Business Management H N5. Understanding Business. 1.1 Business Activity. Learner s Notes

Transcription

1 Business Management Understanding Business 1.1 Business Activity H N5 Learner s Ntes

2 Intrductin In this tpic yu will find ut abut the fllwing things. Rle f business in sciety SATISFACTION OF HUMAN NEEDS AND WANTS PRODUCTION FACTORS OF PRODUCTION CONSUMPTION IMPACT OF BUSINESS H THE BUSINESS CYCLE CUSTOMER SATISFACTION N5 Business differences BUSINESS SIZE Small, Medium and Large Methds f Grwth (internal and external) H Directin f Grwth (hrizntal, vertical and cnglmerate) H SECTORS OF THE ECONOMY PRIVATE Sle Trader N5 Partnership N5 Private Limited Cmpany Public Limited Cmpany H Multinatinal H Franchise H PUBLIC Natinal Gvernment Organisatins H Devlved Gvernment Organisatins N5 Lcal Gvernment Organisatins N5 THIRD Charity Scial Enterprise BEST Ltd Licensed t: Turnbull High Schl 1

3 Business differences BUSINESS OBJECTIVES Prfit Maximisatin Public Service Scial Respnsibility Enterprise Survival Maximise Custmer Service Increase Market Share Crprate Scial Respnsibility H Satisficing H Managerial Objectives H Grwth H SECTORS OF INDUSTRY Primary Secndary Tertiary Quaternary H INTERNAL STRUCTURE H Staff Grupings (functin, prduct, custmer, territry) H Management Structures (tall, flat, matrix, entrepreneurial) H Structure Changes (delayering, dwnsizing, utsurcing) H N5 N5 ONLY H HIGHER ONLY BEST Ltd Licensed t: Turnbull High Schl 2

4 WHAT DO BUSINESSES DO? When a grup f peple wrk tgether t try and achieve smething that they all want, then they have frmed an ORGANISATION. A BUSINESS is an rganisatin that is frmed t prvide GOODS and SERVICES. An explanatin f the things that businesses prvide can be seen belw. Item Descriptin Examples GOODS These are physically TANGIBLE things. This means that they can be seen and tuched. Car Newspaper Washing Machine SERVICES These are things that are dne fr thers. Services are INTANGIBLE. This means that they CANNOT be seen and tuched after they are prvided. Hairdresser Cleaner Taxi Driver Bank 3 BEST Ltd Licensed t: Turnbull High Schl

5 WHAT TYPES OF GOODS AND SERVICES DO BUSINESSES PROVIDE? There are different TYPES f gds that businesses can prvide. The main nes can be seen belw. Type Descriptin Examples DURABLE These gds and services last fr a lng perid f time. Car Cmputer Fridge Washing Machine NON-DURABLE These gds and services DO NOT last fr a lng perid f time. Newspaper Cinema Ticket Meal CONSUMER These gds and services are cnsumed by individual private PEOPLE t satisfy their needs and wants. Fd CD s Games Clthing CAPITAL These gds and services are cnsumed by BUSINESSES s that they can prvide ther gds and services. Rbtics Tls Vehicles Almst all services are NON DURABLE, and sme gds and services can be several types all at nce. Fr example, a van sld t a business fr making deliveries will be a DURABLE CAPITAL GOOD. A fridge bught fr smene s hme is a CONSUMER gd while the same fridge bught fr a lcal ice cream shp wuld be a CAPITAL gd. 4 BEST Ltd Licensed t: Turnbull High Schl

6 HOW DO BUSINESSES PROVIDE GOODS AND SERVICES? Businesses have t wrk t prvide gds and services thrugh a prcess knwn as PRODUCTION. All PRODUCTION PROCESSES are made up f the fllwing 3 linked stages. STAGE 1 INPUT STAGE 2 PROCESS STAGE 3 OUTPUT Further infrmatin abut what happens in each f these stages can be seen ver the next few pages. BEST Ltd Licensed t: Turnbull High Schl 5

7 1 INPUT STAGE At the input stage, a business will have t gather tgether the fllwing items that it will need t make a gd r service. a RAW MATERIALS RAW MATERIALS are the parts that have t be put tgether t make the gd r service. Fr example, a business making cars will need t get the bdy, wheels, engine, etc befre they can make a car. b FACTORS OF PRODUCTION FACTORS OF PRODUCTION are RESOURCES (useful things) that are used t put the raw materials tgether in rder t make a gd r service. The 4 factrs f prductin available fr use and hw they are paid fr can be seen belw. Factr f Prductin CAPITAL Descriptin Capital describes MONEY and all f the EQUIPMENT it can be used t buy. Capital has t be paid fr thrugh INTEREST (extra mney paid frm brrwing r lst thrugh spending). Capital is a MAN MADE resurce. ENTERPRISE Enterprise cvers all f the IDEAS fr gds and services a business has and the ORGANISATION OF RESOURCES undertaken by it in rder t make these ideas turn int real gds and services. Enterprise earns PROFITS. LAND Land is the Earth and all f the NATURAL RESOURCES in it r n it (eg il, wd, animals, crps, etc). Land is paid fr thrugh RENT (mney paid fr the use f the land). LABOUR Labur is all f the wrk that is dne by PEOPLE (aka HUMAN RESOURCES). Labur is paid fr by WAGES. Businesses must decide carefully abut which factrs f prductin they will use because they are SCARCE. This means that they are nly available in LIMITED amunts and s shuld nt be wasted. Fr example, a business making cars might decide t pay fr wrkers (labur), capital (equipment) and managers t design the car and supervise the prductin (enterprise) t allw them t make a car. BEST Ltd Licensed t: Turnbull High Schl 6

8 2 PROCESS STAGE At the prcess stage, a business transfrms the raw materials int the gd r service that it is prducing. It des this thrugh the use f the factrs f prductin. Fr example, a business making cars will use capital and labur t build the bdy f the car, add the engine and mechanics, add the seats and windws, etc. The prcess stage is the mst imprtant stage f prductin because it creates WEALTH. Wealth represents the value f gds r services available. Prductin creates wealth because the TOTAL VALUE f the gd r service prduced shuld be mre than the cst f the raw materials and factrs f prductin used t make it. This increase in wealth frm prductin is knwn as VALUE ADDED, and is can be calculated as fllws. VALUE ADDED = OUTPUT VALUE INPUT VALUE Fr example, when a chip shp buys 1 f ptates and prduces 5 f chips, the value added (and increase in verall wealth) frm prductin is 4 ( 5 1). Prductin shuld always aim t create wealth because if it desn t then it has been a waste f the mney spent n raw materials and factrs f prductin it used. BEST Ltd Licensed t: Turnbull High Schl 7

9 3 OUTPUT STAGE At the utput stage, a business will have created the final gd r service that it wants t prvide. Fr example, a business making cars will nw have a finished wrking car. Fr many gds and services, the utput stage fr ne business is the start f the input stage fr anther. This is because prductin and wealth creatin fr these gds and services has t be repeated in several different linked businesses befre they are finally ready. This is because mst businesses d nt have the skills r materials t carry ut every prcess required t cmpletely create a gd r service. When this is the case, all f the businesses whse prductin prcesses are "linked tgether t make ne gd r service are said t frm a PRODUCTION CHAIN. An example f the prductin chain needed just t make bread can be seen belw. Chain link Inputs Prcess Output FARMER SEEDS FARMING WHEAT MILLER WHEAT MILLING FLOUR BAKER FLOUR BAKING BREAD. BEST Ltd Licensed t: Turnbull High Schl 8

10 WHY DO WE USE BUSINESSES TO PROVIDE GOODS AND SERVICES? In every ECONOMY (an area where gds and services are prduced and used) there are CONSUMERS. These are peple wh buy gds and services t satisfy the fllwing. Item Descriptin Examples NEEDS These are BASIC gds and services that we must have if we are ging t be able t SURVIVE. FOOD CLOTHING SHELTER WANTS These are gds and services that we DO NOT need t have t survive they are nly wanted by us because they wuld make ur lives easier r prvide pleasure. They are smetimes called LUXURIES. Cnsumers wants are usually thught t be UNLIMITED because when smene satisfies ne want, then they will start t think f anther ne which they believe will make them even happier. Hlidays Jewellery Fancy Clthes Car This prcess f cnsumers creating r buying and then using up gds and services t satisfy their needs and wants is called CONSUMPTION. It is pssible that cnsumers culd prduce all f the gds and services that they need fr themselves. In sme develping ecnmies this has t be the case because cnsumers d nt have any ther chice. This is because there may be nly a limited amunt f gds and services available and/r they d nt have the mney t make purchases. 9 BEST Ltd Licensed t: Turnbull High Schl

