Author: Study for Business

• What is labour productivity?
• The importance of labour productivity
  • Uses of labour productivity
  • Limitations of labour productivity
• Do you understand the importance of labour productivity? Take the quiz and find out
• Review similar topics

What is labour productivity?

Labour productivity shows businesses how many products or services are produced by their employees within a specific period of time. This shows how efficiently employees are working within the timeframe selected. Labour productivity is often measured by output per worker.

For instance, a clothing manufacturer produces skirts for fashion retail outlets. Company A has 25 employees who sew 275 skirts each week. Each employee will sew 11 skirts each week. Company B on the other hand only has 17 employees and is able to sew 221 skirts per week. Each employee will be able to make 13 skirts each week.

Company	Number of employees	Skirts produced each week	Number of skirts produced by each employee
Company A	25	275	11
Company B	17	221	13

Although Company A is able to produce more skirts each week, the employees in Company B are working faster to sew the skirts. This means that Company B will have lower labour costs to make each skirt. For instance, if each employee at both companies is paid £384 per week, Company A will pay £34.9 (£384/11)in labour costs per skirt whereas Company B will pay £29.5 (£384/13). This will make Company B more competitive as they will have higher profit, or the option to lower their prices.

Businesses will try to improve their labour productivity results. To do this, they will track the results over time to see how many units each employee is producing. If the business finds employees are producing less, they will take action to try to improve the outcome or result.

The importance of labour productivity

Labour productivity can have strong uses in the organisation. However, it does also have some limitations that need to be considered and monitored.

Uses of labour productivity

• Labour productivity can be a good way to find groups of employees, teams or departments that are the most efficient. For instance, teams can be compared with each other by measuring the labour productivity for both of them. Their tasks and the equipment used to complete the task need to be the same for an accurate comparison. The one with the highest labour productivity might be working more efficiently.
• Increased labour productivity can result in lower labour costs. Businesses can then make higher profits or reduce prices. This could potentially lead to a higher competitive advantage.

Limitations of labour productivity

• Although labour productivity might increase, and employees produce more products within a specified timeframe, the quality of the products might decrease. Employees might work quickly to produce more but in so doing be careless resulting in a lower quality product.
• Competitive advantage might be lost if the competition also increases labour productivity in their organisations. The competition could also lower their prices to match.

Do you understand the importance of labour productivity? Take the quiz and find out

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The method of cost-based pricing (also called mark-up pricing or cost plus pricing) discussed in this article is based on the full-cost method.

What is cost-based pricing?

Cost-based pricing is a strategy used by businesses to set the selling price of a product.

• Businesses calculate the unit cost to purchase or manufacture each product.
• The amount of profit they would like to achieve for each product is then added to the cost.
• This additional profit, the amount more than the unit cost, is called a ‘markup’.
• The markup is a percentage of the unit cost of each product.
• The unit cost and the markup are added together to determine the selling price.

Calculating cost-based pricing

Retailer (markup pricing):

The unit cost for each dress a clothing retailer purchases from a manufacturer is £25. The clothing retailer adds a markup of 120%.

• Unit cost per dress = £25
• The markup per dress = £30
• The selling price for each dress = the unit cost per dress + the markup per dress
• Selling price = £25 + £30 = £55

Manufacturer (cost plus pricing):

In some cases, the unit cost needs to be calculated first before a markup can be added. For example, a mineral water manufacturer has annual fixed costs of £45 000. It produces 150 000 units of bottled water each year. The variable costs for each unit are £0.5. The manufacturer sets the selling price by adding a markup of 250% to each bottle of water.

• Fixed costs per unit: £45 000 / 150 000 = £0.3
• Costs per unit = £0.3 + £0.5 = £0.8
• A markup of 250% of £0.8 = £2
• Selling price = £2.8 (add the cost per bottle of water and the markup)

The benefits and drawbacks of using the cost-based pricing method

Benefits of cost-based pricing

Some benefits to cost-based pricing include:

• An easy calculation. Marketers can quickly calculate and make decision based on how much mark-up they would like on each product.
• The company is focusing on covering costs. It is likely that a profit will be made after costs have been covered.
• Suppliers may be able to convince customers that it is necessary to increase prices in order to cover costs.

Limitations of cost-based pricing

Some drawbacks to cost-based pricing include:

• Setting a price without considering the competition’s pricing strategy. If the competition sets their prices lower than the business using the cost-based pricing method, demand for the competitor’s products will be higher.
• Not all costs are easy to calculate. Some costs may increase faster than expected, resulting in an incorrect pricing strategy.
• There may be unexpected changes in demand. Sales might be low due to unforseen circumstances such as an economic downturn, or changing customer tastes and preferences.
• Not market oriented. Businesses should conduct market research to identify how much the customer is willing to pay.

Watch the video and answer the questions below.

What costs did business owners say were increasing?

Inventories, supplies, (raw) materials, fuel and labour costs.

What was causing these costs to increase?

Inflation / inflationary costs

What costs caused the manufacturer from Wisconsin to increase his prices, in other words, to pass on the costs to the consumer?

His supplier was increasing the price of raw materials weekly (a cost to the manufacturer). Also finding and keeping qualified employees.

How does this situation show one of the limitations of cost-based pricing?

It may be very difficult to calculate costs. Under inflationary conditions, prices may change quickly resulting in the original mark-up not covering costs.

Take the cost-based pricing quiz

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What are different stakeholder objectives?

