BUSINESS 1.

1
Businesses as decision-making organizations: A business is a decision-making organization
involved in the process of using inputs to produce goods and/or services.

Areas of a business

Functional areas of a business:

For a business organization to operate effectively, tasks must be carried out by functional
areas (i.e. departments). These departments are interdependent (i.e. they must work
together to reach the organization’s goals).

Human resources
Manages the personnel of the organization: Personnel issues include: Workforce planning,
recruitment, training, appraisals, dismissals, redundancies, outsourcing HR strategies.

Finance and accounts

Manages the organization’s money. Accurate recording and reporting of financial documents
must take place to: Comply with legal requirements (e.g., taxation laws) and inform
stakeholders such as shareholders and potential investors.

Marketing
Responsible for identifying and meeting the needs and wants of customers. Key functions
focus on the seven Ps of marketing: Product, price, place, promotion, people, processes and
physical evidence.

Operations management
Responsible for the process of converting raw materials and components into finished
goods. Operations management also applies to the process of providing services to
customers.

Business sectors

Business sectors
Businesses can be classified according to the stage of production they are engaged in.
These are known as sectors of an economy.
Primary sector
Businesses in this sector are involved in the extraction, harvesting and conversion of natural
resources.

Secondary sector
Businesses in this sector are involved in the manufacturing or construction of products.

Tertiary sector
Businesses in this sector specialize in providing services to the general population.

Quaternary sector
Businesses in this sector are involved in intellectual, knowledge-based activities that
generate and share information.

The chain of production

The chain of production links all the production sectors by tracking the stages of an item’s
production from the extraction of raw materials all the way through to it being delivered to the
consumer. As the item makes its way through the chain of production, value is
added to the item.

Entrepreneurs
An entrepreneur is an individual who plans, organizes and manages a business, taking on
financial risks in doing so. Characteristics of entrepreneurs include: Taking substantial risks,
having a vision for the business, rewarded with profit, responsibility for
employees, failure may result in personal costs.

Challenges and opportunities

There are many potential opportunities for starting a business. They can be easily
remembered by the mnemonic GET CASH©.

Common challenges
Production problems, poor location, people management problems, external influences,
legalities, marketing problems, unstable customer base, lack of finance capital, high
production costs, cash flow problems
Growth
Capital growth is one of the rewards to entrepreneurs who own their own businesses. This is
when there is an appreciation in the value of the assets of the business (e.g. land and
buildings). Capital growth has the potential to become worth more than the value of the
owners’ salaries.

Earnings
Entrepreneurs can earn far in excess of salaries from any other occupation that they might
pursue working for someone else.

Transference and inheritance

In many societies, it is the cultural norm for entrepreneurs to pass on their businesses
(transference) to the next generation of children (inheritance) to secure the future of the
younger generation.

Challenge
Some people view the setting up and running of a business to be an enjoyable challenge.

Autonomy
There is autonomy (independence, freedom of choice and flexibility) in how a business is run
by the self-employed. This is highly attractive to individuals who prefer to decide how they
work instead of following the instructions and rules set by their employers.

Security
Being self-employed can offer more job security than working for an employer. It is
potentially easier to wealth for financial security in retirement.

Hobbies
Some people want to pursue their passion or turn their hobby into a business.
TYPES OF BUSINESS ENTITIES 1.2

Private vs. public sectors

Businesses can be categorised into private or public sector organizations depending on:
-​ who owns them.
-​ their main business objective.
Most businesses are in the private sector.

Private sector
Organizations owned and controlled by private individuals and businesses. Main aim - to
make profit.

Public sector
Organizations owned and controlled by the government. Main aim - to provide essential
goods and services.

Profit-based organizations
These are revenue generating businesses with profit objectives at the core of their
operations.Their goals are to: Make a profit, reward the owners with profits from
the business, return some of the profits back into the business for capital growth.

Sole traders
These businesses are owned by individuals who own and run a personal business. This is
the most common type of business ownership as it is relatively easy to set up. Start-up
capital is usually obtained from personal savings and borrowing. Sole traders have unlimited
liability.

Unlimited vs. limited liability

When deciding on which type of organization to set up, an entrepreneur needs to consider
whether or not to incorporate the business to benefit from limited liability.
Partnerships
Partnerships are owned by two or more persons (known as partners). At least one partner
must have unlimited liability. Start-up finance is raised mostly by personal funds which are
pooled together by the partners. A legal document known as a deed of partnership is drawn
up to formalise agreements such as how profits and losses are to be shared between
partners.

