1. Understanding Business 1.1 – Business Activity
Business Management H N5
Understanding Business 1.1 – Business Activity

2. What is a business?
BUSINESSES are organisations that are formed to provide:
GOODS
SERVICES
GOODS and SERVICES can be:
DURABLE
NON DURABLE
CAPITAL
CONSUMER
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3. How do businesses provide goods and services?
PRODUCTION describes the processes that a business uses to create or develop goods or services for consumption.
Production involves the following stages:
INPUT
PROCESS
OUTPUT
Production issues include:
FACTORS OF PRODUCTION
WEALTH CREATION
CHAINS OF PRODUCTION
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4. Why do businesses exist?
CONSUMERS are people who buy goods and services to satisfy:
NEEDS
(UNLIMITED) WANTS
Most economies prefer to use businesses to satisfy consumers’ CONSUMPTION for the following positive reasons.
EFFICIENCY
ECONOMIC BENEFITS
SOCIAL BENEFITS
However, some people feel that certain businesses can instead cause the following negative impacts (called EXTERNALITIES).
SOCIAL COST
OPPORTUNITY COST
Externalities mean that economies should keep an eye on the activities of the businesses in them to make sure that they have more benefits than costs for the economy and the people in it.
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5. The Business Cycle
The process of businesses using the factors of production to produce goods and services to satisfy the needs and wants of consumers is known as the BUSINESS CYCLE.
This process is a cycle because it goes on over and over again because consumers UNLIMITED wants constantly create new things that businesses can produce.
The cycle means that if a business is to succeed it MUST pay particular attention to minimising its externalities and satisfying consumers unlimited wants to stop the business failing.
Consumers have NEEDS and (NEW and UNLIMITED) WANTS.
Businesses identify consumers NEEDS and WANTS and decide to make GOODS and SERVICES to satisfy them.
THE
BUSINESS CYCLE
Wages from employment allow consumers to CONSUME goods and services.
Businesses employ the FACTORS OF PRODUCTION to PRODUCE the desired goods and services and increase WEALTH.
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6. Satisfying Consumers
To ensure that a business is able to continue to provide goods and services that will satisfy unlimited wants they must try to do the following.
FIND OUT WHAT CONSUMERS WANT
DESIGN SUITABLE PRODUCTS
PRODUCE PRODUCTS TO A PROPER STANDARD
TREAT CONSUMERS IN A POSITIVE WAY
MANAGE THE MONEY OF THE BUSINESS
The main way that many businesses try to achieve these things is by employing the following different specialised workers (known as FUNCTIONAL DEPARTMENTS or AREAS) to each take on some of these jobs.
MARKETING
OPERATIONS
HUMAN RESOURCE MANAGEMENT (HRM)
FINANCE
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7. Are all businesses the same?
Despite the fact that all businesses are set up to satisfy needs and wants by providing goods and services, there are many differences between individual UK organisations in the following areas.
SIZE
OWNERSHIP and PURPOSE
OBJECTIVES
OUTPUT
INTERNAL STRUCTURE
Many businesses record their specific activities in a document called a MISSION STATEMENT to help people understand what is does and think POSITIVELY about it.
Information about the differences between businesses is very important because they will affect the way it is MANAGED and run.
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8. Types of Business – Size
Business size can be measured in a variety of different ways, but one of the most common measurements involves the number of workers employed.
Therefore, the main types of business by size are:
SMALL BUSINESS (<50 workers)
MEDIUM BUSINESS ( workers)
LARGE BUSINESS (>250 workers)
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9. Changing Business Size
Businesses can grow in the following ways.
INTERNAL GROWTH
New premises
New staff
New equipment
New products
Management buy out
EXTERNAL GROWTH
Management buy in
Mergers
Amicable or hostile takeovers
EXTERNAL GROWTH is popular with many businesses for the following reasons.
SPEED
LOWER COSTS
DESTROY COMPETITION
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10. Directions of Growth
A DIRECTION OF GROWTH refers to the way that any growth affects the activities of a business.
The main directions of growth are as follows.
HORIZONTAL
VERTICAL - FORWARDS
VERTICAL - BACKWARDS
CONGLOMERATE
GETAWAY TRAVEL
TRAVEL AGENT
(TAKEOVER BUSINESS)
CONGLOMERATE
GROWTH
FORWARD
VERTICAL
GROWTH
JB SMITHS
CRISP RETAILER
(TAKEOVER BUSINESS)
YELLOW WONDER
CRISP MAKER
(TAKEOVER BUSINESS)
WALKIES CRISPS
CRISP MAKER
(ORIGINAL BUSINESS)
BACKWARD
VERTICAL
GROWTH
MacDONALDS FARM
POTATO FARMER
(TAKEOVER BUSINESS)
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11. Benefits from Growth
BENEFITS TO BUSINESSES from growth include the following.
