Business Notes (Unit 1)

1.1 - Introduction to business management

Lesson 1 -

Business: Organization involved in the production of goods and/or provision of services

Product: Tangible; items/objects

Service: Non-tangible

Needs & Wants

A business’ ultimate goal is to satisfy needs and wants of customers (otherwise: failed business)

• Backwards business: identify need/want first; create product/service later

• Clever business: Invent/create a need/want (e.g. Instagram)

Customer: People of organizations that buy a product

Consumer: The ones that actually use the product

Peter Drucker - Management Guru (1980s)

• “The only single purpose of a business is to create customers”

Main Functions of a business

• Human resources: right people, right place, right time

• Finance & Accounts: manage costs & everything to do with money

• Marketing: advertising; identifying & fulfilling needs/wants to sell products (7Ps)

• Operations: converting raw materials/components to finished goods

Cost < Revenue → (cost-revenue) cost = low, revenue = high

Lesson 2 -

Business Sectors

• Primary: Where raw materials come from (e.g. Ikea needs trees to cut down to make furniture)

• Secondary: Manufacturing and construction of products

• Tertiary: Providing services e.g. retailing, transport, banking

• Quaternary (sub-cat of tertiary): AI, research; intellectual knowledge-based activities for development

Sectoral Change: Shift in the relative share of national output and employment that is attributed to each business sector over time

• Typically developing countries → Primary

• Developed countries → Tertiary

Sectoral changes in MEDCs

• Higher household incomes

• More leisure time (e.g. activities, eating out)

• Greater focus on customer service

• Increasing reliance on support services (e.g. cleaners, nannies)

Entrepreneur: The person that owns the business, comes up with the idea, sells it for a profit

• Arthur Fry (1931) invented + commercialized the Post-it-note (1980) → now sold in over 100 countries around the world

Intrapreneur: Employed by a large org. → demonstrates entrepreneurial thinking to develop new products/services → Businesses want these kinds of people

• E.g. Paul Buchheit (Google employee) came up with the idea of Gmail (programmed it in 1 day) → lead developer ever since

Entrepreneurship: The process of setting up a new business

Characteristics of Entrepreneurs

• Risk-takers

• Self-motivated

• Confident

• Innovative

Competitive advantages come from:

• Market reading

• Need seeking

• Technology driving

Lesson 3 -

Reasons for starting a business (GET CASH)

• Money

• Self-employed (own boss)

• Wanting to make a change in the world

• Work-life balance

• Innovation

• Control

G - growth
E - earning
T - transference & inheritance
C - challenge
A - autonomy
S - security
H - hobbies

Mass Market: Targets everyone/huge population

Niche: Small target market

Process of starting business

Organizing the basics → Research the market → Planning the business → Establishing legal requirements → Raising the finance → Testing the market

OR

Refine the idea → Prepare a business plan → Decide on legal structure → Take care of administrative tasks → Finde a locale → Hire employees → Seek financing

Problems new businesses might face

• Lack of finance

• Cash flow problems

• Marketing problems

• Unestablished customer base

• People management problems

• Legalities

• Production problems

• High production cost

• Poor location

• External influences

Business Plan - Document that sets out the business idea, goals, objective, and other details → crucial in the attempt to raise external sources of finance

• Business idea, aims, objectives

• Business organisation

• HR

• Finance

• Marketing

• Operations

Why do I need a business plan?

• Helps attract funding

• Supports strategic planning

• Identify all resources needed

• Provides a focus for development

• Used to measure success

Integrated Business: Business that participates in multiple sectors (primary, secondary, tertiary, quaternary)

A business has a good chance of success when:

• there is a skilled and collaborative team of employees in place;

• there is enough funding to run the business;

• the marketing has been researched well; and

• the operations are efficient and resilient.

