Unit 1: Introduction to BM

1.1 What is a business?

Business

The organization of human, physical and financial resources to produce goods or services that meet customer needs while adding value

The aim of a business

To satisfy the needs and desires of their customers by selling a good or providing a service

Factors of Production

• Resources used in the production process

• Land

  • The natural resources used in the production of a product

  • E x : Good, water, physical land, fish, metal ores, minerals

• Capital

  • The money and equipment used to produce the product, including non-natural resources

  • E x : Tools, equipment, machinery, vehicles, buildings

• Labour

  • Physical human effort and psychological intellect used in the production process, hence the employees themselves.

• Enterprise

  • An individual with the necessary skills and ability to take risks in organizing the previous three to generate profitable output

Transformation (adding value)

• The process of creating a product that is worth more than the costs of the inputs used

• Value added is measured as the difference between the costs of the inputs and the price of the final output

Outputs

• Goods

  • Tangible physical items capable of being stored

• Services

  • Intangible items that cannot be stored and are given to customers when needed

• By-products

• Combined (Good + Service)

Primary Sector

• Businesses in the first stage of production involved in extraction, harvesting, and conversion of natural resources

• Relatively low value added in this sector

• E x : Fishing, forestry, mining

Secondary Sector

• Businesses involved in the processing of raw materials into finished and usable products or inputs for other businesses

• E x : Car making, construction, breweries, aerospace, engineering

Tertiary sector

• Businesses that focus on providing a service to consumers and other businesses

• – High value is added in this section

• EX: Banking, insurance, security, catering, education, healthcare, retail, transportation, news media, law, leisure, tourism, entertainment

Quaternary sector

• Businesses involved in the creation or sharing of knowledge or information

• High value is added

Entrepreneur

Someone who takes the financial risk of starting and managing a new business in return for a profit. They are usually self-employed.

Challenges for starting up a business AO2

• Lack of experience in all the different areas of a business:

  • Poor marketing

  • Poor hiring

  • Lack of cash flow

  • Poor pricing

• Difficulties raising money to set up and expand

  • Businesses are at a high risk in their early stages

  • Entrepreneurs may have to use their own funds, which can be limited

  • Can restrict the options when developing and launching the product

• Difficulties in building brand awareness

  • New products must compete with well-established brands

  • Difficult to attract the attention of intermediaries (e.g. retailers) and customers

  • New products may not get shelf space as they are risky

• Lack of market power

  • Customers may feel they have the power to delay payments

  • Suppliers may be worried about getting paid, may insist on early or advance payments

• Legal problems, e.g. copyright and patent problems

• External influences

Opportunities for starting up a business

• Social change

  • EX: An ageing population brings forth the opportunity to start up businesses taking care of the elderly

• Technological change

  • EX: An increased demand for EVs may inspire startups in the automotive industry

• Economic change

  • EX: Growth in an economy can lead to more consumer spending

    • Creates new markets & opportunities for new businesses

• Environmental change

  • EX: Growing concern regarding the environment can inspire startups linked to sustainability

• Political change

  • Ex: A decision to join a trading union with another country

  • Start-ups in tourism or export

• Legal change

  • Ex: Fewer regulations → reduced costs of selling up a business

• Ethical change

  • Ex: Growing interest in the values of a brand

  • Opportunities to start up businesses with a strong ethical stance

1.2 Types of business entities

Nationalization

Occurs when a government takes ownership of a business from the private sector into the public sector.

Privatization

Occurs when a government transfers ownership of a business from the public sector to the private sector.

Public sector business

• A business organization which is owned and controlled by the government.

• These organizations may have strategic importance to the country (e.g. defence).

• They may provide essential services which the government wants to ensure everyone has access to (e.g. energy).

• They may provide merit goods, which are goods or services that private individuals undertake and thus do not consume enough of.

Private sector businesses

• Organizations that are owned and controlled by individuals rather than the government.

• These businesses are either run to make a profit or have profit and social objectives as dual purposes.

Types of private sector businesses

• Profit-based businesses

• For-profit social enterprise

• Non-profit social enterprise

Types of profit-based businesses

• Unincorporated

  • Sole trader

  • Partnership

• Incorporated

  • Privately-held companies

  • Publicly-held companies

Shareholder

Persons or organizations that own a part of a company. Each share represents a part ownership of the business

Limited liability

Investors can only lose the money they have invested in a business in case of bankruptcy the investors’ personal possessions are safe, limiting their risk.

Unlimited liability

Occurs when an individual or group of individuals is personally responsible for all the actions of their business. If the business has financial problems, investors could lose their personal assets

Dividend

Money that is paid out of profits to shareholders. They are a reward to the owners of a business

Social enterprises

Businesses that set out to solve a social or environmental problem

Types of social enterprises

• For profit social enterprise

• Non-profit social enterprise

For-profit social enterprise/private sector social enterprise

• Business that makes revenue and profits but also has a social and/or environmental objectives as part of its business model

• A private sector social enterprise is a type of for-profit social enterprise.