Limited liability companies

These are businesses owned by their shareholders. Shareholders have invested money to
provide capital for a company. Companies are incorporated businesses. In the eyes of the
law, the companies are treated as a legal entities separate from its owners. This means they
have limited liability.There are two types of companies – private held and publicly held
companies.

Privately held companies

A privately held company’s shares are owned by friends and/or family. These shares cannot
be traded publicly on the stock exchange. Shareholders can only sell their shares if they
have prior permission from other shareholders. Typically, privately held companies are also
family businesses.

Publicly held companies

A publicly held company can sell shares on the stock exchange. Shares are held by the
general public. No prior permission by other shareholders is required for a shareholder to
sell their shares.

The main features of the following types of for-profit social enterprises:

• Private sector companies
• Public sector companies
• Cooperatives

For-profit social enterprises

These are revenue generating enterprises with social objectives at the core of their
operations. Their aims are to: Make a surplus (i.e. earn revenue greater than costs incurred)
and use the surplus for the benefit of society.

Private sector for-profit social enterprises

These enterprises operate in a similar way to traditional for- profit businesses. They aim to
make a surplus instead of relying on donations to achieve social aims. These firms produce
goods and/or services and compete with similar businesses. They often use the triple bottom
line as an accounting framework for ethical business practices.

Public sector for-profit social enterprises

These enterprises are state-owned to operate in a commercial way. They help to raise
government revenues to provide essential services to society that may be inefficient and
undesirable if left solely to the private sector.

Cooperatives
Owners of cooperatives are called members. Members own and run cooperatives (i.e. they
are also employees of the organization).Their aim is to create value for members by
operating in a socially responsible way. All employees have a vote to contribute to decision-
making. Any profits earned are shared between their members.

The main features of the following types of non-profit social enterprises:

Non-governmental organizations (NGOS)

An NGO operates in the private sector. They provide goods and/or services normally
expected from the public sector. However, these goods/services may be underprovided by
governments.
BUSINESS OBJECTIVES 1.3

Visions and missions

Hierarchy of objectives
Objectives provide businesses with a targeted direction for the future. The nature of these
objectives are:

Vision
This is an outline of an organization’s aspirations in the distant future. Vision statements
focus on the very long-term. They are expressed as a broad view of where the company
wants to be.

Mission statements
This is a simple declaration of: The underlying purpose of an organization’s existence, its
core values, mission statements focus on the medium to long-term, a well-written mission
statement is clearly defined and realistically achievable.
Common business objectives:
• Growth
• Profit
• Protecting shareholder value
• Ethical objectives

Objectives of a business

Objectives and their importance to a firm

Objectives are the goals or targets an organization strives to achieve. They are generally
specific and quantifiable and are set in line with the organization’s mission statement.
Objectives are important for three reasons: To measure and control, to motivate and to
direct.

Growth
This is usually measured by an increase in its sales revenue or by market share. Growth is
essential for survival in order to adapt to ever-changing competitive business conditions.
Failure to grow may result in declining competitiveness and threaten the firm’s sustainability.

Profitability
Profit maximization is traditionally the main business objective of most private sector
businesses. It provides an incentive for entrepreneurs to take risks in setting up and running
a business.

Protecting shareholder value

This objective is about earning a profitable return for shareholders in a sustainable way. A
challenge for the directors of a firm is to balance short-term profits (in the form of dividends)
with an investment in the long -term value of the company.

Ethical objectives
Ethics are the moral* principles that guide decision-making and strategy. *Morals are
concerned with what is considered to be right or wrong, from the point of view of society.
Therefore, business ethics are the actions of people and organizations that are considered
to be morally correct.
Strategic and tactical objectives

Strategies
Strategies are plans of action to achieve the objectives of an organization. They are: medium
to long-term goals, expressed specifically, fulfilment of strategies will allow an organization to
reach its objectives.

Examples of strategic objectives

Market standing: This refers to the extent to which a business has presence in the industry.
Image and reputation: This stems from consumer beliefs and perceptions of a firm.
Market share: This is measured by expressing the firm’s sales revenue as a percentage of
the industry’s total sales.

