+

Business in Contemporary SocietyHigher/Int 2 Business ManagementSession 2009/2010

+Business Activity

Any activity which results in the provision of goods/services which satisfy human wants

Wants Needs

Durable Non-DurableConsumer

Goods

Capital

Goods

Goods & Services

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+Terms

Production: refers to the making of goods to be sold or move to the next stage

Consumption: refers to the purchasing of goods/services

Needs: essential for survival Wants: what people demand after needs are satisfied

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+Wealth Creation

The 4 Factors of Production are combined together to produce an output Land – natural resources Labour – workforce Capital – equipment and money invested Enterprise – the entrepreneur (more later)

At each stage of production value is added with each new ingredient therefore wealth is created

Goods/Services are then sold in markets.

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+Business Activity5

TheOrganisation

(Internal)

InputsLand

LabourCapital

Enterprise

OutputGoods

andServices

Marketing

People(HumanResources)

Finance

Production(Operations)

External Influenceseg Competition

External Influenceseg Government Policy

+The Cycle of Business6

WANTS

IDENTIFICATION

PRODUCTION

CONSUMPTION

+Sectors of Industrial ActivitySector Description ExamplePrimary Extracting materials Fishing, farming,

coal mining

Secondary Manufacturing Cars, computers and cakes

Tertiary Provide a service Supermarkets, airlines, accountants

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Industrial Revolution De-Industrialisation

+Activities

Activity No. 1: Sectors of Industry

Activity No. 7: Class Careers

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+Types of Business Organisations(Private Sector) – Sole Trader

Advantages Easy to set up Owner keeps profits Owner decides hours to

work Owner makes all decisions

Disadvantages No one to share

responsibility, workload or problems

Difficult to obtain finance Unlimited liability

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Ownership Size Objectives FinanceIndividual • < 50

employees• Survive• Make profit• Quality

product

• Personal savings

• Overdrafts• Loans• Grants

+Types of Business Organisations(Private Sector) – Partnership

Advantages Workload responsibilities

shared Partner experience/skills Easier to obtain finance Shared risks/decisions

Disadvantages Disagreements Unlimited liability Profits are split Legal agreement required

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Ownership Size Objectives Finance2-20 partners • Locally

• Nationally• Survive• Make profit• Quality

product

• Personal savings

• Overdrafts• Loans• Grants• Partner

+Types of Business Organisations(Private Sector) – Ltd

Advantages Limited liability Responsibility/risks shared Privacy retained: no

accounts published Access to finance improved

Disadvantages Complicated to setup Rules and regulations of

Companies Act

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Ownership Size Objectives FinanceShareholders(not publically available)

• National Also:• Strong

brand• High sales• Growth

• Shares• Banks loans• Mortgages• Governmen

t grants

+Types of Business Organisations(Private Sector) – Plc

Advantages Limited liability Access to finance improved Economies of Scale

possible

Disadvantages Rules and regulations of

Companies Act Annual Accounts published No control over ownership

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Ownership Size Objectives FinanceShareholders(sold on stock exchange)

• >250 employees

• Often multinational

Also:• Market leader• Social

responsibility• Growth• Maximise

profits

Also:• Shares

easily sold on Stock Market

£50,000 investment

+Multinationals: Benefits Taxation or Grant incentives Lower wage rates Higher skilled workforce Legislation (relaxed) Rate of Corporation Tax Can operate competitively (locally) Increased Market Share Save on costs of transportation Avoiding Trade Barriers Selling Globally (without licenses)

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+Multinationals: Costs Legislation may be too restrictive Local currency may be weak (converting profits back) Lack of technical expertise Poor infrastructure Cultural difficulties Political Instability Exploitation (eg low wages) Forcing local businesses out Major functions remain at HQ usually – close a

subsidiary

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+Activities

Activity No. 2: Types of Business Organisation

Hall, Jones and Raffo: Chapter 6

Question 1: Sole Trader p43 Question 2: Partnership p44 Question 3: Limited Company p46 Question 4: Decision Making p49

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+Franchises

A person who starts a business and provides a product or service supplied by another business is known as a franchisee and operates a business known as a franchise

The franchisee is allowed to use the franchisor’s business name and sell its products

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+SPAR Franchise

SPAR is a franchised Convenience store. It was founded in the Netherlands as a voluntary chain of grocers under the name "De Spar".

