This methodology determination is similar to labor investment vs capital investment, where a task may be performed by labor as opposed to automation.

Please note this article is written mostly within the domain of IT infrastructure, however there are aspects of this subject which are also applicable to accounting methodologies for Capital Expenditure and Operational Expenditure.

A limited analogy of Capital Expenditure and Operational Expenditure is to think of Capital Expenditure as renting infrastructure and Operational Expenditure as a purchasing your infrastructure. There are advantages to both types of financing your infrastructure.

Capital Expenditure (CapEx)

Capital Expenditure is the up-front spending on physical infrastructure such as hardware,

Examples of Capital Expenditure

• Networking Equipment
• Servers, Spinning Disk, SSD and Compute
• Racking Equipment
• Climate Control Equipment
• Cabling and Termination (Patch Panels, Ethernet Pattress Boxes)
• Software
• Monitoring and Disaster Recovery
• Land or Property
• Generators
• Security

Capital Expenditure usually has a large inital cost as a new project is delivered, over time the cost of the infrastructure will remain mostly constant until hardware failures, obselesence and improvements to methodologies cause changes to configuration.

• Renewals
• Expansions
• Upgrades
• New Infrastructure

Advantages of Capital Expenditure

• Greater control over fixed assets, which can be liquidised if required, this applies not just to IT equipment but warehousing, property and vehicles.
• Property and equipment can be kept physically close to users to provide faster, cheaper throughput. Access to resources that could be internal do not rely on the WAN.
• Low cost to bandwidth for even medium sized organisations when transferring locally. Low or no cost transfer between hosts.
• Upgrades and downgrades to hardware is generally easier than cloud based solutions. Cloud based solutions generally do not provide an easy method of scaling down infrastructure.
• Issues with the host can be identified by onsite skills rather than second or third party infrastructure teams.
• On premise infrastructure still works when wider services like Cloud solutions, ISPs or links between sites go down.
• Capital Expenditure is generally better for organisations with a lot of techical debt, because applications can keep running for years with little cost. When reaching capacity older appliances can be decomissioned to free up space for newer hardware or software.
• Generally heavy compute or IOPS (Transfer between appliances) is best suited on premise, because the cost will be lower than cloud.

Disadvantages of Capital Expenditure

• Large initial cost to start a project.
• Large cost when appliances need refreshing/upgrading.
• Growing or Expanding businesses will require more assets, including space and electrical infrastructure to support the requirements of the business.
• Redundancy and SLAs are on the business, power outages or natural disasters can cause business closing consiquences.
• Large monolithic applications can cause technical debt.
• Generally the value of the assets you purchase decreases over time and with wear.

Operational Expenditure (OpEx)

Operational Expenditure is different in that the cost of the asset is not included at the start but you continually pay for it throughout the lifetime of the project.

Operational Exepnditure is also more dynamic as you can pay your provider to scale up and down the instances horizontally or vertically as needed, increase compute or storage, or increase the number of nodes required.

Examples of Operational Expenditure

• Storage Cost
• Administrative Expenses
• Maintenance
• Subscriptions and Licencing

Generally it can be easy to decide which option is cheaper over the lifetime of a project if an on-premise business has already invested in the surrounding infrastructure, however increasingly cloud providers are offering lower cost incentives such as lower cost products than a traditional virtual machine or cheaper hardware through their platform.

Advantages of Operational Expenditure

• Products are generally available quicker for purchase for project managers than on-premise, providing a more agile IT strategy.
• Expenses are generally at every billing cycle consistently, rather than an initial cost for hardware and then a smaller maintenance cost.
• Generally you pay for consumption where you only pay for the resources used, however some providers will agree to a discount if a commitment is made for resources over a longer term.
• Costs can be predicted and generally billing can be itemised easily, which helps in understanding risk.
• Some IaaS and most SaaS solutions will patch and maintain infrastructure, such as databases without much input from the product owners.

Disadvantages of Operational Expenditure

• Generally costs for highly transactional applications can be higher than on-premise solutions, such as compute or IOPS intensive workloads.
• Decisions may be set with a short term view and poor cost analysis.
• Availability of skilled professionals is not easy.
• Can be more expensive than in-house solutions.