11 Hwever, mst ecnmies usually prefer t satisfy cnsumers needs and wants thugh having businesses prvide gds and services fr the fllwing psitive reasns. Benefit EFFICIENCY Descriptin Almst every business SPECIALISES in prviding certain gds and services. This means that the business des what it is best at. Specialisatin means that businesses can be EFFICIENT. This means that they use minimum inputs fr maximum utputs and s can prduce their gds and services quickly, with little wastage and t a gd standard because practice makes perfect fr them! Fr the ecnmy this EFFICIENCY means that mre gds and services can be made with the limited factrs f prductin it has available. ECONOMIC BENEFITS Ecnmic benefits are MONEY based advantages that ccur fr a business itself r the peple living and wrking arund it. They happen due t the efficiency frm using businesses t prduce gds and services instead f self-sufficient individuals. Examples f ecnmic benefits that can arise include: MORE EMPLOYMENT MORE WAGES FOR STAFF TO USE TO BUY GOODS AND SERVICES MORE WEALTH FOR BUSINESS OWNERS MORE TAXES FOR GOVERNMENT TO PROVIDE SERVICES WITH MORE GOODS AND SERVICES TO CHOOSE FROM SOCIAL BENEFITS Scial benefits are things that IMPROVE the QUALITY OF LIFE fr the peple living and wrking arund a business because it is prducing there. Examples f scial benefits include: INCREASED SATISFACTION OF NEEDS/WANTS MORE LEISURE TIME BECAUSE WE DON T HAVE TO DO EVERYTHING FOR OURSELVES POSITIVE ACTION TO IMPROVE WORKING CONDITIONS (eg Fairtrade businesses) BETTER FACILITIES (eg schls, rads t supprt businesses) 10 BEST Ltd Licensed t: Turnbull High Schl

12 Even thugh mst ecnmies agree that the use f businesses can result in the abve benefits, sme peple feel that certain businesses can instead cause the fllwing negative impacts (knwn as EXTERNALITIES). Cst SOCIAL COST Descriptin Scial csts are things that WORSEN the QUALITY OF LIFE fr the peple living and wrking arund a business because it is prducing there. Examples f scial csts include: NOISE POLLUTION WATER AND AIR POLLUTION TRAFFIC CONGESTION OVERCROWDING DUE TO LOTS OF PEOPLE MOVING NEAR THE BUSINESS OPPORTUNITY COST OPPORTUNITY COST exists when yu have t make a chice. It measures the amunt f extra benefit that yu lse ut n when yu sacrifice ne thing in rder t get smething that yu desire mre. Fr example, imagine yu were thirsty and nly had enugh mney fr a bttle f water r a cartn f fruit juice. Yu decide t buy the water rather than the fruit juice. This decisin has an pprtunity cst because chsing nly the water means yu have lst ut n the extra benefit frm getting the fruit juice t. This idea means that businesses that make bad prductin decisins will create a negative pprtunity cst fr sciety. This is because they will have wasted valuable limited resurces and s sciety will have lst the benefit these resurces culd have prvided if they had been used in a better way. These externalities mean that ecnmies shuld keep an eye n the activities f the businesses within them t make sure that they have mre benefits than csts fr the ecnmy and the peple in it. 11 BEST Ltd Licensed t: Turnbull High Schl

13 THE BUSINESS CYCLE The abve prcess f businesses using the factrs f prductin t prduce gds and services that will satisfy the needs and wants f cnsumers is knwn as the BUSINESS CYCLE. The business cycle can be shwn in the fllwing diagram. Cnsumers have NEEDS and (NEW and UNLIMITED) WANTS. Businesses identify cnsumers NEEDS and WANTS and decide t make GOODS and SERVICES t satisfy them. THE BUSINESS CYCLE Wages frm emplyment allw cnsumers t CONSUME gds and services. Businesses emply the FACTORS OF PRODUCTION t PRODUCE the desired gds and services and increase WEALTH. This prcess is knwn as the business cycle because it ges n ver and ver again. This is because by the time businesses have prvided the riginal gds and services that cnsumers needed and wanted, cnsumers UNLIMITED wants will have created new things that businesses culd nw begin t prduce. This cycle means that if a business is t succeed it MUST pay particular attentin t minimising its externalities and satisfying cnsumers unlimited wants. This is because if they dn t d this then the business will fail because the cycle will be brken as cnsumers begin t use different businesses which d satisfy their particular wants. BEST Ltd Licensed t: Turnbull High Schl 12

14 SATISFYING CONSUMERS T ensure that a business is able t successfully cntinue t satisfy cnsumers unlimited wants they must try t d the fllwing. FIND OUT WHAT CONSUMERS WANT DESIGN GOODS AND SERVICES THAT WILL PROPERLY MEET CONSUMERS NEEDS AND WANTS PRODUCE THE GOODS AND SERVICES DESIRED BY CONSUMERS TO A PROPER STANDARD TREAT CONSUMERS IN A POSITIVE WAY WHEN THEY ARE BUYING FROM THE BUSINESS MANAGE THE MONEY OF THE BUSINESS SO THAT IT CAN CONTINUE TO SATISFY CONSUMERS The main way that many businesses try t achieve these things is by emplying different teams f specialised wrkers (knwn as FUNCTIONAL DEPARTMENTS r AREAS) t each take n sme f these jbs. Hwever, in sme small and medium sized businesses, there are nt always specific departments fr each f these jbs and s it can smetimes be certain individuals wh becme respnsible fr them. The main functinal activities that are undertaken in mst businesses are as fllws. 1 MARKETING The marketing functin is respnsible fr finding ut what cnsumers want and then designing gds and services that will prperly meet their needs and wants. This will be achieved thrugh activities such as: Carrying ut MARKET RESEARCH (inf n custmers and cmpetitrs) Designing apprpriate features fr the PRODUCT t be sld Deciding n a PRICE that cnsumers will pay Deciding the best PLACE t sell t prduct t cnsumers Deciding hw t PROMOTE the prduct t let cnsumers knw abut it 13 BEST Ltd Licensed t: Turnbull High Schl

15 2 OPERATIONS The peratins functin is respnsible fr prducing the prduct that marketing has designed t a prper standard fr cnsumers. This will be achieved thrugh activities such as: Organising QUALITY raw materials and factrs f prductin Cmpleting the PROCESS stage f prductin t high standards Making enugh finished gds and services t meet cnsumers DEMAND Getting finished gds and services DELIVERED t cnsumers n time 3 FINANCE The finance functin is respnsible fr prviding and managing the mney that marketing, peratins and HRM need fr their wrk. This will ensure that nt t much is spent and s the business can affrd pay its bills and s cntinue prviding fr cnsumers. This will be achieved thrugh activities such as: RECORDING FINANCIAL (mney) TRANSACTIONS PAYING BILLS and WAGES Creating dcuments t MANAGE CASHFLOW (mney in and ut) Creating dcuments t TRACK PROFITS Creating dcuments t TRACK BUSINESS VALUE 14 BEST Ltd Licensed t: Turnbull High Schl

16 4 HUMAN RESOURCE MANAGEMENT (HRM) The HRM functin is respnsible fr making sure that staff effectively help peratins prduce gds and services t a prper standard fr cnsumers. They als have t ensure that members f staff treat cnsumers in a psitive way when they are buying frm the business. This will be achieved thrugh activities such as: RECRUITING AND SELECTING well qualified staff MONITORING and SUPPORTING the wrk f staff Prviding staff with TRAINING t imprve their peratins skills DISCIPLINING staff wh cause prblems fr ther wrker and cnsumers Prviding staff with CUSTOMER SERVICES TRAINING Checking staff fllw CUSTOMER SERVICES POLICY prperly Cmmn examples f activities which will make up CUSTOMER SERVICE training fr staff can be seen belw. Activities SERVICE STANDARDS Descriptin Businesses will want t prvide their staff with training in the fllwing areas t ensure that they prvide high standards f custmer service. EXPECTED STANDARDS OF POLITENESS WHEN DEALING WITH CUSTOMERS MINIMISING THE TIME TAKEN TO BE SERVED PRODUCT KNOWLEDGE TO BE ABLE TO ADVISE CONSUMERS These standards f custmer service may be shared with cnsumers t make them cnfident that the business will treat them prperly. COMPLAINTS PROCESS Businesses may have a publicised prcedure r staff fr trying t deal with cmplaints s any that any dissatisfied cnsumers can be helped and encuraged t use the business again despite their disappintment with smething in the past. PRODUCT SUPPORT Businesses will may prvide assistance t custmers t help them understand hw t use and get the mst use ut f their prducts after they have bught them. Examples f this prduct supprt will include the fllwing. CUSTOMER SUPPORT HELPLINES WARRANTIES AND GUARANTEES 15 BEST Ltd Licensed t: Turnbull High Schl

