BUSINESS IN CONTEMPORARY SOCIETY The Theory of Business How it works Why it works

What’s in this unit… The Business Cycle Sectors of Activity Types of Organisation Obtaining Finance Objectives and Entrepreneurs Stakeholders Changes in the business environment

The Business Cycle Business activity is any activity which provides us with goods and services to satisfy our wants The output of business activity is the goods and services

GOODS Tangible items DURABLE GOODS NON-DURABLE GOODS (Single-use)

SERVICES Intangible Items The service sector makes up the largest part of our modern economy in Scotland – the majority of employees work in services Insurance Tourism Education Health Call centres

FACTORS OF PRODUCTION In order to produce goods and services business need resources. These resources are inputs for business activity These resources are called the factors of production:- LAND LABOUR CAPITAL ENTERPRISE Take Note

Natural resources, such as oil, water and land itself LABOUR The people that work for the organisation including mental and physical work CAPITAL The man-made resources – factories, machinery, transport etc ENTERPRISE The human effort and will to provide the goods – the entrepreneur Take Note

The Cycle of business is… The constant production of goods and services to satisfy the needs and wants of the consumer Needs – food and shelter Wants – luxury goods

The Business Cycle is also:

Sectors of Industrial Activity There are 3 sectors of industry PRIMARY SECTOR – business involved in exploiting or extracting natural resources SECONDARY SECTOR – businesses that are involved in manufacturing and construction TERTIARY SECTOR – services (aka Service Sector) Take Note

TYPES OF BUSINESS ORGANISATION Local National International

The UK is a Mixed Economy Private Sector Public Sector That sector of the Economy run by local and central government That sector of the Economy run by individuals and groups

SECTORS All businesses can be categorised into one of 3 different sectors or TYPES PRIVATE SECTOR PUBLIC SECTOR VOLUNTARY SECTOR

THE PRIVATE SECTOR Most organisations operate in this sector Organisations owned by individuals

The Private Sector Profit making Not-for-profit Incorporated Unincorporated Voluntary Organisations Charities Youth Clubs etc Private Limited Companies PLC’s Holding Companies Soletraders Partnerships No separate legal entity Take Note Separate legal entity

SOLE TRADER – a business owned and managed by one person ADVANTAGES Very simple to set up You get to make all the decisions You get to keep the profit DISADVANTAGES Borrowing is difficult Unlimited liability Lack of assistance and advice – being on your own Take Note

Survival of a small business Entrepreneur with:- High motivation to succeed Self-discipline Organisational ability Self-belief The ability to relate to others Self-starting and initiative Leadership Adaptability As well as these:- A marketable idea A sound business plan Appropriate training Take Note

PARTNERSHIP A business owned and controlled by 2-20 people Partnership agreement required ADVANTAGES Shared responsibility Specialisation More money can be invested Take Note

DISADVANTAGES Unlimited liability Arguments Difficulties if partners wish to leave Take Note

LIMITED COMPANIES PRIVATE LIMITED COMPANY – Ltd PUBLIC LIMITED COMPANY – plc Most businesses now prefer to set up as a limited company – the costs involved have decreased and it is becoming simpler.

Details … Limited companies can be set up on the internet They have limited liability Shareholders are required by law You must register with the Registrar of Companies Complete 2 legal documents – MEMORANDUM OF ASSOCIATION AND ARTICLES OF ASSOCIATION Take Note

The difference… Ltd – can only sell shares to individuals with the full agreement of the existing shareholders Plc – can sell shares to anyone who wants to buy them on the stock exchange

ADVANTAGES Shareholders HAVE LIMITED LIABILITY Ltd does not have to disclose their annual reports Plc – easier to plan, develop and expand because people are more willing to invest Take Note

DISADVANTAGES Must be registered and may have to disclose financial information Large organisations can be difficult to manage There are costs in setting up Take Note

THE FRANCHISE:- Where one business pays for the right to run under the trading name of another. The owner of the name is called the franchiser The person who runs and owns the business is called the franchisee Take Note

ADVANTAGES Expansion of the company with little difficulty or input New business has existing name and image New business will have support of parent company Product innovation is shared Take Note

DISADVANTAGES Bad publicity in one area could affect the whole company Franchiser can tell the franchisee exactly what to do A percentage of profit has to be paid to the franchiser Take Note

MULTINATIONAL COMPANIES A company that has branches in more than one country There are many benefits to be gained:- Cheap labour and premises Increased market share Tax evasion Government grants through FDI Transportation costs are cut Trade barriers can be avoided Take Note

Disadvantages Ability to relate to the people of the country in question. Cadbury's made a blunder with its campaign for the Temptations range. "I'm too good to share. What am I? Cadbury's Temptations or Kashmir?" “It's always a risky thing to make your brand topical," he says. "Joking apart this is a war that has claimed 36,500 lives since 1989."

