IB Business Management HL UNIT 1

Business

An organization that provides goods and services to the community in exchange for money, with the goal of becoming profitable. (Sometimes non profits work for the benefit of helping a community)

Inputs

Capital
Enterprise
Land
Labour

Processes

Human resources
Finance
Marketing
Operations management

Outputs

Goods
Services

Functional areas of a business

Human resources, finance & accounts, marketing, operations management

Human resources

Manages the personnel of the organisation; workforce planning, recruitment, training, appraisals, dismissals, redundancies, outsourcing HR strategies.

Finance and accounts

Manages the organizationmoney; comply with legal requirements (e.g. taxation laws), and inform stakeholders

Marketing

Responsible for identifying the wants and needs of the customers.

Seven P's of marketing

Product
Price
Place
Promotion
People
Processes
Physical evidence

Operations management

Responsible for the process of converting raw materials and components into finished goods. Also is the process of providing services to customers.

Primary sector

Businesses in this sector are involved in the extraction, harvesting, and conversion of natural resources.

Secondary sector

Businesses in this sector are involved in the manufacturing or construction of products

Tertiary sector

Businesses in this sector specialise in providing services to the general population

Quaternary sector

Businesses in this sector are involved in intellectual, knowledge-based activities that generate and share information.

Entrepreneurs

(Business starters) An individual who plans, organises, and manages a business, taking on the financial risks.

Common challenges for a business

Production problems
Poor location
People management problems
External influences
Legalities
Marketing problems
Unstable customer base
Lack of finance capital
High production costs
Cash flow problems

Capital growth

Capital growth is the increase in the value of an investment over time. It is measured by the difference between the price paid for the investment and its current market price.

Capital growth is the goal of most investors, seeking to gain a profit from the money they have invested.

Autonomy

Independence, freedom of choice, and flexibility

Private sector

Organizations owned and controlled by private individuals and businesses.

Main aim - to make profit.

Public sector

Organizations owned and controlled by the government.

Main aim - to provide essential goods and services.

Profit-based organisations

Any business entity, whose primary aim is to generate profit from the regular operations, with a view to maximising the wealth of owners, is called as a profit organisation.

Their goals are to:
Make a profit.
Reward the owners with profits from the business.
Return some of the profits back into the business for capital

Sole traders

These businesses are owned by individuals who own and run a personal business.

This is the most common type of business ownership as it is relatively easy to set up.

Start-up capital is usually obtained from personal savings and borrowing.

Sole traders have unlimited liability.

Unlimited liability

Liability means that you are responsible for something, having unlimited liability means that you are entirely responsible for its debts and completely at risk.

Limited liability

Liability means that you are responsible for something, limited Liability is a legal structure whereby shareholders or directors are legally responsible for their company's debts only up to the value of their shares

Non-governmental organizations (NGOS)

An NGO operates in the private sector.

They provide goods and/or services normally expected from the public sector.

However, these goods/services may be underprovided by governments.

Cooperatives

Owners of cooperatives are called members.

Members own and run cooperatives (i.e. they are also employees of the organization).

Their aim is to create value for members by operating in a socially responsible way.

All employees have a vote to contribute to decision-making.

Any profits earned are shared between their members.

Porter's generic strategies

Cost leadership, differentiation, focus (cost focus), focus (differentiation focus).

Publicly held companies

A publicly held company can sell shares on the stock exchange.

Shares are held by the general public.

No prior permission by other shareholders is required for a shareholder to sell their shares.

Privately held companies

A privately held company's shares are owned by friends and/or family.

These shares cannot be traded publicly on the stock exchange.

Shareholders can only sell their shares if they have prior permission from other shareholders.
Typically, privately held companies are also family businesses.

Partnerships

Partnerships are owned by two or more persons (known as partners).
At least one partner must have unlimited liability.

Start-up finance is raised mostly by personal funds, which are pooled together by the partners.

A legal document known as a deed of partnership is drawn up to formalise agreements such as how profits and losses are to be shared between partners.

Hierarchy of objectives

Objectives provide businesses with atargeted direction for the future.

Vision
Mission
Strategies
Tactics

Vision

This is an outline of an organization's aspirations in the distant future.

Vision statements focus on the very long-term.

They are expressed as a broad view of where the company wants to be.

Mission statements

This is a simple declaration of:
the underlying purpose of an organization's existence.
Its core values.
Mission statements focus on the medium to long-term.
A well-written mission statement is clearly defined and realistically

Objective's importance

To measure and control
To motivate
To direct

Growth

This is usually measured by an increase in its sales revenue or by market share.

Growth is essential for survival in order to adapt to ever-changing and competitive business conditions.

Failure to grow may result in declining competitiveness and threaten the firm's

Corporate social responsibility

Corporate social responsibility (CSR) is the conscientious consideration of ethical and environmental practice related to business activity.

CSR practices can provide firms with competitive advantages and long-term

Tactics

Tactics are the methods used to enact strategies of an organization.

They are short-term and frequently generated in order to enact strategies.

Fulfilment of tactics will allow an organization to perform its strategies.

- Survival
- Sales revenue maximisation

Strategies

Strategies are plans of action to achieve the objectives of an organization.

