Download Higher Business Management

Higher Business
Management
Business in Contemporary
Society
What is a business?
• A business is an organisation that
exists to satisfy needs and wants for
a profit.
Needs and wants
• Needs – a need is something
essential to our lives: food, water,
shelter, clothing.
• Wants – a want is an additional luxury
that makes life pleasurable.
Business activity
• A business activity is any activity that
provides us with goods and services
that satisfy human needs and wants.
Wealth creation
• A country’s wealth is measured by how
many goods and services the country can
produce.
• GDP (gross domestic product) = the
number of goods and services produced in
a territory over a specific period (usually
annually).
• The more goods/services sold, the more
likelihood of more jobs for the population,
and therefore the more tax raised for the
government.
• This in turn should be invested in services
for the nation.
Factors of production
In order to produce goods and services,
businesses need to use resources:
• land
• labour
• capital
• enterprise.
Factors of production
• Land – natural resources extracted from
Earth. Can be renewable or nonrenewable.
• Labour – physical and mental effort of
people in organisations.
• Capital – synthetic resources, such as
buildings, machines and tools.
• Enterprise – bringing together the other
three factors of production.
Click for clip
Business cycle
Needs
and
wants
Business
provides
goods/services
Consumers buy
goods/services
Business
cycle
Consumers
have money
to spend
from wages
Wealth for
companies and
employees
Goods
• Goods are tangible, physical products
we can see and touch, such as cars,
plasma TVs, MP3 players and iPads.
• Goods can be durable or non-durable.
Services
• Services are things that are done for
us. They are intangible.
• The police, your hairdresser and
travel are examples of services.
IPO
Input
Raw materials
Natural resources
Process
Workers
Machinery
Output
Finished
goods
Sectors of industrial activity
• Primary sector – Businesses taking natural
resources from the land (eg mining, fishing,
farming).
• Secondary sector – Use resources to make
or build their products, eg manufacturing
and construction firms. Includes utilities.
• Tertiary sector – Businesses that provide
services such as banking, tourism and
security.
De-industrialisation
• Economies begin in the primary sector and
move through each sector as they grow.
• De-industrialisation explains the decline in
heavy manufacturing in Scotland
(shipbuilding, car manufacture).
• The Proclaimers song ‘Letter from America’
mentions some towns that suffered due to
de-industrialisation, such as Linwood.
Reasons for
de-industrialisation
• Customer demand may change.
• Increased overseas competition may
mean jobs go elsewhere to keep
costs low for firms.
• Legislation may hamper firms.
Introduction to the command
words
Every question in the examination will contain
a specific command word
• Explain
• Identify
• Describe
• Distinguish between
• Discuss
• Justify
• Compare
• Outline
Explain
• Explain the cause of de-industrialisation
in the UK.
• De-industrialisation is caused by
increased overseas competition. This
means that as other countries, eg
China, become more competitive
jobs are lost in the UK.
Your answer must have the main theory point and then a detailed
explanation of what that means.
Types of ownership
•
•
•
•
•
•
•
Sole trader
Partnership
Private limited company
Public limited company
Franchise
Co-operative
Charity
Sole trader
• One man/woman business.
• Sole trader owns business. Owner and
business are the same.
• Owner provides own capital (savings and
borrowings).
• Profits go to the owner (but also
responsible for losses).
• Owner controls business, all decisions are
theirs.
Sole trader
Positives
• Easy to set up
• Can make decisions
quickly
• Personal attention to
business
• Profits are not shared
• Can cater for local
needs
• Business affairs kept
private
Negatives
• Limited capital
• Unlimited liability
• Commitment (long
hours, every day)
• New ideas may be
limited
Partnership
• A business owned by several people 2–20.
• Deed of partnership – contract dealing with share
of profits, roles and duties, capital contributed,
dispute procedures.
• Owned jointly but not always equally.
• Partnership is an extension of sole trader.
• Capital provided by partners.
• Profit goes to partners, not always equally.
• All partners entitled to participate in management
(unless silent partners).
Partnership
Positives
• More capital than
sole traders
• Excessive hours
can be cut down
• More ideas may be
generated
• Specialisation can
occur
Negatives
• Actions of one
partner binds all
• More discussion and
consultation
• Limitation on
number of partners
• Unlimited liability
• Partnership ends if a
partner dies
Private limited company
(Ltd)
• Organisation owned by a group of
individuals (2+ shareholders).
