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Higher Business

Management

Business in Contemporary
Society
Today…
 Needs and wants
 Business activity
 Business cycle
 Goods and services
 Competition
 Factors of production
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
Business Activity
 Business activity is any activity
which provides us with goods and
services

 A country’s wealth is measured by


how many goods and services it
produces Q. How is a nation’s
wealth measured?
Business Cycle
Business
Needs provides Consumer
& goods/service buy
Wants s goods/servic
es
Business
Cycle

Consumers
Wealth for
have
companies and
money to
employees
spend from
wages
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
Competition
 Firms are in constant competition with each
other, and indeed how they fare is affecting
by suppliers, buyers and even the threat of
both new firms entering their market, and
the threat of substitute goods.

 Michael Porter called this the Five Forces


Factors of Production
 In order to produce goods and
services, businesses need to use
resources
 LAND
 LABOUR
 CAPITAL
 ENTERPRISE
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
Identify a local business
organisation and describe
each of the factors of
production it uses in order to
operate
Recap…
 Needs and wants
 Business activity
 Business cycle
 Goods and services
 Competition
 Factors of production
Today…
 Entrepreneurs
 Role of entrepreneur
 Entrepreneurs and franchising
 Combining factors of production
 Innovation and risk taking
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
Entrepreneur Task
1. Define what is an entrepreneur.  
2. Identify 4 entrepreneurs and the
business they were involved with. 
3. Using the internet, write a short
biography of the 4 entrepreneurs. 
4. What skills or personality traits do you
think entrepreneurs have? 
5. Describe the role of the entrepreneur in
setting up a business.
1. Define what is an
entrepreneur

A a person who starts a business


from their own idea with the
intention of making a profit. The
person who brings together the
factors of production.
Questions 2 & 3

 Tell the class about the


entrepreneurs you researched.
4. What skills or personality
traits do you think
entrepreneurs have?
       
 Entrepreneurs display creativity,
innovation, imagination and are risk-
takers. Entrepreneurs normally are
associated with SMEs (Small to Medium
Enterprises), however as we have seen
they can operate in large firms too.
5. Describe the role of the
entrepreneur in setting up a
business
      Entrepreneurs develop the business idea. They are not always the
inventor (the originator of the product/service), but are innovative.
      They organise the resources. They make the decisions as to the
location of the premises, method of production, product design,
prices, wages. As the firm grows decisions may be passed down to
others as Richard Branson does.
      Arrange for the financing. Entrepreneurs may put personal money
in, but they also find backers. The central business idea and the
business plan are central to receiving funding.
      They are the risk-takers. If it goes wrong it is they who suffer. As
John DeLorean did! He used personal AND Government money to fund
DMC, but when it all went wrong he went bankrupt!
Role of Entrepreneur
 Identifying business opportunities
 Franchising
 Combining Factors of Production
 Innovation and Risk Taking
Identify Business
Opportunities
 Look for a gap in the market

 Examples:
 McDonald’s Home Delivery in
Clydebank?¹
 Virgin Galactic²
 MJM³
Entrepreneurs and
Franchising
 In order to minimise risks, many
young entrepreneurs have taken to
using franchises as a means of
starting up a business.
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).
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
DeLorean Car & Sinclair
C5

The DeLorean car bankrupted its owner; the C5 was


also a massive flop and ruined Sir Clive Sinclair’s
reputation.
Recap…
 Entrepreneurs
 Role of entrepreneur
 Entrepreneurs and franchising
 Combining factors of production
 Innovation and risk taking
Today…
 IPO Diagram
 Sectors of Activity
 De-industrialisation
IPO Diagram

Input Process Output

Raw materials workers Finished


Natural resources machinery goods
Create an IPO diagram for
the following:

a) the school
b) a football club
c) computer firm
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
a) For each of the sectors of
industry identify 3 local
businesses that operate in
that sector.

