Business Management Unit 1

Private Sector

Part of economy owned and controlled by private individuals and business. Profit based.

Public Sector

Part of economy under the ownership of the government. Traditionally provide essential goods and services that would be under-provided or efficiently provided by the private sector.

State-owned Enterprise

Organizations owned wholly by the government.

Sole trader

A self-employed individual who runs and controls the business and is held responsible for its success and failure.

Benefits of Sole Trader

• Easier control and decision making.

• Quick and easy to set up.

• Financial privacy

• Close customer relationship, competitive advantage.

• Flexibility.

Drawbacks of Sole Trader

• Compete against established business

• Stress

  • Owners do all roles in the business

• Limited capital

• Limited expansion opportunities

• Unlimited liability

• Lack of continuity (no investments)

Unlimited Liability

Feature for sole traders and ordinary partnerships who are legally bound/liable for all the money owed to their creditor.

Limited Liability

Restriction on the amount of money that owners can lose if their business goes bankrupt. Which essentially means owner can only lose what they have put in, and they don’t have to compensate with their own private property.

Partnership

• Are a type of private sector business owned by 2-20 people.

  • Some has more share than others.

Deed of Partnership

Is a legal contract signed by the owners of a partnership.

Advantages of Partnership

• Different skills → allocate to different roles.

• More expertise

• Greater stability, low risk

• Partner can help when on is unavailable.

Disadvantage of Partnerships

• Unlimited liability

• Less access to loans than corporation.

• 1 partner doesn’t have complete control

• Profit have to be shared

• Disagreement

Company/Corporation

A business that is owned by shareholders. Issued a certificate of incorporation, separate legal identity from its owner.

Incorporated

Legal difference between the owners of a company and business itself

Two Documents Must Be Produced and Submitted to AAuthority

• Memorandum of association - brief document outlining fundamental details

• Articles of Association - a longer document, stipulating the internal regulations and procedures of the company.

Advantages of Companies/ Corporations

• Limited liability

• Easier access to finance

• Expansion possibilities

• Established organizational structure

Disadvantages of Companies/Corporations

• Takes time and money to set up

• Selling shares

• Loss of control (shareholders taking control)

• Privacy loss

• A company has no control over the stock market

• No control over share ownership

Private Limited Company

Is a business owned by shareholders with limited liability but shares cannot be bought by or sold to the general public.

Public Limited Company

Incorporated business that allows the general public to buy and shares in the company via the stock exchange.

Initial Public Offering (IPO)

Occurs when a business sells or part of its business to shareholders on the stock exchange for the first time.

Stock Exchange

Marketplace for trading stocks and shares of public limited companies.

Business vs Company

Companies are owned by shareholders, which can be private or public companies.

Business covers other form of ownership such as sole traders and partnerships.

For Profit Social Enterprise

• Social enterprise

• Social purpose

• Improve human, social, or environmental well-being.

Social Enterprise

Revenue generation business with social goals at the core of their operations. They are organizations that engage in business activities but set goals important goals in terms of improving a social cause. Can be organized as for-profit business, non-profit organizations, cooperatives.

Private For-Profit Social Enterprises

• Aim for surplus (profit) instead of relying on donations to achieve social aims

• Triple bottom line framework for ethical business practices

Public For-Profit Social Enterprises

• State-owned enterprises to operate in a commercial way

• Help in raising government revenues to provide services to society that might be inefficient or undesirable if left to the private sector to deal with.

Cooperatives

A form of partnership with more than than 20 people. Each member participates in running the business and have equal say. A for-profit social enterprise that is set up, owned and run by members who can be employees or customers.

Advantages of For-Profit Social Enterprises

• Favorable Legal Status

• Strong Community Identity

• Benefits to the stakeholder community

Disadvantages of For-Profit Social Enterprises

• Complex decision making

• Insufficient capital for growth and financial strength

Non-Profit Social Enterprises

Aim to fund a social purpose using surplus.

Non-Governmental Organizations

Private sector not-for-profit enterprises that operate for the benefit of others rather than aimed at making profit however still using business strategies to generate revenue and achieve financial stability.

Vision Statement

A written expression of an organization’s long-term ambitions that it hopes to achieve in the future. It is often an optimistic view of what the organization want to accomplish.

Mission Statement

A declaration of the organization’s overall purpose, forming the foundation for setting the business’ objectives. The mission can be seen as ways of accomplishing the organization’s vision.

Steps to Set Mission Statement

1. Define the organization e.g what it is

2. Outline the what the organization aspire to be (vision statement)

3. Limited enough to exclude risky goals

4. Broad enough to allow innovative and creative growth

5. Distinguish organization from others.

6. Use to evaluate current business activities

7. Phrase clearly to be understood

Aims

General and long-term goal of a business, often vague and unquantifiable statements. Often expressed in the firm’s mission statement

Objectives

Short-to-medium and specific targets an organization sets in order to achieve its aims. Often expressed as SMART objectives.

