Unit 1 - Introduction to Business Management

Primary sector

Any businesses involved with extracting natural resources/raw materials from Earth

Secondary Sector

Businesses involved with manufacturing or constructing finished products

Tertiary Sector (service)

Businesses that provide the finished product or service to the customer

Quaternary Sector

Sub-category of tertiary sector, high knowledge/skill based sector that generate information and involves highly skilled procedures

Business

A decision making organisation involved with inputting knowledge/resources to provide a product/service

How sectors are spread throughout nations

• Primary: nations specialise in different areas of the primary sector (depends on geography)

• Secondary: Usually large in middle-income countries, accounts for most of country’s output

• Tertiary/Quaternary: concentrated in wealthy nations as wealthy populations have lots of disposable income

Product

Goods and services

Goods

Physical products

Services

Intangible products

Entrepreneur

Individual who plans, organises and manages a business and its operations, taking on financial risks while doing so

Opportunities of entrepreneurship

• Profit/financial rewards

• Achievement → personal growth, challenge

• Self-employment

• Transference to children

• Autonomy → self-managed

Challenges of entrepreneurship

• High start-up costs

• Established competition

• High promotion cost (marketing)

• Heavy workload

• Lack of finance available (banks don’t trust you)

• Possible losses

Entrepreneurship

Action of setting up a new business venture

Visionary

A type of entrepreneur who is able to foresee opportunities like in market changes/trends

Features of being an entrepreneur

1. Self-employed or holds position of CEO of an organisation

2. Economic success and growth is dependent on the entrepreneurial spirit of the country e.g more taxes, more jobs

3. Involves taking risks in pursuit of profit

Characteristics of an entrepreneur

1. Creativity

2. Flexibility

3. Hard-working

4. Strategic

5. Leadership

Public Sector

Organisations owned and controlled by a regional and/or national government, which provides essential goods and services for the public

e.g police, libraries, public schools

Why does the government own the public sector?

• Satisfy the citizens

• Helps provide jobs

• To ensure safety and security

• Ensures no competition

• Makes sure everyone has access to vital services → people who cannot afford it won’t have access otherwise

Private sector

Businesses run and owned by private individuals and organisations that usually, but not always, aim to earn a profit

*Usually aims to make profit, but NGO’s, charities and social enterprises have other aims

Sole trader (Private)

Owned by a single person and is the only owner of the business even if they employ more people

Sole trader advantages

• Quickest and easiest to set up → can avoid costly and complicated start-up costs

• All profits go to the owner

• Decision making is quick as you are the boss

Sole trader disadvantages

• High and heavy workload

• Unlimited liability

• Pressure to stay debt-free → or kept to a minimum

Partnerships (private)

Owned by 2 or more people, strives to earn a profit for its owners

*Usually has max of 20 partners, but can vary depending on country or business type

Deed of partnership

Legal contract signed by all partners likely to include:

• Finance contributed by each partner

• Roles and obligations

• How profit/loss is shared

• Procedures of ending the partnership

*Can help solve potential disagreements!

Unincorporated

Owner is the same legal entity as the business itself

Unlimited liability

No limit to financial responsibility so long as business remains unincorporated

Advantages of partnerships

• Can raise more finance the more partners there are

• Workload is shared

• Can benefit from specialisation and division of labour

• Increased resources → compared to sole trader

Disadvantages of partnerships

• Unlimited liability

• Profits must be shared

• Slow decision making

• Potential conflicts and disagreements

• Lack of continuance → if a partner leaves/passes away, deed is invalid and must be written again

Incorporated businesses

Incorporation = new legal entity called a COMPANY

What can companies do?

1. Sell shares of ownership to raise capital

2. Take on debt and borrow money

3. Have their own bank account and contracts not tied to share holders

4. Sue and be sued

5. Become separate entity from their owners

6. Limited liability

7. Own assets

8. Pay tax

Private limited company/Privately held companies

A limited liability company that cannot raise share capital from general public stock market, and instead shares are sold privately and must be approved by board

Must hold AGM + have BOD

Board of Directors (BOD)

Elected by shareholders to run the company on their behalf,

Annual General Meeting (AGM)

Held with owners/shareholders so they have a say in the running of a business, includes:

1. Voting on business resolutions

2. Re-election of BOD

3. Queries to the CEO regarding the company

4. Approve previous year’s financial accounts

Advantages of Private LTD

• Limited liability

• Better control over shares

• Can raise capital more easily than sole traders/partnerships

• EOS

Disadvantages of Private LTD

• More expensive to operate, higher legal fees

• Can become target of takeovers

• Cannot sell shares to public → limits amount that can be raised

• Shareholder can vote on decisions → poor decisions can be made

Public limited company/Publically held companies

Shares are sold to the public on the stock market, and financial accounts must be available to the government and public

Flotation

When public LTD first sells parts or all of their business to external investors → known as Initial Public Offering (IPO)

Initial Public Offering

Makes public LTD registered on public stock exchange

Advantages of Public LTD

• More finance can be raised through shares on the stock market

• It is easier to borrow money from bank loans → trust

• Limited liability

• Continuity even if a major shareholder leaves/dies

• EOS!