17 Businesses spend s much time, mney and effrt trying t prvide high levels f cnsumer satisfactin thrugh their functinal areas because this can bring them the fllwing BENEFITS. Satisfied custmers will cntinue t use the business this is knwn as CUSTOMER LOYALTY. This is gd because it means cntinued sales in the future and s prfits that will allw the business t cntinue. Satisfied custmers may recmmend a business t thers this can allw the business t INCREASE SALES. This is gd because it means mre prfits and less chance f running ut f mney and failing. Satisfied custmers will mean fewer cmplaints. This can mean staff will be happier at wrk and s MOTIVATED t d mre which can increase prfits. Mtivated and happy staff will be less likely t leave this means that a business can avid the lst wrk and the cst f finding new wrkers. Having a mtivated and happy place t wrk can attract high quality new staff t the business. They may have new ideas which can further imprve business prfits. Businesses fcus n prviding high standards f cnsumer satisfactin nt nly t get the abve benefits but t als prevent the fllwing NEGATIVE CONSEQUENCES frm pr custmer service. Unhappy custmers will nt use the business again this means DECREASED SALES. This is bad because it means less prfits and mre chance f running ut f mney and failing. Unhappy custmers may tell ther peple nt t use the business this culd mean REPUTATION DAMAGE. This is bad because it means less prfits and mre chance f failing. Unhappy custmers will mean many cmplaints. This can mean staff will be unhappy at wrk and s LESS MOTIVATED which can decrease prfits. Demtivated and unhappy staff are MORE likely t leave this means that a business can will have t spend time and mney finding new wrkers. Having a mtivated and happy place t wrk can attract high quality new staff t the business. They may have new ideas which can further imprve business prfits. There will be difficulty in recruiting and retaining new quality staff because f the pr reputatin f the rganisatin. BEST Ltd Licensed t: Turnbull High Schl 16

18 ARE ALL BUSINESSES THE SAME? Althugh all businesses are invlved in satisfying cnsumers needs and wants thrugh the business cycle, there are different types f business. The main factrs which make businesses different frm each ther can be seen belw. BUSINESS SIZE ECONOMIC SECTOR (business wnership and purpse) OBJECTIVES SECTOR OF INDUSTRY (business utput) INTERNAL STRUCTURE Many businesses frmally recrd infrmatin abut their specific differences in a dcument called a MISSION STATEMENT. This is t make sure that all peple invlved with the business understand hw it is rganised and are encuraged t think POSITIVELY abut it because they knw hw it is likely t affect them. Infrmatin abut the differences between businesses is very imprtant because they will affect the way it is MANAGED and run. Fr example, a business set up t make mney fr the wner wuld nt usually decide t prvide prducts fr free because this wuld lse mney instead f making mre. 17 BEST Ltd Licensed t: Turnbull High Schl

19 BUSINESS DIFFERENCES SIZE The term BUSINESS SIZE usually refers t hw big the peratins f a business are. A cmmn way f measuring the size f a business is thrugh the number f staff it emplys. Hwever, ther methds that are smetimes used include the fllwing. NUMBER OF SALES AMOUNT OF MONEY MADE AMOUNT OF EQUIPMENT BOUGHT/USED AMOUNT OF MONEY IBNVESTED IN THE BUSINESS (eg shares) The 3 main size categrisatins f business based n staffing can be seen belw. Size SMALL Descriptin These businesses are made up f between 1 and 50 wrkers. MEDIUM These businesses emply between 50 and 250 wrkers. LARGE These businesses emply mre than 250 wrkers. Size is an imprtant difference between businesses as it affects the management f staff and activities. BEST Ltd Licensed t: Turnbull High Schl 18

20 Althugh mst businesses are small when they start up, they d tend t becme larger ver time if they are successful. The main METHODS OF GROWTH that small businesses use t d this can be seen belw. Methd f Grwth INTERNAL Descriptin Internal grwth (aka ORGANIC GROWTH) invlves a business becming bigger thrugh cntinued investment in its OWN RESOURCES AND ACTIVITIES. Examples f activities that can result in internal grwth can be seen belw. BUILDING NEW PREMISES (increases utput and sales) EMPLOYING NEW STAFF (increases the scale f the wrkfrce) PURCHASING NEW EQUIPMENT (increases utput and sales) SELLING NEW PRODUCTS (increases the scale f utput and sales) MANAGEMENT BUY OUT (current managers buy cntrl f the business frm the wners as they believe they can imprve r expand existing business activities) EXTERNAL External grwth invlves a business expanding by JOINING TOGETHER WITH ANOTHER BUSINESS in the fllwing ways. MERGER A merger (r AMALGAMATION) invlves businesses agreeing t frm ne large cmbined business that they can wrk tgether in as a partnership. Mergers can ften be recgnised frm the merged business name using elements f the rginal separate businesses. Fr example, Halifax and Bank f Sctland merged t becme HBOS. TAKEOVER A takever invlves ne business buying cntrl f anther s that it has the nly say in the new larger business. Takevers can be AMICABLE (where the business being bught ver is happy abut it and allws the takever) r HOSTILE (where the business being bught ver is NOT happy abut it and tries t persuade the wners nt t sell in rder t prevent the takever). Fr example, Pixar Studis was amicably taken ver by Disney Studis. MANAGEMENT BUY IN A management buy invlves an external grup f managers buying cntrl f a business frm its current wners and replacing the current management team in charge f the business. BEST Ltd Licensed t: Turnbull High Schl 19

21 Businesses have t lk at which methd f grwth best suits their particular situatin. Fr example, a business may have t grw internally as there are n ther businesses suitable fr them t take ver r merge with. Hwever, many UK businesses are keen n using EXTERNAL methds f grwth fr the fllwing reasns. Businesses may be able t experience the benefits f grwth MORE QUICKLY thrugh external grwth. This can be the case because the legalities f a takever r merger can ften be cmpleted in less time than it wuld take t grw internally by waiting n premises t be built, staff t be emplyed, new prducts develped, etc. Businesses may be able t experience the benefits f grwth MORE CHEAPLY thrugh external grwth. This can be the case because it may be pssible t takever a business in truble cheaply and fr less than the internal csts f building equivalent premises, develping new prducts, etc. Businesses may be able t use mergers and takevers t ACCESS BENEFICIAL AND/OR UNIQUE ASSETS. This can be the case because external grwth can give access t BRAND NAMES, COPYRIGHTS and PATENTS that wuld therwise be legally prtected and unusable by ther businesses. Businesses may be able t use mergers and takevers t DESTROY COMPETITION IN THE MARKET. This can mean mre custmers and increasing returns fr a business. Businesses may be able t use mergers and takevers t ASSET STRIP. This means that a business makes extra mney by selling the ASSETS (valuable things like premises, etc) f a takever target fr mre than they bught them fr. This is usually nly pssible when the business that is taken ver is in truble and s is cheap t buy. BEST Ltd Licensed t: Turnbull High Schl 20

22 When a business grws internally r externally, the activities f the business as well as its sheer size will be affected. The ways that grwth affects the activities f a business is knwn as a DIRECTION OF GROWTH r INTEGRATION. The main directins f grwth can be seen belw. Directin f Grwth HORIZONTAL INTEGRATION Descriptin Hrizntal integratin (grwth) invlves a business grwing by investing in smething that is the SAME as what it already des. Fr example ne newspaper cmpany taking ver a rival newspaper (EXTERNAL) r a newspaper cmpany launching its wn new paper (INTERNAL). VERTICAL INTEGRATION Vertical integratin invlves a business grwing by investing in smething that is NOT THE SAME as what it already des, but is RELATED t it. Vertical grwth can take place in the fllwing 2 directins. FORWARD VERTICAL (grwth twards the buyer, away frm supplier) BACKWARD VERTICAL (grwth away frm buyer, twards supplier) Fr example, a newspaper cmpany buys a chain f newsagents and s gets clser t the buyer (FORWARD vertical) r a newspaper cmpany buys the cmpany that makes and supplies its paper (BACKWARD vertical). CONGLOMERATE INTEGRATION Cnglmerate integratin (grwth) invlves a business grwing by investing in smething that is UNRELATED t anything it already des. Fr example, a newspaper cmpany buying ver a clthes manufacturer. BEST Ltd Licensed t: Turnbull High Schl 21

23 An example f the different directins f grwth can be seen belw. GETAWAY TRAVEL TRAVEL AGENT (TAKEOVER BUSINESS) JB SMITHS CRISP RETAILER (TAKEOVER BUSINESS) FORWARD CONGLOMERATE GROWTH VERTICAL GROWTH YELLOW WONDER CRISP MANUFACTURER (TAKEOVER BUSINESS) WALKIES CRISPS CRISP MANUFACTURER (ORIGINAL BUSINESS) BACKWARD VERTICAL GROWTH MacDONALDS FARM POTATO FARMER (TAKEOVER BUSINESS) BEST Ltd Licensed t: Turnbull High Schl 22

