Business Management - Topic 1: Introduction to Business Management

Business

Organizations involved in the production of goods and/or the provision of services.

Goods

Physical products (ex: laptop, makeup, books) while services

Needs vs. Wants?

Needs are basic necessities that a person must have to survive (ex: food, water, shelter, clothing) while wants are specific products or services that individuals desire to fulfill a need, though it is not essential for survival.

Customers

People who buy goods

Four Functional Areas of Business

Human Resource Management, Finance & Accounts, Marketing, Operations Management

Four Business Sectors

Primary, Secondary, Tertiary, Quaternary

How does business add value to goods/services?

By enhancing their appeal, functionality, or customer experience, often through branding, innovation, superior quality, and added services like warranties or customer support.

Chain of Production

This links the four business sectors by tracking the stages of an item’s production. (Primary Production → Manufacturing → Services (tertiary/quaternary output) → Consumers)

Main challenges for startups?

Lack of finance, unestablished customer base, cash flow problems, marketing problems, people management problems, production problems, legalities, high production costs, poor location, external influences.

Main opportunities for startups?

Growth, earnings, transference and inheritance, challenge, autonomy, security, hobbies.

Private Sector

Part of economy run by private individuals and businesses, rather than by the government, such as sole traders, partnerships, privately held companies, and publicly held companies.

Sole trader

An individual who owns and runs their own business, where there's no legal distinction between the owner and the business itself.

Advantages of Sole Trader?

Simplicity & Low Costs: It's the easiest and often cheapest way to start a business.

Full Control: You have complete autonomy over the business and its direction.

Flexibility: You can decide when, where, and how you work.

Direct Reward: You keep all the profits.

Disadvantages of Sole Trader?

Unlimited Liability: The biggest drawback is the risk to your personal assets.

Burden of Responsibility: You are responsible for all aspects of the business, often leading to long hours and stress.

Difficulty Raising Finance: Lenders may prefer the legal protections of limited companies.

Potential for Higher Tax Burden: If profits are reinvested into the business, the tax burden can be high, as all profits are subject to income tax.

Partnership

Private sector business entity owned by 2-20 people. They share the responsibilities and burdens of running and owning the business.

Advantages of Partnership

Increased Capital: More people ontribute capital, increasing the financial power and growth potential of the business.

Improved Borrowing Capacity: The combined financial strength of them makes it easier to secure loans and raise additional funds.

Shared Financial Burden: They share the costs and risks associated with the business, reducing the financial strain on any single individual.

Resource Pooling: They pool not just money but also their knowledge, expertise, and business networks, enhancing the company's overall resources.

Disadvantages of Partnership

Unlimited Liability: Each person is personally responsible for the partnership's debts, meaning creditors can go after their personal assets to satisfy business obligations.

Profit Sharing: Profits must be divided among people, which can lead to dissatisfaction if one partner feels they are contributing more than others.

Limited Capital: The number of people is restricted, which limits the total capital available to the business, potentially hindering growth and expansion.

Privately Held Company

A business owned by shareholders with limited liability but whose shares cannot be bought by or sold to the general public on a Stock Exchange.

Limited Liability

Restriction on the amount of money that owners of a company can lose if the business goes bankrupt (ex: shareholders cannot lose more than the amount they invested in the company.)

Publicly Held Company

An incorporated limited liability business that allows shareholders to buy and sell shares in the company via a public Stock Exchange.

Advantages of Limited Liability

Separates Personal and Business Finances: Limited liability creates a legal separation between the business and its owners, preventing creditors from seizing personal assets like houses, cars, or bank accounts to pay business debts.

Limits Financial Risk: Owners are only liable for the amount they have invested in the business, not the total business debt or legal obligations.

Protects Against Lawsuits: If the business faces a lawsuit, owners' personal assets are generally shielded, providing a significant degree of financial security.

Disadvantages of Limited Liability

Higher Costs: Higher formation fees, annual filing fees, and potentially higher accounting and legal costs compared to simpler structures like a sole proprietorship.

Self-Employment Taxes: Treated as self-employed and are personally responsible for paying self-employment taxes (Social Security and Medicare) on their share of the business's profits.

State Fees: Many states require them to pay annual fees, such as franchise taxes, for the privilege of operating.

Complex Regulations: More complex compliance rules, reporting requirements, and regulations than sole proprietorships, which can be time-consuming and expensive to manage.

Social Enterprise

Revenue-generating businesses with social objectives at the core of their operations. They can be for-profit or non-profit business entities, but all profits or surpluses must be reinvested for that social purpose rather than being distributed to shareholders and owners.

Cooperatives

For-profit social enterprises set up, owned and run by their members, who might be employees and/or customers.

Advantages of Cooperative

Democratic Control: Each member has one vote, regardless of investment, ensuring an equal say in the organization's decisions.

Equal Status: Membership is voluntary and open to all, promoting equality and inclusivity within the organization.

Financial Benefits: Members can access products or services at lower costs due to group buying power and share the profits or savings generated by the co-op.

Limited Liability: Members' personal assets are protected; their liability is limited to the amount they have invested or pledged.

Disadvantages of Cooperative

Limited Capital: They struggle to raise large funds because they rely on member contributions, which may be modest, limiting their ability to expand or undertake significant investments.

