Creating Goods & Services

The purpose of business activity can be broadly defined as the organisation of human, physical and financial resources to produce goods or services that meet customer needs while adding value

Produce goods or services

The primary purpose of business activity is to produce goods or services that satisfy a need or demand in the market

Goods are tangible physical items capable of being stored such as cars or games consoles

Services such as insurance or hairdressing are intangible, cannot be stored and are provided to customers when they are needed

Meet customer needs

The ultimate goal is to create products that meet the needs and preferences of customers and provide value to them

By meeting customer needs, businesses can build customer loyalty, increase brand awareness, and generate revenue

Add value

The third purpose of business activity is to add value to products or services

Value-added features can differentiate products from competitors, create a unique selling proposition, and increase customer satisfaction

E.g. a product that is easier to use, has a better design, or is of higher quality than competitors can create a competitive advantage for a business

Business as a Transformation Process

Businesses take inputs and transform them in order to produce outputs that customers will want to buy

1-1-3---the-purpose-of-business-activity

Businesses transform raw materials into finished goods and services, adding value to achieve a profit

Thailand's Boon Rawd Brewery takes inputs including malts, hops and barley and uses the staff on the brewery premises in Bangkok as well as equipment such as mash tuns to transform by brewing these inputs into its output - beer

Inputs used in the transformation process can be classified as financial, human or physical resources as well as enterprise

An Explanation of the Resources used to Create Goods & Services

Resource Input

Explanation

Financial

Capital required to fund the production process

Available cash (working capital) to purchase materials and pay bills

Access to trade credit to improve cash flow

Finance to purchase physical inputs (e.g. loans, owner's capital)

Human

Employees and managers to carry out and oversee production

Suitably trained with relevant skills, qualifications or experience

In sufficient quantity to meet output needs

Physical

Materials, equipment and premises to use in production

Enough space to produce and store inputs and outputs appropriately

Adequate and maintained machinery and technology infrastructure

Enterprise

A business idea and the desire to take the risk in turning it into a business idea

The transformation process may require a capital intensive or a labour intensive approach

Capital intensive production is where the proportion of machinery costs are higher than any of the other resource inputs including labour

The generation of nuclear power is an example of a capital intensive process where a small number of workers oversee a large facility that is largely computer-controlled

Labour intensive production is where the proportion of labour costs are higher than the other resource inputs including machinery

The production of clothing remains a largely labour-intensive process, especially in countries where labour costs are relatively low such as south-east Asia

The main Business Functions

Businesses of all sizes have a range of functions that need to be take place in order for business activity to proceed

In small businesses, all of these functions are often all carried out by its owner

In large businesses, these functions are carried out by departments with their own targets that contribute towards the business achieving its overall objectives

An Explanation of each Business Function

Human Resources

Marketing

The Human Resources function is responsible for organising, managing and developing all of the human resources

It identifies the quantity of workers needed as well as required skills

Recruitment and selection of suitable employees

Training and staff development

Career development and dismissal

Pay and conditions negotiations and other rewards

Health and Safety

The Marketing function is responsible for promoting the products/services and brand to attract and retain customers

Market research to establish customer needs and wants

Development and implementation of appropriate marketing mix strategies

promotion

price

place (including distribution)

product (including packaging)

Finance & Accounts

Operations

The Finance function manages the financial resources and ensures financial stability

It includes:

Securing external finance such as loans

Accurate record keeping of revenue and costs

Construction of annual accounts and period financial reports

Budgeting

Collecting and making payments

wages, salaries and bonuses

customer and supplier invoices

The Operations function focuses on the efficient management of the core activities and production process required to deliver products or services

It includes:

Managing the production process

Sourcing raw materials and components

Managing stock

Overseeing quality

Seek improvements to efficiency

Dealing with waste

Transportation and delivery of goods

Health and Safety

Larger business structures often include other functional areas such as

Administration

IT Support

Legal Services

The Interdependence of the Functions

Although each function has its own targets they all work towards achieving the businesses overall objectives and are therefore interdependent

E.g. Market research conducted by the marketing function may identify a change in customer needs that requires the product to be adapted in order to remain competitive

The finance and accounts function allocates and monitors a budget for research and development

The human resources function organises training for workers to adapt their working methods to produce the redeveloped product

The operations function designs or amends production processes to manufacture the product

The Different Business Sectors

• Different businesses can be classified according to the type of sector in which they operate

• Classification into these sectors is a simplified way of categorising industries as it helps to provide a means of making comparisons between firms in the same sector

• However, this type of classification does not capture the full complexity and interconnectedness of the business world

  • Many businesses operate across multiple sectors or may not fit neatly into a single category
     

All businesses operate in one of four sectors
 

• There are four main sectors of industry in which a business can choose to operate

  • The primary sector is concerned with the extraction of raw materials from land, sea or air such as farming, mining or fishing
    

  • The secondary sector is concerned with the processing of raw materials such as oil refinement, and the manufacture of goods such as vehicles
    

  • The tertiary sector is concerned with the provision of a wide range services for consumers and other businesses such as leisure, banking or hospitality
    

  • The quaternary sector is concerned with the provision of knowledge-focused services, often related to IT technology, consultancy or research
     

The Chain of Production

• The four sectors are linked in the chain of production which is the series of steps taken to turn raw materials into a finished product that can be marketed and sold

The chain of production in two different industries

The Impact of Sectoral Change on Business Activity

• As economies grow and develop, many of the firms within that economy will change their sector of operation (sectoral change)

• Generally speaking, their are successively higher levels of profits to be made in each subsequent sector

  • The reason for this is that each sector adds more value than the previous sector

  • Higher added value equates to higher profits
     

Less developed economies

• A less developed economy will primarily be focused on the primary sector – with most people employed in agriculture and the production of food

  • There has been a global trend away from employment in primary sector industries over the last two decades

  • Only in the least developed nations is the proportion of the workforce employed in the primary sector consistently high

  • This is partly as a result of lower participation rates in education and a lack of infrastructure to support manufacturing or service provision 
      

Employment in Agriculture in a Range of Economies since 1991

(Source: WorldBank)

Graph Analysis

• From these countries, Malawi still retains the highest proportion of employment in the primary sector

• China has seen a significant decrease in primary sector activity

• Germany has had very low primary sector and will have likely been in manufacturing and services well before 1991 

Emerging Economies

• In emerging economies improved technology enables less labour to be needed in the primary sector and more workers are incoved in manufacturing

  • The proportion of workers employed in manufacturing has risen over the last few decades

  • Many businesses have relocated production facilities to take advantage of the lower average wage rates in these economies
     

• Emerging economies have experienced growth in the tertiary and quaternary sectors in recent years, with many businesses now focused on the provision of consumer services

Employment in industry in a range of economies since 1991

(Source: WorldBank)

Graph Analysis

• From these countries, China has the highest proportion of employment in the secondary sector

• Ghana and India have seen significant increases in secondary sector activity

• Brazil and Turkey's secondary sectors have remained relatively stable over the period 1991 to 2019

Developed economies

• The most developed economies have a very high proportion of the workforce employed in the provision of services, increasing focused on the quaternary sector

  • Developed economies use their wealth to fund advanced education and higher-level skills training which further supports the growth of these industries