24 BUSINESS DIFFERENCES ECONOMIC SECTOR The term ECONOMIC SECTOR describes a grup f businesses which are set up and run by their wners fr a similar purpse. There are 3 different ecnmic sectrs PUBLIC SECTOR, PRIVATE SECTOR and THIRD SECTOR. Businesses in the 3 main Ecnmic Sectrs can be seen belw. 1 PUBLIC SECTOR ORGANISATIONS The main features f Public Sectr rganisatins are as fllws. They are set up and wned by different levels f GOVERNMENT n behalf f the public wh have elected them. They are run by paid wrkers and managers and have their prgress checked by members f the Gvernment. They are set up t prvide gds and services that shuld imprve the quality f life fr any member f the public that uses them. Examples f the gds and services that are prvided by public sectr rganisatins include the HEALTHCARE, EMERGENCY SERVICES, EDUCATION, DEFENCE, ROADS AND TRANSPORT and the WELFARE STATE. Mst public sectr gds and services are free (r nly cst a small payment). Public gds and services are usually free because the mney the Gvernment needs t prvide them is cllected thrugh the fllwing TAXES. Tax Payer INDIVIDUAL Example Taxes INCOME TAX (mney paid frm wages earned) COUNCIL TAX (mney paid fr the use f Lcal Cuncil Services) STAMP DUTY (tax n buying a huse) BUSINESS CORPORATION TAX/INCOME TAX (mney paid n business prfits) VALUE ADDED TAX [VAT] (mney paid n mst gds yu buy) DUTIES (extra taxes abve VAT n specific items eg alchl) 23 BEST Ltd Licensed t: Turnbull High Schl

25 The elected Prime Minister, Cabinet Ministers and Parliament make up the Natinal Gvernment. This means that they make decisins abut hw public gds and services shuld be prvided fr the whle f the UK. The large Gvernment rganisatins which have been set up t deliver these gds and services fr Natinal Gvernment are as fllws. a NATIONAL GOVERNMENT DEPARTMENTS Gvernment Departments are paid fr by Parliament and are staffed by emplyees knwn as civil servants. Their jb is t set up and manage activities which will implement the decisins made by Natinal Gvernment abut the prvisin f certain gds and services fr the whle cuntry. Examples f Gvernment Departments include: THE MINISTRY OF DEFENCE THE DEPARTMENT FOR EDUCATION THE DEPARTMENT OF HEALTH HM TREASURY THE DEPARTMENT FOR WORK AND PENSIONS The wrk f Gvernment Departments is mnitred by Parliamentary MINISTERS wh are made respnsible fr them. BEST Ltd Licensed t: Turnbull High Schl 24

26 b EXECUTIVE AGENCIES An Executive Agency is an rganisatin that has been set up by a Gvernment Department t carry ut the day t day wrk that is needed t actually deliver the public gds and services that it is respnsible fr prviding. Fr example, Jbcentre Plus is an executive agency fr the Department fr Wrk and Pensins which is respnsible fr getting peple jbs. Other examples f executive agencies include the fllwing. THE UK BORDER AGENCY (regulates entry and exit fr the UK at airprts, etc) ACAS (tries t help prevent and reslve disputes between staff and managers) COMPETITION AND MARKETS AUTHORITY (CMA) (regulates takevers and mergers). c PUBLIC CORPORATIONS A Public Crpratin is a Gvernment wned business that makes mney frm selling gds and services (like a private cmpany) in rder t generate revenue. This mney can be used t supprt the develpment f the Public Crpratin r prvide funds fr Central Gvernment. The day t day management f these businesses is left t emplyed managers wh run it separately frm main Gvernment Departments. Examples f public crpratins include the BBC and the Pst Office. The number f large Public Crpratins in the UK has been in decline since the 1980 s due t PRIVATISATION. This means that they were turned int PLCs and sld n the stck market. Examples f privatised industires includes British Gas, British Telecm and British Airways. The main reasns behind privatisatin were as fllws. GENERATE REVENUE FROM THE SALE OF THE SHARES SELL OF LOSS MAKING CORPORATIONS WHICH WERE COSTING THE GOVERNMENT MONEY ENCOURAGE EFFICIENCY - CORPORATIONS WOULD HAVE TO MAKE PROFITS OR THEY WOULD CLOSE DOWN (INSTEAD OF BEING SUPPORTED BY THE GOVERNMENT). BEST Ltd Licensed t: Turnbull High Schl 25

27 d DEVOLVED GOVERNMENT In Sctland, Wales and Nrthern Ireland, sme Gvernment plicies and public services are different frm thse in England. This is because the UK wide Central Gvernment has set up a Devlved Gvernment fr these areas which has pwers t make decisins fr their wn areas n certain things knwn as DEVOLVED MATTERS. In Sctland, the devlved Scttish Gvernment can develp and implement plicy n devlved matters such as health, educatin, justice, business, rural affairs and transprt. The wrk f the devlved Scttish Gvernment is managed by the First Minister, the Scttish Cabinet and Parliament. e LOCAL AUTHORITIES Lcal Authrities are respnsible fr supprting central and devlved Gvernment plicies abut the delivery f public gds and services by managing their day-t-day delivery at a lcal level. Examples f Lcal Authrity services include lcal refuse cllectins, Sprts Centres and Libraries. The wrk f Lcal Authrities will be managed by elected LOCAL COUNCILLORS. BEST Ltd Licensed t: Turnbull High Schl 26

28 2 PRIVATE SECTOR BUSINESSES Private Sectr rganisatins are set up and wned by the individuals wh have invested their wn persnal mney (knwn as CAPITAL) in them. They are set up t prvide gds and services nly t cnsumers wh can affrd t pay fr them. This is s that these businesses can make extra mney (called PROFIT) fr the private benefit f their wners. The main types f large private businesses in the UK are as fllws. a SOLE TRADER The main FEATURES f a sle trader are as fllws. Sle traders nly have ONE wner wh invested and rganised all f the start up capital fr the rganisatin. In a sle trader, the single wner has the authrity (pwer) t make all decisins themselves. Sle traders usually nly sell t cnsumers in a fairly small LOCAL area. Sle traders usually nly emply a few wrkers and smetimes nly cnsist f the wner alne. The main ADVANTAGES f being a sle trader are as fllws. Quick decisins can be made in the business because they are all made by the single wner withut interference. This can allw the business t respnd t situatins that might need dealt with quickly, eg chance t invest in an idea. There are few laws r rules that have t be fllwed when setting up a sle trader. This means sle trader businesses can be easier fr peple with little business experience t set up and perate. All f the prfits frm the business can be kept by the single wner. This means that a successful sle trader can make the wner lts f mney quickly. Mney taken ut f the business by the wner is knwn as DRAWINGS. Sle traders d nt have t share infrmatin abut their business with anyne (except the Gvernment fr paying taxes). This means they can keep their infrmatin abut perfrmance and prfits private. BEST Ltd Licensed t: Turnbull High Schl 27

29 The main DISADVANTAGES f being a sle trader are as fllws. The single wner has UNLIMITED LIABILITY fr any mney wed by the business. This means that if the business runs ut f mney, the debt is NOT limited t the mney in the business and s the sle trader will have t pay the rest f the debt using their wn mney and frm the sale f their assets (valuable things, eg huse). All lsses in the business will have t be accepted by the wner alne which culd mean the end up with far less mney than they nce had. There may be n-ne else t share the decisin making and wrk f the business and s this can be stressful fr the wner. The skills f the wner might limit what the business is able t d. BEST Ltd Licensed t: Turnbull High Schl 28

30 b PARTNERSHIP The main FEATURES f a partnership are as fllws. A partnership usually has between 2-20 wners wh have each invested sme f the start up capital fr the rganisatin. Each f these wners is called a PARTNER. In the case f PROFESSIONAL PARTNERSHIPS (eg accunting and legal partnerships) there is n limit t the maximum number f wners. In a partnership, each f the different partners will have a say in the decisin making f the business. The specific amunt f cntrl each partner has ver decisin making will be set ut in a PARTNERSHIP AGREEMENT. A Partnership Agreement is a legal dcument that all partners sign when the partnership is created. This dcument sets ut all f the partnership s rules abut wrk t be dne and the sharing rights fr decisins, prfits and lsses. Usually the partnership agreement will set ut these rights based n the amunt f mney invested (eg a partner wh invests 50% f the capital will nrmally get 50% f the decisin making vtes). Partnerships usually nly sell t cnsumers in a fairly small LOCAL area. Hwever, they can becme big enugh t have several premises and s sell t a NATIONAL (cuntrywide) market. Partnerships may nly emply a few extra wrkers in additin t the partners and smetimes nly cnsist f the partners alne. The main ADVANTAGES f a partnership are as fllws. Any lsses in the business will be shared between all the partners. This means each individual wner will take a smaller persnal lss in a bad year. The decisin making and wrk f the business can be shared between the partners which means less stress fr each wner. The skills f the different partners can allw the business t expand and make mre prfit. There is mre mney available in the business because it has several partners investing. This can allw the business t prvide better gds and services. Partners d nt have t share infrmatin abut their business with anyne (except the Gvernment fr paying taxes). This means they can keep their infrmatin abut perfrmance and prfits private. BEST Ltd Licensed t: Turnbull High Schl 29