SWOT Analysis (internal & external)

SWOT Framework:
S: Strengths
W: Weaknesses
O: Opportunities
T: Threats

STEEPLE Analysis (completely external)

S - sociocultural (demographic, population, beliefs, education, health status, etc)
T - technological (technologies, improve production method, country’s infrastructure)
E - economic (econ conditions, income/demand, GDP, business cycles)
E - environmental (natural resources, climate change, circular business model)
P - political (political parties, law changes)
L - legal (obey country laws, law changes, lobbying, sued by individuals, prosecuted by gov)
E - ethical (profit pressure = unethical decisions, environment & employees, labour practices)

The Business Cycle

• Growth: More goods and services are produced → increase GDP → increase demand for inputs (e.g. labour, capital)

• Boom: Peak/highest point of country’s economy → peak of growth

• Recession: Limited supply → cost increase → price goes up → customers buy less → production falls → demand for inputs decreases → GDP & Economy contract

• Slump: Lowest point of country’s economy → bottom of recession

Terminology:

• Gross domestic product (GDP) – the total monetary value of all final goods and services produced in an economy in a given period of time; represents the size of the economy

• GDP per capita – divides total GDP by the population of a country

• Inflation – an increase in the general price level, usually expressed as a percentage change

• Deflation – a decrease in the general price level, usually expressed as a percentage change

• Interest rate – the cost of borrowing money; important for businesses because they may need to borrow money for business investments

• Unemployment rate – the percentage of the labor force that is out of work but actively seeking employment at a given time

• Import – goods brought into a country

• Export – goods manufactured in a country and sold abroad

• Exchange rate – the price of one country’s currency in terms of another country’s currency

• Subsidy – government payment to businesses

• Tax – payment from individuals or businesses to the government

1.2 - Types of Business Entities

Kognity Lesson -

Private sector

• Creates employment

• Helps the development and growth of the economy

• Provides a wide variety of goods and services

For-Profit Commerical Enterprises

For-profit commercial enterprises: A type of business that earns profits, which are distributed to owners or shareholders; profits may have priority over other objectives.

Main types of ownership structure:

• Sole traders - an individual who owns and runs a business alone

  • Person and business is the same (legally no differentiation) → unlimited liability (no limit to risks)

    

• Partnerships - the creation of a business by 2 or more partners (put to 20), the agreement will likely include

  • the amount of money put in by each partner

  • the sharing of profits and losses by each partner

  • the roles and responsibilities of each partner

  • the rules around accepting new partners or withdrawal of existing partners

  • the procedures for ending the partnership

  • “sleeping partners” → puts money in business but doesn't run it (the person doing the work usually gets the larger share)

  • Deed of partnership → contract that splits the business (e.g., 40% / 60%) doesn’t come up in the exam!
    

• For-profit privately held companies - Privately owned company and often has family or friends as the shareholders; 2 documents needed

  • the Memorandum of Association, which states the details of the company

  • the Articles of Association, which states the internal roles and responsibilities of the board of directors and shareholders

    

• For-profit publicly held companies - A company that is publicly owned and has many shareholders who can buy and sell their shares through a stock exchange; 2 documents needed

  • a memorandum of association, which states the details of the company

  • articles of association, outlining the internal roles and responsibilities of the board of directors and shareholders

    

Vocabulary

Shareholders: Someone who owns part of a business

Dividends: A portion of a business’s profits distributed to the owners/shareholders

Limited Liability: A situation where the owners of a business are not personally responsible for the debts of the business if it fails; the owners and the business are legally separated

For-Profit Social Enterprises

For-profit businesses: Realise that their business objectives now need to focus more on social and environmental sustainability, while still earning the revenues and profits that ensure economic sustainability

Social Enterprise: Any organization that has a social and environmental purpose at its core

• Profit high/low → low-cost product/service → small profit but a large impact (accessibility)

  • Social enterprises are not judged on profit but on multi-stakeholder impact

3 types of for-profit social enterprises

1. Private sector enterprises (produces goods and services that are typically sold in markets for a price by for-profit businesses)

2. Public sector enterprises (produces goods and services that are typically provided by the public sector → bid for contracts with regional/local governments that outsource some essential services to for-profit businesses → gov. can focus money on other public areas)