They are:
medium to long-term goals.
Expressed specifically.
Fulfilment of strategies will allow an organization to reach its objectives.

- Market standing
- Image and reputation
- Market share

Profitability

Profit maximization is traditionally the main business objective of most private sector businesses.

It provides an incentive for entrepreneurs to take risks in setting up and running a business.

What is a stakeholder?

A stakeholder is any individual, group or organization with a direct interest in and/or is affected by the activities and performance of a business.

They can be classified as internal or external stakeholders.

Internal stakeholders

These stakeholders are members of the organization. They have a direct interest in, and are affected by the activities and performance of a business.

The main internal stakeholders are:
Employees
Managers and directors
Shareholders

Employees

Employees are likely to have an interest in the organization they work for.

They tend to strive for improvements in:
Pay and other financial benefits
Working conditions
Job security
Opportunities for career progression

Managers and Directors

Managers are the people who oversee the daily operations of a business.

Directors are senior executives who direct business operations on behalf of shareholders.

They are primarily interested in:
Profit maximization
Job security and financial benefits
Long-term financial health of the company

Shareholders

Shareholders are a powerful stakeholder group due to their voting rights.

They have two main interests:
Maximize dividends
Achieve capital gain in the value of the shares

External stakeholders

These are stakeholders who do not form part of a business but have a direct interest in, and are affected by, the activities and performance of a business.

External stakeholders vary between organizations, but some key external stakeholders are:
Customers
Suppliers
Pressure groups
Competitors
Government

Customers

Customer care is instrumental to the survival of a business.
Their interests vary depending on the goods and/or services provided by the business.
However, they are generally interested in:
Quality of goods and services
Value for money

Suppliers

Suppliers provide a business with stocks of raw materials needed for production.

Their main interests are:
Clients who pay their bills on time
Regular contracts with clients
Good working relationships with clients

Financiers

These are the financial institutions and individual investors who provide sources of finance for a firm.
Financiers earn money by charging interest on the amount of money borrowed.

Their interests include:
The ability of a firm to repay debts from generating sufficient profits
Establishing long-term relationships with firms in order to achieve subsequent earnings

Pressure groups

Pressure groups consist of individuals with a common interest who seek to place demands on organizations to influence a change in their behaviour.

Their interests in the business depend on the purpose of the pressure group.

Competitors

These are rival businesses of an organization.

Their interests in the business include:
Innovation that arises from rivalry
Responding to competitive threats
Performance benchmarking

Economies of scale

Economies of scale is when average costs of production decrease as the organization increases the size of its operations.

Diseconomies of scale

Diseconomies of scale is when an organization becomes too large, causing productive inefficiencies that result in an increase in average costs of production.

Internal economies of scale

These are economies of scale that occur inside the firm.
They are within the firm's control.

Technical economies

Large firms can use sophisticated capital and machinery to mass produce their goods.
The high fixed costs of their equipment and machinery are spread over the huge scale of output.
This results in the reduction of average costs of production.

Financial economies

Large firms can borrow large sums of money at lower rates of interest.
This is because they are seen as less risky to financiers.
This results in the reduction of the costs of borrowing finance.

Managerial economies

Large firms divide managerial roles by employing specialist managers.

Small firms are less able to do so.
e.g., a sole trader often has to fulfil the functions of marketer, accountant and production manager.
This results in the fall of average costs due to higher productivity.

Specialisation economies

These are the results from division of labour of the workforce.

By using mass production techniques, manufacturers benefit from having specialist labour.

These specialists are responsible for a single part of the production process.

This results in the fall of average costs due to higher productivity.

Internal growth

This occurs when a business grows by using its own capabilities and resources to increase the scale of its operations and sales revenue.

External growth

External growth occurs through dealing with outside organizations. Such growth usually comes in the form of alliances or mergers with other firms or through the acquisition of other businesses.

Generic benefits of being a large business

Economies of scale
Lower prices
Brand recognition
Brand reputation
Value-added services
Greater choice
Customer loyalty

Generic benefits of being a small business

Cost control
Loss of control
Financial risks
Government aid
Local monopoly power
Personalised services
Flexibility
Small market size

Mergers and acquisitions (M&As)

Mergers
Take place when two firms agree to form a new company with its own legal identity.

Acquisitions
Occur when a company buys a controlling interest in another firm with the permission and agreement of its board of directors.

Takeover

Takeovers occur when a company purchases a controlling stake in another company without the permission and agreement of the company or board of directors.

They are also known as hostile takeovers.

Joint ventures (JVs)

A joint venture occurs when two or more businesses split the costs, risks, control and rewards of a business project.

In doing so, the parties agree to set up a new legal entity.

Strategic alliances (SAs)

Strategic alliances occur when two or more businesses cooperate in a business venture for mutual benefit.

The firms in the SA share the costs of product development, marketing and operations.
However, SA firms remain independent organizations.

Franchising

Franchising is a form of business ownership whereby a person or business buys a license to trade using another firm's name, logos, brands and trademarks.

The agreement is between the:
Franchisor: the firm selling the license, and the
Franchisee: the entrepreneur buying the license