Business Management year 2

Business

A decision-making organisation that aims to fulfill its customers’ wants and needs by providing goods and/or services

Goods

physical products, e.g. food, clothes, furniture, cars and smartphones

Services

intangible products, e.g. haircuts, tourism, public transport, banking, insurance education, and healthcare

What are factors of production?

Efficiently combined human, physical and financial resources in order to produce goods and services

Factors of production include (4)

• land

• Labour

• Capital

• Entrepreneurship

Entrepreneurship

knowledge, skills and experiences of individuals who have the capability to manage the overall production process

Capital

non-natural/man-made resources

Labour

human efforts

Land

natural resources

What are some examples of land factors of production? (7)

Examples include:

• water

• timber

• sand

• minerals

• metal ores

• plants

• animals

What are some examples of capital factors of production? (5)

Examples include:

• tools

• machinery

• motor vehicles

• physical premises

• infrastructure

What are business departments/functional areas? (4)

human resources  (HR)

finance and accounts

marketing

operations management

What are Human Resources?

Human resources (HR) is the function that handles all aspects of business operations  related to the workforce.

What are some functions carried out by HR? (9)

recruitment

induction

training

development

appraisal

promotion

remunerating (rewarding)

dismissal (of staff)

observe different labour laws in all the countries it operates in (minimum wages, working hours, gender equality, equal opportunities, and anti- discrimination)

What is finance and accounts?

It is a function responsible for managing the organization’s money and maintaining accurate accounts (financial records) of the firm’s funds

What is Marketing?

This business functional area is about identifying the needs and wants of customers so that the business can provide goods and services to meet these requirements and desires

What are some functions of the marketing department? (4)

The activities of this function include:

• discover the products that customers want

• Determining appropriate pricing methods

• Promotion to inform and persuade customers

• Distributing the products to customers efficiently.

What are operations/ operations management or production?

is the process of making goods and providing services from the available resources of a business to meet the needs and wants of its customers

What are some functions of the operations management business function ?

This business function involves ensuring that goods and services meet production targets, deadlines and certain quality standards

Customers

People or other businesses that purchase goods and services.

What is adding value?

The process of producing a particular good or service that is worth more than the cost of the resources used to produce it.

What is the private sector?

The private sector consists of businesses owned and run by private individuals and organisations that usually aim to earn a profit. They operate independently of the government, although need to operate within the rules and regulations in the country

What are some types of private sector businesses? (6)

• Sole traders

• Partnerships

• Privately traded companies

• Publicly traded companies

• Social enterprises, including cooperatives and non-governmental organizations

• Multinational corporations (MNCs)

What are public sector businesses?

They are business organizations that are controlled by a government, with the main aim being to provide essential goods and services for the general public. They can directly charge customers for such services.

Give examples of goods and services that are part of the public sector (6)

• Infrastructure (communication, transportation, road and highway networks, waste disposable systems, and flood control systems)

• Housing (public and social housing)

• Health care services

• Education

• National defence (national security)

• Emergency services (ambulance, fire and police)

List the types of for-profit organizations (AO3) (4)

• Sole traders

• Partnerships

• Privately held companies

• Publicly held companies

What are sole traders?

It is a commercial for-profit business owned by a single person. The person can employ as many people as needed and is the only owner of the company.

List the advantages of being a sole trader/sole proprietor (8)

• quickest and easiest to set up

• The owner receives all of the profits

• high motivation

• complete control without

• Not having to consult with or be accountable to others

• swift decision-making

• privacy - needs to publish its financial accounts only to the tax authorities (rather than to the general public like a publicly held company)

• tax advantages (working from home instead of a separate establishment)

List the disadvantages of being a sole trader (11)

• lack of continuity in the operations (if the owner is unwell, wishes to take a holiday or wants to retire)

• The finance comes from personal savings of the owner, as they cannot easily access external sources of finance.

• accepts all the risks of owning and running their own business, including any losses made or even the collapse of the organization.

• unlikely to be able to gain any economies of scale (perhaps because they cannot buy their materials or stocks (inventory) in bulk)

• sole traders pay more for their goods, their prices charged to customers also tend to be higher

• extremely high workload

• Nobody to consult

• all pressures, burdens and responsibilities fall on the owner.

• unlimited liability

• access to external finance is difficult

• expansion of the business is difficult

What is a partnership?