HIGHER SALES AND PROFITS
INTERNAL ECONOMIES OF SCALE
EXTERNAL ECONOMIES OF SCALE
MARKET POWER
DIVERSIFICATION
RESEARCH AND DEVELOPMENT
SUPPLIER CONTROL
BENEFITS TO SOCIETY from business growth include the following.
MORE PRODUCTS
LOWER PRICES
MORE EMPLOYMENT
BETTER SERVICES
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12. Types of Business – Ownership (Economic Sector)
Businesses can be owned and run by different people for different reasons. This creates different ECONOMIC SECTORS.
The main types of business by ECONOMIC SECTOR are:
PRIVATE (private owners for profit)
Sole Trader
Partnership
PRIVATE Limited Company
PUBLIC Limited Company
Multinational
Franchise
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13. Types of Business – Ownership (Economic Sector)
The main types of business by ownership and purpose are:
PUBLIC (Government owned for service)
National Government Departments
Executive Agencies
Public Corporations
Devolved Services
Local Services
THIRD (run for benefit of specific others)
Charity
Social Enterprise
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14. Types of Business – Objectives
BUSINESSES exist in general to provide goods, services or assistance.
However, there are more specific reasons that owners use their businesses to provide these goods or services. These specific reasons for starting and running a business are known as OBJECTIVES, and the main objectives that exist can be seen below.
PROFIT
PUBLIC SERVICE
AID
ENTERPRISE
SURVIVAL
CONSUMER SERVICE MAXIMISATION
MARKET SHARE GROWTH
SATISFICING
CORPORATE SOCIAL RESPONSIBILITY
MANAGERIAL OBJECTIVES
GROWTH
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15. Types of Business –Output (Industrial Sector)
Different businesses provide different types of goods and services. This creates different INDUSTRIAL SECTORS.
The main types of business by output are:
PRIMARY SECTOR (raw materials)
Farmers
Oil Workers
SECONDARY SECTOR (produce goods)
Car Manufacturer
Furniture Maker
TERTIARY SECTOR (sales and services)
Shop
Bank
QUATERNARY SECTOR (knowledge based development)
Consultancy services
Education
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16. Types of Business –Output (Industrial Sector)
Together these sectors form a CHAIN OF PRODUCTION for the whole economy.
In the UK today, the tertiary and quaternary sectors have become very important due to :
EXPERTISE
OVERSEAS COMPETITION
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17. Internal Structure
The INTERNAL STRUCTURE of a business is concerned with both of the following.
STAFF GROUPINGS
how staff are organised to do their job
MANAGEMENT STRUCTURE
how activities are managed
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18. Staff Groupings
The term STAFF GROUPING refers to the different ways that businesses can ORGANISE THE ACTIVITIES OF STAFF.
The main staff groupings used by businesses are as follows.
FUNCTIONAL GROUPING
PRODUCT/SERVICE GROUPING
CUSTOMER GROUPING
PLACE/TERRITORY GROUPING
Effective staff groupings to organise activities is important to prevent the following problems.
POOR STAFF SKILLS AND MOTIVATION
LACK OF GUIDANCE AND LEADERSHIP
OVERWORKING OF CERTAIN INDIVIDUALS
STAFF DIVISION
DUPLICATION OF RESOURCES
POOR PERFORMANCE AND PROFITS
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19. Management Structure
The term MANAGEMENT STRUCTURE refers to the way that the overall business is MANAGED and CONTROLLED.
To create the management structure for a business, the following has to be decided.
WHICH PEOPLE WILL BE IN CHARGE
WHO WILL HAVE DECISION MAKING AUTHORITY
HOW INFORMATION IS TO BE COMMUNICATED
The answer to the above management structure decisions usually depends on the following factors.
THE BUSINESS TYPE
THE SIZE OF THE ORGANISATION
MANAGEMENT STYLES USED
THE PRODUCT MARKET
TECHNOLOGY AND ICT AVAILABLE
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20. HIERARCHICAL Management Structure
The hierarchical management structure is the traditional structure for most UK businesses, and the main FEATURES of this structure are as follows.
MANY DISTINCT LEVELS OF AUTHORITY
PYRAMID STAFFING STRUCTURE
CENTRALISED TOP DOWN DECISION MAKING
CLEARLY DEFINED (SPECIALISED) STAFF ROLES
Examples of hierarchical organisations include the Police and the Army, and the main ADVANTAGES of this structure are below.
EFFECTIVE TOP DOWN ACTIVITY COORDINATION
SKILLED DECISION MAKERS (through experience)
MANY MANAGERS ALLOW TIGHT CONTROL
MANY MOTIVATING OPPORTUNITIES FOR PROMOTION
SPECIFIC JOBS MEAN LESS STRESS FOR STAFF
The main WEAKNESSES of the hierarchical structure are as follows.
MANY LAYERS SLOW REACTION TIME/DYNAMISM
DEFINED ROLES MAY SUPPRESS TALENTS
LACK OF CONTROL MAY BE DEMOTIVATING
HIGH COSTS OF HAVING MANY MANAGERS
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21. FLAT Management Structure
The flat internal management structure is a modern structure for businesses, and the main FEATURES of this structure are as follows.
