Topic 1 - Intro to Business

Define Stakeholders

Stakeholders are individuals, groups, or an organization with direct interest in the operations and performance of a business

Define Internal Stakeholders &

Types of Internal Stakeholders

Internal stakeholders have a direct interest and are affected by the operations and performance of a business

1. Employees

They seek:

better pay

better working conditions

job career development opportunities

2. Managers

They seek:

Maximizing profit for the business

financial rewards

bonus in salary

3. Shareholders

They seek:

Maximize dividends

Increase shareholder value (or capital gain)

Define External Shareholder &

Types of External Shareholder

External Shareholder are not part of the business, but still have direct interest and are affected by the operations and performance of a business

1. Customers

They seek:

High-quality goods and services for a fair price

2. Suppliers and Creditors

They seek:

Businesses paying what they owe on time

Good working relationship (allows preferential terms, allowing businesses to buy now, pay later, improving cashflow)

3. Financers (financial institutions eg. banks)

Businesses generate sufficient profits to repay debts and internet payments on time

4. Pressure Groups

They seek:

Influence policy and actions of a business

promoting a specific cause

5. Competitors

They seek:

updates on rivals to remain competitive, responding to rivals actions

benchmark performance by comparing key performance indicators (eg. revenue growth, marketshare, etc.)

6. Government

They seek:

businesses avoid unethical practices

health and safety standards are met

Public Sector

owned and controlled by the government

aims to provide services to the general public, most often essential services (eg. public hospitals)

Private Sector

owned and controlled by individuals, groups, or firms

aim is to maximize profits

more efficient when compared to the public sector, as private sectors tend to have higher levels of productivity

Define Sole Trader

An individual that owns and runs a personal business

Sole Trader (Pros & Cons)

Advantages:

- All profit goes to the owner

- Quick decision-making

- Owner has full control

- Minimal tax arrangements and legalities

Disadvantages:

- Unlimited liability

- Workload/Stress

- Limited Sources of finance

Define Partnerships

A business owned and managed by two or more individuals together, they have to sign a deed of partnership, which is a legal document on how profit and losses are shared.

Partnerships (Pros and Cons)

Advantages:

- Increased access to finance

- shared responsibilities

- specialization in skills

Disadvantages:

- unlimited liability

- potential disputes between decisions

Unlimited vs Limited Liability

Unlimited Liability:

- personally responsible for all debts, such that if debts can't be paid, personal assets are at risk

Limited Liability:

- can only lose the amount they invested (eg. can at most lose all shares owned, not personal assets)

Privately Held Company/Private Limited Company

Owned by shareholders, typically family and friends

- shares invested into the business provides capital

- shares aren't listed on the stock exchange

(can't be bought/traded by the general public)

- needs permission from other shareholders to sell shares

Advantages:

- limited liablity

- access to greater finance

Disadvantages:

- loss of control

- compliance costs

Publicly Held Company / Public Limited Company

owned by shareholders

- shares invested into the company provides capital

- listed on the stock exchange for anyone to purchase

Advantages:

- Easier to raise finance

- limited liability

Disadvantages:

- loss of control

- compliance costs

For-Profit Social Enterprise

A business that generates surplus and achieves social, environmental, or cultural objectives

they focus on addressing social issues, and creating a positive impact

Cooperatives

owned, run, and managed by it's own employees

- profits are split equally

- each member has one voting rights

Disadvantages:

- Time-consuming decision-making

- Potential disagreements

- Low profits due to them being split

Non-Governmental Organization

Do not aim for profit, but aims to provide a service

Funded by donations or government funding

Vision Statement

Outlines an organization's aspirations in the distant future

- focuses on the long-term

- where they want to be

- aims to inspire and motivate

(lets shareholders know their direction)

Mission Statement

Outlines the purpose of an organizations existence

- focuses on medium to long-term

- realistically achieveabe

What do Aims and Objectives do?

Aims and objectives help guide a business towards the right direction, aligning efforts of employee towards a common goal.