31 The main DISADVANTAGES f a partnership are as fllws. The partners have UNLIMITED LIABILITY 1 fr any mney wed by the business. This means that if the business runs ut f mney, the debt is NOT limited t the mney in the business and s the partners will each have t pay the rest f the debt using their wn mney and frm the sale f their assets (valuable things, eg huse). It can be hard t make quick and easy decisins in the business because there has t be agreement between all the partners befre smething can be dne. This can mean the business can find it hard t respnd t situatins that might need dealt with quickly. The prfits frm the business are shared between all the partners. This means that each wner can take less mney frm the business (DRAWINGS) than they wuld have dne if they were wrking n their wn. 1 Sme partners are knwn as LIMITED PARTNERS this means they d nt get a say in decisin making but they DO NOT have unlimited liability and s will nly lse the mney they have invested in the business if things g badly. BEST Ltd Licensed t: Turnbull High Schl 30

32 c PRIVATE LIMITED COMPANY The main FEATURES f this type f private sectr business are as fllws. A private limited cmpany usually has at least 2 wners wh have each invested sme f the start up capital fr the rganisatin. Each f these wners is called a SHAREHOLDER this is because they each have a SHARE f the business. Sharehlders will receive prf f their wnership thrugh a SHARE CERTIFICATE. A share certificate is a legal dcument which shws that a persn wns part f a cmpany. In a private limited cmpany, shares can nly be bught PRIVATELY frm existing sharehlders. Private limited cmpanies must create MEMORANDUM AND ARTICLES OF ASSOCIATION when they are created t utline all f the rules f the cmpany and infrmatin abut hw many shares will be available in it. Each share will entitle its wner t a share f any prfits in a gd year. This extra mney fr the wner is knwn as a DIVIDEND. Dividends are usually given ut as a percentage f the riginal cst f a share. Fr example, a sharehlder with 1 shares in a business may get a 3% dividend at the end f the year this means they will get 3p prfit back n each share. Decisin making in a limited cmpany is made by grup f senir managers knwn as the BOARD OF DIRECTORS. In a private limited cmpany, the Bard f Directrs may be the sharehlders wh take these jbs fr themselves r they can be separate peple wh are emplyed by the sharehlders. Sharehlders might decide t emply Directrs because they may be unable t manage the day t day running f the business due t ther cmmitments. Private limited cmpanies may nly sell t cnsumers in a fairly small LOCAL area. Hwever, they can becme big enugh t have several premises and s sell t a NATIONAL (cuntrywide) market. Private limited cmpanies may emply the sharehlders as the Bard f Directrs and extra wrkers t carry ut day t day tasks. Hwever, they can cnsist entirely f nn wners wh have been emplyed by the sharehlders t perate the cmpany. Private limited cmpanies must register and update details abut their Directrs, Secretary, Sharehlders and prfits with COMPANIES HOUSE. This is a Gvernment bdy which keeps track f all cmpanies in the UK and makes sure that they are fllwing legal rules abut the running f cmpanies. Cmpanies Huse prvides each cmpany with its wn unique COMPANY NUMBER t help manage this prcess. If private cmpanies d nt fllw the rules f Cmpanies Huse then they will be fined and can be frced t stp wrking. BEST Ltd Licensed t: Turnbull High Schl 31

33 The main ADVANTAGES f being a private limited cmpany are as fllws. The sharehlders have LIMITED LIABILITY fr any mney wed by the business. This means that if the business runs ut f mney, the debt IS limited t the mney in the business and s the sharehlders can ONLY lse the mney they have invested in the business. There can be lts f mney available in the business because it can have lts f sharehlders investing. This can allw the business t prvide better gds and services. The decisin making and wrk f the business can be shared between the Bard f Directrs which means less stress fr each individual. The different skills f the Bard f Directrs can allw the business t expand and make mre prfit. Any lsses in the business will be shared between all the sharehlders. This means each individual wners will take a smaller persnal lss if the business fails. The main DISADVANTAGES f being a private limited cmpany are as fllws. Private Limited cmpanies have t fllw the legal rules in the COMPANIES ACTS. Fr example, they must include the term Ltd after their name in all dcuments s that peple knw that there is limited liability and s they may nt get all debts repaid. This can mean that limited cmpanies can be cmplicated and difficult fr peple with little business experience t set up and perate. Private Limited cmpanies have t share sme infrmatin abut their business by registering it annually with Cmpanies Huse. This means they cannt keep all their infrmatin abut perfrmance and prfits private. It can be hard t make quick and easy decisins in the business because there has t be agreement between the Bard f Directrs befre smething can be dne. This can mean the business can find it hard t respnd t situatins that might need dealt with quickly. The prfits frm the business are shared between all the sharehlders as dividends. This means that each wner makes less mney than they wuld have dne if they were wrking n their wn. BEST Ltd Licensed t: Turnbull High Schl 32

34 d PUBLIC LIMITED COMPANY The main FEATURES f this type f private sectr business are as fllws. A public limited cmpany has at least 2 wners wh have each invested sme f the minimum 50,000 start up capital f the rganisatin. Owners f a cmpany are called a SHAREHOLDER this is because they wn a SHARE f the business. Shares In a public limited cmpany can be bught and sld by any member f the public r anther business thrugh the STOCK MARKET. Public limited cmpanies create MEMORANDUM AND ARTICLES OF ASSOCIATION t utline all f the rules f the cmpany and prvide infrmatin abut hw many shares will be available in it. Each share will entitle its wner t a share f any prfits in a gd year. This extra mney fr the wner is knwn as a DIVIDEND. Dividends are usually given ut as a percentage f the riginal cst f a share. Fr example, a sharehlder with 1 shares in a business may get a 5% dividend at the end f the year this means they will get 5p prfit n each share. Decisin making in a limited cmpany is made by grup f (at least 2) senir managers knwn as the BOARD OF DIRECTORS. Public limited cmpanies are usually large enugh t have several premises and s can usually sell t a NATIONAL (cuntrywide) market. Public limited cmpanies must register and update details abut their Directrs, Cmpany Secretary, Sharehlders and prfits with COMPANIES HOUSE. This is a Gvernment bdy which keeps track f all cmpanies in the UK and makes sure that they are fllwing legal rules abut the running f cmpanies. Cmpanies Huse prvides each cmpany with its wn unique COMPANY NUMBER t help manage this prcess. If private cmpanies d nt fllw the rules f Cmpanies Huse then they will be fined and can be frced t stp trading. BEST Ltd Licensed t: Turnbull High Schl 33

35 The main ADVANTAGES f being a public limited cmpany are as fllws. The sharehlders have LIMITED LIABILITY fr any mney wed by the business. This means that if the business runs ut f mney, the debt IS limited t the mney in the business and s the sharehlders can ONLY lse the mney they have invested in the business. There can be lts f mney available in the business because it can easily access lts f sharehlders via the stck market. This can allw the business t grw r invest in prviding better gds and services. The expert skills f the Bard f Directrs can allw the business t expand and make mre prfit. Any lsses in the business will be shared between all the sharehlders. This means each individual wner will take a smaller limited lss if the business fails. The main DISADVANTAGES f being a private limited cmpany are as fllws. Public Limited cmpanies have t fllw lts f legal rules in the COMPANIES ACTS. Fr example, they must include the term PLC after their name in all dcuments s that peple knw that there is limited liability and must have their accunts AUDITED (checked by utside accuntants). This means that public limited cmpanies can be cmplicated and difficult t set up and perate. Public Limited cmpanies have t share infrmatin abut their business by registering it annually with Cmpanies Huse. This means they cannt keep infrmatin abut perfrmance and prfits private. Public Limited cmpanies have t share infrmatin abut perfrmance with sharehlders every year by printing and publishing a FINANCIAL REPORT and having an ANNUAL GENERAL MEETING (AGM) which allws sharehlders t speak t the Bard abut activities. This is expensive and means they cannt keep all their infrmatin abut perfrmance and prfits private. The prfits frm the business are shared between all the sharehlders as dividends. This means that each wner makes less mney than they wuld have dne if they were wrking n their wn. Sharehlders can lse cntrl f their business if smene buys a majrity f the cmpany s shares in the stck market in rder t carry ut a takever. BEST Ltd Licensed t: Turnbull High Schl 34

36 e MULTINATIONALS The main FEATURES f this type f private sectr business are as fllws. A multinatinal business is ne which has expanded beynd its initial hme cuntry t nt nly sell in ther cuntries but t actually have premises and prductin activities in them. These verseas activities are usually knwn as SUBSIDIARIES f the riginal PARENT business. Fr example, Frd was riginally an American cmpany but it nw has subsidiary factries in many different cuntries in the wrld (including the UK) which prduce cars fr each f these territries. Mst multinatinals are public limited cmpanies as this type f business can use the stck markets t raise the significant amunts f mney required fr such large scale activities. Multinatinalism is linked t the idea f GLOBALISATION. This term refers t the idea that sme businesses and cnsumers can see the wrld as ne large jined up market t perate in rather than lts f separate natinal r lcal markets. The number f multinatinal businesses has been increasing ver time due t the fllwing factrs which have made it easier fr them t grw and perate in this way. Develpment COMMUNICATIONS TRANSPORT Descriptin Develpments in ICT (like , the internet, netwrks, videcnferencing, etc) have made it easier fr businesses t cmmunicate with and crdinate staff perating in ther cuntries. ICT (eg the Internet) has als allwed cnsumers t becme aware f prducts that are available in ther cuntries and s create a demand fr them in their wn. Develpments in transprt (like supertankers, imprving infrastructures, bradband access, etc) have made it easier and cheaper fr businesses t transprt gds and services between cuntries. TRADE BARRIERS A decline in trade barriers (ie limits n freign investment and imprts) has made it easier and cheaper fr businesses t set up and trade in freign cuntries. NEW MARKETS New markets (such as China and Russia) have becme available fr businesses t perate in due t plitical changes. This means that businesses can nw expand t perate in places they previusly culd nt. BEST Ltd Licensed t: Turnbull High Schl 35

