learned by observing successful competitors in the U.S. or abroad. Global
managers need to be up-to-date with the tools of managerial economics to compete and win in the world
marketplace.

What are the goals of the firm in financial management?

In finance, the goal of the firm is always described as "maximization of shareholders' wealth".
Profit Maximization - is always used as a goal of the firm in microeconomics. Focus on short term goal to be
achieved within a year. It stresses on the efficient use of capital resources.
What are the objectives of a firm in managerial economics?
In the conventional theory of the firm, the principal objective of a business firm is profit maximization. Under
the assumptions of given tastes and technology, price and output of a given product under perfect competition
are determined with the sole objective of maximizing profits.

Five main goals of the firm:

1. The Production Goal

should represent that volume of production which comes nearest to satisfying food requirements and yet
which is capable of achievement by farmers. It is a quantity which represents a compromise between
prospective demand and feasible supply.

2. The Inventory Goal

Inventory goal is essential for a business to succeed. Good management of your company‘s stock
decreases excess inventory and ensures that you have enough product on hand to meet customer
demand. Develop an inventory management plan to streamline ordering and reduce wasted time on
inventory control.

3. The Level of Sales goal

In certain periods of time—every day, week, month, or year—sales agents have set amounts that they
target to achieve, these are what they know as their sales goal or quota. These goals or quotas are
used by companies to inculcate in each agent what his or her role in the company is. Also, these
numbers are what higher-ups use to determine each agent‘s commission.

4. The Market-share goal

The ultimate goal of any small business marketing plan. Small businesses enter their industries as the
underdogs, taking any competitive advantages they can to gain customers from their established
competitors.
 5. The Profit goal
Profit goal is the most important— some might say the only objective of a business. Profit measures
success. It can be defined simply: Revenues - Expenses = Profit. So, to increase profits you must raise
revenues, lower expenses, or both. To make improvements you must know what's really going on
financially at all times. You have to watch every financial event without any kind of optimistic filter.
Recession - a period of temporary economic decline during which trade and industrial activity are reduced,
generally identified by a fall in GDP in two successive quarters

GDP per capita is a measure of a country's economic output that accounts for its number of people. It divides the
country's gross domestic product by its total population. That makes it the best measurement of a country's
standard of living. It tells you how prosperous a country feels to each of its citizens.

What is the difference between GDP and GDP per capita?

GDP is gross domestic product, the total economic output of a country, i.e., the amount of money a country
makes. GDP per capita is the total output divided by the number of people in the population, so you can get a
figure of the average output of each person, i.e., the average amount of money each person makes
lesson
SUPPLY CURVE
Supply curve, in economics, graphic representation of the relationship between product price and quantity of
product that a seller is willing and able to supply. Product price is measured on the vertical axis of the graph
and quantity of product supplied on the horizontal axis

Supply is a fundamental economic concept that describes the total amount of a specific good or service that
is available to consumers. Supply can relate to the amount available at a specific price or the amount available
across a range of prices if displayed on a graph
Supply of goods and services

Price is what the producer receives for selling one unit of a good or service. Economists call this positive
relationship between price and quantity supplied—that a higher price leads to a higher quantity supplied and a
lower price leads to a lower quantity supplied—the law of supply.

What do you mean by shift in supply curve?

The shift to the left shows that, when supply decreases, firms produce and sell a smaller quantity at each price.
The upward shift represents the fact that supply often decreases when the costs of production increase, so
producers need to get a higher price than before in order to supply a given quantity of output.

What are the types of supply in economics?

There are five types of supply:

 Market Supply:
Market supply is also called very short period supply.
 Short-term Supply:
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 Long-term Supply
 Joint Supply
 Composite Supply

Supply of a Commodity: Meaning, Factors Affecting and Types:

Meaning of Supply
In economics, supply during a given period of time means, the quantities of goods which are offered for sale at
particular prices.

The supply of a commodity is the amount of the commodity which the sellers or producers are able and willing
to offer for sale at a particular price, during a certain period of time.

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In other-words, we can say that supply is a relative term. It is always referred to in relation of price and time. A
statement of supply without reference to price and time conveys no economic sense. For instance, a statement
such as ―the supply of milk is 1,000 liters‖ is meaningless in economic analysis.
One must say, ―the supply at such and such a price and during a specific period.‖ Hence, the above statement
becomes meaningful if it is said—‖at the price of R s. 12 per liter; a diary farm‘s daily supply of milk is 1000
liters. Here both price and time are referred with the quantity of milk supplied.‖

Further, elasticity of supply explains to us the reaction of the sellers due to a particular change in the price of a
commodity. If due to a little rise in the price, supply increases considerably we will call it elastic supply. On the
other-hand, supply changes a little or negligibly, it is less elastic.

Definition of Supply

According to J. L. Hanson – ―By supply is meant that amount that will come into the market over a range of
prices.‖
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In short supply always means supply at a given price. At different prices, the supply may be different. Normally
the higher the price, the greater the supply and vice-versa.

According to Prof. Thomas – ―The supply of a commodity is said to be elastic when as a result of a change in
price the supply changes sufficiently as a quick response. Contrary, if there is no change or negligible change
in supply or supply pays no response, it is inelastic.‖

Prof. Thomas‘s definition tells us proportionate changes in price and quantity supplied is the concept of
elasticity of supply. If as a result of small change in price change in supply is more proportionately it will be
higher elastic supply.

Stock Relationship

Stock are related to each other in distinct terms:

1. Stock is the Determinant of Supply:

ADVERTISEMENTS:

Supply is what the seller is able and willing to offer for sale. The ability of a seller to supply a commodity
depends on the stock available with him. Thus, stock is the determinant of supply. Supply is the amount of
stock offered for sale at a given price. Therefore, stock is the basis of supply. Without stock supply is not
possible.

2. Stock Determines the Actual Supply:

Actual supply is the stock or quantity actually offered for sale by the seller at a particular price during a certain
period. The limit to maximum supply, at a time, is set by the given stock. Actual supply may be a part of the
stock or the entire stock at the most. Thus, the stock can exceed supply but supply cannot exceed the given
stock at a time.

3. Stock can be said as the Outcome of Production:

It is very common to understand that by increasing production as well as the potential supply, the stock can be
increased. Sometimes, an increase in the actual supply can exceed the increase in current stock, when along
with the fresh stock, old accumulated stock is also released for sale at the prevailing price.

In this way, supply can exceed the current stock, but it can never exceed the total stock (old + new stock taken
together) during a given period.
Factors Affecting Supply

There are a number of factors influencing the supply of a commodity. They are known as the determinants of
supply.

Important factors are as follows:

1. Price of the Commodity:
Price is the most important factor influencing the supply of a commodity. More is supplied at a lower price and
less is supplied at a higher price.

2. Seller’s Expectations about the Future Price:

Seller‘s expectations about the future price affect the supply. If a seller expects the price to rise in the future,
he will withhold his stock at present and so there will be less supply now. Besides change in price, change in
the supply may be in the form of increase or decrease in supply.

3. Nature of Goods:
The supply of every perishable goods is perfectly inelastic in a market period because the entire stock of such
goods must be disposed of within a very short period, whatsoever may be the price. If not, they might get
rotten. Further, if the stock of goods can be easily stored its supply would be relatively elastic and vice-versa.

4. Natural Conditions:
ADVERTISEMENTS: The supply of some commodities, such as agricultural products depends on the natural
environment or climatic conditions like—rainfall, temperature etc. A change in the natural conditions will cause
a change in the supply.

5. Transport Conditions:
Difficulties in transport may cause a temporary decrease in supply as goods cannot be brought in time to the
market place. So even at the rising prices, quantity supplied cannot be increased.

6. Cost of Production:
If there is a rise in the cost of production of a commodity, its supply will tend to decrease. Similarly, with the
rise in cost of production the supply curve tends to shift downward. Conversely, a fall in the cost of production
tends to decrease the supply.

7. The State of Technology:

The supply of a commodity depends upon the methods of production. Advance in technology and science are
the most powerful forces influencing productivity of the factors of production. Most of the inventions and
innovations in chemistry, electronics, atomic energy etc. have greatly contributed to increased supplies of
commodities at lower costs.

8. Government’s Policy:
ADVERTISEMENTS: Government‘s economic policies like—industrial policy, fiscal policy etc. influence the
supply. If the industrial licensing policy of the government is liberal, more firms are encouraged to enter the
field of production, so that the supply may increase.

Import restrictions and high customs duties may decrease the supply of imposed goods but it would encourage
the domestic industrial activity, so that the supply of domestic products may increase. A tax on a commodity or
a factor of production raises its cost of production, consequently production is reduced. A subsidy on the other-
hand provides an incentive to production and augments supply.
Types of Supply

There are five types of supply:

1. Market Supply:
Market supply is also called very short period supply. Another name of market supply is ‗day-to-day supply or
‗daily supply‘. Under these goods like—fish, vegetables, milk etc., are included. In this supply is not made
according to the demand of purchasers but as per availability of the goods.

2. Short-term Supply:
ADVERTISEMENTS: In short period supply, the demand cannot be met as per requirements of the purchaser.
The demand is met as according to the goods available

3. Long-term Supply:
In this, if demand has been changed the supply can also be changed because there is sufficient time to meet
the demand by making manufacturing goods and supplying them in the market.

4. Joint Supply:
Joint supply refers to the goods produced or supplied jointly e.g., cotton and seed; mutton and wool. In joint
supplied products one is the main product and the other is the by-product of its subsidiary. By-product is mostly
the automatic outcome when the main product is produced.

For example:

ADVERTISEMENTS: When the sheep is slaughtered for mutton wool is obtained automatically.

5. Composite Supply:
In this, the supply of a commodity is made from various sources and is called the composite supply. When
there are different sources of supply of a commodity or services, we say that its supply is composed of all
these resources. We normally get light from electricity, gas, kerosene and candles. All these resources go to
make the supply of light. Thus, the way of supplying the light is called composite supply.
Historical Evolution of operations Management
In the last century, operations management has experienced more changes than any other functional area of
business and is the most important factor in competitiveness. This is a chronology of major themes that have
changed the scope and direction of operations management:

FOCUS ON EFFICIENCY

OM has its roots in the Industrial Revolution that occurred during the late 18th and early 19th centuries in
England. Until that time, goods had been produced without the aid of mechanical equipment. During the
Industrial revolution many inventions came into being that allowed goods to be manufactured with greater ease
and speed; it lead to the development of modern factories. As international Trade grew the emphasis on
operations efficiency and cost reduction increased. Many companies moved their factories to low-wage
countries. Technology was viewed primarily as a method of reducing costs and distracted from the importance
of improving quality.

QUALITY REVOLUTION

US consultants told Japanese executives that continual improvement of quality would open world markets, free
up capacity and improve the economy. They embarked on a massive effort to train the workforce, using
statistical tools to identify causes of quality problems and fix them; so that the made steady progress in
reducing defects and paid attention to consumer‘s needs. Thanks to this progress Japanese good were seen
as more reliable and better met consumer‘s needs, then Japanese firms captured major shares of world
market. Therefore, quality became an obsession with top managers.