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Vendor Lock-in

Although vendors like Azure may offer greater features or added value than traditional on-premise services, there can often be features that PaaS services offer that are not available in other solutions that can increase the total cost of ownership.

Features are not the only drawbacks to cloud solutions, many cloud platforms can offer additional infrastructure or architectures that can make lift and shift harder or impossible. This is especially prevalent for IT teams that do not have software development in their departments.

Downtime

Many cloud services, especially global solutions like AWS, Google Cloud or Azure have had downtime in the past and although they provide service level agreements to their services, they have had downtime that can span many hours.

In addition, configuration changes and DNS are a big factor to consider. Managing trusted IP addresses and DMZ’s over the internet can be difficult to implement effectively. Many cloud solutions are better than what in-house services can offer but resiliency and accessibility becomes an overhead that requires consideration.

Many cloud solutions offer backup technologies and solutions with low import fees but high exit fees when transiting data.

Skill Gaps and Lack of Expertise

As new cloud solutions develop, it is becoming increasingly difficult to learn new skills for all platforms and effectively transfer them from one provider to another, product names and technologies are complex to learn and certifications for one cloud platform may not always apply to others.

Cloud technologies on the whole are here to stay and rapid advancement in technologies can be costly to small business to implement. Many companies are using automated solutions like backups and Azure AD to manage systems that previously were done in house, this can make break-glass protocols or access to systems where the administrator is no longer present difficult.

Bandwidth and Data Transfer Fees

Saving money is a common driver for business decisions and cloud solutions offer good value for services once in-house, however the cost of moving data around the enterprise can be expensive when a hybrid approach is adopted. This is especially prevalent for large transfers of data off the cloud or public internet.

Many cloud solutions can also deliver data faster via CDNs or through local appliances to alleviate this cost, however this requires some investment and can lead to vendor lock-in it can lead to better globalisation and work from home approaches to working.

Choosing the right service can be complex, such as choosing a hosted VM over a PaaS solution like a database server over a managed database can be hard to estimate best value.

As products and services grow over time, these costs will become more difficult to manage and estimate as requirements by users increase.

Incompatibility

Many enterprises choose a hybrid approach when moving to the cloud, offering services once only internal to the enterprise – now available through the public internet makes security a greater consideration. Older applications deemed acceptable risk or air-gaped may no longer be supported by surrounding infrastructure or end user clients.

Many enterprise applications may not be built for the cloud or may not support security technologies the cloud requires when working with externally facing services, in particular patching and maintenance to applications no longer supported by vendors.

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A customer focused approach can be adopted by many aspects of a business, such as;

• Sales
• Management
• Location
• Customer Service
• Marketing
• Growth and Extensibility

Many customers will have different needs and goals and there are many aspects to a business that may need to change to adopt a customer-first approach, but the payoff is;

• High Customer Retention
• Long Term Commitment
• Greater Profitability
• Greater Customer Satisfaction

However, adopting such an approach may also have some negative business consequences;

• Increased Spending
• Increased Overheads
• Increased After-Sales spending
• Immediate responses and on-site negotiation
• Lower Profitability
• Harder Automation or lack there-of

Providing a Customer-Focused Approach to Sales

Giving the customer what they want is paramount to ensuring a customer-focused approach. Customers usually can appreciate a hands-off approach to getting things done and are usually willing to pay extra for it. Providing a service that is better than the competition or providing greater pre-sales support increases, for example, through online-chat or in-person representation allows the business to increase their potential to close a sale and provide the customer greater satisfaction in their choice.