SMART

Specific, Measurable, Achievable, Realistic and Time Constrained

Types of Objectives

Strategic, Tactical, Operational

Strategic (global) Objectives

Medium to long term objectives made by senior management.

Tactical Objectives

Medium to short term objectives set by middle managers.

Operational Objectives

Daily objectives set by floor managers.

Issues to meet Objectives

• Culture clash - difference in culture

• Financial constraints - money

• Conflict

Business Strategy

Plans/approachs/scheme of action that businesses use to achieve their targets. Generally, strategies involve important decisions that may be risky and are done by senior mana

Business Tactic

Short-term plans of action that firms use to achieve their objectives. A tactic is an approach or scheme to achieve aim or objective. Tactic, compare to strategies, involve less resources and risk. They may not require senior management because they can be easily modified or reverse.

Internal Environment Factors Affecting Objectives

• Leadership

• HR

• Organization (merger/acquisition)

• Product

• Finance

• Operations

External Environmental Factor Affecting Objective

• Technological

• Social

• Economic

• Ethical

• Political

• Legal

• Ecological

Why organizations set ethical objectives?

• Build customer loyalty

• Create a positive image

• Develop positive work environment

• Reduce risk of legal redness

• Satisfying customers’ higher expectation

• Increase profit

Impacts from Implementing Ethical Objectives

• The business itself

• Competitors

• Suppliers

• Customers

• Local community

• Government

Ethical Objectives Vs Corporate Social Responsibility

Ethical objectives are just 1 element of CSR

CSR is the concept that a business is obligated to operate in a way that have a positive impact on society.

Corporate Social Responsibility (CSR)

The conscientious considerations of ethical and environmental practices related to business activity.

Ethics

Moral principles that guide decision-making and strategy.

Ethical code of Practice

Documented beliefs and philosophies of an enterprise.

SWOT Analysis

An analytical tool used to assess the internal strengths and weaknesses, external opportunities and threads of a business decision, issue or problem.

Ansoff Matrix

An analytical tool to devise various products and market growth strategies, depending on whether the business want to market new or existing products in either new or existing markets.

Advantages of using the Ansoff matrix

• Provides analytical framework for strategic marketing decisions

• Highlights the various risk degrees associated with strategic direction of marketing

• An identified quadrant points to the marketing tactic that can be used.

Disadvantages of using Ansoff Matrix

• It is only a tool and can be misused.

• It simplifies a complex problem, can be too much.

• Cannot predict actual events and thus, can be misleading.

Stakeholders

Individuals and organizations with a direct interest in the activities and performance of the business. It is a group that affects an organization or is affected by it.

Shareholders

Owners of a limited liability company.

Internal Stakeholders

Members of an organization but have a direct interest in its activities and performance.

External stakeholders

Individuals and organizations not part of the organization but have direct interest in its activities and performance.

Stakeholders includes (examples):

• Owners/shareholders

• Managers

• Workers

• Customers

• Suppliers

• Government

• Local community

• Financiers

• Pressure groups

• Media

Internal Stakeholder Interest

• Shareholder - Return on investment

• Workers - good pay and work conditions

• Managers - meeting objectives, ensure job security

External Stakeholder Examples

• Government - employ people, pay taxes

• Suppliers - stable relationship

• Customers/consumer - want the best product at the best price

• Local community - effect of the business

• Pressure groups

Pressure Groups

Consist of individuals with a common concern and seek to place demands on organizations to act a particular way.

Stakeholder Conflict

Refers to situations where stakeholders have disagreements on certain matters due to differences in their opinions and objectives.

Stakeholder Analysis

Stakeholder analysis is a process used to asses and categorize stakeholders in a project, policy, or decision. This analysis helps organizations understand the various stakeholders' interests, influence, and participation levels, allowing for effective engagement strategies.

Variable Cost

Cost that vary with production

Fixed costs

Remain the same no matter how much or little you make.

Total Cost Formula

Fixed costs + Variable costs

Average Cost

Cost per unit of output (cost to make a product)

Average Cost = Total Cost/ Quantity of Output

Economies of Scale (EOS)

Refers to lower average cost of production as a firm operates on a larger scale due to gains in productive efficiency.

Diseconomies of Scale

The cost disadvantages of growth. Unit costs are likely to eventually rise as a firm grows.