CUSTOMIZATION AND DESIGN

As the goals of low cost and high quality became ―given‖, companies began to emphasize innovative designs
and product features to gain a competitive edge. Quality meant much more than simply defect reduction;
quality meant offering consumers new and innovative products, not only meeting their needs but surprising and
delighting them. Inflexible mass production methods that produced high volumes of standardized goods and
services using unskilled or semiskilled workers and expensive single-purpose equipment, thought very efficient
and cost effective, were inadequate for the new goals of increased G&S variety and improvement.

TIME –BASED COMPETITION

Companies have to respond quickly to changing customer needs to win competitive advantage. That task
includes developing products faster than competitors, speeding ordering and delivering process, rapidly
responding to changes in customers‘ needs and improving the flow of paperwork. As information technology
matured, time became an important source of competitive advantage.

SERVICE REVOLUTION

While the goods-producing industries were getting all the attention in the business community, the popular
press and in business school curricula, service industry were quietly growing and creating many jobs. Today
about four out of five jobs in the US are in the service sector.
INTRODUCTION AND OVERVIEW
Management: An Overview

Management is the act of getting people together to accomplish desired goals and objectives using available
resources efficiently and effectively. Since organizations can be viewed as systems, management can also be
defined as human action, including design, to facilitate the production of useful outcomes from a system. This
view opens the opportunity to manage oneself, a pre-requisite to attempting to manage others.
Operations management is the administration of business practices to create the highest level of efficiency
possible within an organization. It is concerned with converting materials and labor into goods and services as
efficiently as possible to maximize the profit of an organization

 What are the functions of operations management?

Operations management (OM) is the business function responsible for managing the process of creation of
goods and services. It involves planning, organizing, coordinating, and controlling all the resources needed to
produce a company's goods and services.

 What is Operations Management and why is it important?

Operations management involves planning, organizing, and supervising processes, and
make necessary improvements for higher profitability. The adjustments in the everyday operations have to
support the company's strategic goals, so they are preceded by deep analysis and measurement of the current
processes.

What skills are needed for operations management?

 Strong communication skills.

 Good motivational skills.
 Strong negotiation skills.
 Exceptional organizational skills.
 Awareness of internal and external customer needs.

Management functions include:

Planning, organizing, staffing, leading or directing, and controlling an organization (a group of one or more
people or entities) or effort for the purpose of accomplishing a goal.
There are several different resource types within management. Resourcing encompasses the deployment and
manipulation of:
 Human resources
 Financial resources
 Technological resources
 Natural resources
DIFFERENT TYPES OF MANAGEMENT STYLES

There are different types of management styles, and the management process has changed over recent years.
The addition of work teams and servant leadership has changed what is expected from managers, and what
managers expect from their employees

1. Authoritarian management styles

The authoritarian management style involves managing through clear direction and control. It is also
sometimes referred to as the autocratic or directive management style. Authoritarian managers typically assert
strong authority, have total decision-making power, and expect unquestioned obedience.

This type of management style requires clearly defined roles and strict hierarchies and reporting structures.
Employees should not have to question who is responsible for what. To be an effective authoritarian leader,
you need to be willing and able to consistently stay up-to-date on your teams‘ work and to make any and all
decisions.

Bill Gates is an example of a positive authoritarian leader. He had a clear plan for his company. A plan that
was difficult or impossible for many others to grasp until it became a reality and Microsoft became a household
name.

Without being able to see and share what he had in mind, Gates couldn‘t entrust his team to make decisions
on their own. Which is why he directed the team and maintained the decision-making power.

Pros

 In the right environment, an authoritarian management style has been shown to positively affect
employee performance.
 The best environment for authoritarian management typically includes a traditional culture, such as that
commonly found in China and some other Asian countries. These cultures have a high power distance,
where employees expect higher-level people to have more power and tend to automatically defer to
those in higher positions.
 Authoritarian management style can also be effective if you have new or inexperienced employees who
need a lot of guidance and instruction.
Cons

 It‘s important to note that if taken to the extreme, an authoritarian style can easily create a negative
workspace.
 For instance, if you try to hold on to control too tightly, it can lead to micromanagement, which will drive
away your best employees.
 Maintaining total control of all decision-making can also require a great deal of time and effort. If you‘re
overseeing large and/or complex projects, this can be incredibly difficult to manage.

2. Visionary management styles

The visionary management style is also sometimes called inspirational, charismatic, strategic, transformational,
or authoritative. Visionary managers focus on conveying the overall vision of the company, department, or
project to their team.
Unlike authoritarian managers, visionary managers don‘t involve themselves in the day-to-day details. Instead,
they focus on motivation and alignment of the team, to keep everyone moving in the same direction, and
entrust their team members to handle the details about how to get there.

If you are naturally a charismatic, outgoing, and personable leader, you may find this style easy to adopt.
However, it can be more challenging for introverts or people who are uncomfortable in the limelight. It also
requires a great deal of emotional intelligence, a willingness to take risks, and the ability to lead and manage
change.

A well known visionary leader is Nelson Mandela. Mandela was the face and leader of the Anti-Apartheid
movement. Through his determination and force of will, Mandela successfully led his country of South Africa to
liberation. By relying on his charismatic nature and important vision, he motivated people to bring change
without dictating their actions.

Pros

 One of the advantages of visionary management is that it helps motivate employees to work toward
common goals and solutions.
 If your team culture is currently divided, a visionary approach may be useful for getting everyone back
on the same page. Visionary management is also often used when a company or team needs to
change.

Cons

 A disadvantage of visionary management style is that the lack of focus on the detail can lead to
problems, especially if your team members are inexperienced or new.
 For this reason, visionary management is typically better for experienced, professional teams. People
who are already knowledgeable and capable enough to do their work with little or no supervision.

3. Transactional management styles

Transactional management style focuses on using positive rewards such as incentives, bonuses, and stock
options to motivate employees to improve their performance. For instance, transactional managers may rely on
piece-work pay to incentivize their employees to produce more. Similarly, they may structure quarterly or
annual bonuses around employee performance.

Transactional management style is founded on the belief that you can successfully manage and motivate
employees through extrinsic rewards.

Sean Gilbert is one of the co-owners of Gilbert Orchards in Yakima. Gilbert uses piece work pay and supports
it as a means of driving higher productivity.

However, there are now numerous lawsuits and class action cases against the state‘s tree fruit companies,
claiming that piece work pay is unfair and not in line with minimum wage laws. This conflict and rise in legal
action may make many leaders hesitant to rely solely on transactional management to drive performance.
Pros

 Transactional management style tends to be effective for short periods, where you need to motivate
your team to complete work they don‘t want to do. For instance, if you need them to work overtime for a
couple of weeks to finish a project on time, offering an extrinsic reward can be effective.

Cons

 Studies show that extrinsic rewards are less effective than intrinsic ones, particularly in the long run. In
fact, they can negatively impact employee motivation if used too heavily or for too long.
 If you want to increase your team‘s workload or hours indefinitely, transactional management will not be
successful. It‘s also not suitable for promoting creativity or innovation, as rewards are tied directly to
known results.

4. Servant Leadership management styles

The phrase ―servant leadership‖ was originally coined back in 1970 by Robert K. Greenleaf in an essay titled
―The Servant as Leader.‖ This management style is also sometimes called coaching, training, or mentoring.

A servant management style focuses on supporting your employees. Managers who embrace this style spend
their time, coaching, mentoring, and supporting their team. They see their role as one of an adviser or coach
rather than a dictator or rule enforcer.

In order to be an effective servant leader, you need to be highly experienced both in the jobs of your
employees and in performing coaching. Strong interpersonal skills are needed in order to relate well with your
team and build a mentoring relationship. For your team to trust you and open up to you, you will need to show
them you are ethical and trustworthy.

Jack Ma, the Executive Chairman of Alibaba Group, is a well-known example of someone with a servant
leadership management style. Ma is a champion of philanthropic efforts and is recognized as a leader who is
highly supportive of his employees. Ma prizes emotional intelligence and fostering love and support among his
employees in order to achieve greatness.

Pros

 The servant leader management style is effective for helping your team develop and advance
professionally. It also helps create a strong bond between employee and manager and can promote
greater trust, bonding, and collaboration.
 The focus of servant leadership is not to discipline but to help people learn from their mistakes and
improve their own performance. If you have a team of highly-skilled professionals, this leadership style
can help them reach new levels of performance and productivity.

Cons

 One of the disadvantages of this management style is that it can be ineffective for some employees.
For instance, if you have negative employees that are unmotivated, negative, and/or simply a bad fit for
their role, trying to support and coach them may waste both of your time.
  Also, by focusing on learning opportunities and improvement, you effectively communicate that output
is not as high on your priority list, as long as people gave it a genuine attempt. While this can be
successful for process improvement, innovation, and other cyclical initiatives, it can cause problems if
your team is producing physical products or providing customer service.
 This management style also typically requires more of your time, since you have to spend some time in
one-on-one meetings with your employees in order to effectively coach and support them. If your time
is limited or the quality of your output is more important than the happiness and well-being of your
employees, then this style is not ideal.

5. Pacesetting management styles

Pacesetting management style embodies leading from the front of the pack. As a manager, you provide
instructions and set a work pace, and then expect your employees to follow in your footsteps.

Typically, pacesetting involves setting high or hard to reach standards in an effort to drive your team to achieve
new bests and hit bigger goals.

For it to be successful, you will need to be capable of setting a pace that is challenging for your team. You will
also need to ensure that they are motivated enough to try to match your pace.

Jack Welch, once the CEO of General Electric, is a prime example of a persistent and demanding pacesetter.
While he effectively led the company for twenty years, he did earn some negative press and the nickname
―Neutron Jack‖ for setting an exacting pace and cutting 25% of the company‘s jobs over a four year period.

Pros

 If your team is capable and motivated, this style can lead to greater productivity and a healthy sense of
competition and accomplishment. It is most effective when you have a single big challenge to tackle or
a short-term goal to reach.
 Research by Harvard Business Review shows that the majority of teams should avoid implementing
stretch goals. However, they did find that effective but complacent teams can benefit from their use.
 In other words, if you have an effective team that you know is not living up to its potential, adopting a
pacesetting management style can be an effective way to get them out of a comfortable rut.

Cons

 If you‘re consistently pushing your team to meet stretch goals, you can cause them to burn out. Plus, if
your team is not capable of meeting your standards, you could end up setting them up for failure. And
the inability to reach the goals and targets provided can result in a loss of motivation, and lower morale.
 This management style also emphasizes personal accomplishments, so it can create divisions and
resentment among the team. For instance, if only one or two members are able to keep up with your
pace, the others could become bitter and resentful.

6. Democratic management styles

A democratic management style is also sometimes referred to as consultative, consensus, participative,

collaborative, or affiliative style. This style is based on the philosophy that two heads are better than one and
that everyone deserves to have a say, no matter what their position or title.
Managers who adopt a democratic style encourage idea sharing and regular employee participation. The focus
is on encouraging your team to share their thoughts, ideas, suggestions, and potential solutions in order to
help each other, and the company grow.

In a democracy, you as the manager, retain the final decision-making authority, but you seek out and take into
account the thoughts, ideas, and recommendations of your team before making any decision.

Ray Dalio refers to this type of group as one where an idea meritocracy exists – the best idea wins, no matter
who‘s idea it is. Dalio is the founder of Bridgewater Associates, a global leader in institutional portfolio
management and the largest hedge fund in the world. Dalio values independent thinking and encourages every
employee in the company, no matter how new or how junior, to put forward new ideas and suggestions.

