Higher BM (Revised)

Higher Business Management (Revised)

Business in Contemporary Society

Higher BM (Revised)

Needs and Wants Needs – a need is something

essential to our lives: food, water, shelter, clothing

Wants – a want is an additional luxury that makes life pleasurable

Higher BM (Revised)

Business Activity Business activity is any activity

which provides us with goods and services that satisfies human needs and wants

Q. How is a nation’s wealth measured?

Higher BM (Revised)

Wealth Creation A country’s wealth is measured by how many

goods and services the country can produce. GDP (Gross Domestic Product) = number of

Goods & Services produced in a territory over a specific period (usually annually)

The more goods/services sold, the more likelihood of more jobs for the population, and therefore more tax to be raised for the Government.

This in turn is hopefully invested in services for the nation.

Higher BM (Revised)

Factors of Production In order to produce goods and

services, businesses need to use resources

LAND LABOUR CAPITAL ENTERPRISE

Higher BM (Revised)

Factors of Production Land – natural resources extracted from

Earth. Can be renewable or non-renewable

Labour – physical and mental effort of people in organisations

Capital – man-made resources, such as buildings, machines, tools

Enterprise – bringing together the other three factors of production

Higher BM (Revised)

Business Cycle

Business Cycle

Business provides goods/services

Consumer buy goods/services

Wealth for companies and employees

Consumers have money to spend from wages

Needs &

Wants

Higher BM (Revised)

Goods and Services Goods are tangible, things we can

see and touch like clothes, DVDs, cars etc…

Goods can be durable or non-durable

Services are things that are done for us. They are intangible

Higher BM (Revised)

IPO

Input Process Output

Raw materials workers Finished Natural resources machinery goods

Higher BM (Revised)

Sectors of Industrial Activity Primary Sector – businesses involved in

exploiting or extracting natural resources (mining, fishing, farming)

Secondary Sector – businesses involved in manufacturing and construction. Includes utilities.

Tertiary Sector – Businesses involved in providing services such as banking, tourism, security

Higher BM (Revised)

De-industrialisation Economies begin in the primary

sector and as it grows moves through each sector.

Reasons for this can be: Changes in demand Increased overseas competition Lack of investment Restrictive government policies

Higher BM (Revised)

Types of Ownership Sole Trader Partnerships Private Limited Co. Public Limited Co. Franchises Co-operatives Charities

Higher BM (Revised)

Sole Trader One man/woman business Sole Trader owns business. Owner and

business are the same Owner provides own capital (savings &

borrowings) Profits go to the owner (but responsible

for losses) Owner controls business, all decisions

are theirs

Higher BM (Revised)

Sole Trader +/- Easy to set up Can make decisions

quickly Personal attention to

business Profits are not shared Can cater for local

needs Business affairs kept

private

Limited capital Unlimited liability Commitment

(long hours, every day)

New ideas may be limited

Higher BM (Revised)

Partnerships A business owned by several people 2-20 Deed of Partnership – contract dealing with

share of profits, roles and duties, capital contributed, dispute procedures

Owned jointly but not always equally Partnership is an extension of sole trader Capital provided by partners Profit goes to partners, not always equally All partners entitled to participate in

management (unless silent partners)

Higher BM (Revised)

Partnership +/- More capital Excessive hours

can be cut down More ideas may

be generated Specialisation can

occur Limited

partnerships

Actions of one partner binds all

More discussion and consultation

Limitation on number of partners

Unlimited liability Partnership ends

if a partner dies

Higher BM (Revised)

Private Limited Companies (Ltd.) Organisation owned by a group of

individuals (2+ shareholders) Memorandum/Articles of Association Owned by Shareholders (usually family)

whose main function is to elect Board of Directors

Money raised by share issue or borrowing Ordinary Shares & Preference Shares Profit shared between shareholders or

retained by company

Higher BM (Revised)

Private Ltd. +/- More capital Limited liability Owner can retain

control Company does

not die if owners die

Must be registered with Registrar of Companies

Harder to motivate & control workers

High set up costs (legal and administrative)

Diseconomies of scale

                              

Higher BM (Revised)

Public Limited Companies (plc)

Org. owned by a group of individuals, has plc after name

Certificate of Incorporation approved by Registrar of Companies

Shareholders 2+. Shares sold on stock exchange. Prospectus prepared to attract shareholders

Capital raised by share issue or borrowing Profits shared between shareholders or retained

by company Board of Directors = Divorce of ownership and

control

Higher BM (Revised)

plc +/- More capital Employ specialists Limited liability Company does not

die if owners die Shares can be

issued through stock exchange

Formation expensive (legal & administrative costs)

Must publish accounts May become too large

to manage effectively Decisions more

difficult to arrive at Diseconomies of scale

Higher BM (Revised)

Franchise Is when a Business/individual buys a

license to operate a well known firm Owned by Franchisor Franchisee pays Franchisor to get

license as well as a royalty Franchisees runs business on

Franchisor’s guidelines

Higher BM (Revised)

Franchise +/- Franchisor provides

a lot of support; training to start business, equipment, materials, advice, brand name