Internal Economies of Scale (efficiencies)

• Technical

• Managerial

• Financial

• Marketing

• Purchasing

• Risk Bearing

External Economies of Scale

• Technical progress

• Improved transportation networks

• Skilled labour force

• Regional specialization

Economies and Diseconomies of Scale Graph

Internal DIS-economies of Scale (inefficiencies)

• Managerial - Lack of control

• Poor working relationships

• Disadvantages of specialization

• Bureaucracy

• Complacency (too satisfied to notice risks or danger)

External Diseconomies of Ccale

• Increased market rents

• Higher wages and financial rewards - retain workers

• Traffic congestion

Optimal level of output

The most efficient scale of operation for a business which occurs at the level of output where the average costs of production are minimized.

Ways to Measure a Firm’s Size

• Market share - a firm’s sales revenue as a percentage of the industry’s total revenue.

• Total revenue - the value of a firm’s annual sales turnover per time period.

• Size of a workforce - the total number of employees hired by the business.

• Profit - the value of a firm’s profit over a time period

• Capital employed - the value of the firm’s capital investment for the business to work.

Larger Business Benefits

• Brand recognition

• Brand reputation

• Value added services - more resources to provide a range of services.

• Lower price - offer greater price due to economies of scale

• Greater choice - more choice

• Customer loyalty - customers remaining loyal due to perceived trust and value for money.

Smaller Business Benefits

• Personalized services - more time to devote to individual customers.

• Flexibility - more flexible and adaptive to change, large businesses have larger financial commitments

• Small market size - no large firm will compete with it hence allowing it to thrive

• Cost control - no dilution of control (shareholders), less chance to face diseconomies of scale

• Financial risk - Smaller business have less finance hence better control.

• Government aid - Grants and subsidies can be offered to small business by government.

• Local monopoly power - Can enjoy being the only firm in a location.

Why firms want to grow

• To have benefits of larger scale production (economies of scale)

• Gain larger market share and power. Allow charging higher prices.

• Growth for survival, grow to compete with rivals who are also growing.

• To spread risks by diversifying. If one market is at risk, having operations in other markets help ensure firm’s survival.

Internal Growth (organic)

Using the business own capabilities and resources to increase scale of operation and revenue.

Ways Business and Grow Internally

• Changing price

• Good promotion

• Producing better products

• Sell through a better distribution network

• Offer preferential credit

• Increase capital expenditure (investment)

• Improved training and development

• Providing overall value for money

Advantages to Internal Growth

• Better control and coordination

  • Easier to control internal factors

• Inexpensive

  • No interest in paid on retained profit (reinvestment in the company)

• Less risky

  • Builds on the strength of business.

Disadvantages of Internal Growth

• Diseconomies of scale

  • Higher unit costs of production and result from internal growth.

• Restructure need

  • Sole trader can control the business easily, if it grows into a multinational company then structure has to change.

• Dilution of control and ownership

  • Firm grows can change from sole trader to a plc, which then owners have to share decision-making with shareholders.

• Slow growth

  • Internal growth is slower than external growth

External Growth

Happens when a business grows by collaborating with, buying or merging with another firm.

Benefits of External Growth

• Faster way to grow

• Quick way to reduce competition

• Greater market share and power

• Sharing of ideas with other businesses

• Help a firm evolve and spreading risks across different markets.

Disadvantages of External Growth

• The main disadvantage of external growth is the huge costs which can be higher than internal growth.

Mergers

2 business merge to form a new business

Acquisition (takeover)

When one business buys a controlling interesting in another business.

• Hostile takeover is when the acquisition is done without the consent of the target company’s management.

Why firms become targets for takeovers

• Growth potential but lacks sufficient funding for growth

• Seen as small rival with growth potential

• Widely recognized branding but are facing financial crisis.

• Vulnerability

Forward Vertical Integration

Growth strategy that occurs with the amalgamation of a firm operating at a later stage in the production process.

Backward Vertical Integration

Growth strategy that happens when a firm amalgamates with a firm operating at an earlier stage in the production process.

Conglomerates

Businesses that provide a diverse range of products and operate in multiple industries.

Advantages of M&As (Merger and Acquisitions)

• Greater market share

• Economies of scale

• Synergy - access to other’s resources

• Survival - a bigger company, more change of survival

• Diversification

Disadvantages of M&As

• Redundancies - when a role is no longer necessary in a company, hence the need to terminate employees

• Conflict

• Culture class - things need to adapt to the culture of a newly formed organization.

• Loss of control - more people have the say in decision-making

• Diseconomies of scale

• Regulatory problems - governments are concerned with M&As, preventing them due to the risk of monopolies.

Joint Ventures

Growth strategy that combines the contributions and responsibilities of two different organization in a shared project by forming a separate legal enterprise (no rebranding or a new organization, just a project)

Strategic Alliances

• Similar to join ventures but:

  • More than 2 businesses

  • New new businesses is created

  • Individual businesses in the alliance can stay independent

  • More fluid than Joint Ventures

Franchise

Right given by one business to another to sell goods and service using its name and branding. (this is a right, a franchise). An agreement where franchisor to sell the rights to another business, to sell products under its name.