Business unit 1

challenges for starting a business

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

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

public sector

owned by the government

private sector

controlled and owned by private individuals rather than by the government

aims of private sector companies

earn profit

aim of public sector companies

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

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

sole trader

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

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

sole trader disadvantages

• unlimited liability

• limited sources of finance

• high risks

• workload and stress

• limited economies of scale

• lack of continuity

partnership

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

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

advantages of partnerships

• financial strength

• specialisation and divison of labour

• financial privacy

• cost-effectiveness

disadvantages of partnerships

• unlimited liability

• lack of continuity

• prolonged decision-making

• lack of harmony

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

shareholders

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

Annual general meeting

• shareholders vote on resolutions

• re election of BOD

• ask questions to CEO

• approve financial accounts

limited liability

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

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

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

publicly held companies

• shares many similarities with privately held companies

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

flotation

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

Initial public offering

makes the publicly held company listed on a public stock exchange

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

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

private sector for-profit social enterprise

• reinvest or donate any surplus to create positive social change

• ethical business practises

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

cooperatives

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.

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

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

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

vision statement

outlines an organisations aspirations in the distant future

mission statement

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

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

objectives

The goals or targets an organisation strives to achieve.

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

advantages of having ethical objectives and practices

• improved corporate image

• increased customer loyalty

• cost cutting

• improved staff morale and motivation

disadvantages of having ethical objctices and practices

• compliance costs high

• lower profits

• stakeholder conflict

• subjective nature or business ethics

stakeholder

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

corporate social responsibility

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

internal stakeholders

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

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

conflict between stakeholders

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

economies of scale

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

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

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

internal growth usually generated by

• Gaining greater market share

• Product diversification

• Opening a new store

• International expansion

external growth takes place in one of three ways:

• Vertical integration (forward or backwards)

• Horizontal integration

• Conglomerate integration

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

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

advantages of external growth

• quicker than organic growth

• synergies

• reduced competition

• economies of scale

• spreading of risks

disadvantages of external growth

• more expensive than internal growth

• greater risks

• regulatory barriers

• potential diseconomies of scale

• conflict

• possible loss of control

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

advantages for mergers and acquisitions

• increased market share

• economies of scale

• entering new markets

• less competition

disadvantages of mergers and acquisitions

• diseconomies of scale

• culture clash

• inefficiencies

• possible lack of expertise in new products/ industries

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

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

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

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

advantages of strategic alliance

• limit risk

• share resources

• access to new markets

• less competition

disadvantages of strategic alliance

• culture clash

• conflicts of interest

• share profit

• expose trade secrets

franchising

• 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

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.

advantages for franchisee

• low start up costs

• low risk

• likely to benefit from large scale advertising by franchisor

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

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

multinational company(MNC)

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

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

reasons for becoming an MNC

• risk management

• economies of scale

• increased profit

• create employment

• enter new markets

• transportation

• avoid trade barriers

• tax incentives

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

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

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