Business unit 1

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challenges for starting a business

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challenges for starting a business

  • lack of finance

  • unestablished customer base

  • cash flow problems

  • marketing problems

  • people management problems

  • production problems

  • legalities

  • high production costs

  • poor location

  • not able to handle external influences

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opportunities for starting a business

  • growth— increase in value

  • earnings—profit

  • transference and inheritance— something you can pass onto your children

  • personal challenge

  • autonomy

  • security— you’re your own boss

  • hobbies

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public sector

owned by the government

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private sector

controlled and owned by private individuals rather than by the government

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aims of private sector companies

earn profit

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aim of public sector companies

provide essential goods and services that would be underprovided or inefficiently provided by private sector.

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reasons for public sector business activity

  • ensure everyone has access to basic services such as education, health care, etc.

  • avoid wasteful competition as gov. is able to achieve huge economies of scale.

  • protect citizems and businesses through institutions such as the police

  • create employment opportunities

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sole trader

an individual who owns their personal business. Unincorporated(no difference between person and their business)

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sole trader advantages

  • few legal formalities

  • profit taking

  • being your own boss

  • personalised service to customers

  • privacy(dont have to make financials public)

  • quicker decision-making

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sole trader disadvantages

  • unlimited liability

  • limited sources of finance

  • high risks

  • workload and stress

  • limited economies of scale

  • lack of continuity

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for-profit private sector business owned by 2-20 persons

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silent/sleeping partners

raise money from owners who do not actively take part in the running of the partnership but have a financial stake in it

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advantages of partnerships

  • financial strength

  • specialisation and divison of labour

  • financial privacy

  • cost-effectiveness

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disadvantages of partnerships

  • unlimited liability

  • lack of continuity

  • prolonged decision-making

  • lack of harmony

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privately held companies

  • businesses owned by their shareholders

  • limited liability that cannot raise share capital from the general public via stock exchange

  • shares only sold to friends and family

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individuals who have invested money to provide share capital for a company or corporation

  • owners of a limited liability company. shares in a company can be held by individuals or other organisations

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Annual general meeting

  • shareholders vote on resolutions

  • re election of BOD

  • ask questions to CEO

  • approve financial accounts

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limited liability

  • shareholders do not stand to lose personal belongings if the company goes into bankrupcy or liquidation.

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advantages of limited liability companies

  • raising finance— can raise lots by selling shares

  • limited liability— easy to attract investors

  • continuity— business is a separate legal entity

  • benefit from economies of scale

  • productivity— can hire directors + specialists to run firm— no need for owner’s direct involvement

  • tax benefits

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disadvantages of limited liability companies

  • communication problems— as it becomes larger, more impersonal

  • added complexities

  • compliance costs

  • disclosure of information— more bureaucracy

  • loss of control

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publicly held companies

  • shares many similarities with privately held companies

  • able to advertise and sell shares to general public via stock exchange

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when a publicly held company first sells all or part of its business to external investors(shareholders) (IPO)

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Initial public offering

makes the publicly held company listed on a public stock exchange

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social enterprise

revenue-generating businesses with social objectives at the core of their operations.

main goals:

  • achieve social objectives

  • earn revenues in excess of their costs

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benefits of social enterprises

  • use financial surplus to benefit others in society, beyond personal rewards for shareholders and owners

  • create employment opportunities, thereby improving the economic and social landscape of local communities

  • run in a transparent way, providing tangible benefits

  • can be private sector, public sector or a cooperative

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private sector for-profit social enterprise

  • reinvest or donate any surplus to create positive social change

  • ethical business practises

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public sector for-profit social enterprises

  • state-owned social enterprises run in a commercial way

  • help raise gov. revenue and provide essential services that may be inefficient or undesirable if left to private sector

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for-profit social enterprise owned and run by their members, such as employees or customers, with the common goal of creating value for their members by operating in a socially responsible way.

