Bus Enterprise... Unit 1 - LO11 Higher Business Management Unit 1 Learning Outcome 1 Business in Contemporary Society

Bus Enterprise... Unit 1 - LO12 What is Business Activity? n Using “resources” to produce goods and services which people require in order to satisfy their “wants”. n Any kind of activity that results in the provision of goods and services which satisfy human “wants”.

Bus Enterprise... Unit 1 - LO13 Goods and Services Goods n Food n Clothing n Houses n Cars n TVs n Computers n Furniture n CD players Services n Hairdressers n Insurance n Gas and Electricity n Hotels n Leisure Clubs n Lawyers n Banking n Education

Bus Enterprise... Unit 1 - LO14 Durable Goods Things that will last a long time and will be used regularly. n Cars n TV n Washing Machines n Cookers n Microwave Ovens n Refrigerators

Bus Enterprise... Unit 1 - LO15 Non-Durable Goods Things that are “consumed” shortly after purchase. n Food n Drink n Clothing n Shoes n Newspapers n Magazines

Bus Enterprise... Unit 1 - LO16 Business Activity The Organisation (Internal) Inputs Land Labour Capital Enterprise Output Goods and Services Marketing People (Human Resources) Finance Production (Operations) External Influences eg Competition External Influences eg Government Policy

Bus Enterprise... Unit 1 - LO17 Factors of Production n Land - raw materials, factory site n Labour - people with required skills n Capital - finance to buy equipment, machinery, computers, etc n Enterprise - organisation of the above factors, risk-taking, ideas

Bus Enterprise... Unit 1 - LO18 Cycle of Business Businesses produce goods and services to meet customers’ wants. Customers buy goods and services to satisfy their needs and wants.. Wealth is created for companies and for their employees and shareholders. Customers have money to spend from their wages and want other goods and services..

Bus Enterprise... Unit 1 - LO19 Sectors of Industry (Business Activity) PRIMARY (Extractive) Mining Fishing Farming Oil SECONDARY (Making goods) Manufacturing Construction Durables Non-durables TERTIARY (Services) Banking Insurance Tourism Distribution

Bus Enterprise... Unit 1 - LO110 Organisations Types of Organisation Private SectorPublic SectorNon-Profit Making

Bus Enterprise... Unit 1 - LO111 Private Sector Organisations Profit-making n Sole Traders (1) n Partnerships (2 - 20) n Private Limited Companies (50) n Public Limited Companies (no limit) n Co-operatives

Bus Enterprise... Unit 1 - LO112 Sole Trader An organisation owned and controlled by a single person. Most small businesses are sole traders. Advantages: n All profits kept by owner n Owner has complete control n Easy and cheap to set up n More personal service n Own boss Disadvantages: n Owner has unlimited liability n Difficult to raise finance n Owner has none to share workload/decisions/problems with n Work may stop if owner is ill/on holiday

Bus Enterprise... Unit 1 - LO113 Partnership A Partnership is formed by 2-20 people on the basis of a partnership agreement. Advantages: n Responsibilities shared n Partners may bring in different areas of expertise. n Shared workload n Stronger position to raise finance than sole Disadvantages: n Unlimited liability (except sleeping partners) n Profits shared between partners n Conflict between partners may occur n Lack of continuity as partners change

Bus Enterprise... Unit 1 - LO114 Limited Companies A Private Limited Company (Ltd) is a company whose shares are owned privately – not available to the public on the Stock Exchange. Advantages: n Shareholders have limited liability limited liability n Control of company not lost to outsiders n More finance can be raised from shareholders and lenders n Privacy can be retained – not obliged to publish annual reports Disadvantages: n Profits shared between shareholders n Need legal process to set up n Firms governed by the Companies Act n Shares cannot be sold to public - raising finance more difficult than a plc. n Scottish-based firms must provide Companies House with copy of annual accounts.

Bus Enterprise... Unit 1 - LO115 Public Limited Company A PLC is a company whose shares are available to the public on the Stock Exchange. Minimum of 2 shareholders and £50,000 share capital. Advantages: n Shareholders have limited liability limited liability n Board of Directors control company on behalf of shareholders n Huge amounts of finance can be raised n Plcs often dominate their markets Disadvantages: n High set-up costs – detailed prospectuses produced etc n Must abide by Companies Act. n Need legal process to set up n Firms governed by the Companies Act n No control over who buys shares n Must publish annual accounts

Bus Enterprise... Unit 1 - LO116 Multi-national Company Where a PLC has manufacturing plants in more than one country it is classed as a multinational. Reasons for establishing MNcs: n To secure market share n To secure cheaper premises and labour n To avoid trade barriers n Take advantage of economies of scale n Receive tax advantages and grants from other governments Disadvantages of MNCs for host country: n Powerful – strong influence on government of host country – close operations n Exploiting labour in low wage countries n May use up non-renewable resources in host country n Profits go back to parent company n May force out local firms