3. Cooperatives (a business that is owned by its members → Members participate in decision-making either directly by voting on important decisions or through representation, where members elect representatives to make decisions for them → have limited liability)

   1. Cooperatives employ 10% of people worldwide

Private limited: shareholders you know → you personally share your shares (e.g. Miki sells to Chloe → Chloe cannot share further)
Public limited: anyone can buy stock shares → you just need to own more than others to be “majority shareholder”

Economies of Scale: The large quantities you buy → the cheaper it is + efficient (well-oiled machine)

Incorporated: legal differentiation between owners of the company and business itself → owner’s liability is only how much they invested (e.g. Ms. Edge invested $10,000 into Edge Cafe, Edge Cafe poisoned someone, only Edge Cafe is responsible + Ms. Edge invested $10,000 is at risk → not her house, car, pokemon collection, etc)

B2B - business to business (e.g. Seqta sells to Ishcmc)
B2C - business to customer (Ishcmc sells to students)

1.3 Organisational Objectives

Vision Statement: What do we want? → very aspirational (e.g. Ikea: create a better everyday life for many people)
Definition: Written expression of the long-term ambitions

Mission Statement: Why are we doing what we are doing? → more grounded (e.g. Harley Davidson: fulfill dreams through motorcycling)
Definition: Written expression of purpose and reason for being

Aims: Long-term goals → unquantifiable; vague
Objectives: Short-medium term goals → more specific; things we do to achieve aim
- Strategic: big ones (e.g. lose weight; monthly)
- Tactical: medium (weekly)
- Operational: very short term (day to day)

Exam Tip: Aims and objectives are not interchangeable!

SMART Objectives
S: Specific
M: Measurable
A: Achievable
R: Relevant
T: Timely
(e.g. make 3 customer referrals in the next 2 weeks)

Problems meeting objectives:
- Culture clash: If operating in multiple countries targets may apply/not apply in some countries or culture
- Financial constraints: when there is a sales target it’s easy to forget to spend money
- Conflict: Internal conflicts between management

Changes to organizations
- Internal environment (e.g. leadership change, HR, finance)
- External environment (e.g. covid pandemic, STEEPLE)

Merger: When 2 business merge together
Acquisition: When one business buys another one → sometimes linked sometimes not

Exam Tip: Changes may be positive → creates opportunities

Ethical Objectives (code of behavior) → Why business set these
- Building customer loyalty
- Creating a positive image
- Developing a positive work environment
- Reducing the risk of legal redress
- Satisfying customer’s higher expectations
- Increasing profits

People impacted by ethical objectives (bottom line)
- Business itself
- Customers
- Competitors
- Suppliers
- Local community
- Government

(Ethical Objective: Just 1 element of Corporate Social Responsibility)

CSR: Conscientious considerations of ethical and environmental practices related to business activity

Ethics: Moral principles that guide our decision-making and strategy

Ethical Code of Practice: Documented beliefs and philosophies of an enterprise

Ansoff Matrix: Analytical tool designed to look at market growth strategies
Exam Tip: You could be asked to draw an Ansoff Matrix (even if not stated)!

• Market Penetration Strategy: Existing customers & existing products → taking existing products to find even more customers like current ones

  • e.g. scrub daddy

• Product Development Strategy: New product to the existing customers

  • e.g. nail bar expands to a hair salon next to it

• Market Development Strategy: Existing product and find new customers

  • e.g. Starbucks brings American coffee shops to Vietnam

• Diversification Strategy: New products to new customers

  • e.g. Mars Bar developing dog food

Advantages of Ansoff:
- Analytical framework to make strategic marketing strategies
- Highlights various degrees of risks of marketing
- When quadrant is identified → marketing tactics that can be used

Disadvantages of Ansoff:
- Only a tool → can be misused
- Oversimplification of complex problem
- Cannot predict actual events → misleading

Exam Tip: Exam Ansoff questions are usually combined with case study → have to identify which quadrant + justify + draw matrix

1.4 Stakeholders

Stakeholder: A stakeholder is an individual or group that is affected by the business
Shareholder: Are the owners of a limited liability company

All shareholders are stakeholders but not all stakeholders are shareholders! (Shareholders are the owners of a company, so there is only one stakeholder group in the business.)

