Higher Business Management Business in Contemporary Society

What is Business Activity Everyone in our society has needs and wants n To satisfy these wants we consume goods and services n Business activity is any kind of activity which provides goods and services to satisfy consumer wants and needs n

Basic Needs Basic needs are things we need to survive n Food n Shelter n Clothing n Warmth n Drink n

Needs in Modern Society Living in a modern day society what we consider to be needs different n You may say I need a new flat screen TV, a new car n In Underdeveloped nations – they still have basic needs n

Wants In poorer countries they may still want to have the basic needs n Our wants can be distinguished as being Wants and Advanced Wants – wants may be a new X box n Advanced Wants are luxury items that we may never have or have to save up for eg a Ferrari etc n

Goods are tangible – we can see and touch them eg table, chair, washing powder n They can be split into different categories n

Goods cont Durable goods – those that last a long time eg more than a couple of years – cars, washing machines, TVs, etc n Non-Durable goods – those which last a short period of time eg washing powder, cornflakes n

Goods cont …. Consumer goods – (we are all consumers – we “consume” – use goods and services) – the goods we use everyday and want to have n Capital goods – used by organisations to produce other goods and services n

Services are intangible – can’t see or touch them and once they are used they are gone eg a holiday once the holiday is over it is just a memory n Services are provided by organisations and we pay them to provide those services either directly or indirectly n

Services …. . Consumer services – those we use and want everyday eg holidays, window cleaner, buses, taxis etc n Capital services – those used by organisations to ensure the smooth running of their company eg computer maintenance, cleaners etc n

Resources n n n Natural Resources – are extracted from nature eg trees, oil, gas etc Man-made Resources – are made by people to make other products eg machinery, computers, glass Human Resources – people and the activities they carry out within an organisation – teachers, nurses, factory workers

Factors of Production n When resources are brought together into a productive situation they become known as Factors of Production and they change their name

4 Factors of Production n n Natural resources become known as LAND – this is all natural resources that a business may use Man-Made Resources become known as CAPITAL – this is equipment, materials eg plastics that a business may use to provide a product Human Resources become known as LABOUR – all workers in an organisation ENTERPRISE – it is the initiative and the risk taking of bringing together the other factors of production to produce a product or provide a service – the entrepreneur is the risk taker

Wealth Creation n If we consider a natural resource and follow it through all the different stages of production we will see that value is added at each stage and this is what creates wealth – all the different phases of business activity create wealth.

Cycle Of Businesses Identify Wants n Produce goods and services n Consumption and Satisfaction of Wants n

Business Objectives 31/08/10 n n A definition of an organisation is “a group of people working together to achieve the same aims and objectives”. Without aims and objectives no-one would know what they should be doing or even why they may be doing something – they would be disorganised.

Maximising Profit n Businesses aiming to make as big a profit as possible – which is true in the long run eg 5 or 6 years. Some firms may not even strive for this is the short run. There are other important objectives for firms.

Satisficing n The business is not aiming to maximise profits but make enough profit to keep their shareholders happy – they are keeping some of the profits back to invest in the company in the future.

Growth n An organisation may aim to expand its business, through expansion it may hope to benefit from economies of scale and so cut its costs of production. A large organisation may also achieve some monopoly power and so be able to charge higher prices.

Survival n For some firms this is the most important goal especially small firms who are always at risk of going under. We must remember that this may be the objective for larger organisations too who are going through difficult times.

Creating a good reputation – corporate or social responsibility n Firms aim to create a good public image through eg being green, sponsoring local football teams, creating a good image, being committed to sound working practices – as consumers are very aware of how companies act a bad image may mean a loss of customers.

Maximising Sales n This objective can occur when ownership and control are separated eg when managers are not shareholders – the managers salaries will depend upon the amount of sales and so the more sales there are the higher the amount of salary they will gain – so this may well become an objective of the managers within an organisation

Managerial Objectives n Again occurs when ownership and control are separated with managers not having ownership of the firm. These objectives will vary from manager to manager depending upon what each individual manager wishes to achieve eg one manager may insist that members of staff report to him/her at all times or one manager may set aside their budget for perks of the job eg company cars or expense accounts

Provision of a service n Organisations – particularly those in the public sector may have the provision of a service as their main objective – this means they aim to provide a service in the best way possible to meet customer needs eg a hospital or school may have this as their main objective.