Restricted Growth: The limited access to capital and dependence on members' modest means can restrict the business's scope and ability to grow.

Inefficient Management: Members managing may lack the professional skills, experience, and talent necessary for effective leadership, resulting in inefficient operations.

Lack of Secrecy: Transparency and open discussion among members make maintaining business secrets difficult, a crucial aspect for some business operations.

Internal Conflicts: Disagreements and factionalism among members can arise, disrupting business operations and potentially leading to the closure of the cooperative.

Slow Decision-Making: The democratic decision-making process, while inclusive, can be slow and cumbersome, making it difficult to reach consensus and hindering responsiveness.

Non-Governmental Organization (NGO)

Private sector not-for-profit social enterprises that operate for the benefit of others rather than primarily aiming to earn a profit, such as Oxfam and Friends of the Earth.

Company/Corporation

Limited liability business owned by shareholders. A certificate of incorporation gives the company a separate legal identity from its owners (shareholders).

Deed of Partnership

The legal contract signed by the owners of a partnership. The formal deeds specify the name and responsibilities of each partner and their proportion of any profits/losses.

Incorporation

There is a legal difference between the owner of a company and the business itself. This ensures the owners are protected by limited liability.

Initial Public Offering (IPO)

Occurs when a business sells all or part of its business to shareholders on a public stock exchange for the first time. Changes legal status of the business to publicly held.

Mission Statement

The declaration of an organization’s overall purpose. Forms the foundation for setting the objectives of a business.

Vision Statement

An organization’s long-term aspirations, ex: where the business ultimately wants to be.

Why are objectives important to businesses?

They provide focus, motivation, and direction for a company, helping to align employees towards shared goals and measure progress towards overall aims.

What does it mean to protect shareholder value?

To protect shareholder value means a company is focused on increasing its profitability and overall market worth to ensure a strong return on investment for its equity owners. This involves making strategic decisions that lead to higher stock prices and dividends.

Ethical Objectives

Organizational goals based on moral guidelines, determined by the business and/or society, which direct and determine decision-making.

Growth

Increasing a company's revenue and market share, often through organic growth or new customers.

Strategic Objectives

Longer-term goals of a business such as profit maximization, growth, market standing, and increased market share.

Tactical Objectives

Short-term goals that affect a unit of the organization. They are specific goals that guide the daily functioning of certain departments or operations.

Corporate Social Responsibility (CSR)

The conscience consideration of ethical and environmental practice related to business activity. A business that does this acts morally towards all of its various stakeholder groups and the well-being of society as a whole.

Advantages of Socially Responsible Businesses

Increased employee engagement.

Better bottom-line financials.

More support for local and global communities.

Increased investment opportunities.

Press opportunities and brand awareness.

Increased customer retention and loyalty.

A stronger employer brand.

Disadvantages of Socially Responsible Businesses

Financial Costs

Inconsistent Implementation

Greenwashing

Measurement Complexity

Balancing Stakeholder Expectations

Internal Factors

Leadership changes, shifting financial resources, the adoption of new technology, changes in organizational structure, evolving corporate culture, and the performance or growth of the business itself.

External Factors

PESTEL framework: Political (government policies, legislation), Economic (inflation, recession, unemployment), Social (changing demographics, consumer tastes), Technological (new innovations, e-commerce), Environmental (climate change, sustainability concerns), and Legal (new regulations, compliance).

Stakeholder

A person with an interest or concern in a business.

Internal Stakeholder

A person or group within an organization, such as employees, managers, owners, and shareholders, who have a direct interest in the company's operations and success.

External Stakeholder

Any individual, group, or organization outside of a company or project that has an interest in, is impacted by, or can influence the organization's activities or outcomes but is not directly involved in its day-to-day operations.

Why are competitors considered to be external?

Competitors are considered external because they operate in the marketplace, outside the direct control of a company, and are part of the broader competitive environment in which a business must function and adapt to survive and thrive.

Why are shareholders powerful?

The ultimate owners of a company, with their influence stemming from their ability to provide essential capital, participate in company governance by voting on major decisions and electing the board of directors, and receive a share of the profits.

Stakeholder Conflict

Differences in the varying needs and priorities of various stakeholder groups of a business.

Role of Government in Business

Regulation (setting and enforcing rules), economic policy (managing the economy through taxes and monetary policies), infrastructure provision (building roads, power, and water systems), and direct intervention (operating state-owned enterprises or providing subsidies).

How to Resolve Stakeholder Conflict

Facilitating open and transparent communication to understand everyone's perspectives and concerns, then engage in collaborative problem-solving to find mutually beneficial solutions.

Stakeholder Mapping

A model that assesses the relative interest of stakeholders and their relative influence/power on an organization.

Suppliers

External stakeholder groups that provide a business with stocks of raw materials, component parts, and finished goods needed for production. They can also provide commercial services, such as maintenance and technical support.

Services

Intangible products sold to customers (ex: airplane flights, cinemas, banks, spas, schools).

Profitability

Making more money than you spend, ensuring positive cash flow and profits. Successful companies balance both to stay healthy.

Public Sector

Public: Is an incorporated limited liability business that allows shareholders to buy and sell shares in the company via a public Stock Exchange.

Consumers

People who use products, but may not necessarily buy them.