Pros

 A democratic leadership style helps your employees feel valued and heard. It can also encourage them
to solve their own problems and come up with innovative new ideas. By asking for their input, you‘re
effectively encouraging your team members to think for themselves and to take on more responsibility
for team decisions and outcomes.
 Plus, by seeking out the ideas of others, you can arrive at better solutions and achieve greater results
than if you‘re making decisions in isolation.

Cons

 The biggest downside of democratic management is that it takes time. If you‘re often in a scenario
where a decision needs to be made quickly, you won‘t have time to seek out and consider the
suggestions of the team.
 Another issue is that employees can become frustrated or resentful if they feel like you‘re not truly
taking their ideas into consideration. For instance, if you never appear to go with Bobby‘s suggestions,
it could result in his feelings being hurt.
 To avoid this, you will need to either promote anonymous suggestions, to remove the possibility of
favoritism, or become adept at facilitating discussions and helping your team focus on valuable idea
creation and sharing without emphasizing who came up with what.

7. Laissez-Faire management styles

The laissez-faire management style emphasizes employee freedom. Laissez-faire originates from French and
directly translates to ―let do‖ in English. In other words, laissez-faire managers let their employees do what they
will, with little to no interference.

Within the laissez-faire management style, there is no oversight provided during the creation or production
process. Laissez-faire managers promote self-directed teams, and typically only get involved if something goes
wrong or the team requests it.

In a smoothly operating team, a laissez-faire manager will only appear present at the beginning and the end of
the work process. At the beginning, to provide guidelines, share information, and answer questions. And at the
end to review the outcome(s) of the team and provide advice or recommendations about how the team can do
even better next time.
Google uses laissez-faire management as a means of promoting employee creativity and innovation. Google
Founders Larry Page and Sergey Brin created ―20 percent time‖ way back in 2004. While the rule has changed
over time, in essence, management allows employees a portion of their paid work hours to focus on whatever
project they want, without any management oversight.

This freedom enables employees to focus on work they are passionate about and to experiment with creative
new ideas. Hugely successful innovations such as AdSense, Gmail, and Google Maps can all be attributed to
this ―20 percent time.‖

Pros

 If you have a team of highly-skilled professionals, they may thrive with the freedom that a laissez-faire
approach provides.
 This management style can result in a high level of job satisfaction and high productivity for teams who
enjoy the autonomy it provides. It can also help boost innovation and creativity throughout your
organization.

Cons

 If your team is not self-motivated, is not skilled enough to solve problems on their own, or struggles to
manage their own time, laissez-faire can result in missed deadlines and poor quality work.
 The lack of oversight inherent to this style is not appropriate for teams that cannot self-manage. It is
also risky on large and/or critical projects, as you may not become aware of issues until it‘s too late.

This is a lot to take in, isn‘t it? What about your employees? Which management style will work best for them?
Which is right for you?

Your perfect management style needs to align with the following:

• Your own skills, experience, and personality. For instance, you may struggle to be a pacesetter if you‘re not a
subject matter expert.

• The needs of your team. Is your team new and inexperienced? Or are they highly-skilled professionals? The
answer will impact which management style you should adopt.

• The culture. The culture of your team and the organization as a whole needs to impact your style. For
instance, if your company is currently undergoing a lot of change, you may need to be a visionary. If you have
a divided and unmotivated team, you may need to be a servant leader.

The problem is that the vast majority of managers aren‘t asking themselves which management style is the
right fit. They‘re simply adopting the one they‘re most familiar with, most comfortable with, or the one they‘ve
been told to exhibit.

This inflexibility inevitably leads to disaster.

The most successful managers understand that you need different styles for different scenarios and different
projects. You may even need different styles for different members of your team.
A new junior employee may need an authoritarian style until they become comfortable with the job. While your
senior employee who is highly motivated and reliable may thrive under a laissez-faire management style.

Amazing managers craft their approach around their audience and can fluidly switch between styles as
situations change.

When your team isn‘t engaged, that results in:

• Lower productivity

• Poorer quality of work

• Dramatically increased turnover

• More issues with theft and absenteeism

• Reduced profitability

The bottom line is that the wrong management style de-motivates employees, kills productivity, and trains
employees to disengage or leave. Hurting the entire organization.
Operations Management Strategy framework
The Role and Purpose of Operations Strategy

Operations strategy is only one part of overall business or corporate strategy, but it‘s crucial for
competitiveness and success. Without a strong operations strategy, companies fail to keep up with changing
markets and lose out to more strategic competitors. Many companies, big and small, have struggled with
operations strategy, often lacking in comparison with technologically savvy competitors. For example, Amazon,
while constantly advancing technology such as drones for delivery, has pushed aside myriad brick-and-mortar
retailers.

What does brick and mortar retailers mean?

Brick and mortar (also bricks and mortar or B&M) refers to a physical presence of an organization or
business in a building or other structure. The term brick-and-mortar business is often used to refer to a
company that possesses or leases retail shops, factory production facilities, or warehouses for its operations

To be effective and competitive, all parts of a company must work together. All departments should contribute
to the company mission and have strategies underlying the overall corporate/business strategy. In addition to
having an operations strategy, they should also have functional area strategies in finance, IT, sales, marketing,
human resources, and possibly other departments, depending on the type of business.

―An operations strategy should guide the structural decisions and the evolution of operational capabilities
needed to achieve the desired competitive position of the company as a whole,‖ says Tim Laseter in his article
"An Essential Step for Corporate Strategy.‖

These days, however, it‘s not enough to simply follow best practices. Companies must innovate, not just play
catch-up to practices already mastered by competitors.

Authors Steven C. Wheelwright and Robert H. Hayes categorized types of organizations based on a
company‘s attitude toward operations:

 Stage 1, Internally Neutral: The operations function is reactive and viewed as a necessary evil.
 Stage 2, Externally Neutral: The operations function adopts best practices and tries to match the
competition.
 Stage 3, Internally Supportive: The operations function tries to provide support for the overall
business strategy.
 Stage 4, Externally Supportive: The operations function provides competitive advantage for the
company, and sets the industry standard.

Core Operational Strategy Areas

Different sources use different terms to describe strategy areas. Here‘s one way to categorize core strategies:

 Corporate: Overall company strategy, driving the company mission and interconnected departments
 Customer-Driven: Operational strategies to meet the needs of a targeted customer segment
 Core Competencies: Strategies to develop the company‘s key strengths and resources
 Competitive Priorities: Strategies that differentiate the company in the market to better provide a
desired product or service
 Product or Service Development: Strategies in product design, value, and innovation

A company‘s key success factors (KSFs) pertain to competitiveness, such as a company‘s attributes,
resources, capabilities, and competencies. By identifying these, a company can focus on the issues that matter
most and measure them with key performance indicators (KPIs).
Another way to frame strategic areas is by these ―distinctive‖ competencies:

 Price
 Quality, such as performance, features, aesthetics, and durability
 Service
 Flexibility
 Tradeoffs, or competing on one or two distinctive competencies at the necessary expense of others

Tips for Operations Strategies and Tactics

Specific strategies depend on your specific business. Here are strategy tips that apply to many companies,
whether they are producing goods or services.

 Take a Global View: See how others worldwide are providing better goods and services. Learn from
them, and see how you might compete and innovate in a core competency. Also, improve your supply
chain by looking globally, and employ global talent if remote work is an option.
 Have a Strong Mission Statement: Focus your efforts with a mission statement that truly defines your
goals and guides your business approach. Tie your overall business strategy and operations strategy
into it.
 Gain Competitive Advantage with Differentiation: Develop a point of differentiation and a unique
value proposition, and consistently innovate and build strategies around them. Don‘t just use best
practices. Exceed them, and leapfrog the competition.
 Gain Insights from a SWOT Analysis: Analyze your company‘s strengths, weaknesses, opportunities,
and threats as a catalyst to strategy.
 Track Progress: Develop strong analytics and KPI dashboards to measure and optimize your
operational efforts.
UNDERSTANDING SIMILARITIES AND DIFFERENCE AMONG PRODUCTS AND
SERVICES

People require different services and products to satisfy various needs and wants. In this regard, it can be

observed that the marketers play a pivotal role in marketing different products and services to various targeted

customers. However, some people often confuse the two terms and often use them interchangeably to refer to

one thing but a closer analysis between them shows that they are different. The major difference between the

two concepts is that a product is tangible while a service is intangible. More details about the differences

between a product and service are clearly outlined below.

Key Features of a product

The major key feature of a product is that it is physical and it is also tangible. This implies that a product can be

held, it can be seen, felt or smelled. As such, the sale of a product is a once off transaction. However, it should

also be noted that a product can be returned to the seller for replacement or refund in the event that it is wrong

or damaged. When the customer is not satisfied with the product, he can return it to the seller in exchange of

the right type of product desired.

The value of the product is often created and derived from the product by the user. In other words, the user

knows what exactly he or she truly desires from a product hence the decision to buy it. It is the same customer

who can derive value from purchasing a product unlike the value of the service that is created by the service

provider.

The other important aspect about a product pertains to ownership. A product can be owned by the purchaser

since ownership is transferred the moment a transaction has been performed. The fact that a product is

tangible makes ownership transferrable unlike a service that can only be felt. Once a product has been bought,

it can then be easily separated from the provider since the customer can take it home for personal use.

Ownership of a service can therefore not be transferred to its user.

The customer care perspective of a product is limited compared to that of a service. In a service, it is customer

care that attracts the buyers of that particular service while in a product, elements such as branding and other

product features that differentiate it from similar products that attract the customers.
Key Features of a Service

A service is work done by another person for another individual. For instance, a person will visit a restaurant to

have the desired services performed by other people while they relax on their tables. Legal advice is another

good example of a service rendered to another person by professional lawyers. In most cases, people are

usually attracted by the quality of service they get from a particular organization instead of the product itself.

Quality service is satisfactory and people who are satisfied will continue doing business with the company.

The billing process of a service is continuous unlike that of a product. For instance, a service can be in the

form of monthly subscriptions where a service is rendered upon receipt of the subscription. The other notable

aspect about a service is that it cannot be returned to the provider since it is intangible. A service is something

that can only be felt therefore cannot be returned.

The other issue about a service is about their variability. Services vary according to who provide them, where,

when and how. Usually, the quality of the service is mainly determined by the service provider while the

customer determines the value of the product upon its purchase. The quality of the service depends on the

service provider. The marketers of a service should therefore have knowledge about what the customers really

desire such that they can tailor their services to meet those needs. The marketers need to understand the

features to sell to the customers.