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advantages of cooperatives

  • incentives to work bc have a stake in cooperative— enhances self-motivation and productivity

  • decision-making power— employees have a say in how business is run

  • social benefits— run on socially responsible principles

  • public support— people want to help them succeed

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disadvantages of cooperatives

  • disincentive effects— inefficient management bc cooperatives do not pay high

  • limited sources of finance

  • slower decision-making bc democratic

  • limited promotional opportunities

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non-governmental organisations (NGOs)

  • private organisations that pursue activities to relieve suffering, promote basic social services or undertake community development.

  • private sector or not for profit social enterprises

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vision statement

outlines an organisations aspirations in the distant future

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mission statement

simple declaration of the underlying purpose of an organisation’s existence and its core values. clearly defined and realistically achievable

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differences between mission and vision statements

  • vision addresses ‘what do we want to become’ while mission addresses ‘what is our business’

  • mision statements updated more frequently than vision statements

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The goals or targets an organisation strives to achieve.

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why are organisational objectives important

  • to measure and control— help to control a firm’s plans

  • to motivate— can help inspire managers and employees to reach a common goal

  • to direct— provide a clear focus

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advantages of having ethical objectives and practices

  • improved corporate image

  • increased customer loyalty

  • cost cutting

  • improved staff morale and motivation

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disadvantages of having ethical objctices and practices

  • compliance costs high

  • lower profits

  • stakeholder conflict

  • subjective nature or business ethics

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an individual, group, or organisation with a direct interest or involvement in the operations and performance of a business

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corporate social responsibility

  • conscientious consideration of ethical and environmental practise related to business activity

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internal stakeholders

  • members of the business namely employees, managers and directors, and shareholders

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external stakeholders

not part of the business but have a direct interest or involvement in the organisation. comprised of customers, suppliers, financiers, pressure groups, competitors, the government

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conflict between stakeholders

  • differences in the varying needs and priorities of the various stakeholder groups of a business

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economies of scale

  • lower average cost of production as a firm operates on a larger scale due to an improvement in its productive efficiency

<ul><li><p>lower average cost of production as a firm operates on a larger scale due to an improvement in its productive efficiency</p></li></ul>
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types of economies of scale

  • technical economies of scale— big companies use sophisticates capital and machinery to mass produce

  • financial economies— large firms can borrow large sums of money

  • managerial economies

  • specialisation economies— division of workforce rather than management

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diseconomies of scale

  • in a larger firm, managers lack control and coordination

  • likely to be poorer working relationships in an oversiyed business

  • workers become bored with repeating tasks within larger workforce with high specialisation leads to lower productive efficiency

  • amount of bureaucracy grows as a business does

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internal growth usually generated by

  • Gaining greater market share

  • Product diversification

  • Opening a new store

  • International expansion

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external growth takes place in one of three ways:

  • Vertical integration (forward or backwards)

  • Horizontal integration

  • Conglomerate integration

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advantages of internal growth

  • The pace of growth is manageable

  • Less risky as growth is financed by profits & there is expertise in the industry

  • Avoids diseconomies of scale

  • The management know & understand every part of the business

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disadvantages of internal growth

  • The pace of growth can be slow & frustrating

  • Not necessarily able to benefit from economies of scale

  • Access to finance may be limited

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advantages of external growth

  • quicker than organic growth

  • synergies

  • reduced competition

  • economies of scale

  • spreading of risks

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disadvantages of external growth

  • more expensive than internal growth

  • greater risks

  • regulatory barriers

  • potential diseconomies of scale

  • conflict

  • possible loss of control

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merger and acquisition

A merger is a mutual agreement between two or more businesses to join together as a single business

An acquisition occurs when one company takes complete control over another by acquiring more than 50 per cent of its share capital

A friendly takeover is where acquisition has the approval and support of the directors of the target company

A hostile takeover occurs against the will of the target company's board of directors

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advantages for mergers and acquisitions

  • increased market share

  • economies of scale

  • entering new markets

  • less competition

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disadvantages of mergers and acquisitions

  • diseconomies of scale

  • culture clash

  • inefficiencies

  • possible lack of expertise in new products/ industries

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joint venture

A joint venture occurs when two businesses join together to share their knowledge, resources and skills to form a separate business entity for a specified period of time