37 The main ADVANTAGES f being a multinatinal business are as fllws. By grwing t perate in many different cuntries multinatinals can increase the number f sales and prfits that they make. This minimises the risk f failure and maximises returns t wners. A multinatinal can increase brand lyalty and sales frm widespread brand recgnitin and supprt by perating a glbal brand that peple in many cuntries knw abut. By perating in many different cuntries a multinatinal can vary the prducts that they sell in each territry t suit lcal tastes and demand (this is smetimes called GLOCALISATION). This shuld increase cnsumer satisfactin with prducts and s increase sales. By perating n a very large scale multinatinals can make use f INTERNAL ECONOMIES OF SCALE. An internal ecnmy f scale is smething INSIDE f a business that increases prfits by lwering unit prductin csts due t the large size (r scale) f the activities f the business. Cmmn internal ecnmies f scale can be seen belw. FINANCIAL (lwer interest rates due t amunt f mney banked by the large multinatinal) PURCHASING (discunts n materials due t imprtance f large rders placed by multinatinal) TECHNICAL (glbalised sales prvide mre mney t purchase better machines that lwer csts) MANAGEMENT (managers in each territry can lead t better cntrl and wrk) MARKETING (lts f mney available fr prduct develpment, adverts, etc) A multinatinal business can set up prductin facilities in cuntries where wages are lw r laws abut the use f labur are lax. This can allw the multinatinal t decrease the cst f labur used in prductin and s increase verall prfits (especially if the prducts made are sent t a richer ecnmy t be sld at a high price). A multinatinal business can increase prfits by setting up extractin facilities in cuntries where raw materials cme frm. This can bst prfits as it will minimise the cst f purchasing materials as the multinatinal is directly extracting them instead f buying them cmmercially frm smene else. They can als make mney frm selling surplus raw materials that they have extracted t ther businesses. A multinatinal business can increase prfits by lwering transprt csts if prducts made in the cuntry are sld there and nt transprted t it frm smewhere else. By setting up and prducing gds in a cuntry instead f imprting them frm anther territry a multinatinal can avid expensive extra taxes n imprts (TARIFF) and limits t what can be brught int a cuntry fr sale (QUOTA). This can help a multinatinal increase sales and prfits by increasing the amunt f prducts fr sale and keeping the price f them lw. Multinatinal businesses can sell prducts that they make in ne territry t anther part f the business in anther territry at any price they like. This is knwn as TRANSFER PRICING and can help a multinatinal lwer tax bills by manipulating prices t shift prfits ut f high tax rate cuntries and int lw tax rate nes. BEST Ltd Licensed t: Turnbull High Schl 36

38 Many cuntries have Gvernment rules abut hw big a business can becme. This is t try and prevent a business becming a MONOPOLY (the nly business t buy frm) which culd frce cnsumers t pay t much fr prducts due t a lack f chice. By becming a multinatinal, a business can make mre sales than they wuld be allwed t in their parent cuntry alne by spreading their large scale activities acrss many different territries. The exchange rate fr a currency affects hw much it will cst t buy and sell currency and gds between cuntries. Fr example, if mre peple wanted the US Dllar then its value wuld increase and s the exchange rate against the UK Pund wuld becme strnger as fewer peple want the pund ie 1 might have bught $1.50 dllars f currency r gds but nw it wuld nly buy $1.25. Be becming a multinatinal, a business can avid the impact f exchange rates n the csts and prfits f a subsidiary as they will be based there and s nly need t use the currency f the cuntry they are perating in. Many Gvernments arund the wrld are keen t encurage businesses frm ther cuntries t set up and perate in their ecnmies. This is knwn as INWARD INVESTMENT and is ppular with Gvernments fr the fllwing reasns. INCREASED ECONOMIC ACTIVITY (subsidiary sales generate taxes fr the Gvernment t spend) INCREASED EMPLOYMENT (this generates incme tax and decreases benefit payments) INCREASED RANGE OF GOODS AND SERVICES (can make cnsumers happier) INCREASED COMPETITION (can increase chice and lwer prcess fr cnsumers) NEW IDEAS (inward investing cmpanies can bring new techniques and ideas t a cuntry) The enthusasm f sme Gvernments fr inward investment can bring the fllwing benefits t multinatinals which set up subsidiaries in their cuntry. FINANCIAL BREAKS (eg reduced business rates) GRANTS (finance which is given and desn t have t be given back) STAFF SUPPORT (eg assistance with staff recruitment and training csts) INFRASTRUCTURE DEVELOPMENT (eg Gvernment may pay fr new rads t premises, etc) SIMPLIFIED PLANNING PROCEDURES (which makes it easier t build and perate premises) BEST Ltd Licensed t: Turnbull High Schl 37

39 The main DISADVANTAGES f being a multinatinal business are as fllws. Sme multinatinal businesses may becme s large that they start t experience DISECONOMIES OF SCALE. This describes the situatin where the size f the business is starting t interfere with its efficiency and s unit prducatin csts are increasing. Cmmn surces f disecnmies f scale include the fllwing. LANGUAGE BARRIERS (cmmunicatin t staff in different languages can be cstly and difficult) LEGAL SYSTEMS (it is cmplicated t make sure the business fllws the laws f all territries) MANAGEMENT (large numbers f wrkers makes efficient management difficult) PRODUCTION (large scale f activities can make wrkers feel mistakes wn t be nticed) GLOCALISATION (the csts f supprting many different prducts can be inefficient) Multinatinal businesses may face negative publicity, falling sales and declining prfits in cuntries that they perate in if they abuse their size and ecnmic imprtance t carry ut the fllwing activities which can be seen as UNETHICAL. ABUSE OF LOW WAGES AND LAX LABOUR LAWS IN SOME TERRITORIES CREATING UNEMPLOYMENT BY MOVING JOBS FROM ONE COUNTRY TO ONE WITH LOWER WAGES ENVIRONMENTALLY DAMAGING PRODUCTION (eg pllutin) WASTAGE OF LIMITED RAW MATERIALS USE OF TRANSFER PRICING AND OTHER TECHNIQUES FOR TAX AVOIDANCE MONOPOLY POWER (use f multinatinal resurces t lwer prices and clse lcal businesses) GOVERNMENT BRIBERY AND CORRUPTION Multinatinals may find it difficult t perate as they wuld like t in sme cuntries because their Gvernments have rules and regulatins that the multinatinal may find difficult t fllw. They can als frce the business (in certain circumstances) t undertake the fllwing changes. DEMERGER (business is split int 2 separate smaller businesses) DIVESTMENT (sell ff f a majr part/brand f the business entirely) BEST Ltd Licensed t: Turnbull High Schl 38

40 f FRANCHISES The main FEATURES f this type f private sectr business are as fllws. A franchise is a license that ne business buys (FRANCHISEE) s that they have the right t sell the prducts f anther usually better knwn rganisatin (FRANCHISOR). Examples f franchise businesses include McDnalds, Pizza Hut, Subway, etc. Mst franchisee businesses are sle traders as the limited liability and ease f decisin making helps t reassure the franchisr that their brand name will be lked after (as the franchisee has a lt t lse if it isn t). The main ADVANTAGES and DISADVANTAGES f franchising can be seen belw. Party Advantages Disadvantages FRANCHISEE (license buyer) Increased sales frm recgnised prduct. Must make initial payment t franchisr t buy license. Increased sales frm franchiser supprt (eg adverts). Must make regular payments t franchiser frm prfits. Increased prduct quality and sales frm franchiser training. Reduced risk f failure due t high sales and franchisr supprt. Franchisee is nt in ttal cntrl f the business because they must fllw franchiser s rules r lse the franchise license. FRANCHISOR (license seller) Revenue frm initial license payment. Risk f damage t brand reputatin frm pr franchisees. Regular revenue frm nging franchisee prfit payments. Franchiser is bliged t prvide supprt t franchisee. New ideas frm franchisee can increase sales in all utlets. D nt get all prfits frm franchised branches. Grwth f brand name withut the truble r expense f pening new branches. BEST Ltd Licensed t: Turnbull High Schl 39