Take over a successful, winning formula

Franchisee doesn’t have complete freedom

May not agree with decision placed upon you

Royalties paid to Franchisor

Higher BM (Revised)

Co-operatives Organisations set up to benefit workers

or consumers Retail – owned by workers and shoppers Producer – owned by workers Retail – every pound spent receives

dividend or voucher Producer – money comes from workers

who share profits and share a salary Board of Directors (who may also be

workers)

Higher BM (Revised)

Co-operatives +/- Less conflict

between workers and managers 

Workers should be more motivated

Difficult to grow and find additional capital 

New workers may not be able to raise capital needed to join co-op

Higher BM (Revised)

Charities An organisation formed to raise

money for underprivileged people Trustees Charities raise money through

shops, donations and lottery money Surplus after costs goes to the

‘needy’ Board of Managers

Higher BM (Revised)

Charities +/- If charity has

status of charitable trust it doesn’t pay tax 

Looks after less privileged and the environment

Less money may be donated due to introduction of lottery

Relies on voluntary workers who may not be paid for work

Higher BM (Revised)

Public Sector Organisations Businesses set up by an Act of

Parliament Government provides capital

through Treasury Govt. appoints Chairman and Board They may be natural monopolies May be unattractive to private sector

due to enormous capital investment

Higher BM (Revised)

Public Corporations Reasons for being set-up: To avoid wasteful duplication and

confusion To set up and run important non-

profitable services To prevent exploitation of

consumers To protect jobs and key industries

Higher BM (Revised)

Privatisation Is: “The selling off of Public

Corporations to the private sector” Why Privatise? To improve efficiency by

introducing competition Shareholders in Modern Society Privatisation raises huge monies

for government

Higher BM (Revised)

Business Objectives Survival Growth and development Profit maximisation Social responsibility Providing a service

Higher BM (Revised)

Objectives by Business Sector

Type of Business

Aims/Objectives

Private Sector Survival, profit maximisation, increase returns to shareholders

Voluntary Sector

Help others, maximise cash collections, offer a service to community

Public Sector Help people, improve quality of service, cut costs, raise revenue

Higher BM (Revised)

Entrepreneurs A person who

takes an idea and through ability and vision turns it into a good or service.

Richard Branson, left, is Britain’s most famous entrepreneur

Higher BM (Revised)

Role of Entrepreneur Identifying business opportunities Franchising Combining Factors of Production Innovation and Risk Taking

Higher BM (Revised)

Identify Business Opportunities Look for a gap in the market

Examples: McDonald’s Home Delivery in

Clydebank?¹ Virgin Galactic² MJM³

Higher BM (Revised)

Entrepreneurs and Franchising In order to minimise risks, many

young entrepreneurs have taken to using franchises as a means of starting up a business.

Higher BM (Revised)

Combining Factors of Production

The Entrepreneur brings together Land, Labour and Capital.

Let’s look at Richard Branson at Virgin: He would buy or rent the buildings/property

(LAND) He would hire the staff (LABOUR) He would raise the money to start the

venture as well as buy machinery/equipment (CAPITAL).

Higher BM (Revised)

Innovation and Risk Taking Entrepreneurs do not invent but innovate. Henry Ford did not invent the automobile but

through different innovations such as the assembly line and mass production he helped popularise car use and make it affordable for customers to buy

Risks involved are usually to do with uncertainty and money. No-one knows for sure if a new venture will be successful. The entrepreneur could go bust… like John DeLorean¹

Higher BM (Revised)

DeLorean Car & Sinclair C5

The DeLorean car bankrupted its owner; the C5 was also a massive flop and ruined Sir Clive Sinclair’s reputation.

Higher BM (Revised)

Stakeholders Stakeholders are people with a key

interest in a business Stakeholders effect businesses by

exerting influence over decisions Their influence depends on the

degree of their involvement or relative interest in company

Higher BM (Revised)

Identifying Stakeholders INTERNAL Owners/

Shareholders Employees Management

EXTERNAL Customers Banks Investors Local government Suppliers Donors (for Charities) Taxpayers Community

Higher BM (Revised)

Stakeholder Aims/Objectives

Owners = profits, dividends Managers = promotion, job security Employees = wages, working

conditions, job security Suppliers = regular orders, payment Customers = low prices, high quality Banks = loans repaid on time

Higher BM (Revised)

Influence of Stakeholders Cabinet Backbenchers Party Members Trade Unions Media General Public

(Voters) Pressure GroupsTony Blair is

influenced by:

Higher BM (Revised)

Sources of Finance

Higher BM (Revised)

Internal Sources of Finance Retained Profits – profit kept by

company for future activities

Selling Assets – money raised by selling off an asset no longer needed

Both are Short-term

Higher BM (Revised)

External Sources of Finance Long Term (10 years +) Issuing Shares – capital raised by

selling shares Debentures – a fixed interest long

term loan Loans – borrowing money, repaid

over a time period with interest Mortgages – a loan secured for

property

Higher BM (Revised)

External Sources of Finance Medium Term (1-10 years) Leasing – renting equipment or

premises Hire Purchase – acquiring an asset

on credit followed by fixed payments. After last instalment purchaser owns asset.