Businesses may choose a joint venture to reach a new market as it may be more cost effective than exporting, licensing and franchising

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advantages of a joint venture

  • Economies of scale gained from costs spread over larger output can lead to increased profit margins 

  • Both businesses retain their own identity as the joint venture is set up as a separate business for a limited period of time

    • When the joint venture comes to an end the partners continue to operate their original businesses as before

  • Opportunity to enter new markets which otherwise may be closed to the business

  • Joint ventures often involve the exchange of technology, expertise, or specialised knowledge

    • This can enhance the capabilities of the venture and provide access to new opportunities

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disadvantages of a joint venture

  • In a joint venture both businesses have a say in decision-making

    • This shared control can lead to conflict especially if the partners have different management styles or strategic goals

  • Reaching agreement may require extensive negotiations which can slow down the decision-making process

  • Sharing sensitive information such as trade secrets can be a concern if the partners are competitors

  • A culture clash between the two businesses can affect the quality of the business, leading to poor sales

  • Joint venture partners share both profits and costs

    • If one partner contributes more resources or effort than the other there may be disagreements about the distribution of profits leading to conflicts

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strategic alliances

  • Strategic alliance agreements are similar to joint ventures

    • Businesses collaborate for a period of time to achieve a specified goal

    • They agree to work together for their mutual benefit

    • Resources are often shared

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advantages of strategic alliance

  • limit risk

  • share resources

  • access to new markets

  • less competition

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disadvantages of strategic alliance

  • culture clash

  • conflicts of interest

  • share profit

  • expose trade secrets

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  • Franchising is a business model where an individual (franchisee) buys the rights to operate a business model, use its branding and software tools and receive support from a larger company (franchisor) in exchange for an initial lump sum plus ongoing fees

  • Franchising is a popular way to achieve rapid global growth 

  • The franchisee operates the business under the franchisor's established system and receives training, marketing support, access to software and other systems and ongoing assistance

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advantages for the franchisor

  • rapid growth without having to risk large amounts of money

  • allows company a national or international presence

  • rapid growth without having to worry about running costs such as recruitment, training and development, staff salaries, etc.

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advantages for franchisee

  • low start up costs

  • low risk

  • likely to benefit from large scale advertising by franchisor

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disadvantages for franchisor

  • huge risk in allowing other parties to use franchise’s name

  • can be difficult to control daily operations of all franchisees

  • franchising slower than M&A

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disadvantages for franchisee

  • franchisee cant use own initiative to try out new ideas

  • buying a franchise very expensive

  • franchisees have to pay significant percentage of their sales revenues to franchisor

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multinational company(MNC)

a business that is registered in one country but has manufacturing operations/outlets in different countries

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reasons for MNC(multinational company) growth

Factors such as globalisation and deregulation have contributed to the growth of MNC’s

  • Globalisation has made it easier for firms to do business on a global scale and the number and size of MNCs continues to increase

  • Deregulation through trade liberalisation and the harmonisation of financial and technical standards has made it easier for businesses to operate in diverse locations

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reasons for becoming an MNC

  • risk management

  • economies of scale

  • increased profit

  • create employment

  • enter new markets

  • transportation

  • avoid trade barriers

  • tax incentives

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impact of MNCs on host countries

  • Many governments are in favour of MNCs establishing in their country as there are benefits to the wider economy

  • MNCs offer both advantages and disadvantages for a host country with regard to:

    • Employment, wages and working conditions 

    • The impact on local businesses 

    • The impact on the local community and environment 

    • The impact on the national economy

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advantages of an MNC to host country

  • boost local economy creating jobs + opportunities for local businesses

  • MNCs often invest to improve infrastructure

  • MNCs can bring new technologies and skills to local businesses

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disadvantages of MNCs to the host country

  • MNCs may exploit local workers

  • may not create jobs for local workers as may just relocate workers from their own country

  • MNCs can push domestic businesses out of the marker

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