41 3 THIRD SECTOR BUSINESSES The Third Sectr cnsists f nn-gvernmental rganisatins which have been set up t prvide gds and services t benefit specific grups that they feel need special assistance. The main types f large third sectr businesses (ie rganisatins with MORE THAN 250 emplyees) in the UK are as fllws. a CHARITY The main FEATURES f Scttish charities are as fllws. Charities are rganisatins which have been set up fr the sle purpse f PROVIDING PUBLIC BENEFIT in Sctland (r elsewhere) thugh ne r mre f the fllwing recgnised CHARITABLE PURPOSES 2. THE PREVENTION OR RELIEF OF POVERTY THE ADVANCEMENT OF EDUCATION THE ADVANCEMENT OF RELIGION THE ADVANCEMENT OF HEALTH THE SAVING OF LIVES THE ADVANCEMENT OF CITIZENSHIP OR COMMUNITY DEVELOPMENT THE ADVANCEMENT OF THE ARTS, HERITAGE, CULTURE OR SCIENCE THE ADVANCEMENT OF PUBLIC PARTICIPATION IN SPORT THE PROVISION OF RECREATIONAL FACILITIES THE ADVANCEMENT OF HUMAN RIGHTS, CONFLICT RESOLUTION OR RECONCILIATION THE PROMOTION OF RELIGIOUS OR RACIAL HARMONY THE PROMOTION OF EQUALITY AND DIVERSITY THE ADVANCEMENT OF ENVIRONMENTAL PROTECTION OR IMPROVEMENT RELIEF OF AGE, ILL-HEALTH, DISABILITY, FINANCIAL BASED HARDSHIP THE ADVANCEMENT OF ANIMAL WELFARE Charities DO NOT make their mney by trading and earning prfits they encurage the public t give them mney t pay fr their wrk thrugh the use f advertising campaigns, fundraising events, etc. This mney which is given by the public is knwn as a DONATION. Charities can als raise sme mney fr their wrk by setting up a separate special CHARITABLE TRADING ARM. This is a part f the Charity which raises mney thrugh paid fr activities such as restaurants and shps but gives it all back t the main part f the Charity as a dnatin. 2 These charitable purpses are set ut by law in the Charities and Trustee Investment (Sctland) Act BEST Ltd Licensed t: Turnbull High Schl 40

42 In Sctland, fficial charities are registered with the Gvernment s OFFICE OF THE SCOTTISH CHARITY REGULATOR (OSCR) and are given special CHARITABLE STATUS. Charitable status means the charity des nt have t pay as many taxes n the mney that it brings in. This is s that it can maximise the mney it has t supprt its cause. Once registered with OSCR, charities must meet a number f legal respnsibilities set ut in charity law, including reprting t them n an annual basis. The wrk and status f a charity can be tracked with the OSCR thrugh a unique CHARITY REGISTRATION number. This can help prevent peple pretending t be a charity and s cheating the public ut f mney they intended t g t a real gd cause. Charities will have vlunteer and paid emplyees wh are managed by a grup f managers knw as TRUSTEES. Examples f charities perating in Sctland include, verseas supprt charities (such as SCIAF and Mary s Meals), scut grups, cancer supprt charities, churches, nurseries and private schls. BEST Ltd Licensed t: Turnbull High Schl 41

43 b SOCIAL ENTERPRISE The main FEATURES f Scttish scial enterprise rganisatins are as fllws. Scial Enterprises legally cannt be part f a public sectr rganisatin. Scial Enterprises are different frm public sectr rganisatins because they have been set up t penly generate funds in rder t benefit nly a SPECIFIC scial, envirnmental r cultural issue. Scial Enterprises are different frm charities because they aim t generate their funds thrugh GRANTS (mney frm agencies that desn t need paid back) and PROFIT MAKING trading activities. Scial Enterprises are different frm private sectr businesses because they have an ASSET LOCK n bth their prfits and assets. This means that Scial Enterprises MUST use all f their prfits and mney frm the sale f assets (if it is clsed dwn) fr the purpse f its scial missin. Scial Enterprises must be run in an ETHICAL manner which reflects their aim t be f benefit t sciety. This will be seen thugh actins such as ffering their staff satisfactry wages, terms and cnditins, and clear envirnmental plicies. Scial Enterprises will have vlunteer and paid emplyees wh are managed by a BOARD OF DIRECTORS. BEST Ltd Licensed t: Turnbull High Schl 42

44 The main types f scial enterprise rganisatins in Sctland are as fllws. Scial Enterprise Organisatin Descriptin SOCIAL FIRMS These Scial Ecnmy rganisatins are set up t specifically create NEW JOBS fr severely disadvantaged peple in the labur market (eg individuals with learning difficulties). An example wuld be Blindcraft which was set up t help blind peple find wrk. CO-OPERATIVES A c-perative is a grup f peple (knwn as MEMBERS) wh want t wrk tgether in a jintly wned scial enterprise rganisatin in rder t help them meet their cmmn needs. Examples f c-peratives include the Cperative grcery stre, insurance cmpany and travel firms. INTERMEDIATE LABOUR MARKET COMPANIES These Scial Ecnmy rganisatins prvide TRAINING and WORK EXPERIENCE fr the lng term unemplyed and ther disadvantaged grups. The aim is t assist these grups t re-enter the labur market thrugh the prvisin f this paid wrk tgether with high quality training, persnal develpment and active jb-seeking. COMMUNITY BUSINESS These are scial enterprise rganisatins that are set up in a particular gegraphical area and fcus n PROVIDING GOODS AND SERVICES t that area. They are trading rganisatins which are set up, wned and cntrlled by the lcal cmmunity and which aim t be a fcus fr lcal develpment and create self supprting jbs fr lcal peple. CREDIT UNION Credit unins are finance c-peratives that help peple t SAVE and BORROW mney at reasnable rates. BEST Ltd Licensed t: Turnbull High Schl 43

45 A summary f the wnership and cntrl f the abve large UK businesses can be seen belw. Ecnmic Sectr Organisatin Finance Decisin Making PUBLIC SECTOR Natinal Gvernment Organisatins Central Gvernment (frm public taxatin) Prime Minister, Cabinet and Parliament Public Crpratins Trading Activities (and Central Gvernment) Directrs Devlved Gvernment Organisatins Devlved Gvernment (frm the public) First Minister, Devlved Cabinet and Parliament Lcal Authrity Organisatins Lcal Authrity (frm the public) Lcal Cuncillrs PRIVATE SECTOR Sle Trader 1 Owner 1 Owner Partnership 2-20 Partners 2-20 Partners Limited Cmpanies 2+ Sharehlders Bard f Directrs Public Limited Cmpany 2+ stck market sharehlders investing at least 50,000 Bard f Directrs Multinatinal Business - - Franchise Business - - THIRD SECTOR Charities Dnatins Trustees Scial Enterprise Trading Activities Bard f Directrs BEST Ltd Licensed t: Turnbull High Schl 44

46 BUSINESS DIFFERENCES OBJECTIVES An OBJECTIVE is specific gal that a business is trying t achieve at a pint in time. We have already seen that, in general, all businesses EXIST (are set up) t prvide gds and services t satisfy needs r wants. Hwever, we have als seen that the wners f businesses in the varius ECONOMIC SECTORS want t achieve the fllwing specific and different OBJECTIVES in their particular businesses. Ecnmic Sectr PUBLIC SECTOR PRIVATE SECTOR Main Objective Public sectr businesses are usually set up t achieve the bjective f prviding a PUBLIC SERVICE. This means that they prvide their gds and services in rder t imprve the quality f life fr any member f the public wh needs r wants t use them. Private sectr businesses are usually set up t achieve the bjective f MAXIMISING PROFITS fr their wners. This means that they nly intend t prvide their gds and services t cnsumers wh can affrd t pay a price fr them which will make extra mney fr the business. THIRD SECTOR Third sectr businesses are usually set up t achieve the bjective f SOCIAL RESPONSIBILITY. This means that they undertake activities which will imprve the quality f life fr particular members f sciety that they think need extra help. These bjectives therefre make these businesses different frm each ther because they affect the way that each f them is managed and perates every day. BEST Ltd Licensed t: Turnbull High Schl 45

47 There are ther bjectives that businesses may pursue at different times, and these can be seen belw. Objective SURVIVAL Descriptin There can be times when any type f business finds that it is running ut f mney t pay its bills and survive. Public sectr businesses may experience this when budgets are cut due t less mney frm taxatin. Private businesses may experience this when they are lsing sales t cmpetitrs. Third sectr businesses may experience this when funding decreases due t falling incmes. When this is the case businesses must fcus n the bjective f SURVIVAL until things imprve. This means they will have t lwer csts by cutting prductin, mving premises, etc. MAXIMISE CUSTOMER SATISFACTION Many rganisatins will be interested in maximising CUSTOMER SATISFACTION s that the public and their cnsumers think psitively abut the business and cntinue t supprt it. T create and maintain high levels f cnsumer satisfactin, businesses will be interested in dealing psitively with cnsumers in the fllwing ways. POSITIVE TREATMENT OF THE ENVIRONMENT (eg lw pllutin, recycling) FAIR USE OF RESOURCES (eg fair wages in 3 rd wrld cuntries, etc) HIGH QUALITY MARKETING WORK HIGH QUALITY PRODUCTS In the shrt term, these activities are nt always cheap and s they can prevent maximisatin f prfit and limit the number f services that can be prvided frm available budgets. INCREASE MARKET SHARE Many rganisatins will be interested in increasing the number f paying custmers that they have r the amunt f help that they can prvide. This wuld be knwn as increasing their MARKET SHARE. T d this, rganisatins will usually have t: CUT PRICES TO MAKE THEIR PRODUCTS MORE AFFORDABLE INCREASE THE MONEY SPENT ON ADVERTISING PRODUCTS INCREASE THE AMOUNT OF PRODUCTION INCREASE THE NUMBER OF PLACES THE PRODUCT IS BEING PROVIDED IN In the shrt term, these activities are nt always cheap and s they can prevent maximisatin f prfit and limit the number f services that can be prvided frm available budgets. 46 BEST Ltd Licensed t: Turnbull High Schl