It is a commercial business that strives to earn a profit for its owners. It is owned by two or more people

What are some characteristics of partnerships? (5)

• usually max 20 owners/partners

• at least one of the owners must have unlimited liability

• partners usually share responsibility for any liabilities made by the partnership

• In some countries, it is possible to have a limited liability partnership (LLP)

• Most partners sign a Deed of Partnership (or Partnership Agreement) as this helps to resolve potential misunderstandings and disagreements

What is included in the Deed of Partnership/Partnership Agreement? (3)

• responsibilities

• voting rights

• how profits are to be shared between the owners.

What does a LLP do?

A limited liability partnership protects each individual partner from being responsible or liable for another partner’s misconduct or shortcomings

State examples of famous co-founded partnerships (6)

• Steve Jobs and Steve Wozniak (Apple)

• Ben Cohen and Jerry Greenfield (Ben & Jerry's)

• Larry Page and Sergey Brin (Google)

• Richard McDonald and Maurice McDonald (McDonald's)

• William (Bill) Gates and Paul Allen (Microsoft)

• Sam Warner , Jack Warner , Albert Warner and Harry Warner - (Warner Brothers)

Advantages of partnerships (7)

• can raise far more finance than sole traders because of the larger number of owners

• Silent partners/sleeping partners provide additional capital without being involved

• more ideas, different skills and expertise

• partners can share the burden of their workload and responsibilities

• continuity - operations can continue even if a partner is unable to work or on a break

• specialisation and the division of labour ( e.g. a law firm might have partners who specialise in criminal law, civil law, business law and tax law)

• business affairs are confidential, so only the tax authorities need to know the financial position of the partnership

Silent partners/sleeping partners

provide additional capital without having any role in the actual running of the business

Disadvantages of partnerships (6)

• unlimited liability - they are liable for any debts, fines, penalties or law suits, even if these were caused by another partner in the firm. However, sleeping partners are exempt from unlimited liability.

• access to finance is restricted to the finances of each partner

• The number of partners can lead to disagreements and conflict between owners, which can seriously damage the running of the partnership

• Decision making is slower

• profits must be shared between owners

• no continuity if a partner leaves or dies - such cases would void the Deed of Partnership, which would cause a time delay in setting up a new partnership agreement

What are companies?

Companies/corporations are commercial for-profit businesses owned by shareholders

What are some features of companies/corporations? (4)

• profits belong to and are shared among the various owners

• owners have limited liability

• Division of ownership and control - the owners are treated as separate legal entities from those who control and run the business (the board of directors and CEO), who are responsible for the strategic direction of the company.

• Divided into privately held companies and publicly held companies

What is limited liability?

Limited liability allows shareholders to not be personally liable for the debts of their company in case of gaining dept or bankruptcy. Hence, it protects shareholders who cannot lose more than the amount they invested in the business. This is because

What are the features of privately held companies/private limited companies? (6)

• shares cannot be advertised for sale nor sold via a stock exchange

• have shares typically owned by family, relatives, and/or friends

• The company and its owners are separate legal entities (owners can appoint a board of directors to run the company on their behalf in case of change in ownership)

• limited liability - owners are liable only for the capital they invested in the company

• number of shareholders may be limited depending on country

• Usually no legal requirement for the company to publish detailed financial accounts for the general public (this is only needed for corporate tax purposes)

Examples of well-known privately held companies (3)

• Ernst & Young IKEA

• Lego

• Mars

What are the advantages of privately held companies? (5)

• better control - shares cannot be bought or sold without the agreement shareholders.

• more finance than with a sole trader (one owner) or a partnership (up to 20 owners)

• greater privacy - no need to make final accounts available to the general public

• limited liability - cannot lose more than what they invest and are protected from misconduct or misjudgments of other owners

• continuity in the event of the death of a major shareholder

What are the disadvantages of privately held companies? (3)

• can only sell their shares to family, friends, and employees, with the approval of the majority of existing shareholders This can make it difficult to buy and sell shares in the company

• more expensive to operate than a sole trader or partnership (higher legal fees and auditing fees for checking and approving of financial accounts)

• can become a target for a takeover by a larger company which purchases a majority stake, although other owners have to agree to the sale of the company

List features of publicly held companies/joint-stock companies (5)

• shares can be bought and sold by the general public, without approval of existing owners.

• Shares can be bought and sold via a stock exchange/stock market

• When a company first sells its shares to become a publicly held company, it does so through an initial public offer (IPO) via a stock exchange.

• strictly regulated and

• Unlimited number of shareholders raises finance so long as it can attract investors

List examples of publicly held companies (7)

• Apple

• BP

• Facebook

• Google

• Samsung

• Toyota

• Walmart

What are the advantages of publicly held companies? (5)

• Additional finance can be raised through a share issue/selling additional share capital

• Easier to borrow money from bank loans and mortgages, due to their lower level of risk for financial lenders.

