Business In Contemporary Society V4

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

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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

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A country’s wealth is measured by how many goods and services it Q. How is a nation’s produces wealth measured?

Business Cycle Needs & Wants

Business provides goods/service s Business Cycle Consumers have money to spend from wages

Consumer buy goods/servic es

Wealth for companies and employees

Goods and Services 

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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.

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Michael Porter called this the Five Forces

Factors of Production 

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In order to produce goods and services, businesses need to use resources LAND LABOUR CAPITAL ENTERPRISE

Factors of Production 

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Land – natural resources extracted from Earth. Can be renewable or nonrenewable 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.

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

Entrepreneur Task 1. 2.

3.

4.

5.

Define what is an entrepreneur.   Identify 4 entrepreneurs and the business they were involved with.  Using the internet, write a short biography of the 4 entrepreneurs.  What skills or personality traits do you think entrepreneurs have?  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 risktakers. 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 

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     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

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Examples: McDonald’s Home Delivery in Clydebank?¹ Virgin Galactic² MJM³

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 

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 

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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  

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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

Raw materials workers Natural resources machinery

Output Finished goods

Create an IPO diagram for the following: a) the school b) a football club c) computer firm

Sectors of Industrial Activity 

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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 

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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  

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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 Can make decisions quickly Personal attention to business Profits are not shared Can cater for local needs Business affairs kept private

  

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Limited capital Unlimited liability Commitment (long hours, every day) New ideas may be limited

Partnerships  

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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 +/ 

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More capital Excessive hours can be cut down More ideas may be generated Specialisation can occur Limited partnerships

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Actions of one partner binds all More discussion and consultation Limitation on number of partners Unlimited liability Partnership ends if a partner dies

Private Limited Companies   

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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. +/  

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More capital Limited liability Owner can retain control Company does not die if owners die

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Must be registered with Registrar of Companies Harder to motivate & control workers High set up costs (legal and administrative) Diseconomies of scale

Public Limited Companies  

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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 +/   

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More capital Employ specialists Limited liability Company does not die if owners die Shares can be issued through stock exchange

  

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Formation expensive Must publish accounts May become too large to manage effectively Decisions more difficult to arrive at

Recap…    

Sole traders Partnerships Private limited companies plcs

Today…    

Franchise Co-operatives Charities Public Sector Organisations and Corporations

Franchise 

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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 +/

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Franchisor provides a lot of support; training to start business, equipment, materials, advice, brand name Take over a successful, winning formula



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Franchisee doesn’t have complete freedom May not agree with decision placed upon you

Co-operatives 

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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 +/

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Less conflict between workers and managers  Workers should be more motivated



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Difficult to grow and find additional capital  New workers may not be able to raise capital needed to join co-op

Charities 

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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 +/

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If charity has status of charitable trust it doesn’t pay tax  Looks after less privileged and the environment

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Less money may be donated due to introduction of lottery Relies on voluntary workers who may not be paid for work

Public Sector Organisations  

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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  

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Reasons for being set-up: To avoid wasteful duplication and confusion To set up and run important nonprofitable 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 

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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 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

Questions a Business Should Ask Itself 

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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

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Why Define Aims/Objectives? End result to work to Goals motivate people Keeps focus and direction

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Mission Statements 

“We exist to refresh everyone we touch”

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“We strive to lead in the invention, development and manufacture of the industry's most advanced information technologies“

Mission Statements    

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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 

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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 Employees Customers Banks Investors Local government suppliers

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Management Members Committees Donors Taxpayers Community shareholders

Stakeholder Aims/Objectives   

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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) b)

c)

d)

What is a stakeholder in business? Give 3 examples of a stakeholder in a business What kind of influence may stakeholders be able to exert on business? Complete the stakeholder grid available on the work area

Influence of Stakeholders      

Tony Blair is influenced by:

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Cabinet Backbenchers Party Members Trade Unions Media General Public (Voters) Pressure Groups

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… 

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Number of people involved/scale of operation Amount of press coverage they receive Amount of public sympathy they receive How well organised the campaign is

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Amount of finance available for campaign Ability to lobby politicians successfully Strength of 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

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Internal

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External

Sources of Finance

Internal Sources of Finance 

Retained Profits – profit kept by company for future activities

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

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Both are Short-term

External Sources of Finance  

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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  

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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  

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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 

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LEC – Scottish Enterprise Renfrewshire Local authorities – East Renfrewshire Council Government Partnerships – Business Gateway

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Grants and allowances – Repayable Grants, Soft Loans, Subsidies EU grants – Regional Development Fund & Social Fund

Recap… 

Sources of Finance

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Internal

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External

Today…       

Merger Takeover De-merger Divestment Horizontal integration Vertical integration Diversification

Methods of Growth 

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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    

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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 

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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) 

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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)

b)

State 3 factors that affect a business 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 +/

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Provide jobs & income Improve level of expertise of local workers Economies of Scale

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Jobs may only be low-level skills Profits go back to home country Cut corners May exert political muscle

Social Responsibility 

“SR is about how companies manage their business processes to produce an overall positive impact on society” - CSR

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

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Social Responsibility  

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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 

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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   

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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:

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$2 million to US Education Alliance Program

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$100 million to Global Climate and Energy Project

Social Responsibility +/

Customer perceives company in good light



Financial cost

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?