Summary of Key Differences Between Services and Products

1. Products are tangible – they are physical in nature such that they can be touched, smelled, felt and
even seen. Services are intangible and they can only be felt not seen.
2. Need vs. Relationship– a product is specifically designed to satisfy the needs and wants of the
customers and can be carried away. However, with a service, satisfaction is obtained but nothing is
carried away. Essentially, marketing of a service is primarily concerned with creation of customer
relationship.
3. Perishability- services cannot be stored for later use or sale since they can only be used during that
particular time when they are offered. On the other hand, it can be seen that products are perishable.
For example, fresh farm and other food products are perishable and these can also be stored for later
use or sale.
4. Quantity- products can be numerically quantified and they come in different forms, shapes and sizes.
However, services cannot be numerically quantified. Whilst you can choose different service providers,
the concept remains the same.
 5. Inseparability- services cannot be separated from their providers since they can be consumed at the
same time they are offered. On the other hand, a product can be separated from the owner once the
purchase has been completed.
6. Quality- quality of products can be compared since these are physical features that can be held.
However, it may be difficult to compare the quality of the services rendered by different service
providers.
7. Return ability- it is easier to return a product to the seller if the customer is not satisfied about it. In
turn, the customer will get a replacement of the returned product. However, a service cannot be
returned to the service provider since it is something that is intangible.
8. Value perspective- the value of a service is offered by the service provider while the value of the
product is derived from using it by the customer. Value of a service cannot be separated from the
provider while the value of a product can be taken or created by the final user of the product offered on
the market.
9. Shelf line- a service has a shorter shelf line compared to a product. A product can be sold at a later
date if it fails to sell on a given period. This is different with regard to a service that has a short shelve
line and should be sold earlier.

Table showing the differences between a product and service

Product Service
A product is tangible, it is physical and can be A service is intangible, can only be felt and not
held, seen and movable touched
Value of service is offered by the service
Product value is derived by the customer
provider
Customer care forms critical component of
Customer care of the product is limited
marketing a service
A product can be stored for future use
CAPACITY PLANNING DECISIONS
Capacity planning is long-term decision that establishes a firm's overall level of resources.
Capacity decisions affect the production lead time, customer responsiveness, operating cost and company
ability to compete.
The importance of capacity decisions relates to their potential impact on the ability of the organization to meet
future demand for products and services; capacity essentially limits the rate of output possible.
The importance of capacity stems from the relationship between capacity and operating costs.
Capacity planning can apply to a company's computer network, storage, workforce maintenance, and product
manufacturing. Planning for capacity breaks down into three steps: determining service level requirements,
analyzing current capacity, and planning for the future.
1. Determining Service Level Requirements
In this step, a business breaks down work into categories; it also quantifies users‘ expectations for how
that work gets done. Within this first step exist three stages: establishing workloads, determining the
unit of work, and setting service levels.

Businesses choose to organize workloads by either who is doing the work, the type of work performed,
or the work process. They then create a definition of satisfactory service for each load. Whereas a
workload measures the resources needed to accomplish the work, a unit of work measures a quantity
of work completed.

A "service level agreement" lays out the acceptable parameters between the provider and the
consumer.

2. Analyze Current Capacity

Businesses take an in-depth look at their current production schedule to evaluate capacity. They
analyze each workload and system as a whole, following these steps:

 Compare the measurements of any items referenced in service level agreements with their objectives

 Check the usage of the various resources of the system

 Take a look at the resource utilization for each workload and decipher which workloads are the major
users of each resource

 Determine where each workload spends its time. This provides insight into which resources take the
greatest portion of response time for each workload

3. Plan for the Future

Finally, after analyzing current capacity, it‘s time to plan for the future. Base a plan on forecasted
processing requirements to prevent overwhelming the system. In order to accomplish this task, you
need to know the amount of incoming work expected over the coming quarters. Then, configure the
optimal system for satisfying service levels over this period.

These three steps in capacity planning help your organization prepare for future growth. Optimal
configuration ensures you meet service level requirements while only purchasing what you need to get
the work completed. This process facilitates a manufacturing process‘ well-being. It offers your
company an opportunity to optimize its production process and ready itself for the future.

How is capacity planning important for a business?

Capacity planning is important for a number of reasons, the first being that it limits the rate of output of
your business. ... Another reason many employ the use of capacity planning tools is to help determine
operating costs, supply and demand, and even to govern investment decisions for your business down the
road.
The benefits of capacity planning are as follows:

 Budgeting- Capacity planning outlines the personnel and equipment that the business will need to
reach its goals.

 Scalability- It is the process of planning for expansion.

 Growth- Capacity planning also plans for the growth of the business based on the future projections.

 Dynamic Change- The process of capacity planning collects a significant amount of data on how the
company currently operates.
FACILITIES LOCATION STRATEGIES
A location strategy is a plan for obtaining the optimal location for a company by identifying company needs
and objectives, and searching for locations with offerings that are compatible with these needs and objectives.
A company's location strategy should conform with, and be part of, its overall corporate strategy.
Being in the right location is a key ingredient in a business's success. If a company selects the wrong location,
it may have adequate access to customers, workers, transportation, materials, and so on. Consequently,
location often plays a significant role in a company's profit and overall success. A location strategy is a plan for
obtaining the optimal location for a company by identifying company needs and objectives, and searching for
locations with offerings that are compatible with these needs and objectives. Generally, this means the firm will
attempt to maximize opportunity while minimizing costs and risks.
A company's location strategy should conform with, and be part of, its overall corporate strategy. Hence, if a
company strives to become a global leader in telecommunications equipment, for example, it must consider
establishing plants and warehouses in regions that are consistent with its strategy and that are optimally
located to serve its global customers. A company's executives and managers often develop location strategies,
but they may select consultants (or economic development groups) to undertake the task of developing a
location strategy, or at least to assist in the process, especially if they have little experience in selecting
locations.

Formulating a location strategy typically involves the following factors:

1. Facilities. Facilities planning involves determining what kind of space a company will need given its
short-term and long-term goals.
2. Feasibility. Feasibility analysis is an assessment of the different operating costs and other factors
associated with different locations.
3. Logistics. Logistics evaluation is the appraisal of the transportation options and costs for the
prospective manufacturing and warehousing facilities.
4. Labor. Labor analysis determines whether prospective locations can meet a company's labor needs
given its short-term and long-term goals.
5. Community and site. Community and site evaluation involves examining whether a company and a
prospective community and site will be compatible in the long-term.
6. Trade zones. Companies may want to consider the benefits offered by free-trade zones, which are
closed facilities monitored by customs services where goods can be brought without the usual customs
requirements. The United States has about 170 free-trade zones and other countries have them as
well.
7. Political risk. Companies considering expanding into other countries must take political risk into
consideration when developing a location strategy. Since some countries have unstable political
environments, companies must be prepared for upheaval and turmoil if they plan long-term operations
in such countries.
8. Governmental regulation. Companies also may face government barriers and heavy restrictions and
regulation if they intend to expand into other countries. Therefore, companies must examine
governmental—as well as cultural—obstacles in other countries when developing location strategies.
9. Environmental regulation. Companies should consider the various environmental regulations that
might affect their operations in different locations. Environmental regulation also may have an impact
on the relationship between a company and the community around a prospective location.
10. Incentives. Incentive negotiation is the process by which a company and a community negotiate
property and any benefits the company will receive, such as tax breaks. Incentives may place a
significant role in a company's selection of a site.
PROCESS STRATEGY
Process strategy is the pattern of decisions made in managing processes so that they will achieve their
competitive priorities. A process involves the use of an organization's resources to provide something of
value.
A process (or transformation) strategy is an organization’s approach to transforming resources into goods and
services.
The objective of a process strategy is to build a production process that meets customer requirements and
product specification within cost and other managerial constraints.

The process selected will have a long term effect on efficiency and flexibility of production as well as on cost
and quality of the goods produced. Therefore the limitations of a process strategy are at the time of the
process decision.

In understanding Process strategy there are three principles that are particularly important:
 The key to successful process decisions is to make choices that fit the situation. They should not
work at cross-purposes, with one process optimized at the expense of other processes. A more effective
process is one that matches key process characteristics and has a close strategic fit.
 Individual processes are the building blocks that eventually create the firm’s whole supply chain.
 Management must pay close attention to all interfaces between processes in the supply chain,
whether they are performed internally or externally.

It can be utilized to guide a variety of process decisions, operations strategy, and your business‘ ability to
obtain the resources necessary to support them.

A process involves the use of an organization’s resources to provide something of value.

Major process decisions include:

1. Process Structure determines how processes are designed relative to the kinds of resources needed,
how resources are partitioned between them, and their key characteristics.

2. Customer Involvement refers to the ways in which customers become part of the process and the extent
of their participation.

It is Manager‘s job to assess whether the advantages outweigh disadvantages, judging them in terms of the
competitive priorities and customer satisfaction. Customer involvement is not always the best option as there
are disadvantages commonly associated with it. For example, allowing customers to play an active role in a
service process can be disruptive thereby making the process less efficient.

Quality measurement also becomes more difficult to manage.

Additionally, customer involvement in processes can also mean greater expenses for your business as you will
require employees with greater interpersonal skills and possibly consider revising your facility layout. However,
despite these possible disadvantages, the advantages of a more customer-focused Customer involvement
process might increase the net value to your customer. Some customers seek active participation in and
control over the service process, particularly if they will enjoy savings in both price and time. More customer
involvement can mean better quality, faster delivery, greater flexibility, and even lower cost

1. Resource flexibility is the ease with which employees and equipment can handle a wide variety of
products, output levels, duties, and functions.

We consider resource flexibility mainly at two levels:

 Workforce
One of the decisions and operations manager has to make is whether or not to have a flexible workforce,
that is, employees that are capable of doing many tasks.
 The type of workforce you require is also dependent on the need for volume flexibility. For example, when
conditions allow for a smooth, stead rate of output, the likely choice is a permanent workforce that expects
jkjjregular full-time employment.

Alternatively, if the process is subject to hourly, daily, or seasonal peaks and valleys in demand, the use of
part-time or temporary employees to supplement a smaller core of full-time employees may be the best
solution

 Equipment
When a firm‘s product or service has a short life cycle and a high degree of customization, low production
volumes mean that a firm should select flexible, inexpensive, general-purpose equipment. When volumes
are low, the low fixed cost more than offsets the higher variable unit cost associated with this type of
equipment. Conversely, specialized, higher-cost equipment is the best choice when volumes are high and
customization is low. Its advantage is low variable unit cost.

There are four process strategies:

 Process Focus Projects, job shops (machine, print, hospitals, restaurants)

 Repetitive Focus (Autos, Motorcycles, home appliances)

 Product Focus (commercial baked goods, steel, glass, beer

 Mass Customization (difficult to achieve, but huge rewards) Dell computer

PRODUCT DEVELOPMENT: OPERATIONS STRATEGY
Operations strategy provides the ability to improve products, services, and processes.
To develop the strategy, consider the business/corporate strategy and a market/needs analysis. Then,
consider the competing priorities of cost, quality, time, and flexibility — and how you'll handle them.

Operations strategies drive a company‘s operations, the part of the business that produces and distributes
goods and services. Operations strategy underlies overall business strategy, and both are critical for a
company to compete in an ever-changing market. With an effective operations strategy, operations
management professionals can optimize the use of resources, people, processes, and technology.

In the book Operations Strategy, authors Nigel Slack and Michael Lewis define the term. ―Operations strategy
is the total pattern of decisions which shape the long-term capabilities of any type of operations and their
contribution to the overall strategy,‖ they write. Technology and business models are rapidly changing, so
businesses must keep pace and look to the future.

Product Strategy and integrated product development

All great products start with a clear strategy that is customer and market-driven. Your strategy defines the
direction of your product and what you want to achieve. Establishing this first aligns the organization and keeps
everyone focused on the work that matters the most. It tells the team where the product is headed and what
needs to be done to get there.