Can cause unemployment by putting local firms out of business May not be socially responsible in less developed countries They are so powerful that small governments cannot control them Take Note

QUESTION TIME Discuss how the following factors may influence a company’s decision to locate abroad? POLITICAL ECONOMICAL SOCIAL TECHNOLOGICAL ENVIRONMENTAL COMPETITION

SOLUTION POLITICAL ECONOMICAL Legislation Health and Safety Employment Copyright Tax Govt Grants ECONOMICAL Interest rates Exchange rates State of the economy Employment/wage rates

SOCIAL TECHNOLOGICAL Cultural trends Developing tastes Availability of technology Cost of technology Cost of materials Availability of knowledge and skills

ENVIRONMENTAL COMPETITION Availability of raw materials Legislation regarding pollution etc Lack of legislation “ “ COMPETITION New market no competition Too much competition already exists Competition moved already Reduce costs to compete

THE VOLUNTARY SECTOR Organisations that do not aim to make a profit but.. To relieve poverty Advance education Advance religion To carry out beneficial activities

Organisations that are set up and owned by the Government THE PUBLIC SECTOR Organisations that are set up and owned by the Government Take Note

Details.. Services which the private sector could not provide well or could not provide at all. Current – BBC Past – British Telecom Many Public Sector Organisations were privatised by the Thatcher Government. Take Note

AIR TRAFFIC CONTROL Most recent example of privatisation 50% share sold to private business Private business can raise capital more easily than the government Take Note

Government-funded Service Providers National Health Service Social Security Defence Services that the private sector would be unlikely to offer in a way that the government would find acceptable. Take Note

Local Authorities Also provide government funded services- Education Housing Roads and Transport Leisure Services Street Lighting and Refuse Funded by Govt Grants, council tax and from users fees Take Note

SUMMARY PRIVATE PUBLIC Sole Trader Corporations Partnership Service Providers Local Authorities PRIVATE Sole Trader Partnership Private & Public Ltd Multinational Charities Organisations

Why do different businesses have different objectives? BUSINESS OBJECTIVES Why do different businesses have different objectives?

What are business objectives? The goals of the business What the business wants to achieve They will be shaped by the various stakeholders They should be well-defined Take Note

Mission Statements Descriptions of the overall aims of the business and its short term and long term objectives Aimed at stakeholders Often focus on meeting the needs of the customer Take Note

MAIN OBJECTIVES

Survival Businesses in the early stages of trading When trading becomes difficult – War During recession During threat of takeover When procedures or policies are changing Take Note

Profit Maximisation Main aim of Private Sector Businesses Where difference between costs and revenue is the greatest Established businesses are more likely to aim for this Take Note

Growth To be more competitive To take advantage of economies of scale To secure jobs To increase profits Take Note

Image and Social Responsibility Benefit of having a good image Comply with legislation To conform to social attitudes To keep customers, employees etc happy Take Note

What determines business objectives? The size of the business The age of the business The sector of operation External influences Internal change Risk Business culture Take Note

BUSINESS STAKEHOLDERS Various groups of people who have an interest in the business..

THEY INCLUDE:- Owners or shareholders Managers Employees Customers Government Suppliers The community

Effect of Stakeholders They may be able to exert control over or influence decisions This is determined by their degree of involvement or interest Percentage of shares Bank withholding funding Employees going on strike Customers not buying the products Take Note

Examples of stakeholder influence.. COMPANY – M&S Employees – withheld information from management Management – making strategic decisions Customers – not buying the new ranges Shareholders – selling shares due to value Suppliers – suing company for breach of contract

Relationships/Interdependence Consumer and business:- Contact when goods and services are bought Used for market research Pass on information through advertising Consumers make business aware of expectations Consumers have rights of protection Businesses are dependent on consumers – activity would not take place if consumers did not buy goods. However consumers can only buy goods if they have income – this they earn by working for business

Stakeholders of Cadbury and their influence:-

EXTERNAL FACTORS

EXTERNAL INFLUENCE POLITICAL Implementation of Government policies ECONOMIC The state of the economy SOCIO-CULTURAL Changes in needs and wants of the population TECHNOLOGICAL Evolving state of information technology

COMPETITION – WHAT ARE THEY DOING? Examples Take Note POLITICAL Taxation Health and safety Legislation ECONOMIC Rising unemployment EU changes SOCIO-CULTURAL More women in work More single parents Green issues TECHNOLOGICAL Communications Information handling Manufacturing processes COMPETITION – WHAT ARE THEY DOING?

Other issues for consideration:- Sources of finance LEC Banks Local authorities European union grants

METHODS OF GROWTH Merger Activity In the 90’s the number of mergers reached record levels. This was caused by:- Growth in the UK economy Greater competition Improvements in ICT Firms adopting a ‘global’ strategy Businesses were bargain hunting

Types of Merger/Integration Backward Vertical SUPPLIER Types of Integration Lateral Similar but not competition Horizontal Same Business Forward Vertical CUSTOMER Conglomerate Different type of business Take Note

Details.. Reasons for horizontal include:- An attempt to dominate the market A desire to become stronger The need for more efficient operation Take Note

Conglomerate - Diversification Response to a change in the market An opportunity to enter new markets To spread risk Collection of knowledge and experience Take Note

NAB Comparison of business organisations Ownership and control Private Sector and Public Sector organisations

Influence of key stakeholders on different types of organisation External factors and how the affect the operation of business PEST & CO

Practice questions Compare 3 different types of business organisation in the UK in terms of ownership and control 6 All businesses have stakeholders – what influence do they have ? 4 What changes in the external environment have changed the operation of businesses in the UK? 6