• Memorandum/Articles of Association.
• Owned by shareholders (often family)
whose main function is to elect board of
directors.
• Money raised by share issue or borrowing.
• Ordinary shares and preference shares.
• Profit shared between shareholders or
retained by company.
Private limited company
Positives
• More capital than
partnerships
• Limited liability
• Owner can retain
control
• Company does not die
if owners die
Negatives
• Must be registered
with Registrar of
Companies
• Harder to motivate
and control workers
• High set-up costs
(legal and
administrative)
• Diseconomies of scale
Public limited company (plc)
• Organisation owned by a group of
individuals; has plc after name.
• Certificate of Incorporation approved by
Registrar of Companies.
• Shareholders – 2+; shares sold on stock
exchange; prospectus prepared to attract
shareholders.
• Capital raised by share issue or borrowing.
• Profits shared between shareholders or
retained by company.
• Board of directors = divorce of ownership
and management.
Public limited company
Positives
• More capital than
private limited
companies
• Employ specialists
• Limited liability
• Company does not
die if owners die
• Shares can be
issued through stock
exchange
Negatives
• Formation expensive
(legal and administrative
costs)
• Must publish accounts
• May become too large to
manage effectively
• Decisions more difficult to
arrive at
• Diseconomies of scale
Franchise
• A business/individual buys a license to
operate a well-known firm.
• Owned by franchiser.
• Franchisee pays franchiser to get
license as well as a royalty.
• Franchisees runs business on
franchiser’s guidelines.
Click for clip
Franchise
Positives
Negatives
• Franchiser provides • Franchisee doesn’t
a lot of support:
have complete
training to start
freedom
business,
• May not agree with
equipment,
decisions made by
materials, advice,
franchiser
brand name
• Take over a
• Royalties paid to
successful, winning franchiser
formula
Co-operative
• Organisation set up to benefit workers or
consumers.
• Retail – owned by workers and shoppers.
• Producer – owned by workers.
• Retail – every pound spent receives
dividend or voucher.
• Producer – money comes from workers,
who share profits and share a salary.
• Board of directors (who may also be
workers).
Co-operative
Positives
• Less conflict
between workers
and managers
• Workers should be
more motivated
Negatives
• Difficult to grow
and find additional
capital
• New workers may
not be able to raise
capital needed to
join co-operative
Charity
• An organisation formed to raise
money for underprivileged people.
• Trustees.
• Charities raise money through shops,
donations and lottery money.
• Surplus after costs goes to the
‘needy’.
• Board of managers.
Charity
Positives
Negatives
• If charity has status • Less money may
of charitable trust it
be donated due to
doesn’t pay tax
introduction of the
National Lottery
• Looks after less
privileged and the
• Relies on voluntary
environment
workers, who are
usually not paid for
work
Answer a question
• Explain three reasons why an organisation
would become a private limited company.
(3 marks) 2009
• You have 3 marks to achieve, the
command word is explain – remember this
means a good expansion for each mark.
• You have 6 minutes.
Peer marking
• You are going to swap answers.
• Has your partner answered well?
• Does the answer make sense?
• Is it worth a mark?
Solution
• Owners of a private limited company (Ltd) have
limited liability to others, which reduces the risk
of personal loss.
• A private limited company is a larger organisation
and this allows the business to attract finance
more easily.
• Control of a private limited company is still not lost
to complete outsiders, so owners can still make
decisions and decide on the direction of the
business.
• Experience and skills can be gained from
shareholders, and can be used to improve the
performance of the business.
Public sector organisations
• Businesses set up by an Act of
Parliament.
• Government provides capital through
the Treasury.
• Government appoints chairman and
board.
• May be natural monopolies.
• May be unattractive to private sector
due to enormous capital investment.
Public corporations
Reasons for being set-up:
• to avoid wasteful duplication and
confusion
• to set up and run important nonprofitable services
• to prevent exploitation of consumers
• to protect jobs and key industries.
Privatisation
• Is ‘the selling off of public
corporations to the private sector’.
• British Gas, British Telecom and
British Steel are examples of
nationalised industries that were sold
off under the Conservative
government of Margaret Thatcher
(Prime Minister 1979–1990).
Why privatise?
• Makes industries more competitive
and efficient.