Tactics
Tactics are the methods used to enact strategies of an organization. They are short-term
and frequently generated in order to enact strategies. Fulfilment of tactics will allow an
organization to perform its strategies.

Examples of tactical objectives

Survival and sales revenue maximisation

Corporate social responsibility (CSR)

Corporate social responsibility

Corporate social responsibility (CSR) is the conscientious consideration of ethical and
environmental practice related to business activity. CSR policies and practices need regular
review in order to adapt to evolving attitudes and expectations of different markets/countries.
CSR practices can provide firms with competitive advantages and long-term sustainability.
1.4 STAKEHOLDERS

What is a stakeholder?
A stakeholder is any individual, group or organization with a direct interest in and/or is
affected by the activities and performance of a business. They can be classified as internal
or external stakeholders.

Internal stakeholders

Internal stakeholders
These stakeholders are members of the organization. They have a direct interest in, and are
affected by, the activities and performance of a business. The main internal stakeholders
are: Employees, managers and directors and shareholders.

Employees
Employees are likely to have an interest in the organization they work for. They tend to strive
for improvements in: Pay and other financial benefits, working conditions, job security and
opportunities for career progression.

Managers and directors

Managers are the people who oversee the daily operations of a business. Directors are
senior executives who direct business operations on behalf of shareholders. They are
primarily interested in: Profit maximization, job security and financial benefits and long-term
financial health of the company.

Shareholders
Shareholders are a powerful stakeholder group due to their voting rights. They have two
main interests: Maximize dividends and achieve capital gain in the value of the shares.

External stakeholders

External stakeholders
These are stakeholders who do not form part of a business but have a direct interest in, and
are affected by, the activities and performance of a business. External stakeholders vary
between organizations, but some key external stakeholders are: Customers, suppliers,
pressure groups, competitors and government.

Customers
Customer care is instrumental to the survival of a business. Their interests vary
depending on the goods and/or services provided by the business. However, they are
generally interested in: Quality of goods and services and value for money.

Suppliers
Suppliers provide a business with stocks of raw materials needed for production. Their main
interests are: Clients who pay their bills on time, regular contracts with clients, good working
relationships with clients.
Financiers
These are the financial institutions and individual investors who provide sources of finance
for a firm. Financiers earn money by charging interest on the amount of money borrowed.
Their interests include: The ability of a firm to repay debts from generating sufficient profits
and establishing long-term relationships with firms in order to achieve subsequent earning.

Pressure groups
Pressure groups consist of individuals with a common interest who seek to place demands
on organizations to influence a change in their behaviour. Their interests in the business
depend on the purpose of the pressure group.

Competitors
These are rival businesses of an organization. Their interests in the business include:
Innovation that arises from rivalry, responding to competitive threats and performance
benchmarking.

Dealing with stakeholder conflict

Stakeholder conflict refers to the inability of an organization to meet all of its stakeholder
objectives simultaneously. This is due to differences in the varying needs of all its
stakeholder groups. Resolving conflict depends on three key issues: Type of organization:
Organizational aims and objectives, source and degree of power (influence) of each
stakeholder group.
GROWTH AND EVOLUTION 1.5

Economies vs. diseconomies of scale

Economies of scale
Economies of scale is when average costs of production decrease as the organization
increases the size of its operations. i.e. it is the cost-reducing benefits enjoyed by firms
engaged in large scale operations. These are economies of scale that occur inside the firm.
They are within the firm’s control.

Diseconomies of scale
Diseconomies of scale is when an organization becomes too large, causing productive
inefficiencies that result in an increase in average costs of production. i.e. it is the cost
disadvantages of growth when the business becomes too big.

Types of internal economies of scale

Technical economies
Large firms can use sophisticated capital and machinery to mass produce their goods. The
high fixed costs of their equipment and machinery are spread over the huge scale of output.
This results in the reduction of average costs of production.

Financial economies
Large firms can borrow large sums of money at lower rates of interest. This is because they
are seen as less risky to financiers. This results in the reduction of the costs of borrowing.

Managerial economies
Large firms divide managerial roles by employing specialist managers.Small firms are less
able to do so. e.g., a sole trader often has to fulfil the functions of marketer, accountant and
production manager. This results in the fall of average costs due to higher productivity.
Specialisation economies
These are the results from division of labour of the workforce. By using mass production
techniques, manufacturers benefit from having specialist labour. These specialists are
responsible for a single part of the production process. This results in the fall of average
costs due to higher productivity.