There are many ways to provide a custom approach to sales;

• Offer a product that is superior to competition – If your business is able to deliver a product better than the rest, you can capitalize on its potential to increase the customer’s satisfaction.
• Use Marketing that drives the customer toward package solutions – providing a complete service, rather than a means to an end will allow for greater satisfaction, and as a by-product greater opportunities for increased added value.
• Guide the customer – Inform the customer of any regulations or licensing that they may need, arrange to set that up for them as part of the service.
• Offer tertiary products that complement their purchase.
• Provide Pre-Sales service to ensure the customer is satisfied through demonstration or information.
• Understand the customer’s stated clear needs and objectives to provide a product they would be satisfied with.
• Know when the customer is ready to talk, and when they aren’t.
• Exceed the customer’s expectations.
• Develop relationships that the customer values.
• Offer solutions to suit the needs and concerns that the customer may have before purchase.
• Don’t be passive. Engage with the customer
• Ensure customers receive what they ask for and gauge success

Offering a way for the customer to reflect their satisfaction, through survey or metrics will allow a business to identify where they achieve, exceed or disappoint the expectations of the customer.

Providing a Customer-Focused Approach to Management

A large part of Customer Focus for management staff and management, in general, is providing proper training for staff to fulfill the needs of the customer above and beyond their expectations,

• Management shouldn’t be a roadblock between the customer and the sales staff. Provide a framework that can be followed such as a budget or develop routine customer stories.
• Provide training to ensure the sales staff know what isn’t allowed.
• Use appropriate means of communication, don’t push for sales.
• Have measures in place to prevent abuse, A case study about continental found on average the lowest value customers whose flights were delayed were receiving the highest compensation.
• Know your market segment and the needs of the customers, if a customer does not care about your values as a business, you need to change to be competitive.
• Provide staff with a view to the customers’ interests and an incentive to stick to it.
• What is the best way to collect customers’ responses and respond to issues?
• Coordinate your teams as a group with clear ground rules and goals but don’t alienate the customer

Providing a Customer-Focused Approach to Location

When a customer wants a product or service, they may be willing to pay more than the going rate for convenience, more-so due to the new market for app-based food deliveries and same-day online shopping. Having the customer see your storefront when they need to is a perfect situation for both parties.

Many businesses also opt to help the local community and sponsor community projects.

References;

• The Quest for Customer Focus
• Best Practices: Building Your Business with Customer-Focused Solutions

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Large Information Systems

Some businesses are so large that their processes may require information systems to handle day-to-day business processes. One such example is order processing. Businesses with large order systems or large quantities of products to manufacture may only handle order processing through information systems.

One such information system used in a logistical setting is one that would be used to record inbound goods. Physical product businesses for example need to record incoming raw materials or ordered products to process them and turn them into a product. Without a centralised information system it can be very hard to keep track of stock levels, although maintaining the whereabouts of goods used by the business can be useful but in the real world some of these goods can go missing, be wasted, damaged or arrive having already being damaged. This is why information systems must be able to handle losses and inform stock keepers when the product is becoming depleted and must be re-ordered especially on systems that involve Kanban or Just in Time systems. This is one such example of where information systems must be able to handle all scenarios that an employee will encounter.

Examples of Business Information Systems

Business information systems have different requirements throughout the various departments;

Human Resources must be able to use information systems to 
handle processes such as,

• Employee Payroll.
• Employee Performance.
• Hiring and Job Roles.
• Staff Records and Employee Contracts.
• Holiday Management and Illness.
• Training Programs.
• Attendance and Absenteeism.
• Staff Disciplinary Records.

Senior Management may not always use information systems as their roles may be too strategic or sporadic to construct an information system, however they may have daily or even business cyclic tasks such as,

• Monitoring performance of the business or business processes.
• Maintaining customer relationships through relationship management software or CRM.
• Assess generalised performance of a store or business through warehouse management software or employee performance.
• Make strategic decisions about business processes by using sales data or reporting software.
• Identify problems with processes or business cycles.
• Generate Reports for Sales, Product Development or Manufacturers.

General Management may use information systems to,

• Distribute work to employees.
• Identify problems with processes or business cycles.
• Monitor Employee clock-in times.
• Monitor Employee processes or performance.
• Record Paying Hours or Overtime.
• Action directions from higher up.
• Discipline employees.
• Correct or Normalise Data on the System.
• Query or edit the database.
• Prioritise.

Employees may use information systems to,

• Action Jobs tasked to them.
• Query a database.
• Create orders for customers.
  