Features of a for-profit social enterprise

• Private sector business - Independent of state or government control

• More than half its income earned through trading (business activities)

• At least half of its profits are reinvested/donated towards their mission

• Are transparent in the way they operate and the impact they have

Types of for-profit social enterprises

• Private sector social enterprise

• Cooperative

Advantages of Social Enterprises

• Can generate profit while also contributing to society

• Self-sustaining

  • Don’t need to depend on donations or taxpayer money

• Employees may be more motivated as they feel they are working towards a greater purpose

• Differentiation from competitors (?)

  • Since the business’s operations have a unique aspect of social goals which sets the business apart from competitors in the eyes of consumers

Disadvantages of Social Enterprises

• Funding (??)

  • Mainly contribute to the social cause through earning profits from trading

  • If the business is not profitable enough, it may not be able to contribute enough to the social cause.

• Investors may receive lower returns

  • Due to the social aspect within distributing profit.

• Greenwashing

  • There may be a risk that the business may not be genuinely contributing to social/environmental goals.

• Challenges with staying true to the business’s social aims as it grows.

Cooperative

•  type of for-profit social enterprise that is owned and run by and for its members, who each have the power of one vote.

• Types of cooperatives:

  • Employee cooperative

    • Owned by employees

  • Producer cooperative

  • Community cooperative

    • Owned by members of the community

Non-profit social enterprise

Private sector businesses that are not for the purpose of making profit but to benefit society

Types of non-profit social enterprises

• NGOs

• Charities

Non-governmental organizations (NGOs)

• Non-profit social enterprises that promote a particular cause. They generally operate in the private sector.

• Funded by:

  • Donations

  • Sale of goods services

  • Government grants

Sole Traders

• An individual who owns and controls their business.

• They take all the risk

• They keep all the profit

• They may hire employees

• They are unincorporated

• They have unlimited liability

• E.g., Hairdressers, Restaurants, Plumbers

Advantages of Sole Traders

• Can set up the business easily and quickly

• Can keep all the profit

• Independence – owners can manage themselves

• Direct contact with the market demand and can respond quickly

• No report of financial statements to the public

  • More privacy

• Quicker decision making

  • No time taken to sort out disagreements

Disadvantages of Sole Traders

• Unlimited liability

  • losses will have to be paid out of pocket

• Limited sources of finance

  • Banks are unlikely to lend money to sole traders

    • when they do it will be with high levels of interest

• High risk of failure

  • Due to inability to cover unexpected costs, lack of specialization or expertise in all required areas

• All aspects of the business must be handled by the owner

• No economies of scale

  • Not enough room for significant changes in production

• Lack of continuity

  • If sick, no income

Partnership

Two or more people combine to form a business. They may combine their finances, run the business together, as well as share the profit.

Deed of partnership includes

• How much start-up capital each partner puts in

• How the profit is distributed

• How much each partner will be paid

• How a partner may leave

Advantages of Partnership

• Easy to set up, only a deed of partnership is required

• Better financial strength than a sole trader

  • Start-up capital combined

  • Two people would share the loss

• Division of Labour

  • Each owner specializes in what they are good at

• No report of financial statements to the public

  • More privacy

Disadvantages of Partnership

• Unlimited liability

• Prolonged decision making process frequent disagreements or conflicts

  • Due to joint legal and financial accountability

• Lade of continuity

Incorporation

• The process of the company and its owner(s) becoming separate legal identities ­­­— the company itself can own assets, incur debts, enter into contracts, be sued, or sue others independent of its owner(s)

• The company has limited liability

  • If the company goes bankrupt, owners can only lose their initial investment in the company

• The company is owned by shareholders

  • Shareholders are entitled to dividends and voting at the Annual General Meeting

  • A board of directors (elected by the shareholders) will run the company

  • Continuity ownership is passed on through the transferring of shares

Privately-Held Company

• Limited-liability companies whose shares cannot be sold on the open market

• Shares can only be sold with the agreement of other shareholders

• Mostly small to medium-sized company

• Common legal forms:

  • Ltd.(UK)

  • inc.(US)

  • GmbH(Germany)

Advantages of Private Held Companies

• Easier to raise finance

  • Banks are more likely to lend money to a company than an unincorporated business

• Limited liability

• Continuity

• Economies of scale possible as the rate of production can be higher—move room for change in production method

• Division of labour

  • As the company is not only managed by owners—higher productivity

• Tax benefit

  • Corporate tax is lower than tax on an unincorporated business

• Disclosure of information

Disadvantages of Private Held Companies

• Bureaucracy

  • Lots of paperwork

• Compliance costs

  • Must hire accountants, lawyers and auditors

• Loss of control

  • Shareholders have a say in how the entrepreneur runs their business

• Limited Funding

  • Shares cannot be sold to the general public

• Disclosure of information

  • Registered companies have to submit audited financial statements

Publicly-Held Companies

• A publicly-held company sells a percentage of its shares to the public.