  • Some exceptions such as Australia (viticulture, or wine production) and Norway (forestry and oil extraction) continue to have significant primary sectors

Employment in services in a range of economies since 1991

(Source: WorldBank) 

 Graph Analysis

• The most developed countries have the highest proportion of their workforces employed in the service industry

• Thailand's service sector employees twice the number of employees in 2019 as it employed in 1991

• Around half of Ecuador's workforce is now employed in service delivery

Traditional & digital service economies

• The traditional services sector consists of bricks and mortar shops which provided face to face customer services

  • This is in decline across much of the developed world

• The development of the internet has provided a global platform for virtual storefronts which are increasingly able to provide many of the features of bricks and mortar stores

  • This has generated a digital service economy 

  • The digital service economy is becoming more pronounced with some businesses maintaining both an online and physical presence (E.g. clothing retailers Zara and H&M)

  • Others (e,g. Netflix) no longer having a physical presence but are providing intangible entertainment services online

The Role of Entrepreneurship in a Business

• Businesses are usually started by an entrepreneur

• An entrepreneur is a person who is willing and able to create a new business idea or invention and takes risks in pursuing success

• Successful entrepreneurs can identify and pursue opportunities, create value for customers and build thriving businesses
   

What do Entrepreneurs do?

• There are many examples of successful entrepreneurs who have been brought in to run or expand an existing business

• These individuals bring a unique entrepreneurial spirit into the business which helps to drive it forward and expand
  

Examples of entrepreneurial CEOs

• Howard Schultz was hired by Starbucks in 1982 as Director of Retail Operations and Marketing. He later left to start his own coffee company but returned to Starbucks in 1987 as CEO. Under his leadership, Starbucks expanded globally and became one of the most recognised brands in the world
   

• Marissa Mayer was brought in to lead Yahoo! in 2012 as CEO. She implemented several initiatives to revitalise the struggling company, including acquisitions, product improvements, and a renewed focus on mobile

Intrapreneurship

• Intrapreneurship refers to the practice of promoting entrepreneurial thinking and behaviour within an existing business

  • It involves empowering employees to think and act like entrepreneurs

  • The business encourages them to take risks, innovate, and develop new ideas and projects that may benefit the business
     

• Intrapreneurship allows businesses to tap into the creative potential of their employees and generate new products/services or processes that can drive growth and competitive advantage

• This helps to create a culture that generates a sense of ownership and engagement among employees which increases motivation and helps to retain top talent

• To promote intrapreneurship businesses may provide resources to employees or offer incentives/rewards for successful projects

• Characteristics & Skills Required by Entrepreneurs

  • Entrepreneurs require a unique set of characteristics and skills
      

  

  The skills and characteristics required by entrepreneurs

     

  • Perhaps one of the most valuable skills of an entrepreneur is the ability to communicate persuasively

    • Persuade potential financial backers of the merits of their idea

    • Persuade people to join them in creating the product/service

    • Persuade customers of the value of their product/service
       

  • All of the skills work together to create and drive an innovative idea towards success

  • Reasons for Starting up a Business

    • People set up businesses for a variety of reasons
       

    Financial Reasons for Setting up a Business

    Financial Reasons	Explanation	Example
    Necessity	Following redundancy or changes in personal circumstances an individual may decide to start their own business to provide stability or flexibility and income	Following the sudden death of her entrepreneur husband, Sandra Chandler took over the running of his sport coaching business RuggerEds and has led the business to significant growth
    Profit maximisation	People want to create a profitable business that generates substantial revenue and profit for themselves and their shareholders	Amancio Ortega, the founder of Zara,  built a fast-fashion empire that has become one of the most profitable clothing retailers in the world
    Profit satisficing	Occurs when the entrepreneur is not solely focused on maximising profits but rather achieving a satisfactory level of profit  This is common among small businesses, where the owner may prioritise their work-life balance	Yvon Chouinard, the founder of Patagonia, created a successful outdoor clothing and gear company that was initially built to help finance his climbing expeditions

    Non Financial reasons for Setting up a Business

    Non-financial Reasons	Explanation	Example
    Gap in the market	Some entrepreneurs start a business because they have identified a customer need that is not yet being fulfilled In many cases starting a business provides an opportunity to pursue an interest or passion	Professional dancer Miriam Drechsler was keen to open her Balance 1 Dance Academy in Berlin in 1996 because she had identified that there were very few opportunities in Germany to study dance on a professional basis
    Ethical stance	Some entrepreneurs may have a particular ethical stance (e.g. environmental sustainability or social justice) that they want to build their business around	Anita Roddick, started The Body Shop, as she wanted to create a company that would promote environmental sustainability, fair trade and human rights
    Social entrepreneurship	These entrepreneurs aim to create a business that seeks to address a social or environmental problem while also earning a living	Blake Mycoskie, the founder of TOMS Shoes, created a business model that donates a pair of shoes to a child in need for every pair sold
    Independence & personal challenge	Many people want to be their boss and have control over their work They may be dissatisfied with traditional employment structures or desire the freedom and flexibility that comes with running their own business Starting and running a business can be a fulfilling experience	Travis Kalanick and Garrett Camp, the co-founders of Uber, started their business with a desire for independence and the ability to work from anywhere
    Home working	With the advent of technology, many people have started businesses from their homes and this offers them more flexibility and a better work-life balance	Sara Sutton, the founder of FlexJobs, had a desire for independence and the ability to work from home and this led her to create a successful online job board that specialised in remote and flexible work opportunities

    The Process Involved in Starting a Business

    • All businesses start with an idea that fundamentally identifies a product or service that the entrepreneur intends to offer

    • Ideas can be generated from a range of sources

    

    Sources of business ideas

      

    • Once a suitable idea has been identified the entrepreneur is likely to take a series of steps to reduce risk and improve the chances of success
       
       

    Steps to Successfully Launch a Business

    Step	Explanation
    1. Identify essential elements	Essential elements that need to be decided include Business and product name The location of the business The form of ownership the business will take Equipment required Operational format and infrastructure
    2. Conduct market research	Market research should be carried out to determine the needs of customers Price, design and quality expectations Desirable product features and benefits Suitable promotional activity Preferred distribution options As well as this research into the nature of the intended market should be conducted Competitors, their products and prices and level of threat Rate of market growth Potential marke niches Relevant external factors that may impact on success  economic conditions legal factors demographic structure
    3. Construct a business plan	A business plan sets out how the entrepreneur intends to realise their objectives and run the business   Without a business plan it may be difficult raise money from financial institutions or investors   A business plan fulfils a range of internal purposes  It encourages the entrepreneur to think through the business in a logical and structured way and to set out the stages in the achievement of the business objectives It enables the entrepreneur to plot business progress against the plan It identifies both the resources needed and the time when they are required It is a way to make all stakeholders aware of the businesses direction
    4. Check legal constraints	Before starting the business the entrepreneur should ensure that all legal requirements have been met and that legislation related to the product or market in which it is to operate have been reviewed   The package of laws to which a business must adhere will depend upon the country in which it operates though there are several areas where legislation commonly exists around the world including Employment, pay and conditions Health & Safety Consumer protection The provision of financial products Company formation
    5. Raise finance	The entrepreneur is likely to invest some of their own capital into the business Other sources of funds commonly used by start-up businesses include Banks Friends and family Investors Business angels Crowdfunding Peer to peer lending
    6. Test the market	Initially launching the business on a small scale or selling a limited range of products is a sensible option, especially for first-time entrepreneurs The entrepreneur can establish whether the business idea will be well-received and can identify at an early stage the relative popularity of products