Some of the advantages of using an information system

• It may aide the speed a process in a business can be completed as all of the data needed is centralised and managed in one place.
• The information system may enable employees to manage large orders or information as a batch.
• The information system may be able to prioritise important jobs on the system.
• Mistakes could be identified by the system and prompt the user to rectify it.
• The system may improve or identify bottlenecks in the business process.
• The system may allow for customers to interact with it directly and therefore reduce the time it takes for a business to fulfill a customers desires.
• The system may be compatible with other systems through an API which can link systems together.

Some of the disadvantages of using an information system

• If the system is custom or highly specialised making changes to it can be hard or expensive or slow.
• The information system may be slow which could frustrate users.
• The system may not have all the features an employee desires or,
  
• The system may not allow some of their users to change data that they need to change.
• The information system may not be suited for its use case.
• Employees may have preferred the previous method or may not be it savvy enough to use the system.
• The system may be designed in such a way that mistakes become a problem.
• The system may be abused by employees for gain. (clocking out early, marking work as completed when it isn’t)
• If it breaks a business may not be able to function if they are reliant on it.
• If it breaks it may corrupt data that may be unrecoverable.

Custom Information Systems

And there are many more examples of businesses using information systems. Many of them my abe trivial or bespoke, however there are programs designed to make information systems at a higher level than writing a program for them, One such example is Microsoft Access.

Many businesses will use Microsoft Access or custom programs to create their data and manage company process. Added advantages of using a custom program is that the company may use a single program (or a single database) for a large business process are,

• Having a custom program allows the business to construct the data they wish to use when they need to, such as recording information that other companies may not.
• Using a custom program may allow for the business to create specific access control levels.
• Customisation like company logos or specific company colors or themes.
• Many Many more…

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Factors Influencing Demand

This article serves to supplement the article Influences for Supply and Demand, that I wrote a while ago. For a more general overview of supply and demand, I suggest visiting there first.

Demand has many factors that influence a market, such as;-

• Changes to the prices to substitute products, such as cheaper products available online or at discount stores could reduce the sales of a premium product or product range.
• Changes to the availability of complementary goods or changes in the price of complementary goods, such as two large luxury opposing ice cream companies.
• Disruptions to the supply chain of competitors, such that their prices or other aspects change.
• The incomes of customers could rise, causing customers to choose superior or premium products, similarly, they could fall and choose less or inferior products, Especially prominent for Elastic products or Luxury Items.
• Advertising could increase consumer interest or make the product more noticeable to customers or potential customers.
• Branding or PR could be used more prominently or advertised.
  • Recently companies have opted for using social marketing or guerilla marketing, as it can be more successful or noticeable since ad-blockers and the fall of cable TV and TV Advertising have made it harder to reach consumers.
• Advertising or Branding of other competitors products could also potentially boost your own profits, especially if the product is generic or seasonal.
• Changes to consumer incomes.

The demand for a product or service may also depend on the demographics of the product, if it is aimed at older people and the area is a student town, finding customers may be more difficult than other locations.

External Shocks, such as the economy or new technologies that make the product or service obsolete could also negatively affect the products demand if a business fails to innovate or adapt to change.

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Factors Influencing Supply

This article serves to supplement the article Influences for Supply and Demand, that I wrote a while ago. For a more general overview of supply and demand, I suggest visiting there first.

Supply has many factors that influence a market, such as;-

• The availability of raw materials.
• The time it takes to process a set, batch or quantity of stock, like aged wine or hard sweets.
• Disruptions to the distribution chain of competitors, such that their prices or other aspects change.
• Natural Disasters utility supply issues or storage issues.
• Advertising could increase consumer interest or make the product more noticeable to customers or potential customers and cause a shortage due to unforeseen interest or popularity.
• Branding or PR could be used more prominently or advertised to cause similar consequence.
• New Machinery or Technology could make the production of items much less time consuming or much cheaper such as new methods of batch processing.
• A monopoly may artificially limit the availability or raise the price or perform anti-competitively.
• Automation could speed up production and therefore increase availability.
• Government Subsidy or Tariffs could increase or decrease supply in a domestic market.
  • A subsidy devised to increase sales in a companies domestic market could raise consumer interest.
  • A company may be forced to maintain a domestic market orientation as shipping externally may not be competitive due to tariffs.