The main purpose of a strategy is to align executives and other key stakeholders around how the product will
achieve the high-level business objectives. It also provides the product manager with a clear direction to guide
the team through implementation and to communicate the value of the product to cross-functional teams, such
as sales, marketing, and support.

A product strategy is the foundation for the entire product lifecycle. As product leaders develop and adjust
their product strategy, they zero in on target audiences and define the key product and customer attributes
necessary to achieve success.

Strategy is comprised of three parts: vision, goals, and initiatives.

Vision
Your vision includes details on the market opportunity, target customers, positioning, a competitive analysis,
and the Go-to-Market plan. It describes who the customers are, what they need, and how you plan to deliver a
unique offering.
Goals
Goals are measurable, time-bound objectives that have clearly defined success metrics associated with them.
They help you set what you want to achieve in the next quarter, year, or 18 months. Here are a few examples:

 Increase revenue by 30%

 Expand into 5 new countries
 Increase mobile adoption by 100%
 Reduce the number of support tickets by 15%

Initiatives
Initiatives are the high-level efforts or big themes that need to be implemented to achieve your goals. Here are
some examples:

 Performance improvements
 UI improvements
 Better reporting
 Expand into China
Your strategy provides the foundation for planning your roadmap, defining your features, and prioritizing your
work. To visualize your strategy and see how it ties to your execution plan, it helps if you link releases
and features to initiatives and goals. This allows you to analyze your roadmap at a high level and to discover
any gaps. It is easier to understand the relationships between product lines, products, goals, initiatives, and
releases when you can see them all in one view. This also helps you to identify "orphan" goals or initiatives
and adjust your plans accordingly.

A great strategy starts with a clear product plan, a vision, and a canvas that explains how customer and market
forces shape the product's direction. The first step is to have a north star that tells you where your product is
headed.

Integrated Product Development (IPD) is an experiential, cross-disciplinary course that puts teams of
students from Art & Design, Business, Engineering and Information in a competitive product
development environment.

Integrated product and process development combines the product design processes along with the process
design process to create a new standard for producing competitive and high-quality products.

Integration of new technologies and methods provide a complete new dimension to product design process.
This process starts with defining of the requirements of products based on the customer feedback while
considering the design layout and other constraints. Once the finer details are finalized, they are fed into CAD
models where extensive testing and modeling are done to get the best product.

With integration of production method and technology with product design, it is natural for integration of product
design and process design. Therefore, integrated product and process development can be defined as a
process starting from product idea to development of final product through modern technology and process
management practices while minimizing cost and maximizing efficiency.
I. SYSTEM DESIGN
System design is the process of defining the elements of a system such as the architecture, modules and
components, the different interfaces of those components and the data that goes through that system. It is
meant to satisfy specific needs and requirements of a business or organization through the engineering of a
coherent and well-running system.
Facilities Layout and Material Handling Strategy
Facility layout and design is an important component of a business's overall operations, both in terms of
maximizing the effectiveness of the production process and meeting the needs of employees. The basic
objective of layout is to ensure a smooth flow of work, material, and information through a system. The basic
meaning of facility is the space in which a business's activities take place. The layout and design of that space
impact greatly how the work is done—the flow of work, materials, and information through the system. The key
to good facility layout and design is the integration of the needs of people (personnel and customers), materials
(raw, finishes, and in process), and machinery in such a way that they create a single, well-functioning system.

FACTORS IN DETERMINING LAYOUT AND DESIGN

Small business owners need to consider many operational factors when building or renovating a facility for
maximum layout effectiveness. These criteria include the following:
1. Ease of future expansion or change - Facilities should be designed so that they can be easily
expanded or adjusted to meet changing production needs. "Although redesigning a facility is a major,
expensive undertaking not to be done lightly, there is always the possibility that a redesign will be
necessary.

2. Flow of movement - The facility design should reflect a recognition of the importance of smooth
process flow.

3. Materials handling - Small business owners should make certain that the facility layout makes it
possible to handle materials (products, equipment, containers, etc.) in an orderly, efficient—and
preferably simple manner.
4. Output needs - The facility should be laid out in a way that is conducive to helping the business meet
its production needs.

II. Group Technology, Flexible manufacturing system

Group Technology (GT) GT is a manufacturing philosophy in which components are grouped together to form
families on the basis of geometrical similarity or manufacturing process.
Group technology (GT) is a concept that currently is attracting a lot of attention from the manufacturing
community. The essence of GT is to capitalize on similarities in recurring tasks in three ways:
 By performing similar activities together, thereby avoiding wasteful time in changing from one unrelated
activity to the next.

 By standardizing closely related activities, thereby focusing only on distinct differences and avoiding
unnecessary duplication of effort.

 By efficiently storing and retrieving information related to recurring problems, thereby reducing the
search time for the information and eliminating the need to solve the problem again.

A flexible manufacturing system (FMS) is a form of flexible automation in which several machine tools are
linked together by a material-handling system, and all aspects of the system are controlled by a central
computer. An FMS is distinguished from an automated production line by its ability to process more than one
product style simultaneously. At any moment, each machine in the system may be processing a different part
type. An FMS can also cope with changes in product mix and production schedule as demand patterns for the
different products made on the system change over time. New product styles can be introduced into production
with an FMS, so long as they fall within the range of products that the system is designed to process. This kind
of system is therefore ideal when demand for the products is low to medium and there are likely to be changes
in demand
Components of an FMS:
1. Processing machines which are usually CNC machine tools that perform machining operations,
although other types of automated workstations such as inspection stations are also possible.

2. Material-handling system such as a conveyor system, which is capable of delivering work parts to any
machine in the FMS.

3. Central computer system that is responsible for communicating NC part programs to each machine
and for coordinating the activities of the machines and the material-handling system. In addition, a
fourth component of an FMS is human labor. Although the flexible manufacturing system represents a
high level of production automation, people are still needed to manage the system, load and unload
parts, change tools, and maintain and repair the equipment.

III. ASSEMBLY LINE BALANCING

WHAT IS ASSEMBLY LINE BALANCING?

To workstation within an assembly line in order to meet the required production rate and achieve a minimum
amount of idle time.
Line balancing is the procedure in which tasks along Assigning each task the assembly line is assigned to work
station so each has approximately same amount of work.
Assembly line balancing is a production strategy that sets an intended rate of production to produce a
particular product within a particular time frame. Also, the assembly line needs to be designed effectively and
tasks needs to be distributed among workers, machines and work stations ensuring that every line segments in
the production process can be met within the time frame and available production capacity. Assembly line
balancing can also be defined as assigning proper number of workers or machines for each operations of an
assembly line so as to meet required production rate with minimum or zero ideal time.

Benefits of Assembly Line Balancing in organization

 Improved process efficiency
 Increased production rate
 Reduced total processing time
 Minimum or Zero Ideal Time
 Potential increase in profits and decrease in costs

BALANCED LINE AND ITS EFFECT

 Promotes one piece flow

 Avoids excessive work load in some stages (overburden)
 Minimizes wastes (over-processing, inventory, waiting, rework, transportation, motion)
 Reduces variation
 Increased Efficiency
 Minimizes Idle time

HOW CAN ASSEMBLY-LINE BALANCING HELP ORGANIZATION?

 Increased efficiency
 Increased productivity
 Potential increase in profits and decrease in costs
IV. Project Management-CPM PERT
Project management can be understood as a systematic way of planning, scheduling, executing, monitoring,
controlling the different aspects of the project, so as to attain the goal made at the time of project formulation.
PERT and CPM are the two network-based project management techniques, which exhibit the flow and
sequence of the activities and events. Program (Project) Management and Review Technique (PERT) is
appropriate for the projects where the time needed to complete different activities are not known.
Definition of PERT
PERT is an acronym for Program (Project) Evaluation and Review Technique, in which planning, scheduling,
organizing, coordinating and controlling uncertain activities take place. The technique studies and represents
the tasks undertaken to complete a project, to identify the least time for completing a task and the minimum
time required to complete the whole project. It was developed in the late 1950s. It is aimed to reduce the time
and cost of the project.
PERT uses time as a variable which represents the planned resource application along with performance
specification. In this technique, first of all, the project is divided into activities and events. After that proper
sequence is ascertained, and a network is constructed. After that time needed in each activity is calculated and
the critical path (longest path connecting all the events) is determined.

Definition of CPM
Developed in the late 1950s, Critical Path Method or CPM is an algorithm used for planning, scheduling,
coordination and control of activities in a project. Here, it is assumed that the activity duration is fixed and
certain. CPM is used to compute the earliest and latest possible start time for each activity.

V. LINE OF BALANCE
Line of Balance (LOB) is a management control process for collecting, measuring and presenting facts
relating to time, cost and accomplishment - all measured against a specific plan. It shows the process, status,
background, timing and phasing of the project activities, thus providing management with measuring tools that
help:

 Comparing actual progress with a formal objective plan.

 Examining only the deviations from established plans, and gauging their degree of severity with respect
to the remainder of the project.
 Receiving timely information concerning trouble areas and indicating areas where appropriate
corrective action is required.
 Forecasting future performance.

The purpose of the LOB method is to ensure that the many activities of a repetitive production process stay ―in
balance‖ that is, they are producing at a pace which allows an even flow of the items produced through a
process and at a speed compatible with the goals set forth in a plan. The advantages of LOB schedule are as
follows:

 Clearly shows the amount of work taking place in a certain area at a specific time of the project.
 Has the ability to show and optimize the resources used for large number of repeated activities,
executed in several zones or locations.
 Easier cost and time optimization analysis because of all the information available for each activity in
the project.
 Ease of setup and its superior presentation and visualization.
 Easier to modify, update and change the schedule.
 Better managing of all the various sub-contractors in the project.
 Allows for simpler and clearer resource management and resource optimization functions.
 Visualization of productivity and location of crews.
 It allows project managers to see, in the middle of a project, whether they can meet the schedule if they
continue working as they have been.
I. PRODUCTIVITY & QUALITY TOOLS
Productivity is a tool of measurement that determines the efficiency of the organization in terms of the ratio of
output produced with respect to inputs used. Various factors like technology, plant layouts, equipment, and
machinery affect productivity. Hence, operations managers need to carry out a regular review of all these
factors to maintain as well as improve productivity.
Productivity can be either measured as total productivity or as partial productivity where single variable or
multiple variables are considered. Measuring productivity in production organizations is relatively easy. But
measuring productivity for knowledge workers and in the service organizations is difficult. Maintaining time
sheets to determine the time spent on each task and the quantity of work done is one of the ways of measuring
productivity in the services industry. Quality is one of the key issues, which defines an organization's
competitive position in the market.
Quality is conformance to requirements. A well designed and properly produced product without any error may
not be perceived as a quality product by the customers if it does not satisfy their requirements.

QUALITY CIRCLES
A quality circle is a participatory management technique that enlists the help of employees in solving problems
related to their own jobs. Circles are formed of employees working together in an operation who meet at
intervals to discuss problems of quality and to devise solutions for improvements. Quality circles have an
autonomous character, are usually small, and are led by a supervisor or a senior worker. Employees who
participate in quality circles usually receive training in formal problem-solving methods—such as brain-
storming, pareto analysis, and cause-and-effect diagrams—and are then encouraged to apply these methods
either to specific or general company problems. After completing an analysis, they often present their findings
to management and then handle implementation of approved solutions. Pareto analysis, by the way, is named
after the Italian economist, Vilfredo Pareto, who observed that 20 percent of Italians received 80 percent of the
income—thus the principle that most results are determined by a few causes.
KAIZEN
Kaizen is a Japanese term meaning "change for the better" or "continuous improvement." It is a Japanese
business philosophy regarding the processes that continuously improve operations and involve all employees.
Kaizen sees improvement in productivity as a gradual and methodical process.