Secure cooperation between independent wholesalers and retailers as a response to the emergence of grocery chains in Europe.

"DESPAR" is the acronym for the Dutch sentence "Door Eendrachtig Samenwerken Profiteren Allen Regelmatig" which translates into "We all benefit from joint cooperation".

The symbol of the fir tree, SPAR in Dutch, to identify the organization and it became the SPAR logo.

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+The Franchisor

Advantages DisadvantagesQuick entry to new markets Reliant on franchisees to

maintain image and ‘good name’

Receive % of profits Money received < running selfProtection from competitionRisk is shared

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+The Franchisee

Advantages DisadvantagesAlready established name and brand

% of profits paid to franchisor

Training provided Strict rules imposed by franchisor

Back-up Service provided (advice)

Performance depends on franchisor’s input and other franchisees

All benefit from shared ideasRisk is shared

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+Activities

Activity No. 8: McDonalds Case Study: McDonalds (Server)

www.whichfranchise.com www.franchiseexpo.co.uk www.franchisedirect.co.uk

Short investigation and report into different franchises available including cost of initial investment

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+The Public Sector

Managed by the government on behalf of the taxpayer who owns them

Funded through taxation Aims:

Provide services Improve communities Act in best interests of society

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+Types of Public Sector OrganisationsCentral Government

• Health, Defence and Transport• People are elected to become politicians• Politicians control Central Government

Local Government • East Lothian Council is an example• Schools, roads, council housing and leisure• Elected politicians control and appointed managers run local government

Public Corporations

• Goods and services provided• Owned by government – nationalised industries• Funded by government and members of public eg BBC License Fee• Chairperson and Board of Directors

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+Privatisation

Governments sold these companies because: Huge amounts of income for the Treasury Some public corporations were poorly managed and not

profitable Wanted to increase share ownership and make public

interested in the success of companies/the economy

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However: Public corporations were often sold off too

cheaply Privatisation has not always led to greater

competition

+Contracting Out

Examples are refuse collection and school meals Firms are invited to submit bids (competitive tendering)

to provide these services Cost effective? Private Sector organisations have an

incentive to keep costs low

See Extra Note for more detail:

also appears in Growth section

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+Voluntary Organisations

Managed and run by volunteers: no financial gain they usually have an interest in the organisation

Examples: Scouts Girl Guides Youth and Sports Clubs

Finance Donations Membership fees

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+Charities

Charity? Relieve poverty Advance education Advance religion Carry out activities beneficial to the community

Examples: Children in Need Red Cross RSPB

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Finance Donations Government and lottery funding Selling goods Fundraising events

Charities Commission keep a register of charities

“Charitable Status’ means exemption from paying

VAT

Can ‘Gift Aid’

+Activities

Activity No. 3: Contracting Out

Activity No. 4: Objectives (thoughts before next section)

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+Objectives

Targets or Goals Required so that a measurement of success can be

made Make decision to achieve goals eg:

objective = expand overseas

action = find location; recruit staff; market products

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Remember objectives can change over time

+Examples of Objectives

Private Sector Objectives

Survive Maximise profit Maximise sales Market share increase Become market leader Grow High quality product Managerial Objectives

Voluntary Sector Objectives

Provide a service Help those in need Raise money Efficient use of money Socially responsible

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What about satisficing?