- they also motivate and inspire employees

Define Aim

An aspiration in the future (similar to vision)

Define Objetive

Objectives are specific, measurable, and achievable targets

Define Strategic Objevtive

long-term specific performance goals (eg. profit, marketshare, etc.) made to fulfil the firms overall mission statement

Types of Strategic Objectives

1. Growth

- growth (increase) in sales revenue, marketshare, etc

2. Profit

maximize profit

3. Protecting shareholder value

value of shares are valued above everything else

attracts new investors

Define Ethical Objectives & Pros/Cons

Ethical objectives are the moral principles that guide the decision making in a business

Advantages:

+ Improves corporate image and reputation

+ Customer loyalty

+ Improved staff morale and motivation

Disadvantages:

- compliance costs

- stakeholder conflict

- pressure maintaining ethical record

Tactical Objective

Short-term goals made on a daily basis for departments/operations

Define Corporate Social Responsibility

CSR refers to an organization consideration of actions and decisions that impact society in positive ways. CSR includes environmental sustainability efforts, ethical sourcing of materias, fair labour practices, and community engagement.

Advantages and Disadvantages for CSR

Advantages:

1. improves corporate image and reputation

- attracts existing and potential customers

- attracts quality workers

- positive media coverage

- favourable for investors, especially ethical investors

2. Profitable and Adds Value

- Provides a Unique Selling Point differentiating against competitors, providing a competitive advantage

- Allows premium pricing

3. Boosts employee morale and productivity

- employee less likely to leave

- motivation and productivity

4. solves social problems

Disadvantages;

1. stakeholder conflict

2. compliance cost

- overall profit may decrease if business cant compensate by selling at higher prices

Economies of Scale & It's advantage

When a firms average costs of production decreases as scale of operations increases due an improvement in productive efficiency.

Advantages:

- Provides a firm with competitive cost advantages, allowing to lower selling price while having a higher profit margin.

Internal Economies of Scale

Economies Of Scale that occurs inside the firm within its own control

Types of Internal Economies of Scale

Types of Internal Economies of Scale:

1. Technical Economies

Large firms can utilise their machinery to mass produce their products. The high fixed costs will be spread over large scale of output, reducing the average costs of production

2. Financial Economies

Large firms are able to borrow large sums of money for lower interest rates, reducing the average cost of production

3. Managerial Economies

Hiring specialist managers for different departments or operations to increase productivity, and decrease average costs of production

4. Marketing Economies

- Selling in bulk will save time and transaction costs

- Buying marketing advertisement in bulk for discounted prices

- Reusing the same marketing campaign across the world

these will reduce the average costs of production

5. Purchasing Economies

- Buying resources in bulk at discounted prices, reducing average costs of production

External Economies of Scale

Economies of Scale that occurs outside the business due to favourable location or growth of the industry

Types of External Economies of Scale

1. Technological Economies

Technological progress increases productivity, decreasing average costs of production

2. Improved Transportation Network

Can import resources with lower manufacturing costs

Faster deliveries reducing costs

3. Abundance of Skilled Labour

Due to government aided training or reputable education in certain areas, businesses in these locations have a pool of skilled and trained labour, reducing recruitment and training costs

Diseconomies of Scale

The average cost of production increases as a firm's scale of operations increases, resulting in inefficiencies.

Internal Diseconomies of Scale

Internal Diseconomies of Scale usually happen due to mismanagement

1. Lack of control and coordination as the span of control increases in organizations that operate in multiple locations, resulting in slower decision-making. Some employees may feel alienated, decreasing morale.

2. Poor working relationships in an oversized business, seniors may be detached from employees in lower hierarchy, affecting communication, reducing productivity

External Diseconomies of Scale

Increase in average costs of production due to factors beyond the firms control.

1. Higher Rent Costs

if too many businesses locate in a certain area, rent costs will rise, increasing fixed costs. Thus, average costs of production will increase.

2. If there are a large number of employers, businesses might have to offer higher pay and financial rewards to retain workers. This increases costs, raising average costs of production.

3. Traffic Congestion

Too many businesses in one location, causing traffic congestion, delaying deliveries. This increases transportation costs, increasing average costs of production.

Define Internal Growth

When a business uses it's own capabilities and resources to increase it's scale of operations and sales revenue.

Methods of Internal Growth

Methods of Internal Growth

1. Changing Prices

Customers tend to buy products at lower prices, but if there's fewer substitutes, prices should be raised.

2. Improved Promotion

People are more likely to buy a product if they are well-informed and reminded about it's benefits

3. Product innovation (improving/creating)

conducting market research to improve or produce new products that appeal to the market and increase sales.