    Problems that a new Business may face

    • Starting a new business can be exciting but it also comes with its own set of challenges

    • Overcoming these issues requires effective strategic planning, hard work and a willingness to adapt and learn as the business evolves
      

    • Some of the common problems that new businesses may face include
       

    1. Lack of funding

    • One of the biggest challenges for new businesses is securing enough funding to get started and sustain operations until they become profitable

    2. Lack of market demand

    • A business idea may seem great on paper, but if there is no market demand for the product or service, it may not be a viable business

    3. Competition

    • New businesses may face competition from established players in the industry, making it difficult to attract customers and establish a foothold in the market

    4. Hiring and retaining talent

    • Finding and retaining skilled employees can be challenging, especially for new businesses that may not have the resources to offer competitive salaries and benefits

    5. Legal issues

    • New businesses may need to follow to a range of laws which can be complex and time-consuming to navigate

    6. Operational issues

    • Running a business requires a range of operational skills such as managing finances, marketing and sales

    • New business owners may struggle to manage all of these responsibilities
      

    7. Scaling

    • As a business grows, it faces new challenges such as managing increased demand and expanding into new markets

    Private & Public Sector Businesses

    • It is useful to classify firms into categories so that we can make comparisons between them. Firms can be classified according to:

      • Whether they operate in the public or private sector

      • Their type of legal ownership (sole trader, private limited company etc)

      • The sector in which they operate (primary, secondary etc)

      • Whether they are for-profit or non-profit

    Public or Private Sector

    • Public sector firms are owned and controlled by the Government and usually funded through taxation

    • Private sector firms are owned and controlled by other firms and private individuals (entrepreneurs and shareholders) and are usually funded by owner's capital, borrowing and retained profits

    • Privatisation occurs when government-owned firms are sold to the private sector

    • Many government owned firms have been partially privatised

      • The government retains a share in them so they can influence decision-making and receive a share of the profits e.g. the shares of Singapore Airlines are 55% government owned & 45% privately owned
         

     Characteristics of Private and Public Sector Firms

    Public Sector Firms

    Private Sector Firms

    Their main goal is usually to provide a service Public sector firms can operate on a local, regional or national government level E.g. Transport for London (local);  Agricultural State Service in India (regional); Caribbean Airlines (national) Governments are likely to retain ownership of  organisations in the public sector for several reasons They are strategically important to the country  E.g. defence or justice systems They provide essential services E.g. water or electricity supply They are merit goods that may not be provided in sufficient quantities by private businesses E.g education or health services

    The objective of most private sector organisations is profit maximisation This often causes the private sector to be more efficient than the public sector with higher levels of productivity Types of business ownership vary from sole trader to partnerships to company shareholders Former public sector businesses (privatised) have become some of the largest companies in many economies E.g. British Telecom Plc is one of the FTSE 100 leading companies in the UK Air India, the country's national airline, was privatised and sold to Tata in 2021 as the Indian government seeks to reduce its commercial involvement in the economy

     

    • In recent decades Governments around the world have tended to move away from the centralised provision of services

      • In Cuba small private sector businesses are now encouraged, although a large proportion of workers remain employed directly by the government

      • Political change in Venezuela has led to a rare example of an increase in the involvement of the state in the economy

    Sole Traders & Partnerships

    • When an entrepreneur starts a business, they will often start operating as a sole trader

    • If a group of entrepreneurs set up a business they may choose to operate as a partnership

    • Over time, they may change the form of business to gain more funding or provide more security for the owners by becoming a private limited company with limited liability

     

    Small business owners can choose to operate as a sole trader, partnership or private limited company

     

    • Two of the most common forms of business at start up are sole traders and partnerships

    • Each one of these forms has various advantages and disadvantages associated with the structure
        

    An Explanation of Sole Traders and Partnerships

    Sole Trader	A business that has a single owner (although they may still hire employees) Sole traders often run their business alone and require a varied skillset
    	Advantages	Disadvantages
    	Easy and inexpensive to set up The owner has complete control over the business All profits belong to the owner Simple tax arrangements Decisions can be made very quickly so the business can react swiftly to market change High levels of personal satisfaction	Unlimited liability, meaning the owner is personally responsible for any debts the business incurs Limited access to finance and capital Limited skill sets Difficult to take time off from the business
    Partnership	Two or more people join together to form a business Good examples of this type of business include lawyers and accountants A partnership agreement sets out the rules of the partnership such as dissolution of the partnership how profits are to be distributed between partners voting rights of partners
    	Advantages	Disadvantages
    	Easy to set up and inexpensive Shared responsibilities and decision-making More skills and knowledge are available Increased access to finance and capital	Unlimited liability Potential for disputes between partners as decisions need to be agreed Profits are often shared equally, regardless of the contribution Difficult to transfer ownership

    Privately Held Companies

    • To overcome the personal risks of unlimited liability involved in running a sole trader or partnership, an individual or group of entrepreneurs may choose to form a private limited company

    • There is a small fee payable to incorporate and register a private limited company (Ltd)

    • Legal guidance is usually required to draw up the Articles of Association

      • These set out the rules of the business including ownership and voting rights of shareholders
          

    An Explanation of Private Limited Companies (Ltd)

    Characteristics
    The ownership of the business is broken down into a specified number of shares These shares can be sold by the owner, usually to friends and family or to venture capitalists Decision-making often rests with the person appointed to run the company, often called the Managing Director or CEO The business is a separate legal entity to its shareholders and can own assets in its own rights and is responsible for its debts Private limited companies are often family-owned
    Advantages	Disadvantages
    Limited liability, meaning the owners are not personally responsible for the company's debts Access to greater finance and capital as the company is considered to be more reputable Easier to transfer ownership by selling shares Can have a professional image and reputation	More expensive and time-consuming to set up More complex legal requirements and regulations than sole traders Annual financial reporting and auditing are required Less privacy as external stakeholders can access some financial data Shareholders have little control over the company as the founder or CEO usually imposes their agenda

      

    The Importance of Limited Liability

    • Limited liability reduces the responsibility for business debts to the amount a shareholder has invested

      • Shareholders cannot be required to sacrifice their personal assets if the business fails 

      • This lowers the risk to investors and increases the potential for the business to raise finance through the sale of shares

    Publicly Held Companies

    • When a business is growing rapidly it may require a significant amount of capital to fund its expansion

    • To secure this funding, it may choose to transition from a private limited company (LTD) to a public limited company (PLC)
      

    • This is a complex process with many legal requirements and involves undergoing a stock market flotation
       

    The Benefits of Becoming a Public Limited Company (PLC)