Loans

Higher BM (Revised)

External Sources of Finance Short Term (up to 1 year) Overdraft – borrowing more money

than is available in bank account Trade Credit – businesses receive

goods first, then pay later Factoring – a specialist business

collecting unpaid debts for a fee

Higher BM (Revised)

Additional Sources of Finance LEC – Scottish

Enterprise Renfrewshire

Local authorities – East Renfrewshire Council

Government Partnerships – Business Gateway

Grants and allowances – Repayable Grants, Soft Loans, Subsidies

EU grants – Regional Development Fund & Social Fund

Higher BM (Revised)

Methods of Growth Merger Takeover De-merger Divestment Horizontal integration Vertical integration Diversification

Higher BM (Revised)

Methods of Growth Merger – an agreement to bring two

firms under one board of directors Takeover – when a firm buys over 50%

of another firm’s share capital De-merger – when a firm is split into

two parts Divestment – selling off parts of

business no longer fitting long-term strategy

Higher BM (Revised)

Horizontal Integration Occurs when a firm takes over or

merges with another firm at the same stage of production.

Higher BM (Revised)

Vertical Integration

Rubber plantation

Car showroom

Higher BM (Revised)

Diversification Diversification is when businesses

reduce risk by expanding the number of goods/services they provide

Higher BM (Revised)

Multinationals What is a Multinational?

A company with HQ in one country but with bases, manufacturing or assembly plants in others

Higher BM (Revised)

Why become a Multinational? Companies may become

Multinationals to: increase market share secure cheaper premises and labour to avoid tax or trade barriers to take advantage of government

grants

Higher BM (Revised)

Multinationals +/- Provide jobs &

income Improve level

of expertise of local workers

Economies of Scale

Jobs may only be low-level skills

Profits go back to home country

Cut corners May exert

political muscle

Higher BM (Revised)

Social Responsibility “SR is about how companies manage

their business processes to produce an overall positive impact on society” - CSR

Major Concerns High Fossil fuel emissions Global warming Exploitation of workers Safety of employees

Higher BM (Revised)

Social Responsibility Levi’s ‘Sweatshop workers’ EuroDisney US culture invades

France DDT pesticide banned in High

income countries, yet sold on to low income nations

Higher BM (Revised)

Exxon Valdez Disaster 1989 Exxon Valdez

disaster in Alaska 11 million gallons of

oil spilled over 1,500 mile shoreline

500,000 birds dead 4,500 otters dead 14 killer whales

dead

Higher BM (Revised)

Aftermath Clean-up cost $100 million 1994 fined $5 billion by US courts “Exxon Valdez synonymous with

corporate arrogance and shirking of responsibility” – Alabama court

Consumer boycott: Exxon slipped from 1st to 3rd biggest oil company

1999 Exxon merged with Mobil

Higher BM (Revised)

Has Exxon learned it’s lesson? In 2002 ExxonMobil donated:

$2 million to US Education Alliance Program

$100 million to Global Climate and Energy Project

Higher BM (Revised)

Social Responsibility +/- Customer

perceives company in good light

Financial cost

Higher BM (Revised)

A Systems View of Business Any system is made up of 4 key

parts:

Inputs Processes Outputs Feedback

Higher BM (Revised)

Internal Pressures New personnel in the organisation

(settling in time, training etc… especially in senior positions!)

New technology being used (training, errors, set-up and maintenance costs)

Change in firm’s financial position (loss of contracts, customers, market share etc…)

Higher BM (Revised)

External Pressures: PEST Analysis Political Factors Economic Factors Social Factors Technological Factors and: Competitive Factors Environmental Factors

Higher BM (Revised)

Political Factors Tax policy Employment laws Environmental regulations Trade restrictions and tariffs Political stability

Higher BM (Revised)

Economic Factors Economic growth Interest rates Exchange rates Inflation rate Unemployment

Higher BM (Revised)

Social Factors Demographics Lifestyles Structure of the Labour Market Trends and fashions Attitudes Education levels Ethnic markets

Higher BM (Revised)

Technological Factors ICT R&D activity Automation Rate of technological change E-commerce

Higher BM (Revised)

Competitive Factors Product differentiation Price wars Profit margins Imitators Location

Higher BM (Revised)

European Union The European Union was formed in 1992

by the Maastrict Treaty It has 25 member states It is a Single Market The Euro is the Currency adopted by

most of the member states Major Institutions: EU Parliament

(Brussels), European Central Bank (Frankfurt)

Higher BM (Revised)

Higher BM (Revised)

EU Legislation Converting from Imperial Measurements

to Metric (1994 Units of Measurements Legislation) Steven Thorburn the Metric Martyr

Mobile phone firms have been warned they face European Union legislation after failing to cut "unjustifiably high" charges for calls made and received when abroad.

Higher BM (Revised)

The Environment and Green Issues

As the Environment becomes more important due to Global Warming and Ozone Depletion, firms have to act accordingly (as part of being Socially Responsible).

What is the Kyoto Agreement?¹ Friends of the Earth and Greenpeace

are Environmental Pressure Groups