FEW DISTINCT LEVELS OF AUTHORITY
DECENTRALISED DECISION MAKING (ie shared)
LIKELY TO BE SOME DELEGATION
FLEXIBLE STAFF ROLES
Examples of flat organisations include Doctors and IT Businesses, and the main ADVANTAGES of this structure are as follows.
FEW LEVELS SPEED UP COMMUNICATION AND DECISIONS
FEWER MANAGERS LOWERS COSTS
DECENTRALISED AUTHORITY IS MOTIVATING
DECENTRALISATION MAKES MOTIVATING USE OF ALL STAFF SKILLS
The main WEAKNESSES of the flat organisational structure are as follows.
POSSIBILITY OF LACK OF STRATEGIC PERSPECTIVE
POSSIBILITY OF LACK OF COORDINATION
POSSIBILITY OF LACK OF CONTROL
DEMOTIVIATION FROM FEW OPPORTUNITIES FOR PROMOTION
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22. MATRIX Management Structure
The matrix internal management structure is a modern structure for businesses, and the main FEATURES of this structure are as follows.
STAFF ORGANISED INTO SEPARATE TEAMS BEST SUITED TO THIER SKILLS
NO DISTINCT LEVELS OF AUTHORITY
INDIVIDUAL STAFF HAVE FULL FUNCTIONAL AUTHORITY
STAFF JOIN NEW TEAMS WHEN INITIAL PROJECT ENDS
Examples of matrix organisations include Research Projects and Development Projects, and the main ADVANTAGES of this structure are as follows.
ALLOWS QUICK COMMUNICATION AND DECISION MAKING
MAXIMISES INDIVIDUAL SKILLS AND STRENGTHS
AUTHORITY AND FLEXIBILITY WILL BE MOTIVATING
SKILLS AND MOTIVATION MAXIMISE TEAM OUTPUT
VARIETY OF ACTIVITIES CAN BE UNDERTAKEN AT ONCE
The main WEAKNESSES of the matrix structure are as follows.
EACH TEAM WILL NEED EXPENSIVE SUPPORT TEAMS
TEAMS MAY NOT WORK IN A COORDINATED WAY
EXPENSIVE TO HAVE THE NECESSARY SKILLED STAFF
Team A
Team B
Team C
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23. ENTREPRENEURIAL Management Structure
The entrepreneurial management structure is a structure often used in small businesses, and the main FEATURES of this structure are as follows.
FEW LEVELS OF AUTHORITY (1?)
TOP DOWN CENTRALISED DECISION MAKING
An example of an entrepreneurial management structure organisation is a SOLE TRADER, and the main ADVANTAGES of this structure are as follows.
STRONG TOP DOWN LEADERSHIP
EFFECTIVE TOP DOWN ACTIVITY COORDINATION
EFFECTIVE AND QUICK DECISION MAKING
The main WEAKNESSES of the entrepreneurial management structure are as follows.
INFORMATION OVERLOAD MAY AFFECT EFFECTIVENESS
LACK OF CONTROL MAY BE DEMOTIVATING FOR STAFF
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24. CENTRALISED Management Structure
Centralised structures mean that only SOME (top) managers will be responsible for ALL of the decision making and control in a business.
Examples of centralised structures include HIERARCHICAL and ENTREPRENEURIAL, and the main ADVANTAGES of this structure are as follows.
STRONG TOP DOWN LEADERSHIP
EFFECTIVE TOP DOWN ACTIVITY COORDINATION
SKILLED DECISION MAKERS (through experience)
The main WEAKNESSES of the centralised structures are as follows.
LACK OF CONTROL MAY BE DEMOTIVATING
HIGH COSTS OF HAVING MANY MANAGERS
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25. DECENTRALISED Management Structure
Decentralised structures mean that decision making and control in a business is spread between DIFFERENT managers and in some cases staff.
Examples of decentralised structures include FLAT and MATRIX, and the main ADVANTAGES of this structure are as follows.
DECENTRALISED AUTHORITY IS MOTIVATING
DECENTRALISATION MAKES BEST USE OF SKILLS
The main WEAKNESSES of the decentralised structures are as follows.
POSSIBILITY OF LACK OF STRATEGIC PERSPECTIVE
POSSIBILITY OF LACK OF COORDINATION
POSSIBILITY OF LACK OF CONTROL
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26. The Changing Nature of Internal Structure
Internal structure for a business is likely to be DYNAMIC and so develop over time for the following reasons.
CHANGE SPEED OF COMMUNICATION
CHANGE SPEED OF DECISION MAKING
CHANGE AMOUNT OF MANAGEMENT CONTROL
ADJUST FOR CHANGES IN SIZE
IMPROVE STAFF MOTIVATION AND OUTPUT
IMPROVE PERFORMANCE AND PROFITS
Many modern businesses tend to find themselves changing into flatter structures through the following activities.
DOWNSIZING
DELAYERING
OUTSOURCING
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