Bus Enterprise... Unit 1 - LO117 Non-profit Making Organisations CHARITIES Aim: To raise awareness, to raise funds for worthy cause, to relieve poverty, fund research into various medical conditions Finance: donations from public and companies, government grants, profit from own shops, Lottery grants Control: Register of Charities regulate for Government. Board of Trustees appointed. Rely on volunteers. VOLUNTARY ORGANSATIONS Aim: To organise activities for the good of the members, eg Scouts, Golf Club Finance: Membership fees, Lottery grants, Sports Council or local authority grants Control: Elected committee from among the members/volunteers

Bus Enterprise... Unit 1 - LO118 Public Sector Organisations n Public Corporations BBC and Royal Mail n Bank of England n Local Government Services Education, Housing, Police, Social Services n Central Government Departments Treasury, Defence, Health, Employment, Social Services, Environment, Transport, etc

Bus Enterprise... Unit 1 - LO119 Local Govt Organisations Central Govt Organisations Public Corporations Control Managers and employees of the council, but are answerable to locally elected councillors Employed Civil Servants run these day to day, but accountable to Parliament Govt minister appoints a chairperson and board of directors to run company. Finance Central Govt (taxation) Business Rates Council Tax Charges for services Taxation Grants from Govt From public – licence fee (BBC) Selling service (mail) Objectives To meet local needs Provide a range of services To stay within budget To improve society Make effective use of taxes To provide a service Provide quality service Make best use of funds Serve public interest

Bus Enterprise... Unit 1 - LO120 Business Objectives n Maximising profits n Survival n Growth n Maximising sales revenue n Managerial objectives n Satisficing n Good reputation n Social Responsibility n Providing a service

Bus Enterprise... Unit 1 - LO121 Business Objectives Objectives are crucial to structured decision-making. Having objectives often motivate people in organisations. Depend on: size of organisation, state of economy, private/public/voluntary Objectives may not be achieved due to: competition, environment, law, political situation, demands of shareholders, owners or society.

Bus Enterprise... Unit 1 - LO122 Enterprise and the Entrepreneur n Having and developing a business idea n Acquiring the necessary resources n Raising the finance to acquire resources n Risking losing the money invested Anita Roddick, Richard Branson, James Dyson, Martha Lane Fox

Bus Enterprise... Unit 1 - LO123 Enterprise: Franchising A franchise is a business agreement that allows one business (the franchisee) to use another business’s name and sell the other business’s products or services, eg the Body Shop, MacDonalds, Apollo Blinds, Prontoprint The franchisee pays the franchiser a percentage of annual turnover or a set royalty each year. The franchisee and franchiser can set up in any type of business, ie a sole trader, partnership etc.`

Bus Enterprise... Unit 1 - LO124 Franchising Advantages to Franchiser n Quick way to enter new geographical markets n Increase market share without heavy investment n Provides reliable revenue from franchisee n Risks shared with franchisee n Franchiser’s name becomes more well known as business expands Disadvantages to Franchiser: n Receives only a share of profits n Profits dependent on ability of franchisees n Franchisers reliant on franchisees to maintain image and ‘good name’ of business.

Bus Enterprise... Unit 1 - LO125 Franchising Advantages to Franchisee n Benefit from national advertising by franchiser n Risk of failure reduced as franchiser already established n Benefit from back up service, eg training and administration n All franchisees benefit from ideas generated by each of them Disadvantages to Franchisee: n Percentage of profits paid to franchiser n Strict rules imposed – products, price, store layout etc n Franchiser might not renew franchise after a time n Costly to purchase a successful franchise n Franchisee’s reputation and profitability depend partly on performance of franchiser and other franchisees

Bus Enterprise... Unit 1 - LO126 Stakeholders Internal n Shareholders/ Owners n Managers n Employees External n Suppliers n Customers n Banks/lenders n Society/Local Community n National Government n Local Government n Taxpayers n Donors (Charities)

Bus Enterprise... Unit 1 - LO127 Their interestTheir influence Shareholders Want firm to be profitable to provide good dividends and improved share value. Voting in a particular way at the AGM – voting for particular directors, approving dividend payments. Managers Receive salaries and bonuses, so want successful business. May want status, job security, recognition. Make important decisions re hiring staff, product mix. Employees Want good salaries, job satisfaction, good working conditions and job security Exert influence by standard of their work and industrial relations. Contributions through quality circles, works councils etc. INTERNAL STAKEHOLDERS

Bus Enterprise... Unit 1 - LO128 External Stakeholders’ Interests n Suppliers - regular orders, prompt payment n Customers - low prices, high quality, good service n Banks - ability to make payments for loans on time n Government - payment of taxes, compliance with laws n Community - corporate responsibility

Bus Enterprise... Unit 1 - LO129 External Stakeholders’ Influence n Suppliers – change period of credit, level of discounts, change prices n Customers - taking their business elsewhere. Demand changes, environmentally friendly policy n Banks – granting/withholding of loans, setting rate of interest, requesting repayment n Government - legislation, equal pay, minimum wage, etc with which the business must comply n Community – petition companies or making complaint to local authority.