• limited liability

• Larger companies can operate on a wide scale and exploit exploit economies of scale, market share, and market power.

• Continuity

What is a share issue?

The process of subsequently selling more shares in a company. The process in which a company makes new shares available for sale, or the number of shares offered.

What is market share?

The percentage of the total revenue or sales in a market that a company's business makes up. For example, if there are 50,000 units sold per year in a given industry, a company whose sales were 5,000 of those units would have a 10 percent share in that market.

What is market power?

A company's relative ability to manipulate the price of an item in the marketplace by manipulating the level of supply and/or demand

What are economies of scale?

Economies of scale are cost advantages realised by companies when production becomes more efficient. Companies can achieve economies of scale by increasing production while lowering per-unit production costs. For example, a company can buy 200g of metal for 50$, and later negotiate 500g for 100$ (buying in bulk)

What are the disadvantages of publicly held companies? (4)

• lack of privacy - general public have access to their financial accounts

• the most administratively difficult and expensive to set up and run (high costs of complying with the rules and regulations of the stock market,…)

• As the general public can buy and sell shares freely, there is always a potential threat that a rival company will make a takeover bid

• Large companies can suffer from diseconomies of scale - being too large can cause higher average costs of production.

What are social enterprises?

They are organisations that focus on meeting social objectives (such as improving social and environmental well-being). Social enterprises are an example of social purpose organisations (SPOs).

What are some features of social enterprises? (4)

• exist to improve society

• need financial funding and suitable human resources

• combine social and commercial agendas in order to achieve their social and environmental agenda (they strive to gain a financial surplus to facilitate social gain)

• Their activities, by definition, purposely create social benefits.

Types of social purpose organisations (SPOs) (3)

• charities

• cooperatives

• non- governmental organizations (NGOs)

What are the differences between traditional businesses and social enterprises?

According to the Harvard Business Review, traditional businesses focus on their mission, whereas social enterprises focus on their purpose

What are some characteristics of missions? (6)

• what we do

• Operating a business

• Strategic

• Created buy-it

• Provides focus

• Builds a company

What are some characteristics of purpose? (6)

• why we do it

• Sharing a dream

• Cultural

• Instills ownership

• Fuels passion

• Builds a community

What types of social enterprise are there?

1. For-profit social enterprises (AO3):

• Private sector companies

• Public sector companies

• Cooperatives

  2. Non-profit social enterprises (AO3):

     • Non-governmental organisations (NGOs)

What are for-profit social enterprises?

A for-profit social enterprise uses commercial business practices in order to achieve social goals, such as improving the environment, building better communities and developing social wellbeing. Such organizations do not focus on generating profits for their shareholders but strive to build and improve communities.

What are the three main types of for-profit social enterprises?

• Private sector companies

• Public sector companies

• Cooperatives

What are the differences between for-profit social enterprises and traditional charities?

Unlike traditional charities, for-profit social enterprises need to earn a profit (or financial surplus) in order to survive. This is because traditional charities rely on donations as their main source of finance.

What are private sector companies (AO3)?

Private sector companies are for- profit business organizations that operate in the private sector. They differ from those that operate in the public sector in terms of ownership, and control, the purpose of their existence, how they raise finance, how they are managed, and how any profits (financial surplus) are distributed or how losses dealt with.

What are microfinance providers?

They are for-profit social enterprises that operate as private sector companies. They offer a financial service to those who don’t have the money to repay interests that come with bank loans.

What is the aim of microfinance providers?

The aim of providing Microfinance is to help entrepreneurs struggling to finance their business start-ups to gain access to loans of a small amount. As with the majority of loans, interest is charged on the amount borrowed, although these are typically lower than what commercial banks would charge.

What are the advantages of microfinance providers? (6)

• can help to build and foster a culture of entrepreneurship and economic independence.

• helps to provide poverty relief

• empower entrepreneurs of small businesses and the underprivileged in low-income countries.

• creates benefits for the wider community, such as improved healthcare, education and employment opportunities.

• Microfinance providers act in a socially responsible way by helping the poorest and most vulnerable adults in society.

• Help people get out of poverty by making them become financially independent.

What are the disadvantages of microfinance providers? (5)

• Considered unethical as they earn profits from low- income individuals and households.

• provides finance on a small scale, so is unlikely to make a real difference to society as a whole

• Struggling entrepreneurs might not be able to repay interest charges

• increases the debts of entrepreneurs who may subsequently struggle in their business venture.

• relatively low profitability - lower chances of attracting and/or retaining managers and employees, given their remuneration packages have lower value

What is a remuneration package?