Marketing economies
Large firms benefit from selling in bulk. High costs of advertising can also be spread by large
firms through using the same marketing campaign across the world.

Purchasing economies
Large firms benefit from buying resources in bulk. Discounts are usually given to bulk
purchases. Large firms are able to purchase enormous quantities, so they get the biggests
discounts.

Risk-bearing economies
Conglomerates can spread fixed costs across a wide range of business
operations.Unfavourable trading conditions for some products can be offset by more
favourable trading conditions in their other products.

Examples of internal diseconomies of scale

Lack of control and coordination
Poorer working relationships
Lower productive efficiency from outsourcing
Bureaucracy
Complacency

Types of external economies of scale

Technological progress
Technological innovations increase productivity within an industry with significant cost
savings. E.g., the internet has revolutionised business by offering e-commerce. This offers
cost savings as the location of premises can be in more affordable areas.

Improved transportation networks

Globalized transportation networks have enabled firms to import raw materials and finished
goods that have been manufactured at much lower costs. Increased convenience from
improved logistical networks allows for faster deliveries at lower costs.

Abundance of skilled labour Regional specialisation

Certain locations may benefit from reputable education and training facilities. Local
businesses benefit from this by having a suitable pool of educated and trained labour. This
reduces costs of recruitment and training.
Regional specialisation
Certain locations or countries have established reputations for specialising in specific goods
and services. Firms in those locations benefit from having access to specialist labour,
sub-contractors and suppliers. They are also able to charge a premium price for their
products.

Examples of external diseconomies of scale

Higher rents Local market conditions for pay and financial rewards
Traffic congestion
Context specific problems

The difference between internal and external growth

Internal growth
This occurs when a business grows by using its own capabilities and resources to increase
the scale of its operations and sales revenue.

Methods of internal growth

Changing prices
Effective promotions
Product Innovation
Increased distribution
Preferential credit for customers
Capital expenditure
Staff training and development
Providing overall value for money

External growth
External growth occurs through dealing with outside organizations. Such growth usually
comes in the form of alliances or mergers with other firms or through the acquisition of other
businesses.
Reasons for businesses to grow

Measuring the size of a business

The size of a business can be measured in several ways: Market share, total sales revenue,
size of workforce, profit and capital employed.

Generic benefits of being a large business

Economies of scale, lower prices, brand recognition, brand reputation, value-added services,
greater choice and customer loyalty.

Generic benefits of being a small business

Cost control, loss of control, financial risks, government aid, local monopoly power,
personalised services, flexibility and small market size.

External growth methods

External growth methods

Mergers and acquisitions (M&As), takeovers, joint ventures (JVs), strategic alliances (SAs)
and franchising.

Mergers and acquisitions (M&As)

Mergers
Mergers take place when two firms agree to form a new company with its own legal identity.

Acquisitions
Acquisitions occur when a company buys a controlling interest in another firm with the
permission and agreement of its board of directors.
Takeover
Takeovers occur when a company purchases a controlling stake in another company without
the permission and agreement of the company or board of directors. They are also known as
hostile takeovers.

Joint ventures (JVs)

A joint venture occurs when two or more businesses split the costs, risks, control and
rewards of a business project. In doing so, the parties agree to set up a new legal entity.

Strategic alliances (SAs)

Strategic alliances occur when two or more businesses cooperate in a business venture for
mutual benefit. The firms in the SA share the costs of product development, marketing and
operations. However, SA firms remain independent organizations.

Franchising
Franchising is a form of business ownership whereby a person or business buys a license to
trade using another firm’s name, logos, brands and trademarks. The agreement is between t
the:
Franchisor: the firm selling the license
Franchisee: the entrepreneur buying the license

benefits
drawbacks
MULTINATIONAL COMPANIES (MNC’s) 1.6

Impact of MNCs on host countries

Multinational companies
A multinational company (MNC) is an organization that operates in two or more countries.
MNCs have grown considerably over time due to the benefits of being such super-sized
businesses.

Reasons why businesses become MNCs

Increased customer base, cheaper production costs (especially inexpensive labour),
economies of scale, brand development and brand value, avoid protectionist policies and
spread risks.

Host countries
A host country is any nation that allows a multinational company to set up in its country. The
impact on host countries can be beneficial or harmful.