• Privatisation raises huge monies for
government.
• The public are more willing to invest
on the Stock Exchange than before.
Business objectives
•
•
•
•
•
Survival
Growth and development
Profit maximisation
Social responsibility
Providing a service
Objectives by business
sector
Type of
business
Private sector
Aims/objectives
Survival, profit maximisation,
increase returns to shareholders
Voluntary sector Help others, maximise cash
collections, offer a service to the
community
Public sector
Help people, improve quality of
service, cut costs, raise revenue
Objectives in exams
• Explain internal factors that could
be taken into account prior to an
organisation setting strategic
objectives. (4 marks)
• A difficult question – what do you
think it means?
Meaning
• What areas of the business would be
looked at by management before they
make an important decision about the
direction of the business?
• Hint – size of the business.
• Can you expand and get 4 marks?
Marking…
• Size of the organisation would be
considered - smaller firms’ strategic
objectives will be of a smaller nature
than those of multinational companies.
• Company policy on, for example social and
ethical responsibility, are the company
products & activities following this
policy?
• Consider shareholders’ points of view.
• Consider whether a private or public sector
organisation.
• Consider internal financial situation.
• Consider technological factors.
Entrepreneur
• A person who takes an idea and through
ability and vision turns it into a good or
service. He/she combines the four factors of
production.
• Richard Branson is Britain’s most famous
entrepreneur.
Scottish entrepreneurs
•
•
•
•
•
Sir Tom Hunter
Ann Gloag and Brian Souter
Tom Farmer
Duncan Bannantyne Click for clip
Michelle Mone
• How did they make their money?
Role of an entrepreneur
•
•
•
•
Identify business opportunities
Franchising
Combine factors of production
Innovation and risk taking
Identify business
opportunities
• Look for a gap in the market
Examples:
• McDonald’s home delivery in
Clydebank?¹
• Virgin Galactic²
• MJM³
Entrepreneurs and
franchising
• In order to minimise risks, many
young entrepreneurs have taken to
using franchises as a means of
starting up a business.
• It is important to remember the
benefits of the franchising model as it
reduces risk.
Combining factors of
production
• The entrepreneur brings together
land, labour and capital.
Let’s look at Richard Branson at Virgin:
• He would buy or rent the floorspace
for factories or shops (land)
• He would hire the staff (labour)
• He would buy machinery/equipment
(capital).
Innovation and risk taking
• Entrepreneurs do not invent, they innovate.
• Henry Ford did not invent the automobile
but through different innovations such as
the assembly line and mass production he
helped popularise car use and make it
affordable for customers.
• Risks involved are usually to do with
uncertainty and money. No-one knows for
sure if a new venture will be successful.
The entrepreneur could go bust…like John
DeLorean.¹
Stakeholders
• Stakeholders are people with a key
interest in a business.
• Stakeholders affect businesses by
exerting influence over decisions.
• Their influence depends on the degree
of their involvement or relative interest
in a company.
The three Is…
• When answering questions about
stakeholders think of the three Is:
• Identify (who are they?)
• Interest (why do they want the firm to
succeed?)
• Influence (how can they affect the
firm’s future?)
Identifying stakeholders
Internal
• Owners/shareholders
• Employees
• Management
External
• Customers
• Banks
• Investors
• Local government
• Suppliers
• Donors (for charities)
• Taxpayers
• Community
Stakeholder aims/objectives
• Owners want high profits, high
dividends.
• Managers want promotion, bonuses,
job security.
• Employees want better wages, better
working conditions, job security.
Stakeholder aims/objectives
• Suppliers want regular orders, prompt
payment.
• Customers want low prices, high
quality.
• Banks want loans repaid on time.
Stakeholder influence
• Owners put capital in, vote at AGM
(change board of directors).
• Managers hire/fire employees, create
policy and rules, make decisions.
• Employees go on strike,
increase/decrease productivity,
provide good/bad customer service.
Stakeholder influence
• Suppliers raise/lower prices, change
delivery times, change credit terms.
• Customers can choose to buy or not
to buy products, affect ‘word of
mouth’ and reputation.
• Banks grant or deny loans, change
interest rates, change repayment
details (end date).
Command word practice
• Describe
• Give a thorough description of
whatever you are being specifically
asked about.
• It is vital that you describe the correct
point not just the theory point.
