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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
2
+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
3
+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.
4
+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
7
Industrial Revolution De-Industrialisation
+Activities
Activity No. 1: Sectors of Industry
Activity No. 7: Class Careers
8
+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
9
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
10
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
11
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
12
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)
13
+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
14
+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
15
+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
16
+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.
17
+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
18
+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
19
+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
20
+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
21
+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
22
+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
23
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
24
+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
25
+Charities
Charity? Relieve poverty Advance education Advance religion Carry out activities beneficial to the community
Examples: Children in Need Red Cross RSPB
26
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)
27
+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
28
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
29
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
30
+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
31
+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)
32
Ensure that you know the interests and
influences
+Activities
What is my interest and influence?
Activity No. 5: Conflict between stakeholders
33
+Sources of FinanceCan you describe the following?
34
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
35
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
36
+Internal Growth
Increasing number of stores Selling new products Entering new markets Employing more staff (demand)
37
+External Growth
When two businesses come together to form one business:
Merger:
Takeover:
38
+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
39
+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
40
+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
41
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
42
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
43
+Dynamic Activity
Internal and External influences can affect an organisation
44
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
45
+External Factors (PESTEC) No. 1 Political
Legislation Infrastructure provision Taxation Availability of funding eg grants
Economic Interest rates Exchange rates Inflation Unemployment Business cycle
46
+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
47
+External Factors (PESTEC) No. 3 Environmental
Changes in weather Recycling and energy saving Carbon emissions
Competition Competition from multinationals – a global market
48
+Activities
Activity No. 6: Case Study (various)
Activity No. 9: New working practices
Activity No. 11: Summary
49
+Congratulations
You have completed
Business in Contemporary Society
in
Higher/Int 2 Business Management