4. Offering Preferential Credit

Customers are more likely to buy products with the "buy now pay later" option, however, this may affect their cashflow

5. Increased capital expenditure

Any investment spending, like expanding to new locations, or new production processes/technologies to improve productivity, however, the investment may be risky

6. Improved Training and Development

Employees will feel more confident and competent in their jobs, motivating the workforce and improving the quality of customer service, allowing customer loyalty and higher sales.

Advantages and Disadvantages of Internal Growth

Advantages:

1. Better Control and Coordination

Organization can maintain control, without risks of losing control or ownership in external growth

2. Inexpensive

Main source of finance in internal growth is usually using retained profits or loans.

3. Maintains Corporate Culture

No culture clashes or conflicting management styles

4. Less Risky due to the reasons above

Disadvantages:

1. Potential Diseconomies of Scale

Higher average costs of production from internal growth, cause communication issues and slower decision-making.

2. Slower Growth

Define External Growth

When business deals with outside organizations to increase it's own scale of operations and sales revenue.

Advantages and Disadvantages of External Growth

Advantages:

1. Faster growth

Diverse external resources and finance available

2. Synergies

Business can benefit from a greater pool of skills and knowledge shared by external parties

3. Reduced Competition

Reduces competition and increases market share

Disadvantages:

1 . Expensive

2. Greater Risks

Due to less knowledge of new markets, and uncertainties in external growth

3. Potential Diseconomies of scale

Potential inefficiencies that increase average costs

4. Culture Clash

Unable to combine different cultures or management styles

Reasons for Business to Grow

1. Economies of Scale

Increase scale of operations while decreasing average costs of production

2. Brand Recognition

Can sell to a wider market

3. Brand Reputation

4. Greater Choice

More choice for customers

5. Customer Loyalty

Reasons for Business to Stay Small

1. Cost Control

They may face higher average costs and require additional borrowing costs from financial institutions

2. Loss of Control

3. Government Aid

subsidies and grants

4. Personalised Services

devote more time to each customer

Mergers and Acquisitions

When two or more businesses form a single company, enabling improved synergies, economies of scale, and larger market share.

Merger

When two or more firms agree to create a new company with it's own legal identity.

Acquisition

When a company buys a controlling amount of interest in another company, with permission and agreement from it's board of directors.

What is Synergies in Mergers and Acquisition

Synergies is when there is a large pool of skills and knowledge from external parties, enabling greater output and improved efficiencies.

Advantages and Disadvantages for Mergers and Acquisitions

Advantages:

1. Greater Market Share

- Greater Market Power, Sales Revenue, and Larger Customer Base

2. Economies Of Scale

- Operating at a larger scale would reduce average costs of production, improving firms profit margins and competitiveness

3. Synergies

- Access to each others resources, technologies, management, human resources, and channels of distribution, increasing output, productivity, and sales revenue.

4. Diversification

- Allows a firm to diversify their product mix, spreading risks as well as gaining a larger customer base

5. Entry into New Markets

Disadvantages:

1. Redundancies

2. Conflict and Disputes

3. Cultural Clash

4. Loss of Control

5. Diseconomies of Scale, longer channels of communication

may slow down productivity and decision-making

Define Takeovers/Hostile Takeover

When a business buys a controlling amount of stake in another company without permission and agreement from it's board of directors.

Define Joint Venture

When two or more businesses split costs, risks, and rewards in a project, in doing so, creating a new legal identity.

Define Strategic Alliance

When two or more businesses cooperate for mutual benefits, sharing costs of production, operations, and marketing, while remaining as individual organizations

Define Multi-National Company (MNC)

An organization that operates in two or more countries

Reasons to become an MNC

1. Increased customer based = increased sales revenue

2. cheaper production costs

3. Economies of Scale

eg. some countries can offer a better quality and quantity of land at a lower costs, reducing the average costs of production

4. Brand Development and Recognition

5. Spreads Risks

eg. unfavourable market conditions in one country won't damage the entire business

Positive and Negative Impacts of MNCs

Positive Impact:

1. Job Creation

2. Knowledge and Technology Transfer

Negative Impacts:

1. Social Responsibility

2. Competitive Pressure

eg. local businesses may be forced to reduce prices to remain competitive, or may not have the knowledge/technologies

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