It is the complete bundle of pay, benefits and perks given to an employee. Examples include: bonuses, commission, performance-related pay, additional leave, childcare, mobile phone/s, company car/s, etc.

What is the public sector?

The public sector is the part of the economy composed of government-owned and/or -controlled enterprises. Public sector companies operate commercially - sell goods and/or services in order to gain a financial surplus. They can be owned wholly or partially by the government. The financial surplus they earn for the government is used for the benefit of society as a whole.

What is a public-private partnership (PPP)?

It is a long-term contract between a private company and a government agency for providing a public asset or service, in which the private party bears significant risk and management responsibility, but not the majority stake.

What are some other examples of service providers in the public sector that operate as for-profit social enterprises? (6)

• Broadcasting services, such as national broadcasters of television and radio services

• Educational establishments, such as schools, colleges, and universities

• Housing associations to provide social housing for people

• National health service provides free basic healthcare services to the vast majority of the population

• Public transport providers, such as buses and mass rail transit

• Sports and leisure centres, including public swimming pools

List the advantages of public sector companies (5)

• By being able to charge for their services, they help to reduce the debt burden of the economy and taxpayers in particular

• secure employment opportunities

• have a positive impact on local communities, as well as country’s overall economic growth and development.

• the government can finance projects that it does not have enough money for

• As the product is provided by the government, there are fewer risks involved.

List the limitations of public sector companies (5)

• By funding their projects, the government gives up the option of financing other items of government expenditure, such as road maintenance, flood defence systems, and developing communications networks.

• high set-up and running costs

• high-risk businesses with unpredictable profits

• Difficult to persuade partners or investors to help fund them

• Large amount of bureaucratic policies and procedures, which can cause inefficiencies and delays to decision making

What are public corporations?

Public corporations are public sector companies owned by the government on behalf of the general public

What are cooperatives?

Cooperatives are for-profit social enterprises that are owned and managed by their members. Cooperatives exist throughout the world, but are predominant in the agricultural and retail sectors of the economy in many parts of Europe.

List examples of cooperatives (4)

• employee cooperatives

• producer cooperatives

• managerial cooperatives

• customer cooperatives

List the features of cooperatives (8)

• They strive to provide a service for its members

• profits are shared between its members

• Members have limited liability, restricted to the amount they invested in the business

• have a separate legal entity from their owners

• All shareholders are expected to help run the cooperative, although it is overseen by an elected board of directors that makes long-term strategic decisions.

• All members have equal voting rights

• have a democratic culture

• decentralised decision making (many offices make decisions instead of one)

What are advantages of cooperatives? (7)

• not difficult or expensive to set up

• They are tax exempt because the business serves interests of its members and the community (such as home care associations for the elderly)

• As all members are expected to run it, it is more likely to succeed

• Thanks to its democratic nature, the members feel equally important to the success of the business. This is likely to lead to a harmonious working environment.

• The absence of pressure from external investors and shareholders allows the member-owners to act towards their own interests

• As cooperatives strive to benefit their members and society, they often qualify for government financial support

• continuity

What are disadvantages of cooperatives? (4)

• It can be difficult to attract investors, financiers, member-shareholders, specialist managers due to its non-profit nature, lack of remuneration, etc.

• employees and managers may lack financial motivation

• limited sources of finance as their capital depends on the amount contributed by their members

• democratic culture - larger contribution and greater responsibilities do not increase influence on the final vote - which can be seen as inefficient and unfair

What are the differences between charities and social enterprises?

Social enterprises are funded by commercial activities for the majority of their revenue streams, whereas traditional charities rely on donations, government grants, and/or endowments (provided income or property)

What is the triple-bottom-line? (3)

It is a business management model which comprises of a for-profit social enterprise’s three main objectives:

• Economic objective (profit) - to earn a profit to fund its activities and growth

• Social/cultural objective (people) - to provide social gains for local communities, (job opportunities, support for the underprivileged)

• Environmental objective (planet) - to manage and operate the business in such a way as to protect the ecological environment

What is a vision statement?

It is an inspiring or aspirational declaration of what an organization ultimately strives to be, or wants to achieve, in the distant future.

What are some features of vision statements? (6)

• Show an organisation’s core values

• act as a clear guide for key stakeholders when planning and implementing current and future corporate strategies

• describe where the company aspires to be in the future

• Increase motivation

• provide organisations with clear long-term direction

• Give inspiration

What is a mission statement?

It is a written succinct (brief, clear) and motivating declaration of an organization’s core purpose (why it exists), identity (who they are) and focus (what they do).