Disadvantages of Public LTD

• Most expensive and admin work heavy

• Shareholders expect dividends

• Can become targets of takeovers if anyone buys a controlling share

• Financial information is public for potential investors, the press and competitors

For Profit Social Enterprises

Business that aim to achieve a social or environmental mission, while also generating a profit

*Usually reinvests a portion of their profits to further their social/environmental mission

Social Enterprises

Revenue-generating businesses with social objectives at the core of their operations

Difference between for-profit business and for-profit social enterprise

Business = Strives to return profit to owners

Social Enterprise = Return a surplus for social gain rather than personal gain

Social enterprise goals

1. To achieve social objectives

2. Earn revenues in excess of costs

Benefits of social enterprises

• Financial surpluses are to benefit others in society

• Employment opportunities → improves economic and social conditions of local communities

• Run transparently → provides tangible benefits + heaving clean conscience for social mission

Private sector companies (social enterprise)

Aims for profit + ethical objectives in the private sector

• Revenue is for socially responsible activities

• Can be sole trader, partnerships, private limited companies

• Aims for triple bottom line

Triple bottom line

1. Economic aims → earn profit and to reinvest back into business for social benefits

2. Social aims → provide benefits to people in society like job openings and support minorities in society

3. Environmental aims → to protect the planet by acting sustainably

Public sector companies/State Owned Enterprises (social enterprise)

For-profit social enterprises that are partially or wholly owned by the government and formed through legal means

• Aims to fulfil social needs like tourism and entertainment

• Tries to be profitable, provide jobs and to support the economy

Cooperatives (social enterprise)

For-profit owned and run by their members (staff or customers), aiming to create value and better conditions for their members

• Operates in many industries e.g retail, financial services etc.

Consumer cooperatives

Owned by customers who buy the goods/services from cooperative for personal use e.g food, childcare, housing

• Members get access to products at lower prices

Worker cooperatives

Set up, owned and organised by their employee members e.g cafés, printers

Producer cooperatives

Cooperatives that join and support each other to process and/or market their products e.g farmer cooperatives join up to buy equipment collectively → all benefit from bulk purchase

Advantages of cooperatives

• Incentives to work → staff are loyal and have interest

• Decision-making power → staff have a say in how business is run

• Social benefits → creates social gains for rest of society

• Public support → tends to gain support as people believe in what cooperative stands for

• Staff are happy to share opinions in business’ interest

Disadvantages of cooperatives

• Slow decision making → all staff can vote and votes may be made for personal gain

• Limited source of finance → cannot raise funds via stock market + bank may not trust

• Disincentive effects → lack of effective structure + funds may lead to low salaries

• Decisions made may be poor without manager → reduce competitiveness

• Less promotional opportunities → flatter organisational structures, and staff rarely can progress professionally

Not For Profit Social Enterprise

Profit is not the main goal, and surplus revenue is turned to achieve their social goals. Main type is NGO’s

e.g public libraries, state schools

NGO

Non-governmental organisations (formerly charities)

Private organisations that pursue activities to relieve suffering, promote interest of the poor, protect environment and provide basic social services

*Private sector

Operational NGOs

Provides physical support and services, established from a given objective or purpose e.g Mother’s Choice

Advocacy NGO

Promotes or defends a particular cause aggressively to raise awareness via direct action

e.g Greenpeace

Vision

Very long-term

An inspiring or aspirational declaration of what an organisation strive to be → indicates core values

“What do we want to become?“

Mission

Long-term

A succinct and motivating declaration of an organisation’s core purpose, identity and focus

“What is our business?“

Advantages of Vision and Mission

• Enhances brand image

• Can help give senior managers direction → sets framework

Disadvantages of Vision and Mission

• Often very vague → lacks practical application

• Usually just PR statements for public’s consumption and marketing

• V + M usually just mixed together

Objectives

Goals or targets an organisation strives to achieve, more specific and quantifiable (measureable)

Growth objective

Increase in size of a business and its operations

Benefits of growth objectives

• Higher sales revenue and profits

• EOS

• Reduced risks

• Helps adapt to ever-changing world + remain competitive

Internal growth

Expanding without help from an external partner firm, using its own resources e.g retained profits to invest in production facilities

External growth

Expansion and evolution through third party resources

Ways to measure growth

Sales revenue, sales volume, profits etc.