The concept of kaizen encompasses a wide range of ideas. It involves making the work environment more
efficient and effective by creating a team atmosphere, improving everyday procedures, ensuring employee
satisfaction, and making a job more fulfilling, less tiring, and safer.

SGA
SG&A is the acronym for selling, general and administrative. SG&A are the operating expenses incurred to
1) promote, sell, and deliver a company's products and services, and 2) manage the overall company.
SG&A will be reported on the income statement in the period in which the expenses occur. Hence, SG&A
expenses are said to be period costs as opposed to being part of a product's cost. Since SG&A expenses
are not a product cost, they are not assigned to the cost of goods sold or to the goods that are in inventory.
Examples of SG&A
SG&A expenses include sales commissions, advertising, promotional materials, compensation of the
company's officers as well as the marketing, sales, finance and office staffs, rent, utilities, supplies, computers,
etc. provided they are outside of the manufacturing operations
II. Value analysis and Value Engineering
Value Analysis

Value Analysis (VA) is concerned with existing products. It involves a current product being analyzed and
evaluated by a team, to reduce costs, improve product function or both. Value Analysis exercises use a plan
which step-by-step, methodically evaluates the product in a range of areas. These include costs, function,
alternative components and design aspects such as ease of manufacture and assembly.

A significant part of VA is a technique called Functional Analysis, where the product is broken down and
reviewed as a number of assemblies. Here, the function is identified and defined for each product assembly.
Costs are also assigned to each one. This is assisted by designing and viewing products as assemblies (or
modules). As with VE, VA is a group activity that involves brainstorming improvements and alternatives to
improve the value of the product, particular to the customer.

Value Engineering

Value Engineering (VE) is concerned with new products. It is applied during product development. The focus is
on reducing costs, improving function or both, by way of teamwork-based product evaluation and analysis. This
takes place before any capital is invested in tooling, plant or equipment.

This is very significant, because according to many reports, up to 80% of a product‘s costs (throughout the rest
of its life-cycle), are locked in at the design development stage. This is understandable when you consider the
design of any product determines many factors, such as tooling, plant and equipment, labor and skills, training
costs, materials, shipping, installation, maintenance, as well as decommissioning and recycle costs.

Therefore, value engineering should be considered a crucial activity late on in the product development
process and is certainly a wise commercial investment, with regard to the time it takes. It is strongly
recommended you build value engineering into your new product development process, to make it more robust
and for sound commercial reasons.

III. Total Quality Management

What Is Total Quality Management (TQM)?

Total quality management (TQM) is the continual process of detecting and reducing or eliminating errors in
manufacturing, streamlining supply chain management, improving the customer experience, and ensuring that
employees are up to speed with training. Total quality management aims to hold all parties involved in the
production process accountable for the overall quality of the final product or service.

Total quality management (TQM) is a structured approach to overall organizational management. The focus of
the process is to improve the quality of an organization's outputs, including goods and services, through
continual improvement of internal practices. The standards set as part of the TQM approach can reflect both
internal priorities and any industry standards currently in place.

FIVE IMPORTANT FACTORS IN TOTAL QUALITY MANAGEMENT

1. Commitment and understanding from employees.

2. Quality improvement culture.

3. Continuous improvement in process

4. Focus on customer requirements

5. Effective control

IV. STATISTICAL QUALITY CONTROL

Statistical quality control refers to the use of statistical methods in the monitoring and maintaining of the quality
of products and services. One method, referred to as acceptance sampling, can be used when a decision must
be made to accept or reject a group of parts or items based on the quality found in a sample. A second
method, referred to as statistical process control, uses graphical displays known as control charts to determine
whether a process should be continued or should be adjusted to achieve the desired quality.
PLANNING AND MANAGING OPERATIONS

I. DEMAND FORECASTING
Demand Forecasting refers to the process of predicting the future demand for the firm‘s product. In other
words, demand forecasting is comprised of a series of steps that involves the anticipation of demand for a
product in future under both controllable and non-controllable factors.
The business world is characterized by risk and uncertainty, and most of the business decisions are taken
under this scenario. An organization come across several risks, both internal or external to the business
operations such as technology, attrition, unrest, employee grievances, recession, inflation, modifications in the
government laws, etc.
STEPS IN DEMAND FORECASTING

 Specifying the Objective

 Determining the Time Perspective
 Choice of method for Demand Forecasting
 Collection of Data and Data Adjustment
 Estimation and Interpretation of Results

II. VALUE CHAIN

A value chain is a business model that describes the full range of activities needed to create a product or
service. For companies that produce goods, a value chain comprises the steps that involve bringing a product
from conception to distribution, and everything in between—such as procuring raw materials, manufacturing
functions, and marketing activities.
Because of ever-increasing competition for unbeatable prices, exceptional products, and customer loyalty,
companies must continually examine the value they create in order to retain their competitive advantage. A
value chain can help a company to discern areas of its business that are inefficient, then implement strategies
that will optimize its procedures for maximum efficiency and profitability.

III. SUPPLY CHAIN MANAGEMENT

Supply chain management is the management of the flow of goods and services and includes all processes
that transform raw materials into final products. It involves the active streamlining of a business's supply-side
activities to maximize customer value and gain a competitive advantage in the marketplace.
SCM represents an effort by suppliers to develop and implement supply chains that are as efficient and
economical as possible. Supply chains cover everything from production to product development to the
information systems needed to direct these undertakings.
In SCM, the supply chain manager coordinates the logistics of all aspects of the supply chain which consists of
five parts:

 The plan or strategy

 The source (of raw materials or services)
 Manufacturing (focused on productivity and efficiency)
 Delivery and logistics
 The return system (for defective or unwanted products)

IV. PURCHASING
Purchasing is a business or organization attempting to acquire goods or services to accomplish its goals.
Although there are several organizations that attempt to set standards in the purchasing process, processes
can vary greatly between organizations.
Purchasing is the organized acquisition of goods and services on behalf of the buying entity. Purchasing
activities are needed to ensure that needed items are obtained in a timely manner and at a reasonable cost. A
purchasing department is especially necessary in a manufacturing business, where large amounts of raw
materials and components must be obtained on a recurring basis.
V. INVENTORY MANAGEMENT
Inventory management is a discipline primarily about specifying the shape and placement of stocked goods. It
is required at different locations within a facility or within many locations of a supply network to precede the
regular and planned course of production and stock of materials.
Inventory is defined as a stock or store of goods. These goods are maintained on hand at or near a business's
location so that the firm may meet demand and fulfill its reason for existence. If the firm is a retail
establishment, a customer may look elsewhere to have his or her needs satisfied if the firm does not have the
required item in stock when the customer arrives. If the firm is a manufacturer, it must maintain some inventory
of raw materials and work-in-process in order to keep the factory running. In addition, it must maintain some
supply of finished goods in order to meet demand.

 Inventory management refers to the process of ordering, storing, and using a company's inventory.
These include the management of raw materials, components, and finished products as well as
warehousing and processing such items.

 For companies with complex supply chains and manufacturing processes, balancing the risks of
inventory gluts and shortages is especially difficult.

 To achieve these balances, firms have developed two major methods for inventory management: just-
in-time and materials requirement planning: just-in-time (JIT) and materials requirement planning
(MRP).

VI. SCHEDULING
Scheduling is the process of arranging, controlling and optimizing work and workloads in a production process
or manufacturing process. Scheduling is used to allocate plant and machinery resources, plan human
resources, plan production processes and purchase materials.
operation
managerial

llll
VALUE-ADDED
The difference between the cost of inputs and the value or price of outputs

VALUE-ADDED is the term used to describe the difference between the cost of inputs and the value or price of
outputs. In nonprofit organizations, the value of outputs (e.g., highway construction, police and fire protection)
is their value to society; the greater the value-added, the greater the effectiveness of these operations. In for-
profit organizations, the value of outputs is measured by the prices that customers are willing to pay for those
goods or services. Firms use the money generated by value-added for research and development, investment
in new facilities and equipment, worker salaries, and profits. Consequently, the greater the value-added, the
greater the amount of funds available for these purposes.

There are many factors that affect the design and management of operations systems. Among them
are the degree of involvement of customers in the process and the degree to which technology is used to
produce and/or deliver a product or service. The greater the degree of customer involvement, the more
challenging it can be to design and manage the operation. Technology choices can have a major impact on
productivity, costs, flexibility, and quality and customer satisfaction.

INPUTS TRANSFORMATION OUTPUTS

Land Processes High goods percentage
Human Cutting, drilling Houses
Physical labor Transporting Automobiles
Intellectual labor Teaching Clothing
Capital Farming Computers
Raw materials Mixing Machines
Energy Packing Televisions
Water Copying, faxing Food products
Metals Textbooks
Wood CD players
Equipment High service percentage
Machines Health care
Computers Entertainment
Trucks Car repair
Tools Delivery
Facilities Legal
Hospitals Banking
Factories Communication
Retail stores Other
Other Innovation
Information
Time
Legal constraints
Government regulations

PRODUCTION OF GOODS VERSUS DELIVERY OF SERVICES

Although goods and services often go hand in hand, there are some very basic differences between the two,
differences that impact the management of the goods portion versus management of the service portion.
Production of goods results in a tangible output, such as an automobile, eyeglasses, a golf ball, a
refrigerator- anything that we can see or touch. It may take place in a factory, but can occur elsewhere. For
example, farming produces non manufactured goods. Delivery of service, on the other hand, generally implies
an action. A physician‘s examination, TV and auto repair, lawn care, and the projection of a film in a theater are
examples of services.
The majority of service jobs fall into these categories:

Government (national, state, local).

Wholesale/retail (clothing, food, appliances, stationery, toys, etc.).
Financial services (banking, stock brokerages, insurance, etc.).
Health care (doctors, dentists, hospitals, etc.).
Personal services (laundry, dry cleaning, hair/beauty, gardening, etc.).
Business services (data processing, e-business, delivery, employment agencies, etc.).
Education (schools, colleges, etc.).
Food Processor Inputs Processing Output
Raw vegetables Cleaning Cannes vegetables
Metal sheets Making cans
Water Cutting
Energy Cooking
Labor Packing
Building Labeling
Equipment

Hospital Inputs Processing Output

Doctors, nurses Examination Treated patients
Hospital Surgery
Medical supplies Monitoring
Equipment Medication
Laboratories Therapy

Manufacturing and service are often different in terms of what is done but quite similar in terms of how it is
done. For example, both involve design and operating decisions. Manufacturers must decide what size factory
is needed. Service organizations (e.g., hospitals) must decide what size building is needed. Both must make
decisions on location, work schedules, capacity, and allocation of scarce resources.
Manufacturing and service organizations differ chiefly because manufacturing is goods-oriented and
service is act-oriented. The differences involve the following:

1. Degree of customer contact.

2. Uniformity of input.
3. Labor content of jobs.
4. Uniformity of output.
5. Measurement of productivity.
6. Production and delivery.
7. Quality assurance.
8. Amount of inventory.
9. Evaluation of work.
10. Ability to patent design.