Exam question
• Describe how five different
stakeholders could influence an
organisation. (5 marks)
• In this question you have to describe
not the stakeholder but their influence
on the business.
One to get you started...
• The bank is a stakeholder and they
could influence the business by
granting a loan – this would mean
the business could carry out their
chosen objective to expand.
• The influence – carrying out the
objective is clear in this answer.
Now it’s your turn
• Describe how five different
stakeholders could influence an
organisation. (5 marks)
• You have 10 minutes.
Peer-assessment
solution
• Manager – makes decisions on the future plans of
the organisation.
• Worker – can produce a quality product or service
by working hard.
• shareholder/owners – purchase more shares.
• Customer – buys the product or service.
• Local community – petition the organisation to
make a change to environmental policies.
• Government – alters legislation.
• Bank – approves a loan.
• Suppliers – alter the price of supplies.
Methods of growth
•
•
•
•
•
•
•
Merger
Takeover
De-merger
Divestment
Horizontal integration
Vertical integration
Diversification
Methods of growth
• Merger – an agreement to bring two firms
under one board of directors.
• Takeover – when a firm buys over 50% of
another firm’s share capital.
• De-merger – when a firm is split into two
parts.
• Divestment – selling off parts of the
business that no longer fit the long-term
strategy.
Horizontal integration
• Occurs when a firm takes over or
merges with another firm at the same
stage of the production chain.
• For example, if Ford Motor Company
merged with or bought out Toyota –
both are car manufacturers at the
same stage of the production chain.
Vertical integration
Rubber
plantation
Car
showroom
Diversification
• Diversification is when businesses
reduce risk by expanding the number
of goods/services they provide.
• Virgin and General Electric are
examples of diversified firms.
Multinational
What is a multinational?
• A company with HQ in one country
but with bases, manufacturing or
assembly plants in others.
Why become a
multinational?
Companies may become multinationals
to:
• increase market share
• secure cheaper premises and labour
• avoid tax or trade barriers
• take advantage of government
grants.
Multinational
Positives
• Provide jobs and
income
• Improve level of
expertise of local
workers
• Economies of
scale
Negatives
• Jobs may only
be low-level
skills
• Profits go back
to home country
• Cut corners
• May exert
political muscle
Social responsibility
• ‘Social responsibility is about how
companies manage their business
processes to produce an overall positive
impact on society’ – Campaign for Social
Responsibility
Major concerns:
• high fossil fuel emissions
• global warming
• exploitation/safety of workers.
Social responsibility
Positives
• Negatives
• Customer
inancial cost
perceives company • May reduce
in good light
competitiveness in
• Encourages brand
certain markets
loyalty
(though the
reverse can also
be true)
• Costs may be
passed to
customers
At last an easy question!
• Describe three different methods of
growth. (3 marks)
• You have 6 minutes.
Did you get it?
• Vertical integration – organisations at different
stages in the same industry combine together.
• Horizontal integration – organisations at the
same stage of production combine together.
• Backward vertical integration – when a
business takes over a supplier.
• Forward vertical integration – when a business
takes over a customer.
• Diversification – organisations in completely
different industries combine together.
A systems view of business
Any system is made up of four key
parts:
• inputs
• processes
• outputs
• Feedback.
Internal pressures
• New personnel in the organisation
(settling in time, training etc,
especially in senior positions!)
• New technology being used (training,
errors, set-up and maintenance
costs)
• Change in firm’s financial position
(loss of contracts, customers, market
share etc)
External pressures:
PESTEC analysis
• Political factors
• Economic factors
• Social factors
• Technological factors
and:
• Competitive factors
• Environmental factors
Political factors
•
•
•
•
•
Tax
Government legislation
Environmental regulations
Trade restrictions
Political stability
Political factors (contd.)
• Tax - corporation tax, VAT.
• Laws - Hasawa (1974), minimum wage etc.
• Environment - Kyoto Agreement, carbon footprint
issues.
• Trade – tariffs and trade embargos.
• Stability - changes in government (from Labour to
Conservative or Republican to Democrat) or even
more severe with revolutions or coups (can affect
tax rates and investment if governments have
different political views).
Economic factors
•
•
•
•
•
Economic growth
Interest rates
Exchange rates
Inflation
Unemployment
Economic factors (contd.)
• Economic growth – are new jobs being created and is
spending increasing?