    Access to Capital	Shared Risks	Increased Liquidity
    Significant amounts of capital can be raised very quickly  This is often a more cost effective way to raise capital than borrowing money from banks or other lenders	The risks associated with ownership are spread among a larger group of shareholders This reduces the financial risk to any individual	A company's shares become more liquid (they can be bought and sold more easily) on a public stock exchange This can increase the value of the company's shares and make it easier for shareholders to buy/sell shares
    Access to Greater Expertise	Greater Public Profile	Succession
    The company will have a board of directors made up of independent directors and representatives from major shareholders This can bring in additional expertise/perspectives which can help the company grow and expand	Becoming a PLC can raise a company's public profile and increase its visibility with customers, suppliers, and potential investors This increased visibility can help the company attract new business and grow its customer base	Shareholders can sell their shares, transfer ownership or pass them on to heirs This makes it easier to plan for the long-term continuity of the company

     

    • Public limited companies are subject to greater degrees of scrutiny and are expensive to run

      • Detailed annual accounts must be made publicly available

      • The media often reports on strategy, major decisions and changes in executive structure

      • Legal and accountancy costs will be significant
         

    • The top three initial public offerings as of March 2023 are:
      

      • The Saudi Arabian oil company, Saudi Aramco, raised $29.4 billion in its IPO in December 2019

      • The Chinese e-commerce company, Alibaba Group, raised $25 billion in its IPO in 2014

      • The Japanese telecommunications company, SoftBank Corp., raised $23.5 billion in its IPO in 2018

    • For-Profit Social Enterprises

      • A social enterprise is a business or organisation that aims to generate revenue and achieve social, environmental, or cultural objectives
        

        • It combines the principles and practices of traditional business with a focus on addressing social issues and creating positive social impact

        • Social enterprises typically reinvest a significant portion of their profits back into their mission rather than maximising profits for shareholders

      Social enterprises in the private sector

      • Social enterprises in the private sector look to make a profit whilst improving one or more aspects of society such as environmental, education, or health concerns

      • Many social enterprises aim to create jobs, improve social mobility or provide opportunities for marginalised groups

      • A proportion of profits is invested into achieving these social aims
        
        

      Advantages and Disadvantages of Social Enterprises

      Advantages

      Disadvantages

      Social enterprises often develop creative and innovative solutions to social challenges   By generating revenue social enterprises can become financially self-sustaining This financial independence reduces their reliance on donations and grants, making them less vulnerable to political and economic change   Social enterprises  create jobs which supports economic development particularly in developing  communities They often provide training and employment which can lead to increased social mobility and better quality of life Social enterprises work with a wide range of stakeholders

      Achieving financial stability can be difficult, especially during the initial stages Balancing a social mission with making money can be a delicate balancing act   Social enterprises have to navigate complex legal frameworks and tax structures It may be difficult to quantify and measure the success of social enterprise activities Social enterprises may find it difficult to grow Obtaining additional finance to expand into new markets or reach a larger audience is likely to be difficult

       

      Social Enterprises in the public sector

      • In the public sector a range of organisations provide socially-focused services with the aim of making a profit or surplus

        • Services are often provided to other public sector organisations, communities or government departments 

      Cooperatives

      • Cooperatives are a form of for-profit social enterprise that are owned and run by and for their members with the principle that working together means more power

        • Each member owns one share and has one vote on key decisions

        • Profits are either shared equally between members or reinvested for their benefit
           

      • Although cooperatives are often celebrated as businesses that take a broader approach to business than the generation of profits and provide some key social benefits they do have some drawbacks 

      • Decision-making in cooperatives can be time-consuming as members have the right to have a say

        • When a member leaves a cooperative their share is relinquished and they receive no further benefits

        • Disagreements can occur when members possess differing social and commercial objectives

      Diagram Showing the Different Forms of Cooperatives

      

      Cooperatives exist in many industries and provide a means of empowering stakeholders
        

      An Explanation of the Different Types of Cooperatives

      Employee Cooperative	Community Cooperative	Retail Cooperative
      Owned equally by workers within the business Each employee has a vote in business decisions Profit is shared equally between employees E.g. Flaskô in Brazil which was purchased by its employees in 2003	Owned by members of the local community Members usually contribute time as well as finance to the cooperative Profit is commonly reinvested to continue providing socially valuable products E.g. Hour Exchange Portland in the USA, a time-bank organisation	A group of independent retailers come together and operate under one brand name Buying power is increased and marketing costs are shared E.g. DIY retailer ACE Hardware in the Philippines
      Producer Cooperative	Financial Cooperative	Housing Cooperative
      Groups of manufacturers work together during the production process Sharing and maximising the use of expensive capital equipment is often a key aim Producer cooperatives are common in agriculture E.g. The German Wine Group cooperative brings together small wine producers in the country's main wine-producing regions	Organisations that provide financial services to individuals that may not otherwise qualify for standard banking products Often focused on a particular community Social aims take precedence over profits E.g. in the UK, Medway Credit Union provides loans and savings facilities to those living with challenging circumstances	Organisations that provide housing for members  Members collectively own and benefit from socially cohesive and lower cost dwellings E.g. Almost 30% of housing in Poland is owned through housing cooperatives with  Spółdzielnia Mieszkaniowa in Warsaw being one of the most well-known

  • Non-profit Social Enterprises

    • A non-profit social enterprise is an organisation that combines the characteristics of both a non-profit organisation and a social enterprise
      
      

    • Non-profit social enterprises pursue a social or environmental mission while using business strategies to generate revenue and achieve financial sustainability

      • These organisation rarely make a surplus or profit

    • Two of the main forms of non-profit social enterprises are non-governmental organisations (NGOs and Charities
      

    Non-governmental organisations (NGOs)

    • NGOs operate locally, nationally and/or internationally and are independent of government
       

    • These are typically voluntary, community-based organisations which do not aim to make a profit but seek to meet a need or provide a service
      
      

    • NGOs are typically financed by a combination of government funding and donations from businesses or private individuals
      

    • With a community based emphasis, they are able to

      • Engage in small scale projects giving control to community stakeholders

      • Draw on local skills

      • Encourage sustainability & remove the need for aid

      • Tackle environmental sustainability using local knowledge & resources 

      • Lobby governments to support their cause
         

    • NGOs have played a major role in many LEDCs and their aid often comes with fewer conditions or expectations than that provided by overseas development agencies
      

    • Examples of NGOs include Oxfam International, Save the Children International and Amnesty International  

    Charities

    • Charities have a specific purpose defined by law and are subject to strict regulations governing their activities
      
      

    • They primarily rely on donations from individuals, corporations and governments and often actively fundraise and engage in campaigns to attract donations

    

    Examples of charities around the world

     

    • The terms NGO and charity are often used interchangeably and there are variations in their definitions and usage between countries or regions

    • Non-profit Social Enterprises

      • A non-profit social enterprise is an organisation that combines the characteristics of both a non-profit organisation and a social enterprise
        
        

      • Non-profit social enterprises pursue a social or environmental mission while using business strategies to generate revenue and achieve financial sustainability

        • These organisation rarely make a surplus or profit

      • Two of the main forms of non-profit social enterprises are non-governmental organisations (NGOs and Charities
        

      Non-governmental organisations (NGOs)

      • NGOs operate locally, nationally and/or internationally and are independent of government
         

      • These are typically voluntary, community-based organisations which do not aim to make a profit but seek to meet a need or provide a service
        
        

      • NGOs are typically financed by a combination of government funding and donations from businesses or private individuals
        