The overall effectiveness of a product is readily available to be supplied by manufacturers depends on consumer interest, the availability of raw materials and the lead time it takes to produce a product.

Agricultural products may be much harder to maintain during droughts or other natural disasters as they take the time to grow naturally and no amount of investment can speed up the process much more than what people are willing to pay for.

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Detailing the steps involved can help to create a better picture of the complexity of a project. To do this, Critical Path Analysis Diagrams are used to break down the project into stages.

Each stage is made up of nodes, and each node is made of three numbers, the nodes are the circles in the image above (there are two) and have a path between them, Each path has the project that will be completed on the top and the time on the bottom.

Each node has a number on the left half, the earliest start time on the top and the latest finishing time on the bottom. Some diagrams also denote the direction of the path, however, it usually starts on the left, and ends on the right.

Some Critical Path Analysis Diagrams can become complex and take a long time to complete, some stages may also require few or many steps to complete, it is for this reason that Critical Paths are also shown on a diagram.

In the diagram above, there are four nodes and therefore more work to be completed, however having a top and bottom section has so far proven redundant. It is only when there is an alternate path that these nodes become useful.

We can now see that having the latest finish time has meant that the project now cannot be finished until the ninth day as the task ‘Air Transport’ Requires a longer time period than the other tasks. This is why the fourth node now reads ‘9’ on the latest finish time. Additionally, there is now dashes along the Critical Path as this task must be completed in order for the project to remain on time.

Critical Path Advantages

Finding the critical path of a project allows a business too;

• Conduct better contingency planning as they can see clearly where projects have the potential to get held up in the process and aren’t slowed down due to failures in the system.
• Optimize workflow for employees as they will be able to better manage the time they need to complete a task, should a task have a long lead time, the task could be delayed without affecting the progress of the project, for example, a node having a quicker ‘earliest start time’ than other tasks.
• Allows a job to be completed in the shortest amount of time possible.
• It can help to reduce risk on projects that have complex time dependencies.

Critical Path Disadvantages

• However, it does not account for the likelihood of failure of a task where it was poorly planned from the beginning.
• It does not account for the fact that a project may eventually have stages that need changing as time progresses or situations change.
• It depends on the accuracy of the projects predicted time-scale.
• It may not account for other factors like cost or trade-off.
• Resources may not be as flexible in the long term as previously planned.

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• Labour Intensive Production aims to use a large workforce to complete work by hand, this usually employs a lot of people to create a product. Some products may be seen to have more value if they were manufactured by hand.
• Capital Intensive Production aims to create a product using as little people as possible, the process could be entirely or partially automated and can sometimes be used to assist individuals in manufacture, such as a custom robotic factory worker that moves parts of a product to assembly, or a robot that screws in multiple screws at once. The aim of these tools is to make the job simple or quicker than manual labour, in order to product multiple product in a given time. Production machinery may be very expensive, but aims to be cheaper than labour intensive production in the long run.

Labour Intensive Production

Labour costs are higher than capital intensive production, however they can vary. If the task is simple then automation may not be necessary. Labour Intensive production will generally have lower running cost than capital intensive production, as workers will perform most of the tasks. Firms can benifit from access to low-cost labour as the job will likely be low skilled.

• Businesses can benefit from premium pricing for ‘hand crafted’ goods.
• There is generally better quality if it is not a fast process.
• Labour costs can be lower if businesses hire on temporary contracts. Individuals will not need to operate specialised machinery.
• Some businesses can use a flexible workforce to make sure that locations are staffed efficiently.
• Labour Intensive production allows for improvement easily compared to capital intensive production.
• Observation is easier.
• Lower Break-even output.
• Labour intensive production is often associated with low tech repetative processes.

Capital Intensive Production

• There is generally a better consistency than manual labour.
• Businesses can loose competitiveness as they are stuck in the same production technique.
• Machinery may become obsolete.
• You can’t make businesses such as a restaurant or hotel capital intensive as customers may feel that their stay was devalued by it.
• May generate resistance from labour workforce when implementing.
• Kanban systems are easier to implement.
• There may be a greater loss if there is a fault.
• Programmed machines do not loose skill and there is no skill shortage for machines.
• Potentially High labour costs if individuals need to maintain complex machines.
• Firms can benefit from access to long term financing.
• Labour is more specialised so individuals are good at their job.
• There is usually longer term benefits.
• Robots do not require pay.
• Costs are mainly fixed.
• There is therefore usually a higher break-even output.