Raising Finance 2/09/10 Long term sources of finance – can take up to 30 years to pay back. n Increasing the owners capital – usually applies to sole traders and partnerships – the owner will use their own funds to invest in the business. n

n Business Mortgages – borrowing money for the sole purpose of buying business premises – interest is added on and a payment is made at regular intervals to pay off the mortgage, the building is collateral – so if payments are not met then the building can be repossessed – can be paid off over 25, 30 years.

n Debentures – similar to an IOU – a company can sell debenture certificates to other organisations or individuals with the promise that in eg 25 years time the money will be repaid with interest. The debenture can be sold on and whoever holds the certificate on the payment date receives the money. The org receiving the money may receive a large amount which they do not have to pay back until the due date.

n Sale and leaseback agreements – a firm may sell its assets eg computers to a leasing company and receive a certain amount of cash for them – then they lease the equipment – paying a certain sum of money each month – the contract may include upgrades, maintenance and training.

n Venture capital – this is where venture capitalists lend money to businesses which are considered to be too risky by banks but are judged to be viable by specialist organisations. The venture capitalist may ask for a share in the business in return for the investment.

Medium-term sources of finance n Bank Loans – apply to the bank for a loan – you can receive a large amount of money, which you can pay off in fixed instalments, you have to pay back plus interest, the money can be used as the business wishes, whatever the company buys belongs to them right away.

n Hire Purchase Agreements – this is money loaned to an organisation to buy a specific item eg cars, equipment. Monthly payments are made with interest added on, the agreement is for that specific item and company does not own it until the last payment is made. Hire purchase payments can be cheaper than bank loans because the item purchased is collateral and can be repossess if payments are not met.

Short-term sources of finance n Overdraft – are short term – can be expensive as you are charged interest daily, you have to arrange an overdraft – you cannot just take out more than you have in your account – this is very expensive. You will have an overdraft limit and the bank can call in your overdraft at any time.

n Debt factoring – firms can sell on any debts owed to them to debt factoring firms eg £ 10, 000 worth of debt, they sell on for £ 7, 500 – they don’t have the problem of collecting the debt (it may save them money), they have cash in hand to buy equipment etc or tide them over difficult times.

n Trade Credit – receiving a period of time between buying something from your supplier and then paying for it, sometimes longer periods of payment time can be negotiated before payment is made.

METHODS OF GROWTH 6/09/10 Integration – firms combining to become larger and more powerful. If firms are joining together on equal terms this is called a merger – HBOS (Halifax and Bank of Scotland). n If one of the organisations loses its identity then it is a takeover – eg Morrisons and Safeway. n

n There can be friendly takeovers – where the organisation being taken over agrees to be taken over eg it may be struggling to survive. Or they may be hostile takeovers where the company and its shareholders try to resist being taken over.

n Sometimes an organisation may take over another organisation purely to gain its assets – this is known as asset stripping – the company doing the taking over may sell the assets for a profit (or may keep them), they will also have got rid of a competitor and gain their market share.

Horizontal Integration n Vertical Integration – backwards, forwards n Conglomerate Integration n

n De-integration – the opposite of integration – cutting back in the areas they operate in and focus on their core competence – this is the area in which they have most skills – they can then grow and expand in this area – may also happen when a company sells off less profitable parts of the organisation.

De-merger n This involves splitting up a conglomerate – all the subsidiaries of the conglomerate become separate and new companies in their own right

Divestment n A conglomerate selling off its subsidiaries to another company – eg British Aerospace selling off Rover to BMW.

Contracting out/outsourcing n A firm may use other companies to carry out certain activities for them eg cleaning, catering etc and allows them to focus on what they do best and so grow and expand in this area.

Management buy out/buy in n Team of managers getting together to buy a stake in a company can happen when a subsidiary is being sold off – can happen when a subsidiary might be getting shut down. Buy out is a team of managers within the company buy the stake. Buy in is when a team of managers from outwith the company buy the stake.

Question Examples Compare three different types of business organisations in the UK, in terms of ownership, control and finance. You should ensure that you include at least one publicly funded and at least one privately funded organisation in your answer. n 9 marks n

n n A type of business organisation is a sole trader, a sole trader is owned by one person, the control of the business is by the sole owner, a sole trader may raise finance through the owner investing their own money in the business. Whereas the NHS is a publicly funded organisation and its ownership is the government on behalf of the public, the control is through NHS trusts, their finance comes from taxation levied by the government

n On the other hand a Public Limited Company (Plc), is owned by shareholders and is controlled by a Board of Directors who are voted on by the other shareholders, a Plc may raise finance in many ways for example a bank loan.

n n Explain the objectives each of these organisations may have. You should include at least 3 different objectives for each organisation Identify 3 stakeholders for 2 different types of organisations. For each organisation discuss the different levels of influence these stakeholders may have on the organisation.

The role of enterprise and the entrepreneur n The entrepreneur brings together and combines the other factors of production to provide goods and services. No enterprising people or enterprising activities – nothing would happen.

Entrepreneur sets things in motion by: Having and developing a business idea n Ensuring the necessary resources are available to put the idea into practice n Using their own or borrowed money to finance the idea. n People who are willing to take the risk of losing their own money and possessions. n