      • With a community based emphasis, they are able to

        • Engage in small scale projects giving control to community stakeholders

        • Draw on local skills

        • Encourage sustainability & remove the need for aid

        • Tackle environmental sustainability using local knowledge & resources 

        • Lobby governments to support their cause
           

      • NGOs have played a major role in many LEDCs and their aid often comes with fewer conditions or expectations than that provided by overseas development agencies
        

      • Examples of NGOs include Oxfam International, Save the Children International and Amnesty International  

      Charities

      • Charities have a specific purpose defined by law and are subject to strict regulations governing their activities
        
        

      • They primarily rely on donations from individuals, corporations and governments and often actively fundraise and engage in campaigns to attract donations

      

      Examples of charities around the world

       

      • The terms NGO and charity are often used interchangeably and there are variations in their definitions and usage between countries or regions
         

      An Evaluation of Charities and NGOs

      Advantages

      Disadvantages

      NGOs and charities can gain support for particular needs from a very wide audience including the global public and many wealthy governments They often have specialists working for them who provide in country support so as to increase the efficiency of their aid They conduct research, gather data and as a result often make highly specific project proposals aimed at directly improving the standard of living NGOs and charities can help develop human skills in the countries in which they work and this helps to break families out of poverty

      The country or group receiving the charitable support or aid can become overly dependent on it The scope of what an NGO or charity can do may be limited or only focussed on one segment of the population e.g children Salary levels of senior managers of NGOs and charities is often closely examined and spending decisions sometimes attract negative media attention Funding for NGOs and charities can be irregular which makes financial planning difficult

      
      An Introduction to Business Aims & Objectives

      • Aims and objectives serve as a guide for the businesses' overall strategy and direction, helping to focus efforts and resources toward a common purpose
        

        • Business aims are the long-term aspirations of an organisation

        • Business objectives are specific, measurable, achievable, relevant, and time-bound targets (SMART targets) that must be achieved to realise those aspirations
            

      • Aims and objectives align the efforts of all employees towards a common vision and ensure that everyone is working towards the same goals
        

      • They are critical for businesses to function effectively and achieve long-term success

        • E.g. A business aim may be to become the market leader in a particular industry

        • The corresponding objectives may include increasing sales by 25% over the next three years, improving customer satisfaction by 15%, and expanding into new geographic markets
           

      • There is a hierarchy of objectives which cascade downwards
        

      

      The hierarchy of business objectives
       

      • A businesses strategic objectives are determined by its overall aim

      • Strategic objectives then determine tactical and operational objectives which detail the achievable goals a business and its functions want to achieve over a specified period of time
         

      An Example of the Hierarchy for an Independent Coffee Shop Chain

      Component	Explanation	Example
      Aim	What the business is looking to achieve in the long term? Usually determined by senior executives Often the same as the overall mission or vision and describes the businesses reason for being	To be the most successful independent coffee shop chain in the country
      Strategic Objective	The specific performance goals set by senior management for the business to achieve over time Derived from the firm’s overall aim and mission statement Strategic objectives may focus on achieving specified levels of market share, profit, sales growth or new product/market development	To have the highest market share of independent coffee shops in the country
      Tactical Objective	Objectives set by middle managers intended to direct the targets set by the functional areas they oversee	To hire, train and retain sufficient members to ensure prompt, knowledgeable and engaging customer service in all coffee shops
      Operational Objective	The day to day goals or targets of functions or departments within the business, derived from strategic and tactical objectives Tactical objectives must be carefully aligned across functions so that all parts of the business are working towards the shared goal	To reduce average queue times to less than 2 minutes per customer in all coffee shops

      Vision Statement & Mission Statement

      • A mission statement outlines the fundamental purpose and reason for an organisation's existence

        • It describes what the company does, who it serves, and how it provides value to its customers or stakeholders
          

      •  A vision statement articulates the long-term aspirations and future goals of the business
         

      A Comparison of Mission Statements and Vision Statements

      Mission Statements

      Vision Statements

      Explain the present overall purpose of the business For example, it may refer to the way the business conducts its operations or how it currently meets the needs of customers and other stakeholders   Mission statements may need to change over time as market conditions develop IKEA's current mission statement is 'To offer a wide range of well-designed, functional home furnishing products at prices so low that as many people as possible will be able to afford them.'

      Sets out what the business wants to achieve in the future These statements are likely to be expressed in aspirational terms and often include the emotional feeling that people should feel about their company They are intended to inspire and motivate and allow stakeholders to understand where the business is heading Vision statements rarely change Audi's long-term vision statement is 'To be the brand with the greatest appeal, fascinating customer-relevant innovations and breathtaking design.'

    • An Introduction to Common Business Objectives

      • The most effective objectives are clearly stated and allow progress to be assessed

      • These types of objectives can be summarised using the acronym SMART
         

      SMART objectives

      • Strategic, tactical and operational objectives should be

        • Specific - what exactly the business is measuring, such as the value of sales or sales volume

        • Measurable - a quantifiable success measure, such as a percentage increase

        • Agreed - the objective is shared with workers and perhaps mutually agreed

        • Realistic - whilst ambitious, it is capable of being achieved in normal circumstances

        • Time-bound - a date or time by which the objective should be achieved
           

      

      An example of a SMART tactical objective 

       

      • Once objectives have been determined leaders develop strategies which plan how they are to be achieved

        • Strategies are medium- to long-term plans which should be monitored carefully and reviewed if necessary
           

      • Effective strategies take into account the businesses position in the market as well as external factors that may affect their chances of success

      Diagram Which Lists Common Business Objectives

      

      Business objectives may change over time. E.g. the initial objective may be growth but an established business may choose to focus on ethics
       

      An Explanation of the Common Strategic Objectives in the Private Sector

      Strategic Objective	Explanation
      Profit Maximisation	Most firms have the rational strategic objective of profit maximisation Profit = Total Revenue (TR) - Total Costs (TC) To maximise profits, firms can either increase their sales revenue or decrease their costs Firms continuously analyse their costs to see if they can reduce them so that profit can be maximised
      Growth	Some firms have the strategic objective of growth Firms with a growth objective often focus on increasing their sales revenue or market share Firms will also maximise revenue in order to increase output and benefit from economies of scale A growing firm is less likely to fail
      Ethics & Social Responsibility	An increasing number of firms are launching with ethical or socially responsible objectives These typically include a focus on climate action & addressing poverty or inequality   They still require profit to survive, but will accept less than if they were profit maximising as long as they are meeting their social objective
      Survival	Challenging market conditions or difficult periods of change or crisis can require a focus on keeping the business going Survival is also a common strategic objective for new business start-ups and careful cash-flow management is likely to be at its core The recent pandemic required many businesses to adopt a short-term survival objective with many taking advantage of government support to enable them to continue trading and recover
      Protecting Shareholder Value	A common objective for public limited companies where the value of shares and dividends payable to shareholders are important metrics   Strategic objectives may seek to protect shareholder value above all else Having this objective will help to encourage new investors and satisfy existing shareholders

      
       

      Changing Objectives in a Dynamic Environment

      • Businesses operate in a dynamic (constantly changing) environment which may cause the business to pivot between different objectives

        • Business objectives are often influenced by various internal and external factors
           

      • These changes are often necessary to ensure that the business remains competitive, profitable, and compliant with regulations
         