Characteristic Goods Services

Customer contact Low High
Uniformity of input High Low
Labor content Low High
Uniformity of output High Low
Output Tangible Intangible
Measurement of productivity Easy Difficult
Opportunity to correct quality problems before delivery to customer High Low
Inventory Much Little
Evaluation Easier More Difficult
Patentable Usually Not usually

THE SCOPE OF OPERATIONS MANAGEMENT

The scope of operations management ranges across the organization. Operations management people are
involved in product and service design, process selection, selection and management of technology, design of
work systems, location planning, facilities, planning, and quality improvement of the organization‘s products or
services.

The operations function includes many interrelated activities, such as forecasting, capacity planning,
scheduling, managing inventories, assuring quality, motivating employees, deciding where to locate facilities,
and more.

We can use an airline company to illustrate a service organization‘s operation system. The system
consists of the airplanes, airport facilities, and maintenance facilities, sometimes spread out over a wide
territory. Most of the activities performed by management and employees fall into the realm of operations
management:
Forecasting such things as weather and landing conditions, seat demand for flights, and the growth in air
travel.

Capacity planning, essential for the airline to maintain cash flow and make a reasonable profit. (Too few or
too many planes, or even the right number of planes but in the wrong places, will hurt profits.)

Scheduling of planes for flights and for routine maintenance; scheduling of pilots and flight attendants; and
scheduling of ground crews, counter staff, and baggage handlers.

Managing inventories of such items as foods and beverages, first-aid equipment, in-flight magazines, pillows
and blankets, and life preservers.

Assuring quality, essential in flying and maintenance operations, where the emphasis is on safety, and
important in dealing with customers at ticket counters, check-in, telephone and electronic reservations, and
curb service, where the emphasis is on efficiency and courtesy

Motivating and training employees in all phases of operations.

Locating facilities according to manager‘s decisions on which cities to provide service for, where to locate
maintenance facilities, and where to locate major and minor hubs.

EXAMPLES OF TYPES OF OPERATION

Types of Operations Examples

Goods producing Farming, mining, construction, manufacturing, power generating.
Storage/transportation Warehousing, trucking, mail service, moving, taxis, buses, hotels,
airlines
Exchange Retailing, wholesaling, financial advising, renting or leasing, library
loans, stock exchange
Entertainment Films, radio and television, plays, concerts, recording
Communication Newspapers, radio and TV newscasts, telephone, satellites, the
internet

A primary function of an operations manager is to guide the system by decision making. Certain decisions
affect the design of the system, and others affect the operation of the system.

System design involves decisions that relate to system capacity, the geographic location of facilities,
arrangement of departments and placement of equipment within physical structures, product and service
planning, and acquisition of equipment. These decisions usually, but not always, require long-term
commitments. Moreover, they are typically strategic decisions. System operation involves management, and
quality assurance. These are generally tactical and operational decisions. Feedback on these decisions
involves measurement and control.

Purchasing has responsibility for procurement of materials, supplies, and equipment. Close contact with
operations is necessary to ensure correct quantities and timing of purchases. The purchasing department is
often called on to evaluate vendors for quality, reliability, service, price, and ability to adjust to changing
demand. Purchasing is also involved in receiving and inspecting the purchased goods.

Industrial engineering is often concerned with scheduling, performance standards, work methods, quality
control, and material handling.

Distribution involves the shipping of goods to warehouses, retail outlets, or final customers.

Maintenance is responsible for general upkeep and repair of equipment, buildings and grounds, heating and
air-conditioning; removing toxic wastes; parking; and perhaps security.

THE CHALLENGES OF MANAGING SERVICES

Services can pose a variety of managerial challenges for managers-challenges that in manufacturing are either
much less or nonexistent. And because services represent an increasing share of the economy, this places
added importance to understanding and dealing with the challenges of managing services. Here are some of
the main factors:

1. Jobs in service environments are often less structured than in manufacturing environments.
2. Customer contact is usually much higher in services.
3. In many services, worker skill levels are low compared to those of manufacturing workers.
4. Services are adding many new workers in low-skill, entry-level positions.
 5. Employee turnover is often higher, especially in the low-skill.
6. Input variability tends to be higher in many service environments than in manufacturing.
7. Service performance can be adversely affected by workers‘ emotions, distractions, customers‘
attitudes, and other factors, many of which are beyond managers‘ control.

Because of these factors, quality and costs are more difficult to control, productivity tends to be lower, the
risk of customer‘s dissatisfaction is greater, and employee motivation is more difficult.

OPERATIONS MANAGEMENT AND DECISION MAKING

The chief role of an operations manager is that of planner and decision maker. In this capacity, the operations
manager exerts considerable influence over the degree to which the goals and objectives of the organization
are realized. Most decisions involve many possible alternatives that can have quite different impacts on costs
or profits. Consequently, it is important to make informed decisions.

Operations management professionals make a number of key decisions that affect the entire
organization. These include the following:

 What: What resources will be needed, and in what amounts?

 When: When will each resource be needed? When should the work be scheduled? When should
materials and other supplies be ordered? When is corrective action needed?
 Where: Where will the work be done?
 How: How will the product or service be designed? How will the work be done (organization, methods,
equipment)? How will resources be allocated?
 Who: Who will do the work?

MODELS
A model is an abstraction of reality, a simplified representation of something. For example, a child‘s toy car is
a model of a real automobile. It has many of the same visual features (shape, relative proportions, wheels) that
make it suitable for the child‘s learning and paying. But the toy does not have a real engine, it cannot transport
people, and it does not weigh 2,000 pounds.

Models are sometimes classified as physical, schematic, or mathematical:

Physical models look like their real-life counterparts. Examples include miniature cars, trucks, airplanes, toy
animals and trains, and scale-model buildings. The advantage of these models is their visual correspondence
with reality.

Schematic models are more abstract than their physical counterparts; that is, they have less resemblance to
the physical reality. Example include graphs and charts, blueprints, pictures, and drawings. The advantage of
schematic models is that they are often relatively simple to construct and change. Moreover, they have some
degree of visual correspondence.

Mathematical models are the most abstract: They do not look at all like their real-life counterparts. Examples
include numbers, formulas, and symbols. These models are usually the easiest to manipulate, and they are
important forms of inputs for computers and calculators.

The variety of models in use is enormous. Nonetheless, all have certain common features: They are all
decision-making aids and simplifications of more complex real-life phenomena. Real life involves an
overwhelming amount of detail, much of which is irrelevant for any particular problem. Models omit unimportant
details so that attention can be concentrated on the most important aspects of a situation.

Because models play a significant role in operations management decision making, they are heavily
integrated into the material of this text. For each model, try to learn (1) its purpose, (2) how it is used to
generate results, (3) how these results are interpreted and used, and (4) what assumptions and limitations
apply.

The last point is particularly important because virtually every model has an associated set of
requirements that indicate the conditions under which the model is valid. Failure to satisfy all of the
assumptions (i.e., to use a model where it isn‘t meant to be used) will make the results suspect. Attempts to
apply the results to a problem under such circumstances can lead to disastrous consequences.
Managers use models in a variety of ways and for a variety of reasons. Models are beneficial because they

1. Are generally easy to use and less expensive than dealing directly with the actual situation.
2. Require users to organize and sometimes quantify information and, in the process, often indicate areas
where additional information is needed.
3. Increase understanding
COMPETITIVENESS, STRATEGY, AND
PRODUCTIVITY
COMPETITIVENESS
Companies must be competitive to sell their goods and services in the marketplace. Competitiveness is an
important factor in determining whether a company prospers, barely gets by, or fails.

Business organizations compete through some combination of their marketing and operations
functions. Marketing influences competitiveness in several ways, including identifying consumer wants and
needs, pricing, and advertising and promotion.

1. Identifying consumer wants and/or needs is a basic input in an organization‘s decision making
process, and central to competitiveness. The ideal is to achieve a perfect match between those wants
and needs and the organization‘s good and/or services.
2. Pricing is usually a key factor in consumer buying decisions. It is important to understand the trade-off
decision consumers make between price and other aspects of a product or service such as quality.
3. Advertising and promotion are ways organizations can inform potential customers about features of
their products or services, and attract buyers.

Operations has a major influence on competitiveness through product and service design, cost, location,
quality, response time, flexibility, inventory and supply chain management, and service. Many of these are
interrelated.

1. Product and service design should reflect joint efforts of many areas of the firm to achieve a match
between financial resources, operations capabilities, supply chain capabilities, and consumer wants
and needs.

2. Cost of an organization‘s output is a key variable that affects pricing decisions and profits.

3. Location can be important in terms of cost and convenience for customers. Location near inputs can
result in lower input costs. Location near markets can result in lower transportation costs and quicker
delivery times. Convenient location is particularly important in the retail sector.

4. Quality refers to materials, workmanship, design, and service. Consumers judge quality in terms of
how well they think a product or service will satisfy its intended purpose.

5. Quick response can be a competitive advantage. One way is quickly bringing new or improved
products or services to the market. Another is being able to quickly deliver existing products and
services to a customer after they are ordered, and still another is quickly handling customer complaints.

6. Flexibility is the ability to respond to changes. Changes might relate to alternations in design features
of a product or service, or to the volume demanded by customers, or the mix of products or services
offered by an organization.

7. Inventory management can be a competitive advantage by effectively matching supplies of goods

with demand.

8. Supply chain management involves coordinating internal and external operations to achieve timely
and cost-effective delivery of goods throughout the system.

9. Service might involve after-sale activities customers perceive as value-added, such as delivery, setup,
warranty work, and technical support.

10. Managers and workers are the people at the heart and soul of an organization, and if they are
competent and motivated, they can provide a distinct competitive edge by their skills and the ideas they
create.

WHY SOME ORGANIZATIONS FAIL

Organizations fail, or perform poorly, for a variety of reasons. Being aware of those reasons can help
managers avoid making similar mistakes. Among the chief reasons are the following:

1. Putting too much emphasis on short-term financial performance at the expense of research and
development.
2. Failing to take advantage of strength and opportunities, and/or failing to recognize competitive threats.
3. Neglecting operations strategy.
 4. Placing too much emphasis of product and service design and not enough on process design and
improvement.
5. Neglecting investments in capital and human resources.
6. Failing to establish good internal communications and cooperation among different functional areas.
7. Failing to consider customer wants and needs.

The key to successfully competing is to determine what customers want and then directing efforts toward
meeting (or even exceeding) customer expectations. There are two basic issues that must be addressed. First:
What do the customers want? Second: What is the best way to satisfy those wants?

Operations must work with marketing to obtain information on the relative importance of the various
items to each major customer or target market.
Understanding competitive issues can help managers develop successful strategies.

STRATEGY
Strategies are plans for achieving organizational goals.bg The importance of strategies cannot be overstated;
an organization‘s strategies have a major impact on what the organization does and how it does it. Strategies
can be long term, intermediate term, or short term. To be effective, strategies must be designed to support the
organization‘s mission and its organizational goals.