b) Use symbols/images to
draw a diagram of the
business activity sectors, and
place the businesses in the
proper sector
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
Explain why there has been a
growth in employment in call
centres in Scotland, and
state the reasons why it is
important that Scotland
continues to attract these
jobs
Recap…
 IPO Diagram
 Sectors of Activity
 De-industrialisation
Today…
 Sole traders
 Partnerships
 Private limited companies
 plcs
Types of Ownership
 Sole Trader
 Partnerships
 Private Limited Co.
 Public Limited Co.
 Franchises
 Co-operatives
 Charities
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
Sole Trader +/-
 Easy to set up  Limited capital
 Can make decisions  Unlimited liability
quickly
 Personal attention to
 Commitment (long
business hours, every day)
 Profits are not shared  New ideas may be
 Can cater for local needs limited
 Business affairs kept
private
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)
Partnership +/-
 More capital  Actions of one
 Excessive hours partner binds all
can be cut down  More discussion
 More ideas may be and consultation
generated  Limitation on
 Specialisation can number of partners
occur  Unlimited liability
 Limited  Partnership ends if
partnerships a partner dies
Private Limited Companies
 Organisation owned by a group of individuals
 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
Private Ltd. +/-
 More capital  Must be registered
with Registrar of
 Limited liability Companies
 Owner can retain  Harder to motivate &
control control workers
 Company does not  High set up costs
die if owners die (legal and
administrative)
 Diseconomies of scale
Public Limited Companies
 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
plc +/-
 More capital  Formation expensive
 Employ specialists
 Must publish accounts
 May become too large
 Limited liability to manage effectively
 Company does not  Decisions more
die if owners die difficult to arrive at
 Shares can be
issued through
stock exchange
Recap…
 Sole traders
 Partnerships
 Private limited companies
 plcs
Today…
 Franchise
 Co-operatives
 Charities
 Public Sector Organisations and
Corporations
Franchise
 Business 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
Franchise +/-
 Franchisor provides a  Franchisee doesn’t
lot of support; have complete
training to start freedom
business, equipment,  May not agree with
materials, advice, decision placed
brand name upon you
 Take over a
successful, winning
formula
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)
Co-operatives +/-
 Less conflict  Difficult to grow
between workers and find additional
and managers  capital 
 Workers should be  New workers may
more motivated not be able to raise
capital needed to
join co-op
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
Charities +/-
 If charity has  Less money may be
status of donated due to
charitable trust it introduction of
doesn’t pay tax  lottery
 Looks after less  Relies on voluntary
privileged and the workers who may
environment not be paid for
work
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
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
Identify as many different
types of business
organisations as you can that
are involved in producing a
new music CD
Recap…
 Franchise
 Co-operatives
 Charities
 Public Sector Organisations and
Corporations
Today…
 Privatisation
 Business Objectives
 Mission Statements
Privatisation
 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
Business Objectives
 Survival
 Growth and development
 Profit maximisation
 Social responsibility
 Providing a service
Objectives by Business
Sector

Type of Aims/Objectives
Business
Private Sector Survival, profit maximisation,
increase returns to
shareholders
Voluntary Help others, maximise cash
Sector collections, offer a service to
community
Public Sector Help people, improve quality of
service, cut costs, raise
Questions a Business
Should Ask Itself
 Peter Drucker (1973) believes a
business should ask:
 What is our business?
 Who is the customer?
 What is value to the customer?
 What will our business be?
 What should our business be?
Mission Statements
 A company’s raison d’être

 Why Define Aims/Objectives?


 End result to work to
 Goals motivate people
 Keeps focus and direction
Mission Statements
 “We exist to refresh everyone we
touch”