      Factors Which Cause Business Objectives to Evolve

      Factor	Explanation	Example
      Market conditions	Market conditions such as competition, demand, and changing consumer price sensitivity can have a significant impact on a business's aims and objectives	Uber and Lyft were initially focused on capturing the largest share of the ride-hailing market (market share)   As competition intensified, both companies shifted their focus to profitability, and their objectives changed accordingly (profit maximisation)
      Technology	A business may shift its focus from traditional brick-and-mortar retail to online retail as technology allows for a more cost-effective way to reach customers	Amazon began as an online bookstore, but as technology advanced, it expanded into a wide range of retail categories such as electronics, clothing and groceries    Their objective changed from increasing market share to market development
      Performance	If a business is not meeting its sales goals in on area, it may change its objectives to try an improve its financial performance   In some cases this may involve retrenchment (moving out of existing markets)	In 2018 Ford announced that it was shifting its focus away from producing passenger cars and focusing more on SUVs and trucks   The move was driven by the company's poor financial performance and the new objectives were aimed at improving sales and profitability
      Legislation	A company may need to shift its focus to comply with new regulations or capitalise on new opportunities created by changes in legislation	With the passage of the Affordable Care Act in the USA in 2014, healthcare providers had to adjust their aims and objectives to comply with new regulations and take advantage of new opportunities created by the law
      Ethics & Social Change	Over time attitudes towards social issues and what is considered to be right and wrong develop and may force a business to change its objectives	It is almost unbelievable that until the 1950s tobacco companies marketing objectives included promoting health-giving effects of smoking and increasing sales to young people By 2023 British American Tobacco (BAT) had changed its sales objective 'To have 50 million consumers of our non-combustible products by 2030'
      Internal reasons	Factors such as changes in management or the company culture can also influence a business's aims and objectives   Innovation or advances in processes might mean that more ambitious objectives may be set	In 2014 Microsoft appointed Satya Nadella as the company's CEO He shifted the company's focus from software to cloud services and the company's objectives changed accordingly

    • An Introduction to Corporate Social Responsibility

      • Corporate Social Responsibility (CSR) refers to the concept that businesses have a responsibility to consider and positively impact society beyond their economic interests

      • It is a framework through which companies voluntarily integrate social and environmental concerns into their business operations and interactions with stakeholders

      

      Corporate social responsibility goals can be focussed on a range of different stakeholders

       

      • CSR involves taking into account the impact of business activities on various stakeholders, including employees, customers, communities, the environment, and society at large

      • CSR goes beyond legal compliance and strives for companies to actively contribute to sustainable development and societal well-being
         

      Examples of Socially Responsible Activities 

      Socially Responsible Activity	Example
      Sustainable sourcing of raw materials and components	High street retailer H&M has a goal of using only recycled or sustainably sourced materials by 2030   It also publishes a list of the majority of their supplier’s information which is updated regularly, allowing stakeholders to verify and hold the company responsible for their suppliers’ conduct
      Responsible marketing	Marks and Spencer ensures that it never actively directs any marketing communications to children under the age of 12 and does not directly advertise any products high in fat, sugar or salt to children under the age of eighteen
      Protecting the environment	Cafe chain Prêt à Manger offers discounts to customers who bring their own coffee cup, reducing the number of single-use plastic containers it dispenses
      Responsible customer service	John Lewis's famous 'Never Knowingly Undersold' slogan refers to the company's commitment to checking competitor prices regularly to ensure that the price its customers pay is the lowest available in the local area at that time

      Ethics and CSR

      • Ethics relates to the rights or wrongs of making a strategic decision that are beyond legal requirements and in accordance with a businesses corporate social responsibility principles
        
        

      • Some ethical businesses adopt an ethical code of practice which informs decision-making and may set out how they:

        • Behave responsibly with regards to the environment (for example, using recycled materials in packaging)

        • Avoid negative impacts on animals (e.g animal testing)

        • Adopt fair working practices (e.g. paying a real living wage)

        • Implement robust and equitable supply chains (e.g. using sustainably-sourced raw materials in production)

        • Takes steps to eliminate corruption (e.g. ensuring appropriate tax is paid in the countries in which the business operates)

        • Avoids controversial products or take steps to minimise their impact or access to them (e.g. having strict verification procedures in place prior to cosmetic surgery procedures being carried out)

        • Ceases trading with questionable suppliers or customers (e.g. cancelling a supply contract with a supplier that uses child labour)
           

      • It is now common practice for large companies to publish annual Corporate Responsibility Reports which provide an audit of the steps being taken to meet their commitments to a range of stakeholders alongside annual financial reports
        

      • Extra costs are involved in operating in a socially responsible way and these costs are usually passed on to consumers

      Reasons for Implementing CSR

      • Business set ethical or socially responsible objectives for a range of sound commercial reasons
        

      Business Reasons for Implementing CSR

      Reason	Explanation
      Improved reputation	CSR can enhance the business image and reputation and improve its attraction to many stakeholders  Operating in a socially responsible way is likely to be attractive to both existing and potential customers It should lead to positive media coverage The business may be able to retain and attract quality workers to fill job roles It may be looked upon favourably by investors, especially those that prefer ethical investment
      Added value	CSR can be very profitable as it adds value In competitive markets CSR can provide a differentiating USP that may mean the business can use premium pricing E.g. Tony's Chocolate's, whose mission is to be commercially successful whilst being committed to using cocoa only from slavery-free sources, is able to charge around 200% more for its products than its mass market rivals
      Employee morale & motivation	CSR may improve employee motivation and productivity Workers are more likely to feel connected to a business that 'does the right thing' and may be more inclined to work hard to ensure that the business is a success Employees are also less likely to leave the business or take time off work
      Solve social problems	CSR may help to solve social problems e.g. resource depletion Businesses that adopt CSR objectives are likely to understand that they can play a key role in solving some of the emerging social, ethical and environmental problems faced by communities around the world E.g. businesses that look to minimise the use of fossil fuels in production processes will be making a small contribution to global efforts to combat climate change

      The Impact of Implementing CSR

      • Businesses that choose to adopt ethical principles usually attract long-term loyalty from employees and customers and may find that their approach provides a useful competitive advantage
        
        

      • They are also likely to receive the support of the local community and local government especially if they share their aims
        

      • Suppliers and competitors of ethical businesses often change their approach to ensure that they do not lose sales to more ethical rivals
        

      • Taking an ethical approach costs more and may reduce the overall level of profits if the business is not able to raise their prices to compensate
        
        

        • Japanese fashion retailer Uniqlo has tried to move towards an eco-friendly strategy in recent years, focusing on technologies that make the production of new clothing from recycled materials possible

          • The business has invested significant sums in energy-efficient production facilities and now supports the campaign to safeguard the islands and coastal regions of Japan’s threatened Seto Inland Sea

      • An Introduction to Stakeholders

        • Stakeholders are individuals or groups that affect or are affected by the actions of a business 

          • A business needs to take into account the needs and interests of its stakeholders in order to operate successfully and ensure long term success

        

