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 non-renewable.

• 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.

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Business cycle

Business cycle

Business provides goods/services

Consumers buy goods/services

Wealth for companies and employees

Consumers have money to spend from wages

Needs and wants

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 Process Output

Raw materials Workers Finished Natural resources Machinery 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

• Explain

• Describe

• Discuss

• Compare

• Identify

• Distinguish between

• Justify

• Outline

Every question in the examination will contain

a specific command word

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 traderPositives• 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 companyPositives• 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 companyPositives• 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.

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FranchisePositives• Franchiser provides

a lot of support: training to start business, equipment, materials, advice, brand name

• Take over a successful, winning formula

Negatives• Franchisee doesn’t

have complete freedom

• May not agree with decisions made by franchiser

• Royalties paid to franchiser

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.

CharityPositives• If charity has status

of charitable trust it doesn’t pay tax 

• Looks after less privileged and the environment

Negatives• Less money may

be donated due to introduction of the National Lottery

• Relies on voluntary 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 non-profitable 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

Aims/objectives

Private sector 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

• Michelle Mone

• How did they make their money?

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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 stakeholdersInternal• 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-assessmentsolution

• 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 responsibilityPositives• Customer

perceives company in good light

• Encourages brand loyalty

• Negatives

inancial cost• May reduce

competitiveness in certain markets (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 re-using 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.