What are some features of mission statements? (3)

• normally remains unchanged over time

• a declaration of purpose

• includes a statement or description of the organization, its function, and its overarching objectives

What are some differences between vision and mission statements?

A vision statement tends to be a broad and abstract statement, which sets out where an organisation strives to be someday in the distant future). However, a mission statement tends to be narrow and more specific, it declares the purpose of the organisation, and what it stands for. These do not change regularly, so the mission statement is what the business exists for on a daily basis.

What are the functions of mission and vision statements? (3)

• give a sense of purpose and direction

• Positive and inspirational mission and vision statements motivate employees, especially if the values of the organisation are aligned with those of the workers

• guide the organisation’s strategies and strategic objectives

What are some criticisms of mission and vision statements?

• too vague, therefore rather meaningless and/or difficult to measure

• based on public relations - what the business aspires to and what it actually does on a regular basis may not align

• Exist to only make the organisation look good

• unquantifiable - only outline the aspirational purpose of an organisation’s existence.

• Vision statements are long term, so may not ever materialise.

• may be ignored or not taken seriously by stakeholders

What are business objectives?

Business objectives (or simply objectives) are the clearly defined and measurable targets of an organization, used to to achieve its overall goals. Objectives can be long-term (strategic objectives) or short-term (tactical objectives)

What are purposes of business objectives? (6)

• people know where they are striving to go or what they are trying to accomplish

• give a sense of direction and purpose

• motivate employees

• raise labour productivity

• give a sense of common purpose - promote a sense of belonging and team spirit (cohesiveness)

• enable managers and entrepreneurs to measure progress towards to their stated vision or mission statement

What is Peter Drucker’s SMART objectives acronym?

• Specific

• Measurable

• Agreed/Achievable

• Realistic/Relevant

• Time specific/Time-related

An example of a SMART objective for a multinational company might be "to achieve sales of €10 million in European markets by 2023."

What are features of tactical objectives? (6)

• easier to change or reverse

• Specific, short-term targets with definitive timelines (short-term) for specific functional areas of an organisation

• have a pre-determined time frame of less than a year

• usually delegated (entrusted) to those lower down in the organisational hierarchy

• relate to performance targets, such as to improve labour productivity

What are features of strategic objectives? (6)

• long-term targets that the whole organization is striving to achieve

• Require greater investment in human and financial resources

• related to what the owners of the business want to focus on (survival, growth, profit maximisation, protecting shareholder value, ethical objectives)

• Used to achieve the overall strategic goal, vision, mission of the business

• responsibility of executive directors (senior management)

• ultimately about results.

What is growth?

It refers to an increase in the size of a business and its operations. An example might be to improve the market share of a business by expanding its product portfolio in a particular market.

What are the benefits of growth? (11)

• Higher sales revenue and profit - as a firm grows, its sales revenue increases

• Economies of scale - e.g. being able to purchase raw materials in bulk at a discounted price from their suppliers.

• Reduced risks - larger firms tend to be less vulnerable to changes in the external environment, such as an economic recession

• can be pursued by internal and/or external methods

• necessary for a firm’s survival in a dynamic and competitive business environment

• Larger firms can charge lower prices and therefore attract more customers

• Motivation

• job security

• increased remuneration

• Attracts investors

• represents lower risk to financial lenders

What is internal/organic growth?

Internal growth/organic growth takes place when an organization expands without the help of an external partner firm. Instead, it uses its own resources to do so, such as using retained profits to invest in production facilities in new locations.

What is external/inorganic growth?

External growth/inorganic growth refers to the expansion and evolution of a business by using third party resources and organizations rather than relying on internal sources and activities.

What are methods of measuring the growth of a business? (6)

• Sales revenue - monetary value of the products sold per time period

• Sales volume - number of products sold per time period

• Profits - financial surplus that remains after deducting costs of production from a firm's sales revenue

• Customers - the more customers that the business has, the larger it tends to be

• Size of the workforce - the larger number of employees, the larger it tends to be

• Market share - firm's sales revenue as a proportion of the industry's sales revenue

What is profit?

Profit/financial surplus is the positive difference between a firm's sales revenue and its total costs of production per time period

Why are some features of profit? (7)

• reward for the owners and investors

• provides an internal source of finance

• acts as an incentive for entrepreneurs to take risks and start up new businesses

• provides incentives for them to remain in business and pursue growth in order to reap greater financial returns (motivation)

• enables internal growth

• It is a top priority for traditional commercial (for-profit) businesses

• Lack of it brings liquidity issues, which could possibly lead to bankruptcy and business closure.