        Groups with an interest in the activities of a business

        Internal Stakeholders

        • Internal stakeholders are individuals or groups inside the business

          • Employees

          • Managers and Directors

          • Business owners
              

        The Different Objectives of Internal Stakeholders

        Stakeholder	Objective	Example
        Owners	Owners may be sole traders, a partner in a business or a shareholder in a private limited company Owners are likely to work within the business as well as own it and so will be relying on the business to provide an income They will want all, or a share of the profit and will want the business to be succeed	E.g the owner of a small building business may want it to provide a job and income The owner may also have the aim of passing the business on to a family member on retirement
        Employees	Employees are individuals who work for a company Their primary objective is to earn a living, have job security and be compensated fairly for their work and have a safe working environment	E.g. Google employees in California have some of the best working conditions in the world, with the Company offering sleeping pods, games rooms and free speciality coffee all day
        Management	Managers are individuals who are responsible for the day-to-day operations of a company Their primary objective is to meet the company's goals and objectives They want to maximise profits and minimise costs while ensuring that the company operates efficiently	E.g. a manager of McDonald's may want the restaurant to increase sales and reduce costs by improving efficiency

         

        External Stakeholders

        • External stakeholders are individuals or groups outside of a business

          • Customers

          • Shareholders

          • Creditors

          • Suppliers

          • The local community

          • Local and national government

          • Pressure groups
            

        The Different Objectives of External Stakeholders

        Stakeholder	Objective	Example
        Customers	Customers are individuals or businesses who purchase goods/services from a business Their primary objective is to receive high-quality products or services at a fair price Customers also want good customer service and a positive experience with the company	E.g. a customer of Nike may want the company to provide high-quality shoes at a reasonable price - and to deal promptly with any customer concern issues
        Shareholders	Shareholders are individuals or entities who own a portion of a company's stock They invest in the company with the goal of making a profit Shareholders' primary objective is to maximise their returns on investment They want the company to be profitable and generate a high return on their investment	E.g. a shareholder of Apple may want the company to release new products and increase sales to increase the value of their shares
        Suppliers & creditors	Suppliers and creditors are likely to be one and the same Their primary objective is for the business to pay what it owes promptly and in full Suppliers often want to be able to establish long-term arrangements with customers to improve business stability	E.g. an egg supplier is likely to value a  long-term supply contract with a leading supermarket even if the price it receives for its eggs is low because sales are guaranteed
        The local community	The local community includes individuals and organisations that live or operate in the area where a business operates Their primary objective is for the business to have a positive impact on the community This may include  the business being environmentally responsible, providing jobs, and contributing to local causes	For example, Burnley Savings & Loans Ltd (Bank of Dave) donates all of their profits to local charities and good causes
        Local and national government	The government is responsible for creating and enforcing laws and regulations that affect businesses Their primary objective is to promote the public good and protect the interests of citizens The government wants companies to operate within the law and contribute to the economy	E.g. the government may want a company to pay taxes, comply with environmental regulations, and create jobs
        Pressure groups	Pressure groups are organisations that seek to influence the policies and actions of businesses or governments Their primary objective is to promote a specific cause or agenda Pressure groups want the company to support their cause or take action on an issue	E.g. an animal rights group may want a clothing company to stop using animal products in their clothing

Possible Conflicts Between Stakeholder Groups

• Stakeholder groups often have conflicting interests and objectives, which may lead to tensions and conflicts

  • Shareholders may prioritise profit maximisation, while employees may prioritise fair treatment and high wages

  • Customers may prioritise low prices, while the local community may prioritise environmental sustainability which raises costs and prices
     

• These conflicts can create challenges for businesses to balance the competing demands of different stakeholder groups

  • E.g. A company may need to invest in costly environmental technology to meet the demands of the local community, but this may reduce profitability and upset shareholders
     

• Conflicts can also arise when stakeholders have different levels of power and influence

  • E.g. Pressure groups with strong public support may be able to influence business activity more than individual shareholders
     

• Businesses should try to balance the needs of stakeholders as much as possible to reduce the disruptive impact of conflict

  • Managing stakeholder conflicts requires careful communication, transparency, and compromise
      

Real Business Examples of Stakeholder Conflicts

Stakeholder mapping

• Stakeholder mapping can help a business to identify appropriate strategies for managing relationships with stakeholders, taking into account the level of interest and degree of power they hold
  

Stakeholder mapping helps a business to prioritise their stakeholder strategies 

Diagram analysis 

• Group A Stakeholders

  • Have low interest and little power

  • These needs of these stakeholders can usually be ignored
    

• Group B Stakeholders

  • Have high interest but little power

  • This group needs to be kept informed to instil a sense of belonging and encourage support

  • Little effort is usually required to achieve this - a newsletter or informative website may be enough

    • E.g. The local community
      

• Group C Stakeholders

  • Have low interest but are powerful

  • Satisfying this influential group is important

  • These stakeholders must feel included and their power acknowledged

    • E.g. The media.  Businesses in certain sectors make great public relations efforts to keep the media 'on side' through press conferences and media events
       

• Group D Stakeholders

  • Have both high interest and a high degree of power

  • These are key players - they must be fully informed and satisfied

    • E.g. Shareholders and employees

An Introduction to Economies & Diseconomies of Scale

• As a business grows, it can increase its scale of output and generate efficiencies that lower its average costs (cost per unit) of production

  • These efficiencies are called economies of scale

  • Economies of scale help large firms to lower their costs of production beyond what small firms can achieve
     

• As a firm continues increasing its scale of output, it will reach a point where its average costs (AC) will start to increase

  • The reasons for the increase in the average costs are called diseconomies of scale 

Economies of scale occur when average costs decrease with increasing output & diseconomies of scale occur when average costs increase with increasing output

Diagram Analysis

• With relatively low levels of output, the businesses average costs are high

• As the business increases its output, it begins to benefit from economies of scale which lower the average cost per unit

• At some level of output, a business will not be able to reduce costs any further - this point is called productive efficiency

• Beyond this level of output, the average cost will begin to rise as a result of diseconomies of scale

Internal Economies of Scale

• Internal economies of scale occur as a result of the growth in the scale of production within the business

  • The firm can benefit from lower average costs (AC) generated by factors from inside the business
      

Types of Internal Economies of Scale

External Economies of Scale

• External economies of scale occur when there is an increase in the size of the industry in which the firm operates

• The firm can benefit from lower average costs (AC) generated by factors outside of the business
   

Sources of External Economies of Scale

Diseconomies of Scale

• As a firm continues increasing its scale of output, its average costs per unit will start to increase at some point

  • The reasons for the increase in the average costs per unit are called diseconomies of scale
    

Types of Diseconomies of Scale

Reasons for Growth

• Many firms start small & will grow into large companies or even multi-national corporations (Amazon started in a garage)
   

Reasons why Businesses grow

Reasons to Remain Small

• In 2021, 98.9% of firms in the European Union were considered to be small firms with less than 49 employees

• Some firms start small & will grow into large companies or even multi-national corporations (Amazon started in a garage)

• While many firms grow, others do not or they intentionally choose to remain small
  

Reasons why Small Firms Exist

• Many changes in technology favour large scale operations but others can work to the advantage of small firms

  • The Internet offers low cost access to market for many firms
     

• Modern technology can work in favour of the small-scale and personalised businesses rather than the mass produced and impersonal