Bus Enterprise... Unit 1 - LO130 Sources of Finance Long-term n Owner’s savings n Share issue n Mortgages n Debentures n Sale and Leaseback n Venture Capital Medium-term n Bank Loans n Hire Purchase n Leasing Short-term n Overdrafts n Factoring n Trade Credit n Retained profits n Grant – Govt, EU n Prince’s Trust

Bus Enterprise... Unit 1 - LO131 Government Help for Businesses n Scottish Enterprise and Local Enterprise Companies (LECs) n Careers Scotland n Business Gateway n Local Authorities - Business Start-up Scheme n Govt’s Loan Guarantee Scheme n Govt assistance to exporting firms n Dept of Trade and Industry - advice, Trade Fairs n EU - Regional Development Fund, European Social Fund

Bus Enterprise... Unit 1 - LO132 Other Sources of Help n The Prince’s Youth Trust - help for young people to set up in business n Trade Associations - ‘Association of Small Businesses’, ‘Scottish Motor Trade Association’, ‘ABTA’, etc n Local Chambers of Commerce n Banks n Inland Revenue n Lawyers and accountants

Bus Enterprise... Unit 1 - LO133 Internal Growth of business n Open new sales outlets, eg Dobbies’ 10 th garden centre n Increase staffing n Develop new product – Mars introducing Mars Ice Cream bars

Bus Enterprise... Unit 1 - LO134 Methods of External Growth n Integration - 2 firms combining to become bigger n Merger - integration on equal terms, eg Cadburys and Schweppes n Take-over - one firm’s identity is lost in the take-over. Can be ‘friendly or hostile’. Morrisons took aver Safeway in 2003.

Bus Enterprise... Unit 1 - LO135 Integration n Horizontal n Vertical – Forwards vertical Backward vertical n Conglomerate/Diversifying

Bus Enterprise... Unit 1 - LO136 Integration Horizontal - firms at the same stage of production, eg 2 florists merging, Halifax and Bank of Scotland, Morrisons and Safeway u Goods and services become cheaper – bulk buying and lower admin costs (economies of scale) u Eliminates competition u Increases market share u Cheaper than growing internally

Bus Enterprise... Unit 1 - LO137 Integration Vertical – Forwards vertical – takes over another firm at a later stage of production, eg Scottish & Newcastle u Aim to control distribution outlets for product. Backward vertical – takes over another firm at an earlier stage of production, eg sugar manufacturer merges with sugar plantation u Ensures availability and quality of its input

Bus Enterprise... Unit 1 - LO138 Integration Conglomerate/Diversifying - firms operating in completely different markets merge, eg airline and chain of record shops, Royal Bank of Scotland and Marriot Hotels  Spreads risk – failure in one area can be compensated for by success in another  New opportunities if fear of loss of market share or competition  Enables a firm to overcome seasonal fluctuations in its markets

Bus Enterprise... Unit 1 - LO139 Reasons for External Growth - summary n Eliminate competition/increase market share n Achieving greater economies of scale n Security from hostile take-over - more assets n Cutting out “middlemen” n Securing sources of raw materials n Controlling distribution of products n Spreading risks - ‘not having all eggs in one basket’ n Smoothing seasonal fluctuations in sales n Increase profits n To become market leader and dominate the market

Bus Enterprise... Unit 1 - LO140 De-integration n De-integration - conglomerate selling off firms to concentrate on “core” business n De-merger - subsidiary companies splitting away from the parent company and operating on their own n Divestment - selling off companies n Contracting out/out-sourcing - getting other companies to do work on your behalf n Management buy-out/buy-in - usually a struggling company sold to a management team

Bus Enterprise... Unit 1 - LO141 Business as a “System” n Inputs - raw materials and other resources n Processes - transformation into goods n Outputs - the finished product/service to be marketed n Feedback - the reaction of the market A system is made up of 4 inter-dependent parts:- Any system is affected by the environment in which it operates

Bus Enterprise... Unit 1 - LO142 Internal Pressures to Change n New personnel, especially management n New technology (the internet) n Change in financial position n Results of market research

Bus Enterprise... Unit 1 - LO143 External Pressures to Change Political/legal (legislation, planning, devolved Parliament, etc) Economic (interest rates, foreign exchange rates, the Euro, etc) Social Demographic changes, eg ageing population Socio-cultural changes, eg smaller families (the ‘PESTEC’ analysis)

Bus Enterprise... Unit 1 - LO144 External Pressures to Change EnvironmentalPressure groups influenced business and Govt, businesses affected by pollution, floods etc, Competitive Most businesses face domestic and foreign competition that has an influence on the way they operate. (the ‘PESTEC’ analysis) Technological( , internet, software, product design, robotics, EPOS)

Bus Enterprise... Unit 1 - LO145 Changing Business Environment n Increasing significance of multinationals n Publicly-funded organisations becoming more business orientated n Importance of small firms – <250 staff n Downsizing n Importance and growth of franchising