Profitability Objective

To have a positive difference between sales revenue and costs, acts as a reward and provides internal source to further develop the business

*Also incentive for entrepreneurs to take risks or for current staff to remain in business to grow even more

Protecting shareholder value

Safeguarding interest of the owners of a limited liability company, primarily the CEO’s and BOD’s responsibility

*Contains both long and short term objectives

Strategic objectives

Medium - long-term

Goals that the whole organisation continually strives to achieve, used to achieve overall goal/mission/vision

• Requires greater level of investment in human and financial resources than tactics

• Often related to what the owners of a business want to focus on

Tactical objectives

Short-term

Specific goals of a business with definitive timelines for specific functional areas of an organisation

• Easier to change/reverse than strategical objective

• Usually has pre-determined time frame of less than a year

• Delegated to lower ranked staff

Ethical objectives

Based on moral principles (what is right or wrong) for the wider world

e.g using ethical supplies, fair treatment of all staff, environmental objectives

Ethical

Moral principles that guide decision-making and business strategy, concerned with what is considered right or wrong

Advantages of ethical objectives

• Improves corporate image → enhances reputation for doing good

• Increased customer loyalty

• Can avoid litigation costs → expenses associated with legal action taken against a business

• Improved staff moral and motivation → attract and retain highly motivated staff

Disadvantages of ethical objectives

• Compliance costs are high → e.g staying organic, paying everyone fairly

• Lower profits → less maximisation of profit

• Stakeholder conflict → not all stakeholders will agree as they receive less profit

Types of tactics

1. Survival → new businesses want to stay relevant while large businesses want to survive during recessions

2. Sales revenue maximisation → strive to maximise sales to establish themselves in the market place

Types of strategies

1. Market standing → extent to which a business has presence in the industry

2. Diversification of markets/products

3. Overseas expansion

4. Improve image and reputation

Corporate Social Responsiblity

Values, decisions and actions taken by a business that impacts society in a positive way, considering ethical and environmental practices. Obligation to act morally towards all stakeholder groups.

Internal factors causing objectives to change

1. Corporate culture → more flexible culture are likely to have creative objectives that change over time

2. Type and size of organisation → change in legal status of business entity can cause a large change

3. Private or Public sector → profit maximisation or provide service?

4. Finance → amount of available finance determines scope of objective

5. Risk profile → risk-takers will likely make ambitious objectives, and new firms would prioritise survival

External factors causing objectives to change

1. State of the economy → boom provides opportunities while recession threatens survival

2. Governmental laws → regulations may limit creativity or lowers profit maximisation by increasing cost of compliance

3. Presence of pressure groups → can force business to review their approach

4. New technology → can generate new opportunities

Stakeholders

A person, group or an organisation who are affected by a business’ actions

Internal stakeholders

Employees, owners/shareholders, senior managers/directors

External stakeholders

Customers, suppliers, governments, banks, competitors, pressure groups, trade unions

Employees

Want: high salary, good work condition and environment, perks e.g fringe benefit

Shareholders/Owners

Want: More dividends, business success, profitability, vote in key issues

Senior managers

Want: Business to grow and become more profitable so they get higher pay, good working conditions, staff happiness and productivity

Customers

Want: Low prices and high quality, good customer service, value for money, reliable service

Competitors

Want: Interest in behaviour of competitor to borrow ideas/outplay them, improve own service for advantage, want to see business fail for customer turnover

Governments

Want: Businesses to actually follow regulations, growth in the economy for higher tax, be paid tax

Suppliers

Want: On-going business relationships to repeat sales, punctual and full payment on profitable prices

Pressure groups

Want: to raise awareness about a business’ behaviour in order to make behaviour change, make a positive change in society

Banks and financial institutions

Want: Business to succeed and pay back loans, charge interest on loans, business to deposit earnings

Stakeholder conflict

Differences in varying needs and priorities of the various stakeholder groups

Things to consider with stakeholder conflicts

1. Type of organisation/size

2. Aims and objectives

3. Source and degree of power from stakeholders

Stakeholder mapping

Considers relative interest and power of stakeholders

Economies of Scale (EOS)

Lower average cost of production as firm operates on a larger scale/more efficiently

Purchasing EOS

• Internal

• Buying in bulk → more units you buy means you can negotiate with suppliers

• Larger firms = better rates when buying raw materials

Average cost

Cost per unit of output

Total cost/Quantity of output = Average cost

Financial EOS

• Internal

• Larger firms find it easier and cheaper to raise money/finance

• Can borrow large sums at lower rates as they are less risky