+Higher Level: ObjectivesIdentify vs Describe

Profit Maximisation To make as much profit possible by maximising sales and keeping the cost of sales low

To control and dominate the market within which the organisation operates. This may involve eliminating competition

Become Market Leader

Grow Expand into new markets/countries. Taking advantage of economies of scale and minimising risk of failure

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+Entrepreneur

Have and develop a business idea Willing to take risks Known and associated with innovation Combine the factors of production Use their initiative to make decisions and solve

problems

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+StakeholdersHave an interest in and stand to be affected by the success or failure of an organisation

Internal:

Shareholders/Owners Managers Employees

External:

Suppliers Customers Banks Central/Local Government Local Community Taxpayers Donors (Charities) Community (Society)

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Ensure that you know the interests and

influences

+Activities

What is my interest and influence?

Activity No. 5: Conflict between stakeholders

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+Sources of FinanceCan you describe the following?

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Bank Loan

Bank Overdraft

Mortgage

Leasing

Government Grant

Share Issue

Retained Profits

Remember there are others – for a recap check your finance notes

+Sources of Assistance

Advice will be on starting up; business plans; recording financial transactions; payroll and taxation

Some organisations may be able to give business financial support through a grant or loan

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HM Revenue

and Customs

Local Enterprise Agencies

Banks

Local Authoritie

sBusiness Gateway

Prince’s Trust

Careers Scotland

+Why Grow?

Increase sales/profit and therefore returns for owner(s) Increase market share or become market leader To take advantage of economies of scale To reduce the risk of failure To strengthen brand name

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+Internal Growth

Increasing number of stores Selling new products Entering new markets Employing more staff (demand)

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+External Growth

When two businesses come together to form one business:

Merger:

Takeover:

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+Integration

Combining businesses in order to become larger and more powerful

Equal terms = merger Loss of identity = takeover

Takeovers can be friendly, when it is the best way to survive or hostile when a predatory firm swallows up another one in order to gain market share or asset-stripping

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+Horizontal Integration

Combining two firms at the same stage of production: Eliminate competition Increase market share Achieve economies of scale Acquire the assets of the other firm More secure from hostile takeover bids

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+Vertical Integration

Backwards Vertical: take over a firm at an earlier stage eg jam manufacturer taking over a farm Availability and quality of products ensured

Forwards Vertical: take over a firm at a later stage eg cheese manufacturer taking over a local delicatessens Control of distribution outlets gained

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Eliminates middleman and his profitGives the firm greater economies of scale

Allows the firm to link processes more easily

+Other Methods of Integration Conglomerate:

Two firms producing completely different goods from each other joining together

Diversification results with reduced risk eg one firm/product failing; seasonal changes; acquire assets of other company

De-merger: Splitting up the conglomerate so that its subsidiaries

become companies themselves

Divestment: Business sells some of its assets or part of its company The part sold might not be performing well Can raise finance to focus on core activity expansion

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BT Cellnet, was hived off as a separate business named

"mmO2".

+Management buy-out/buy-in

A team of managers get together and buy an existing company from its owners

Large bank loans will be involved

Buy-out: managers come from within Buy-in: managers come from outside

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+Dynamic Activity

Internal and External influences can affect an organisation

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Think about the impact and possible

consequences of each internal and external factor on a business.

Make a list!

+Internal Factors

Availability of finance New product developments Changes in costs Quality and skills of employees and management Company policy Availability of appropriate ICT Corporate culture

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+External Factors (PESTEC) No. 1 Political

Legislation Infrastructure provision Taxation Availability of funding eg grants

Economic Interest rates Exchange rates Inflation Unemployment Business cycle

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+External Factors (PESTEC) No. 2 Social

Changes in culture, trends and fashions Changes in demographics Work/life balance Working practices

Technological Methods of communication Use in production eg automation Paperless office E-commerce

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+External Factors (PESTEC) No. 3 Environmental

Changes in weather Recycling and energy saving Carbon emissions

Competition Competition from multinationals – a global market

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+Activities

Activity No. 6: Case Study (various)

Activity No. 9: New working practices

Activity No. 11: Summary

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+Congratulations

You have completed

Business in Contemporary Society

in

Higher/Int 2 Business Management