A business’s internal and external stakeholders can have different objectives. These objectives must be taken into consideration by the business as they may have positive or negative impacts on operations. What’s more, when there are major differences in objectives, these can lead to stakeholder conflict. Some stakeholders have the following objectives:

• Owners / Shareholders: Gain profit from establishing or investing in the business. They may also want to expand to to gain further profit potential. Shareholders are likely to want an increase in dividends.
• Managers: Reinvest the profit back into the business. They are responsible for the business operating successfully.
• Employees: Will want higher salaries or wages with better working conditions. They will also want to know they will not lose their jobs (job security) and have chances for further development in the organisation through training or promotion.
• Customers: Usually want better quality products at lower prices.
• Suppliers: Will want their business customers to repay quickly if they have sold their products to them with trade credit conditions.
• Lenders / Creditors / Banks: Want their loans to be paid back on time.
• The government: Will want businesses to pay taxes.
• Local community: Will want the local area to be protected. They will also want long-term investment in the area. Finally, they will also want businesses to actively support the community, for example, through sponsorship.
• Pressure groups: They will want businesses to adjust their operations to fit in with their worldview and actions.

How do different stakeholder objectives lead to conflict?

Shareholders Versus Managers

Shareholders and managers might disagree on how profit should be redistributed. For instance, shareholders may want higher dividends, whereas managers may want to reinvest the profit back into the business. Shareholders may be focused on “short-termism” whereas managers may be focused on expansion or consolidation of the business.

Owners / Shareholders and Managers Versus Employess

Shareholders and managers may have some objectives that are in agreement. They might both want to hard working employees, and may not want to continual increase their wages over time. Employees on the other hand will be focused on job security, fair payment and good working conditions.

Owners / Shareholders and Managers Versus the Local Community

Managers may want their business to have a more neutral relationship with the community, whereas the community may want more involvement from businesses. The local community will not want the environent to be damaged by the business. Furthermore, they might also want support from businesses through sponsorship of loval events.

Managers Versus Customers

Managers will be focused on reducing costs to increase their profits. This may result in providing products with average quality and trying to sell them at higher prices. Conversely, customers may want higher quality products at lower prices. Customers may be dissatisfied with purchases if their expectations are not met.

Managers Versus Suppliers

Managers will want higher quality products at lower prices. Suppliers will want to receive higher prices for the products they are selling. Managers will also want favourable trade credit terms, with more days before they need to make payments. On the contrary, suppliers will want to be paid quickly.

Managers Versus Pressure Groups

Managers might not have prioritised social and environmental issues. On the other hand, pressure groups might impact the businesses by highlighting these issues publically. These could include emplyees rights in the workplace, pollution or environmental damage being caused by the business, or animal rights, just to name a few. Pressure groups will try to generate media interest in businesses who might not be operating up to their ideology.

The impact stakeholder conflicts can have on business decision making

Each internal and external stakholder have an influence on the way businesses make decisions. Firstly, businesses will evaluate how much power the stakeholder has, and how interested they will be in their business.

Most importantly, businesses must consider the objectives of internal stakeholders. They should ensure employees are motivated in the workplace, provided fair wages, training and development, as well as able to have a strong work life balance. Managers should also be provided with growth opportunities.

Furthermore, businesses should monitor and work with their external stakeholders. Suppliers should be paid on time, customers should be satisfied with the products and services they receive, and taxes should be paid to the government.

Video: The impacts of stakeholder conflicts

Why are Amazon employees striking for the first time in the UK?

They are asking for a 50% raise to £15 per hour. The employees believe it will not impact Amazon, and will bring the money back into the economy (as employees spend it).

What other stakeholders are being impacted as some of the employees go on strike?

Other employees trying to enter into the Amazon facilities (feeling of discomfort, unease, which could impact productivity), customers (may receive late shipments), delivery personnel (might not deliver packages on time), Amazon (loss of reputation and potentially profit), politicians are beginning to view Amazon unfavourably.

Thinking for yourself: What do you think Amazon should do?

Take the quiz on stakeholder conflicts

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What are stakeholders?

Stakeholders are people, organisations or groups in the community that have an interest in a business. They can have an impact on the business, or the business could have an impact on them. These could include the owners of the business, customers, the government, suppliers, distributors, employees, community groups, pressure groups, managers and shareholders.

The difference between internal and external stakeholders:

Internal stakeholders

Internal stakeholders are those that belong to the business, in other words, inside the business.

• Owners: The people who started the business.
• Managers: The people who are responsible for the people and the operations of the business.
• Employees: The people who are paid a salary or wage to work at the business.

External stakeholders

External stakeholders are those that do not belong directly to the business, they are outside of the business.

• Customers: People who buy products or services from the business.
• Suppliers: Other businesses that sell raw materials, components, of inventory to another business.
• Distributors: A person, agent, or business that sells (distributes) products onwards to retailers (shops).
• The government: The group of people within the organisation that governs a country.
• Lenders and creditors: People or organisations that lend money to businesses.
• The local community: The group of people living in the area where the business operates.
• Pressure groups: Groups of people who try to influence other people, businesses or the government to do what they want.

Please note: Some textbooks classify shareholders as external stakeholders, whereas others define them as internal. Check with your teacher on the classification for the exam you are taking.

Video: Who are the stakeholders?

Watch both videos about Vattenfall, an energy company focused on producing sustainable and renewable energy, as it expands operations in the UK. Answer the questions after each video.

Who are Vattenfall’s stakeholders as they build the South Kyle Windfarm in South West Scotland?

Create communications, a communications agency in Ayrshire (liason agency for Vattenfall), local people, local communities, local school children, community councils and local authorities (government agencies)

How has Vattenfall impacted the Ayrshire community?

Engagement in the community, providing local investment funds, creating jobs for local people.

Who are Vattenhall’s stakeholders in this video?

The port of Ayr, the local community

How has the Port of Ayr been impacted by Vattenhall?

It has been able to make more money as the wind turbines are being shipped through the port. Positive economic impact as local contractors stay in local hotels, people coming on site visit local shops

Take the quiz and see if you can identify the internal and external stakeholders:

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