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Trade-offs are choosing one thing over another, if you choose to invest in paint over pencils, your opportunity cost, is that you can no longer colour with pencils. This is a poor example, so lets look at some real data so we can get a good understanding of what opportunity cost is really about, and for that we need an example.

Nails and Hammers LTD.

A company, called Nails and Hammers LTD, produces hammers and nails, they have a good reputation, but are not really known, they also manufacture their hammers cheaply and therefore some of them are not exactly to the highest quality. in their first year, they only sell 100 units, this is barely enough sales to keep the business going, so they decide to invest in one of two strategies. Investing in Machinery, in order to produce better quality hammers, or Invest in Advertising, to get the word out about their Hammers and Nails. They decide that they will spend $300 dollars in the second year and see how it goes. They do their market research and come up with these two graphs.

It can be seen from these graphs, that investment in advertisements will produce more sales than investment in machinery, therefore investment in Advertising is the way forward for Nails and Hammers LTD. This is called a trade-off, without the graph, it wouldn’t be known which is better for sales until the second year had ended. The same investment of $300 produced more sales. Lets, look at more data.

Opportunity Cost

Opportunity cost is essentially what you could have won if you had invested in something else, if you can only learn piano or tennis, and you choose piano, the opportunity cost is that you could have learnt tennis.

Let’s take our previous example, and pretend that we invested in the lesser option, Machinery, we can see that we didn’t make as much as we would have if we had invested in Advertising. The opportunity cost in the third year would have been 200, because the investment in advertising, produced 700 sales, minus our 500 sales.

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A Public Limited Company is a business that has decided to offer it’s shares on the public stock market. The Stock Market is where anyone can invest in a Public Limited Company. These are usually high value, large businesses that can have massive profits, and offer dividends to those who invest.

In order to become a Public Limited Company, PLC, you need;

• At least two directors.
• A Secretary
• And you must float at least $50,000 shares on the stock exchange, to become a PLC.

Unlike other businesses, a PLC is often owned by a board of directors, that dictate the decisions of a business. PLC’s must also pay Dividend, which is money that the investors receive from the business, determined by their share value. As PLC’s have external influences, they also fluctuate in value and therefore can loose money. Some businesses owners also find that they can loose control. Being a PLC can bring in more capital and make the business more known publically on the sock exchange.

For contrast, to become a Sole Trader. All you have to do is contact HMRC (Her Majesty’s Revenue and Customs) and every year fill in a self assessment. An LTD must send a Memorandum of Association and Articles of Association. For this reason it becomes a lot harder to do so and often people will employ a Secretary. To be a PLC can take lots of time and can sometimes not be possible for companies with a very bad image. Companies also may struggle if they are unreliable or have seasonal traits, such as a manufacturer of Christmas gifts.

Advantages of a Public Limited Company

• Having Shares will fund expansion, allowing the business to grow.
• This also raises company profile.
• The business can raise a lot of capital because there is no limit for shareholders to invest.
• Shares are transferable, so investors can split profits.
• You can get input from investors.
• Investors may try to grow the business, through things like discounted advertising, if they own part of another business.

Disadvantages of being a Public Limited Company

• There could be a possible loss of control, as people may find that shareholders own over 50% of the shares, entitling them to the ownership of the business. This is also known as a divorce of control.
• Shareholders may have other plans to maximise profits over social and ethical goals.
• Share prices could collapse.
• There are a lot of legal formalities.
• Fluctuations in share price could make a company worthless overnight.
• PLC’s are hard to maintain. As they are usually large, often everyone has their own ideas.
• Some companies may be overvalued.
• Some do not have $50,000 worth of shares to float.

A PLC is usually for large companies. Small businesses will not always expect to grow, Corner shops for example, will not grow beyond what is possible due to the local footfall. Therefore PLC’s are often global businesses.

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