• ITis incorporated

• Limited liability

• Owned by shareholders

• Shares can be bought freely on the stock market

  • Shares are quoted on the stock exchange

  • Anyone can buy or sell shares easily

• Ownership is often split across many people who are often not linked to the company

• Common legal forms

  • Ltd or PLC (UK)

  • Inc. or Corp (US)

  • AG (Germany)

Advantages of Publicly-Held Companies

• Limited Liability

• Can raise large amount of capital

  • The company issues new shares when they do the IPO

  • New shareholders, BUT

• Easy for shareholders to trade shares

  • Makes shares more attractive

• Specialization

  • Company can hire specialist managers in each department

Disadvantages of Publicly-Held Companies

• Lacks privacy

  • The business must provide financial statements to the public.

• Costly legal requirements

• Short-termism of shareholders

  • Since shareholders are less personally acquainted with the company, their main objectives will most likely be to earn profits and dividends

1.3 Business Objectives

Mission statement

• A statement that outlines the overall purpose of a business and what it is trying to accomplish. It is usually specific and realistic.

• It is normally unchanged over time

• Includes

  • Core purpose (why it exists)

  • identity (who they are)

  • Focus (what they do)

• Often includes a reference to

  • who its customers are

  • the way it does business

Vision statement

• A statement that outlines the goals and dreams of the business in the future. It is usually an inspiring, broad and aspirational declaration.

• Not necessarily realistic

Advantages of Vision and Mission Statements

• Gives direction and guides

  • Long-term planning

  • Decision-making

  • Behaviour

• Brand image is

  • Solidified

  • Consistent

  • ... For the customers of the business

  • Because these statements can be used in promotional materials

• Motivates employees

  • Satisfies the need for self-actualization in Maslow's hierarchy of needs.

  • A motivating factor (responsibility/work itself) in Herzberg’s motivation theory

• Allows external stakeholders to know more about the business and what it aims to be.

  • Possibly easier to convince stakeholders of decisions if they are more aligned with the businesses' aims to begin with.

Disadvantages of Vision and Mission Statements

• Can be too vague and general

  • Either statement can be this

  • Can lead to the business losing a sense of direction.

Strategic and tactical objectives [AO3]

Objective

Clearly defined and measurable targets of an organization used to achieve its overall goals. They are given a specific timescale.

Types of business objectives in the private sector

• Growth

  • Revenue

  • Profit

  • Market share

  • Assets

• Profit

  • Involves maximizing the difference between revenue and costs

• Protecting shareholders' value

  • Shareholders generally want higher share prices and dividend payments

• Survival

  • To continue trade over a defined period of time

  • Key objective during:

    • Start-up period

    • Recession or intense competition

    • Times of crisis

• Cash flow

  • Essential to be able to pay debts on time

  • Important for businesses which have a long cash cycle

    • Cash cycle is time that elapses between cash outflow and cash inflow

• Diversification

  • A business aims to produce an increased range of unrelated goods and/or services.

  • This objective may be set in order to spread risk across different markets & products.

Business objectives in the public sector

• Ethical objectives

  • E.g. helping the community or environment

  • Development of relatively poor regions

  • Help raise standards of living in less affluent areas

• Financial objectives

  • To cover operating costs

  • So they do not drain government funds

• Providing a service to the community

  • Serve all of the country’s population

  • E.g. Operating bus services in places where few people live

Strategy

A long-term plan that involves a considerable commitment of resources.

Tactics

Short-term plans that implement a strategy

Strategic Objectives

• Refers to aims and goals of a business that are long-term. These are a result of short-term tactics

  • E.g.

    • Become a market leader

    • Buy a competitor

    • Achieve a stock market valuation of $1Bn

Tactical objectives

• Aims and goals of a business that are short-to medium-term

• and often only include parts of the business. These are put in place to implement strategic objectives.

Corporate Social Responsibility (CSR) [AO3]

Corporate social responsibility

• An approach under which businesses consider the interests of all groups in society and multiple stakeholders groups as a central part of their decision-making

• This approach is used by traditional businesses to include social responsibilities into their business objectives

Advantages of CSR

• Enhanced brand image

  • Recognition as socially responsible builds trust in consumers.