• Interest rates – high interest rates affect borrowing from banks
– this will affect not only companies but also consumers and
suppliers, therefore spending may be less if interest rates are
high.
• Exchange rates – if there is a favourable return between
dollar and pound, for example, then it would be cheaper for US
firms to settle in the UK than in, say, Europe (euro).
• Inflation rate – is inflation high and crippling new businesses
or is it stable?
• Unemployment – if high then inflation will be low and vice
versa; cheap workforce could be available if there is high
unemployment.
Social factors
•
•
•
•
•
•
•
Demographics
Lifestyles
Structure of the labour market
Trends and fashions
Attitudes
Education levels
Ethnic markets
Social factors (contd.)
• Demographics – change in the nature of the population (the
grey pound – old folk on the increase, SAGA Holidays etc).
• Lifestyles – by sport, hobby etc.
• Structure of labour market – increase in women in labour
force; decline in manual labour jobs; increase in service
sector jobs; increase in part-time, temporary employment.
• Trends and fashions – changes in taste (denims trendy or
not?).
• Attitudes – change in people’s opinions.
• Education – Guardian reader different from the Sun (tabloid
vs broadsheet?).
• Ethnic – different cultures and regional trends (pork, cows etc
sacred or forbidden by certain religious groups).
Technological factors
• ICT
• Research and development (R&D)
activity
• Automation
• E-commerce
Technological factors
(contd.)
• ICT – changes in software, hardware and
telecommunications can impact on how a business
performs locally, nationally and globally.
• R&D activity – investment and spending are
factors in a firm staying competitive and innovative.
• Automation – the introduction of machines has
set-up costs and human costs.
• E-commerce – buying and selling online has
revolutionised 21st century retailing.
Environmental factors
•
•
•
•
Global warming
Recycling
Pollution and industrial waste
Organic foods
Environmental factors
(contd.)
• Global warming – the impact of humans may have
caused significant long-term damage to the Earth;
firms must look to reduce their carbon footprint
• Recycling – saving the planet’s resources and reusing items are considered good, ethical business
practice.
• Pollution and industrial waste – disposing of waste
has to be conducted safely and not impact on the
local environment or negative publicity will occur.
• Organic foods – people are moving towards more
natural foods.
Competitive factors
•
•
•
•
Product differentiation
Price wars
Profit margins
Imitators
Competitive factors (contd.)
• Product differentiation – a firm’s product has to
stand out from the rest.
• Price wars – firms may become embroiled in costly
price competition.
• Profit margins – competitors impact on profits as
firms have to compete and match in terms of price,
market research and advertising.
• Imitators – patent protection is needed to reduce
the impact of copycats.
The European Union
• The European Union was formed in
1992 by the Maastrict Treaty.
• It has 25 member states.
• It is a single market.
• The euro is the currency adopted by
most of the member states.
• Major institutions: EU Parliament
(Brussels), European Central Bank
(Frankfurt).
EU legislation
• Converting from Imperial measurements to
metric (1994 Units of Measurements
Legislation); Steven Thorburn, the metric
martyr.
• Mobile phone firms have been warned they
face EU legislation after failing to cut
‘unjustifiably high’ charges for calls made
and received when abroad.
The environment and green
issues
• As the environment becomes more
important as a result of global warming
and ozone depletion, firms have to act
accordingly (as part of being socially
responsible).
• What is the Kyoto Agreement?¹
• Friends of the Earth and Greenpeace
are environmental pressure groups.
Final test
• Explain how external factors may
affect an organisation. (6 marks)
• Read the question carefully. Make
sure you know what it is asking about
specifically.
• Any questions? 10 minutes to
answer.
Peer assessment
•
•
•
•
•
•
Political – legislation and regulations will affect an organisation
in that it will need to comply with the laws of the country it
operates in.
Economic – factors such as inflation, recession/boom periods
and interest rates will affect organisations in a number of ways.
Social – changes in trends and fashions mean that
organisations must continually carry out market research to see
what products will sell or what new products are desired.
Technological – as technology changes organisations must
keep up to date and this will involve a large financial cost.
Environmental – organisations now need to attempt to be
socially responsible and environmentally friendly both to comply
with legislation and satisfy consumer groups.
Competitive – organisations must continually monitor their
competitors’ prices and alter theirs accordingly.