Internal Stakeholders: Members of the org. but have a direct interest in activities and performance (e.g. managers, owners, workers, shareholders)
External Stakeholders: Individuals and organizations not part of the org. but have a direct interest in its activities and performance (customers, suppliers, government, media)

Exam Tip: Some shareholders are internal stakeholders others are external stakeholders!

Interests
Internal Stakeholders:
- Shareholders - Return on investment
- Workers – good pay and conditions
- Managers – meeting objectives and job security

External Stakeholders:
- Government – employs people and pays taxes
- Suppliers – stable relationship
- Customers/consumers – want the best product at the best price
- Local community – how does the business affect them?
- Pressure Groups

Exam Tip: Although most sources consider competitors to be stakeholders, it is preferable to not include them for the purpose of exam questions!

Pressure Groups: Individuals with a common concern who seek to place demands on organizations to act in a particular way (e.g. Greenpeace → climate change)
- Boycotting
- Lobbying
- Public Relations
- Direct Action

Conflict: Situations where stakeholders have disagreements on certain matters due to differences in their opinions

Dealing with Conflict (3 key issues):
- Type of organization in question
- Aims and objectives of the business
- Source and degree of power (influence) of each stakeholder group

1.5 Growth and Evolution

Total costs (TC) = Fixed costs + Variable costs
Variable cost → ones that vary with production (e.g. how many cookies you make)
Fixed costs. → ones that remain the same no matter how much you produce (e.g. oven)

Average costs (AC) = cost per unit of output

AC = TC / Quantity of Output

Economies of scale = the more I’ve produced, the lower my average cost is
- Helps businesses gain a competitive advantage
- Major benefit of growing a business

Exam Tip: Don’t define EOS as ‘bulk buying’

Diseconomies of Scale: Going past the ‘sweet spot’ where production becomes inefficient again → the cost disadvantages of growth. Unit costs are likely to eventually rise as a firm grows

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

Size of an organization → The size of a business can be measured in several ways:

• 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 workforce - the total number of employees hired

• by the business.

• Profit - the value of a firm’s profits per time period.

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

Benefits of larger business:
- Brand recognition
- Brand reputation
- Value-added services
- Lower price
- Greater choice
- Customer loyalty

Benefits of larger business:
- Cost control
- Financial risk
- Government aid
- Local monopoly power
- Personalized services
- Flexibility
- Small market size

Internal Growth (organic): Using its own capabilities and resources to  increase the scale of its operations and sales revenue (financed through a combination of retained profits, borrowing and issuing of new shares)

External Growth (fast track growth): Occurs through dealings with outside organizations. Such growth usually comes in the form of alliances or mergers with other firms or through the acquisition  (takeover) of other businesses
- Disadvantages: Huge costs → tend to be higher than needed for internal growth

Merger – 2 businesses merge and form a new business

Acquisition (takeover) – when 1 business buys a controlling interest in another business.

Hostile takeover – when the acquisition is unwanted

1.6 Multinational Companies (MNCs)

Globalization Effects: Increased competition, greater brand awareness, skill transfer, closer collaboration

Growth of MNCs: Improved communication, dismantling of trade barriers, deregulation of world financial markets (e.g. switch to Euro currency), increasing economic/political power of MNCs (e.g. Coca Cola impact on US election ‘don’t vote for Trump’)

MNC: An organization that operates in two or more countries, with its head office usually based in the home country

Why do businesses want to be MNCs?
- Profit
- EOS
- To reduce transport and distribution costs 
- Sell in new markets by locating in them
- Cheaper supplies of raw materials or markets
- Cost advantages, most often in terms of low labor costs
- Overcome barriers to trade
- Reduce risk

Impact of MNC on the host country:

Government relationship with MNCs:
- Tax avoidance
- Global tax disputes
- Strategic investments
- Governments as customers

Business Toolkit - Decision Trees