MISSION
An organization‘s mission is the reason for its existence. It is expressed in its mission statement, which states
the purpose of an organization. For a business organization, the mission statement should answer the question
―What business are we in?‖ Mission vary from organization to organization, depending on the nature of their
business.

A mission statement serves as the basis for organizational goals, which provide more detail and describe the
scope of the mission. The mission and goals often relate to how an organization wants to be perceived by the
general public, and by its employees, suppliers, and customers. Goals serve as a foundation for the
development of organizational strategies.

STRATEGIES AND TACTICS

If you think of goals as destinations, then strategies are the roadmaps for reaching the destinations. Strategies
provide focus for decision making. Generally speaking, organizations have overall strategies called
organizational strategies, which relate to the entire organization. They also have functional strategies, which
relate of the functional areas of the organization. The functional strategies should support the overall strategies
of the organization, just as the organizational strategies should support the goals and mission of the
organization.
Tactics are the methods and actions used to accomplish strategies. They are more specific than strategies,
and they provide guidance and direction for carrying out actual operations, which need the most specific and
detailed plans and decision making in an organization.

EXAMPLES OF OPERATIONS STRATEGIES

FACTORS OPERATIONS EXAMPLES OF COMPANIES OR SERVICES
STRATEGY
Price Low cost U.S. first-class postage
Carrefour
Jetstar
Quality High-performance-design Sony TV
and/or high quality Lexus
Disneyland
Five-star restaurants or hotels
Consistent quality Coca-Cola, PepsiCo
Kodak, Xerox, Motorola
Electrical power
Time Rapid delivery McDonald‘s restaurants
Express Mail, UPS, FedEx
One-hour photo
On-time delivery Pizza Hut
FedEx
Express Mall
Flexibility Variety Burger King (―Have it your way‖)
Hospital emergency room
McDonald‘s (Business welcome‖)
Toyota
Supermarkets (additional checkouts)
Service Superior customer service Disneyland
Hewlett-Packard
IBM
Ritz-Carlton Hotels
Location Convenience Supermarkets, dry cleaners
Mall stores
Service stations
Banks, ATMs

STRATEGY FORMULATION
Strategy formulation is almost always critical to the success of a strategy. Wal-Mart discovered that when it
opened stores in Japan. Although Wal-Mart thrived in many countries on its reputation for low-cost items,
Japanese consumers associated low cost with low quality, causing Wal-Mart to rethink its strategy in the
Japanese market.

Environmental scanning is the considering of events and trends that present either threats or opportunities
for the organization. Generally, these include competitors‘ activities; changing consumer needs; legal,
economic, political, and environmental issues; the potential for new markets; and the like.

Important factors may be internal or external. The following are key external factors:

1. Economic conditions these include the general health and direction of the economy, inflation and
deflation, interest rates, tax laws, and tariffs.

2. Political conditions these include favorable or unfavorable attitudes toward business, political stability
or instability, and wars.

3. Legal environment these includes antitrust laws, government regulations, trade restrictions, minimum
wage laws, product liability laws and recent court experience, labor laws, and patents.

4. Technology this can include the rate at which product innovations are occurring, current and future
process technology (equipment, materials handling), and design technology.

5. Competition this includes the number and strength competitors, the basis of competition (price, quality,
special features), and the case of market entry.

6. Markets this includes size, location, brand loyalties, ease to entry, potential for growth, long-term
stability, and demographics.

The organization also must take into account various internal factors that relate to possible strengths or
weaknesses. Among the key internal factors are the following:

1. Human resources
This include the skills and abilities of managers and workers; special talents (creativity, designing,
problem solving); loyalty to the organization; expertise; and dedication;

2. Facilities and equipment

Capacities, location, age, and cost to maintain or replace can have significant impact on operations.

3. Financial resources
Cash flow, access to additional funding, existing debt burden, and cost of capital are important
considerations.

4. Customers
Loyalty, existing relationships, and understanding of wants and needs are important.

5. Products and services

These include existing products and services, and the potential for new products and services.

6. Technology
These include existing technology, the ability to integrate new technology, and the probable impact of
technology on current and future operations.

7. Suppliers
Supplier relationships, dependability of suppliers, quality, flexibility, and service are typical
considerations.
 8. Other
Other factors include patents, labor relations, company or product image, distribution channels,
relationships with distributors, maintenance of facilities and equipment, access to resources, and
access to market.

What is meant by fiscal policy?

Fiscal policy is the means by which a government adjusts its spending levels and tax rates to monitor and
influence a nation's economy. It is the sister strategy to monetary policy through which a central bank
influences a nation's money supply.

In economics and political science, fiscal policy is the use of government revenue collection and expenditure to
influence a country's economy
The two major examples of expansionary fiscal policy are tax cuts and increased government spending. Both
of these policies are intended to increase aggregate demand while contributing to deficits or drawing down of
budget surpluses
When inflation is too strong, the economy may need a slowdown. In such a situation, a government can
use fiscal policy to increase taxes to suck money out of the economy. Fiscal policy could also dictate a
decrease in government spending and thereby decrease the money in circulation
What are the 3 tools of fiscal policy?
Fiscal policy is therefore the use of government spending, taxation and transfer payments to influence
aggregate demand. These are the three tools inside the fiscal policy toolkit

What is Inflation:
A general increase in prices and fall in the purchasing value of money.

Inflation is an economic term that refers to an environment of generally rising prices of goods and services
within a particular economy.
For example, prices for many consumer goods are double that of 20 years ago

The definition of inflation in simple terms is the increase in the price of goods. It can also refer to the use of
more money to buy the same product. So you can see the inflation as the rise in prices of goods or decrease in
purchasing power. ... As prices rise and inflation rises, the value of money decreases.

There are two major types of inflation:

demand-pull and cost-push.

Demand-pull inflation occurs when consumers have greater disposable income. ...

Cost-pull inflation happens when supply decreases, creating a shortage. Producers raise prices to meet the
increasing demand for their goods or services.

Two Causes of Inflation and the Circumstances That Create Them

There are two main causes of inflation: Demand-pull and Cost-push. Both are responsible for a general rise in
prices in an economy. But they work differently. Demand-pull conditions occur when demand from consumers
pulls prices up. Cost-push occurs when supply cost force prices higher.

You may find some sources that cite a third cause of inflation, expansion of the money supply. But the Federal
Reserve explains that it's a type of demand-pull inflation, not a separate cause of its own.

Demand-Pull Inflation

Demand-pull inflation is the most common cause of rising prices. It occurs when consumer demand for goods
and services increases so much that it outstrips supply. Producers can't make enough to meet demand. They
may not have time to build the manufacturing needed to boost supply. They may not have enough skilled
workers to make it. Or the raw materials might be scarce.

If sellers don't raise the price, they will sell out. They soon realize they now have the luxury of hiking up prices.
If enough do this, they create inflation.
There are five circumstances that create demand-pull inflation. The first is a growing economy. As people get
better jobs and become more confident, they spend more.

As prices rise, people start to expect inflation. That expectation motivates consumers to spend more now to
avoid future price increases. That further boosts growth. For this reason, a little inflation is good. Most central
banks recognize this. They set an inflation target to manage the public's expectation of inflation. The U.S.
central bank, the Federal Reserve, has set a target of 2% as measured by the core inflation rate. The core rate
removes the effect of seasonal food and energy cost increases.

The third circumstance is discretionary fiscal policy. That's when the government either spends more or taxes
less. Putting extra money in people's pockets increases demand and spurs inflation.

Marketing and new technology create demand-pull inflation for specific products or asset classes. The asset
inflation that results can drive widespread price increases. Asset and wage inflation are types of inflation. For
example, Apple uses branding to create demand for its products. That allows it to command higher prices than
the competition. New technology also occurred in the form of financial derivatives. These new products created
a boom and bust cycle in the housing market in 2005.

Over-expansion of the money supply can also create demand-pull inflation. The money supply is not just cash,
but also credit, loans, and mortgages. When the money supply expands, it lowers the value of the dollar. When
the dollar declines relative to the value of foreign currencies, the prices of imports rise. That increases prices in
the general economy.

How exactly does the money supply increase? Through expansionary fiscal policy or expansionary monetary
policy. The federal government executes expansionary fiscal policy. It expands the money supply through
either deficit spending. Deficit spending pumps money into certain segments of the economy. It creates
demand-pull inflation in that area. It delays the offsetting taxes and adds it to the debt. It has no ill effect until
the ratio of debt to gross domestic product approaches 90%.

Occasionally, the government can create inflation simply by printing more cash. Venezuela did this between
2013 and 2019. It created hyperinflation, and the money became worthless. People began using eggs as
currency.

The Federal Reserve controls expansionary monetary policy. It expands the money supply by creating more
credit with the use of its many tools. One tool is lowering the reserve requirement. It's the amount of funds
banks must keep on hand at the end of each day. The less they have to keep on reserve, the more they can
lend.

Another tool is lowering the fed funds rate. That's the rate banks charge each other to borrow funds to maintain
the Reserve requirement. This action also lowers all interest rates. That allows borrowers to take out a bigger
loan for the same cost. Lowering the fed funds rate has the same effect. But it is a lot easier. As a result, it's
done much more often. When loans become cheap, too much money chases too few goods and creates
inflation. The prices of everything increase, even though neither demand nor supply has changed.

Cost-Push Inflation

The second cause is cost-push inflation. It only occurs when there is a supply shortage combined with
enough demand to allow the producer to raise prices.

There are five contributors to inflation on the supply side. The first is wage inflation that increases salaries. It
rarely occurs without active labor unions.

A company with the ability to create a monopoly is a second contributor to cost-push inflation. It controls the
entire supply of a good or service. The Sherman Anti-Trust Act outlawed monopolies in 1890.

Natural disasters create temporary cost-push inflation by damaging production facilities. That's what happened
to oil refineries after Hurricane Katrina. The depletion of natural resources is a growing cause of cost-push
inflation. For example, overfishing has reduced the supply of seafood and drives up prices.

Government regulation and taxation also reduce supplies. In 2018, U.S. tariffs reduced supplies of imported
steel. That created shortages in manufactured parts, with some producers raising prices. In 2008, subsidies to
produce corn ethanol reduced the amount of corn available for food. This shortage created food price inflation.

When a country lowers its currency's exchange rates, it creates cost-push inflationin imports. That makes
foreign goods more expensive compared to locally produced goods.
The Bottom Line

There are two major types of inflation: demand-pull and cost-push. Demand-pull inflation occurs when
consumers have greater disposable income. Having more money to spend allows people to want more
products and services. Expansionary fiscal and monetary policies, consumer expectation of future price
increases, and marketing or branding can increase demand.

Cost-pull inflation happens when supply decreases, creating a shortage. Producers raise prices to meet the
increasing demand for their goods or services. Increase in wages, monopoly pricing, natural disasters,
government regulations, and currency exchange rates often decrease supply vis-à-vis demand.
GAME THEORY AND PRICING STRATEGIES
Game theory is the process of modeling the strategic interaction between two or more players in a situation
containing set rules and outcomes. While used in a number of disciplines, game theory is most notably used as
a tool within the study of economics. The economic application of game theory can be a valuable tool to aide in
the fundamental analysis of industries, sectors and any strategic interaction between two or more firms. Here,
we'll take an introductory look at game theory and the terms involved, and introduce you to a simple method of
solving games, called backwards induction.
lesson
lesson