 “We strive to lead in the invention,


development and manufacture of
the industry's most advanced
information technologies“
Mission Statements
 Qualities of Good Mission Statements:
 Visionary
 Clarify intentions and aspirations
 Describe current activities and
intended position
 Key values of organisation
 Capable of being realised
Recap…
 Privatisation
 Business Objectives
 Mission Statements
Today…
 Stakeholders
 Identifying stakeholders
 Interest of stakeholders
 Influence of stakeholders
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
Identifying Stakeholders
 Owners  Management
 Employees  Members
 Customers  Committees
 Banks  Donors
 Investors  Taxpayers
 Local government  Community
 suppliers  shareholders
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
a) What is a stakeholder in business?
b) Give 3 examples of a stakeholder in
a business
c) What kind of influence may
stakeholders be able to exert on
business?
d) Complete the stakeholder grid
available on the work area
Influence of Stakeholders
 Cabinet
 Backbenchers
 Party Members
 Trade Unions
 Media
 General Public
(Voters)
Tony Blair is  Pressure Groups
influenced by:
Pressure Groups
 A Pressure Group is an organisation formed by
people with a common interest, who get
together in order to further that interest.
Effectiveness of Pressure
Groups depends on…
 Number of people  Amount of finance
involved/scale of available for
operation
campaign
 Amount of press
coverage they receive  Ability to lobby
 Amount of public politicians
sympathy they receive successfully
 How well organised the  Strength of
campaign is
individual
campaigners
Explain why it is important
for managers to
communicate their
decisions to stakeholders
Recap…
 Stakeholders
 Identifying stakeholders
 Interest of stakeholders
 Influence of stakeholders
Today…
 PEST Analysis (External Analysis)
 Political Factors
 Economic Factors
 Social Factors
 Technological factors
 Competitive Factors
PEST Analysis
Political Factors
 Tax policy
 Employment laws
 Environmental regulations
 Trade restrictions and tariffs
 Political stability
Economic Factors
 Economic growth
 Interest rates
 Exchange rates
 Inflation rate
 Unemployment
Social Factors
 Demographics
 Lifestyles
 Trends and fashions
 Attitudes
 Education levels
 Ethnic markets
Technological Factors
 ICT
 R&D activity
 Automation
 Rate of technological change
 E-commerce
Competitive Factors
 Product differentiation
 Price wars
 Profit margins
 Imitators
 Location
Complete a PEST Analysis
grid for an industry
selected by the teacher.
Recap…
 PEST Analysis (External Analysis)
 Political Factors
 Economic Factors
 Social Factors
 Technological factors
 Competitive Factors
Today…
 Sources of Finance

 Internal

 External
Sources of Finance
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


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
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
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
Additional Sources of
Finance
 LEC – Scottish  Grants and allowances
Enterprise – Repayable Grants,
Soft Loans, Subsidies
Renfrewshire  EU grants – Regional
 Local authorities – Development Fund &
East Renfrewshire Social Fund
Council
 Government
Partnerships –
Business Gateway
Recap…
 Sources of Finance

 Internal

 External
Today…
 Merger
 Takeover
 De-merger
 Divestment
 Horizontal integration
 Vertical integration
 Diversification
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
Horizontal Integration
 Occurs when a firm takes over or
merges with another firm at the
same stage of production.

+ =
Benefits of Horizontal
Integration
 This can help eliminate competition
 Can lead to increased market share
 Allows for economies of scale
 Combined company becomes more strong
and secure
 Acquisition of other company’s assets
Vertical Integration
Rubber
plantation
Backwar
d

Forward
Car
showroo
m
Benefits of Vertical
Integration
 It reduces costs as there are no
middlemen; more profits are kept
 Company benefits from greater
economies of scale
 Processes can be linked easily
(supplies are guaranteed, retails
outlets available for products to be
sold in)
Diversification
 Diversification is when businesses
reduce risk by expanding the
number of goods/services they
provide
Diversification Benefits
(aka Conglomerate Integration)
 Reduces risk of business failure (if
one part fails, there is another to
compensate!)
 Business becomes larger and more
financially secure
 Firm acquires assets of the other
company
a) State 3 factors that affect a business

b) give an example for each factors of a


PEST analysis

c) explain merger and demerger

d) list and explain 3 sources of finance

e) what is divestment?
Recap…
 Merger
 Takeover
 De-merger
 Divestment
 Horizontal integration
 Vertical integration
 Diversification
Today…
 Multinationals
 Social Responsibility
 Exxon Valdez
Multinationals
 What is a Multinational?

 A company with HQ in one country


but with bases, manufacturing or
assembly plants in others
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
Multinationals +/-
 Provide jobs &  Jobs may only be
income low-level skills
 Improve level of  Profits go back to
expertise of local home country
workers  Cut corners
 Economies of Scale  May exert political
muscle
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
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
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
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
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
Social Responsibility +/-
 Customer  Financial cost
perceives
company in good
light
Today…
 Multinationals
 Social Responsibility
 Exxon Valdez
For each of the following
examples, identify which
would be the best type of
business organisation to use.
Justify your decision for each.
A) firm of solicitors
B) window cleaner
C) garage repair and sales
Which of the following
services are provided by
government and are publicly
funded? Identify whether
they are funded by Scottish
or UK government.
A) university education
B) local bus service
C) water supply
D) sheltered housing
E) Letter postal service
Identify 2 business
objectives of HBOS from
case study on p. 30
How do business
objectives of an
organisation like the BBC
differ from STV?