  • Niche markets can be targeted profitably by small firms that have relatively small overheads and do not need to achieve the volume of sales required by larger competitors

  • This is especially true where technology reduces the cost differential between the mass produced and the niche product
     

An Evaluation of Remaining Small

Internal (organic) & External (inorganic) Growth

• The growth of firms can be internal (organic) or external (inorganic)
  

• Internal growth is usually generated by

  • Gaining greater market share

  • Product diversification

  • Opening a new store

  • International expansion

  • Investing in new technology/production machinery
    

• External growth usually takes place when firms merge in one of three ways

  • Vertical integration (forward or backwards)

  • Horizontal integration

  • Conglomerate integration
    

A diagram that illustrates how a firm can grow through forward or backward vertical integration

• Forward vertical integration involves a merger or takeover with a firm further forward in the supply chain

  • E.g. A dairy farmer merges with an ice-cream manufacturer
     

• Backward vertical integration involves a merger/takeover with a firm further backward in the supply chain

  • E.g. An ice-cream retailer takes over an ice-cream manufacturer
    

The Advantages & Disadvantages of Internal Growth

• Firms will often grow internally (organically) to the point where they are in a financial position to integrate with others

  • Integration speeds up growth but also creates new challenges
      

The Advantages & Disadvantages of Internal Growth

Mergers & Acquisitions (M&As) & Takeovers

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

  • In 2022 Moj and MX Takatak, India's two leading video-sharing platforms merged, combining 300 million monthly active users with the aim of becoming a serious competitor to China's Tiktok
    

  • The Walt Disney Company and 21st Century Fox merged in 2018 to gain a higher market value and share (the new company achieved a market share greater than 90%)
     

• 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

    • In 2014 Facebook acquired mobile messaging company Whatsapp for around $19 billion with a shared mission to 'bring more connectivity and utility to the world by delivering core services efficiently and affordably'

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

    • The US food giant Kraft completed its hostile takeover of Cadbury Plc in 2010 by increasing its initial bid to shareholders by over $3 billion
      

An Explanation of the Advantages & Disadvantages of Each Type of Growth

Joint Ventures

• 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
  

  • E.g. The mobile network EE is a joint venture formed by the French mobile network, Orange and the German mobile network, T-Mobile
     

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

Key reasons for global mergers and joint ventures 

Spreading risk 

• Businesses operating in different markets spreads the risks associated with fluctuating economic conditions 
  

  • If there is an economic downturn in one market, they may still gain sales in another market that is less affected
    

Entering new markets/trading blocs

• Entering a market using a joint venture is a quicker method than using organic growth
  

• In emerging economies, many governments inisist that foreign businesses can only operate as a joint venture as this can benefit domestic businesses 
  

• Forming a joint venture with a local company allows the joining business to gain knowledge and business of the local markets
  

Accessing national/international brand names/patents

• A patent is the legal right given by the government to an individual or business to make, use or sell an invention and exclude others from doing so
  

• The process of developing intellectual property can be a long and expensive process
  

  • Working in a joint venture may allow a businesses can use to get access to intellectual property or a business with a strong reputation  
    

Securing resources/supplies 

• Businesses can create joint ventures with another business which have access to resources e.g  land and raw materials
  

  • This allows business to quickly gain access to resources which helps to speed up the production process
    

• Businesses have to be aware of any ethical issues concerning the resources as this can damage the reputation of the business e.g. perhaps being unaware that the company they are joining with uses child labour
  

Maintaining/increasing global competitiveness

• Businesses can increase their global dominance by working in a joint venture with another business

• By expanding in this way, even for a short period, a business can benefit from economies of scale which leads to lower costs

  • Businesses can reduce prices which can increase sales, leading to a higher market share

The Advantages & Disadvantages of Joint Ventures

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

  • Examples of global franchises include Domino's Pizza, KFC and Burger King
     
    

Some of the many food franchises available

• The franchise model is a popular strategy for growing a business, offering both advantages and disadvantages to the business owners 

The Advantages & Disadvantages of Growth Generated by the Franchise Model

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
     

The Main Differences Between Joint Ventures & Strategic Alliances

 An Introduction to Globalisation

• Globalisation is the economic integration of different countries through increasing freedoms in the cross-border movement of people, goods/services, technology and = finance

• This integration of global economies has impacted national cultures, spread ideas, speeded up industrialisation in developing nations and led to de-industrialisation in developed nations

• Globalisation has been increasing for thousands of years - it is not a new phenomenon

• Improvements in technology and the speed of global connections have exponentially increased the level of interdependence between nations in the past 50 years

• Consumers now source products globally recognising global brands wherever they travel  
  

The four main Characteristics of Globalisation

• Globalisation has several impacts on domestic businesses that increasingly need to compete with global brands
   

Impacts of globalisation on domestic businesses
 

• Domestic businesses face increased competition as a result of globalisation

  • This incentivises them to improve efficiency in order to remain competitive against global brands

  • Some domestic businesses may drastically cut staffing or require higher levels of productivity from workers
     

• The transfer of skills between global and domestic businesses can be mutually beneficial

  • Domestic workers can gain skills and knowledge from an international competitor

  • Global businesses will gain local knowledge, market insight and experience from domestic workers
    

• Domestic businesses can compete by developing or emphasising a persuasive unique selling point (perhaps the fact they are local)
  
  

• Both domestic and global businesses can benefit from close collaboration through joint ventures or strategic alliances

Reasons for the Growth of Multinational Corporations (MNCs)

• A multinational company (MNC) is a business that is registered in one country but has manufacturing operations/outlets in different countries

• E.g. Starbucks headquarters are in Washington, USA but they have 32,000 stores in 80 countries
   

• 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 why Businesses want to Become Multinationals

• There are numerous reasons why businesses aim to grow to become multinationals

There are many benefits to becoming a globally recognised brand
 

1. Economies of scale: as they operate globally they are able to increase their output & benefit from lowered costs created by economies of scale
    

2. Increased profit: much of their profit is sent back to their home country. This point is debatable as many MNCs have offshore bank accounts and do not bring the profit back home
    

3. Create employment: new jobs are created in host countries each time a new facility is setup & this raises income which helps to improve the standard of living in that country
    

4. New markets: MNCs can identify potential markets & begin to sell there
    

5. Transportation: MNCs are able to setup facilities closer to their customers which reduces transportation costs
    

6. Risk management: by selling in many national markets, the risk of failure is reduced

   • If Egypt goes through a recession (with sales falling there), then this could be less impactful due to rising sales in a strong German market
      

7. Tax incentives: MNCs are able to increase their profits by setting up in countries with low corporation tax - or countries that offer MNCs a tax break (no tax) for their first 5-10 years of operation
    

8. Cost advantages often related to labour: many businesses choose to locate production facilities in countries where labour costs are low 

   • Nike originates from the USA but 50% of their manufacturing takes place in China, Vietnam and Indonesia due to the lower production costs in these countries
      

9. Avoidance of barriers to trade: MNCs can establish bases in countries that are operating protectionist measures and by doing so, they avoid the measures e.g. A Chinese MNC may setup in the USA & produce there, thus avoiding import tariffs on  their products exported from China to the USA

The Impact of MNCs on the Host Countries

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

MNCs impact several metrics in the national 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 and Disadvantages of MNCs to the Host Country