• Differentiation from competitors

  • Being a socially responsible company distinguishes a company from a normal shareholder-focused business in the market

• Employee retention & motivation

  • Maslow: Self-Actualization needs

  • Herzberg: Motivating factors - Responsibility, work itself

• Attracts more investors

  • Investors may be interested in not only financial returns but also positive societal or environmental impact

Disadvantages of CSR

• Increased costs overall

  • There are compliance costs involved with social responsibility and implementing ethical objectives

• Increased publicity for unethical behaviour

  • Since the company has been established as socially responsible, consumers may see through it

  • As a strategy to get more revenue

• Lower profit in the short-term (?)

Triple Bottom Line

Refers to when businesses have social and environmental objectives alongside profit.

Implementation of Triple-Bottom Line

• Marketing-focused

  • The business claims sustainable practices though often with limited measurable evidence

  • In order to create a positive brand image

  • Could be potentially greenwashing

• Impact report and societal impact

  • A business produces an impact report to show evidence of social-and-environment-friendly practices

• Becoming a private sector social enterprise

  • A business with social, environmental, or community goals as its main objective

  • E.g. B-corps, which certifies companies committed to social impact

1.4: Stakeholders

Stakeholders

An individual or group that is interested in or affected by the decisions made in a business organisation

Internal Stakeholders (list)

• Shareholders/owners

• Managers

• Employees

Rights / wants of Shareholders

• Rights

  • To receive a share of profits

  • To be kept informed by the management

• Wants

  • Maximize share price

  • Maximize dividend

Responsibilities of Shareholders

• To treat management fairly

Employees

The workers within an organization

Rights/wants of employees

• Rights

  • To be treated fairly (good working conditions

  • Job security

  • To be paid fairly

  • To be kept informed

• Wants

  • High pay

  • Promotion opportunities

  • Competitive remuneration packages

Responsibilities of employees

• To work effectively

• To show up for work on time

Rights/Interests of managers

• Rights

  • To be appropriately rewarded for responsibilities

  • Duties correspond to level of authority

• Interests

  • Maximize salary

  • Satisfy shareholders

  • Maximize profits

  • Make the business grow/be more efficient

    • They may want to reinvest profits to grow the business but the shareholders want higher dividends —> Conflict

Responsibilities of managers

• To carry out duties to the best of their abilities

• To be discreet when handling sensitive business data

External stakeholders (definition)

Refers to individuals or groups outside of the business organization who are interested in or affected by a business

External stakeholders (list)

• Customers

• Competitors

• Suppliers

• Government

• Pressure groups

• Banks

Customers

Refer to a firm’s clients, individuals or organizations who puchase a business’s goods and services

Rights/Interests of customers

• Rights

  • To be able to purchase goods/services at a reasonable price

  • Receive good quality service/goods in exchange for the price paid

  • To have a range of choices

    • No business having an unreasonably high market share so customers don’t have any option but to buy from them

  • To be supplied on time

Responsibilities of customers

• To pay suppliers on time

Competitors

Competitors are businesses which operate in the same industry as a business and contest for the same customers

Wants of competitors

• We dont care

Pressure groups

Individuals who come together or organizations which are set up for a common concern. They aim to influence government and public opinion to create social change.

Rights/Interests of pressure groups

• Interests

  • Businesses follow the pressure group’s vision

    • E.g. Sustainable operations

  • To live in an area that is free from excessive noise or pollution

  • To benefit from employment

Responsibilities of pressure groups

• To cooperate with the business in its daily activities

Suppliers

Refers to organizations that provide the goods and services for other businesses

Rights/Interests of suppliers

• Rights

  • To be paid on time

  • To be kept informed about any changes in future orders

• Interests

  • Shorter trade credit durations

Responsibilities of suppliers

• To provide products which

  • Are good quality

  • Meet specifications requested

  • Are sent on time

Government

Refers to the ruling authority within a state or nation

Rights/Interests of the government

• Rights

  • The business pays its taxes

  • The business obeys the law

• Interests

  • The business provides employment to the local community

    • (Ties in with MNCs and their impact on the host country —> if they don’t provide employment, stakeholder conflict with government)

Responsibilities of the government

• To protect business, customers, employees, and the environment

Banks/other lenders

• A source of finance for the business who may provide loan capital

Rights/interests of banks/other lenders

• Rights

  • That the business is able to pay back the loan

• Interests

  • To have a good/long-lasting with the business

Responsibilities of banks/other lenders

• To not charge excessive interest rates

• To not withdraw loans without a reasonable period of notice

Common types of stakeholder conflicts

• Managers vs. consumers

  • Managers want to raise price of product to gain more profit

  • Consumers want a reasonable price

• Managers vs. Shareholders

  • Shareholders want high dividend payouts

  • Managers may want a higher bonus instead

• Shareholders vs. pressure groups

  • Shareholders may not be worried about environmental harm as long as they can maximize their share price and dividends

  • Pressure groups are concerned about the environment

1.5 Growth and Evolution

How is the size of a business measured

• Sales Revenue

• Market share → Revenue/market revenue

• Value

• Profit

• No. of employees