48 Objective ENTERPRISE Descriptin Enterprise invlves all f the fllwing activities. COMING UP WITH IDEAS FOR NEW PRODUCTS (INNOVATION) ORGANISING THE RESOURCES NEEDED FOR PRODUCTION COMPLETING PRODUCTION AND ACTUALLY PROVIDING THE PRODUCT ACCEPTING THE RISK THAT THIS NEW PRODUCT COULD FAIL Peple wh are willing t be enterprising are called ENTREPRENEURS. Examples f famus Scttish entrepreneurs include Michelle Mne and Tm Hunter. Successful entrepreneurs usually have the fllwing skills and qualities. CREATIVITY FLEXIBILITY UNDERSTAND WHEN AND HOW TO USE INITIATIVE AND INNOVATION A POSITIVE ATTITUDE TO CHANGE BEING ABLE TO EVALUATE RISK TO HELP MAKE GOOD DECISIONS HAVE THE ABILITY TO PERSUADE OTHERS TO HELP THEM IN THEIR VENTURE It is particularly imprtant that a cuntry has entrepreneurs in all srts f rganisatins wh will help them develp new prducts fr the fllwing reasns. THERE WOULD BE NO NEW GOODS OR SERVICES WITHOUT ENTERPRISE SOCIETY WOULD FAIL TO ADVANCE WITHOUT NEW GOODS AND SERVICES WITHOUT ENTERPRISE SOME NEEDS AND WANTS WILL BE UNSATISFIED WITHOUT ENTERPRISE BUSINESSES COULD FALL BEHIND COMPETITION AND SO LOSE CUSTOMERS SATISFICING Smetimes the wner f a business will be happy t accept less than maximum prfit in rder t have a smaller but satisfactry business. Fr example a sle trader may be happy with the prfits f wrking fr 5 days a week rather than maximising them by wrking every day. This bjective may be pursued in rder t prvide the business wner with a better wrk-life balance which minimises their stress and prvides mre leisure time. 47 BEST Ltd Licensed t: Turnbull High Schl

49 Objective CORPORATE SOCIAL RESPONSIBILITY Descriptin Crprate scial respnsibility refers t actins that a business pursues t try and meet nt nly the demands f the wners but t satisfy the needs f all f the ther different grups f peple (bth inside and ut) that are invlved with it. This extent f this kind f actin will be affected by the ETHICS f the business. These are the values and principles which influence what is right and wrng when making decisins. Examples f wrk which can be undertaken as part f crprate scial respnsibility include the fllwing. STOPPING ANIMAL TESTING REDUCTION, RECYCLING AND REUSE OF PRODUCTS REDUCTION IN THE USE OF HARMFUL PRODUCTION CHEMICALS EQUALITY OF EXPERIENCE FOR STAFF AND CUSTOMERS SUPPORT OF CHARITIES USE OF FAIR TRADE Despite the likely increase in csts that are invlved with pursuing crprate scial respnsibility, many businesses are indeed spending time and mney n this bjective fr the fllwing reasns. IMPROVED PUBLIC IMAGE (can increase lng term sales and prfits) PREVENTS LOST SALES FROM NEGATIVE PUBLIC IMAGE IMPROVED STAFF MORALE (can imprve prductin and custmer service) PREVENTS LEGAL ACTION (frm breaking envirnmental and equality laws) AVOIDS PRESSURE GROUP ACTION (which can create bad publicity and lst sales fr irrespnsible businesses) MANAGERIAL OBJECTIVES Managerial bjectives are things that managers wuld like t d fr their wn benefit, eg quick business grwth t imprve their reputatin, increased wages, better cmpany car, etc. When the managers are als the wners then this is nt a prblem as the business is theirs t d as they please with. Hwever, when the day t day managers are nt the wners then there is what is knwn as a SEPARATION OF OWNERSHIP AND CONTROL. If this is the case then managers and wners may be in cnflict as mangers try t spend the wners prfits n themselves. This may result in the managers being in cnflict with the wners when they find ut abut this situatin. 48 BEST Ltd Licensed t: Turnbull High Schl

50 Objective GROWTH Descriptin Many rganisatins will be interested in grwing in size ver time fr the fllwing reasns. Higher prfits frm making and selling mre prducts than a small business culd. Access t ECONOMIES OF SCALE which will lwer unit csts and s increases unit prfits as the business grws. Example f ecnmies f scale include the fllwing. FINANCIAL (lwer interest rates due t amunt f mney banked) PURCHASING (discunts n materials due t imprtance f rders) TECHNICAL (mre mney fr better machines can lwer csts) MANAGEMENT (mre managers can lead t better cntrl and wrk) MARKETING (mre utput means lwer unit csts fr adverts, etc) Increased MARKET POWER can allw a business t maximise prfits by having the ability t increase market prices. This means that a business has becme s large that there is little cmpetitin left in the market and s cnsumers will have t purchase frm them n matter what price they charge. Lwered risk f failure frm DIVERSIFYING int selling a variety f different prducts. This is because if the demand fr ne prduct drps, a diversified business has thers that it can cntinue t sell in rder t keep cash cming in. Lwered risk f failure frm increased funds fr RESEARCH AND DEVELOPMENT (R&D) that can lead t the develpment f new prducts that can generate revenue. In general this grwth is supprted by sciety as it leads t increased emplyment, a wider range f gds and services and lw prices (frm ecnmies f scale). Hwever, there may be times where the high prices that large businesses can charge due t market pwer can becme harmful t sciety. Therefre, in rder t prtect cnsumers, the UK Gvernment ften prevents extreme grwth that wuld damage cmpetitin thrugh market pwer. One f the main ways that the Gvernment prtects cmpetitin is thrugh the COMPETITION AND MARKETS AUTHORITY. This is a Gvernment bdy which can investigate a merger and prevent it if the grwth frm it wuld result in market pwer. BEST Ltd Licensed t: Turnbull High Schl 49

51 A summary f cmmn bjectives f different types f business can be seen belw. Sectr Organisatins Cmmn Objectives PUBLIC SECTOR Central Gvt Devlved Gvt Lcal Gvt PROVIDE PUBLIC SERVICE ENTERPRISE MAXIMISE CUSTOMER SERVICE GROWTH CORPORATE SOCIAL RESPONSIBILITY PRIVATE SECTOR Sle Trader Partnership Private Limited Cmpany Public Limited Cmpany Multinatinal Franchise MAXIMISE PROFITS SURVIVAL ENTERPRISE MAXIMISE CUSTOMER SERVICE INCREASE MARKET SHARE SATISFICING (Sle Traders and Partnerships) MANAGERIAL OBJECTIVES (Limited Cmpanies) GROWTH CORPORATE SOCIAL RESPONSIBILITY THIRD SECTOR Charity Scial Enterprises SOCIAL RESPONSIBILITY SURVIVAL ENTERPRISE MAXIMISE CUSTOMER SERVICE SATISFICING CORPORATE SOCIAL RESPONSIBILITY 50 BEST Ltd Licensed t: Turnbull High Schl

52 INDUSTRIAL SECTORS The term INDUSTRIAL SECTOR describes a grup f businesses which prduce a similar type f gd r service. There are 4 main industrial sectrs PRIMARY SECTOR, SECONDARY SECTOR, TERTIARY SECTOR and QUATERNARY SECTOR. The 3 main Industrial Sectrs and their OUTPUT f different gds and services can be seen belw. 1 PRIMARY SECTOR BUSINESSES Primary sectr rganisatins are respnsible fr EXTRACTING (getting) frm the Earth the RAW MATERIALS (eg WOOD, OIL, COAL, etc) needed fr the input stage f prductin. Examples f primary sectr businesses include: FARMERS OIL WORKERS FISHERMEN FORESTRY WORKERS 2 SECONDARY SECTOR BUSINESSES Secndary sectr rganisatins are respnsible fr MANUFACTURING GOODS using the RAW MATERIALS frm the PRIMARY sectr. Examples f secndary sectr businesses include: CAR MANUFACTURER FURNITURE MAKER NEWSPAPER COMPUTER MANUFACTURER 51 BEST Ltd Licensed t: Turnbull High Schl

53 3 TERTIARY SECTOR BUSINESSES Tertiary sectr rganisatins are respnsible fr PROVIDING SERVICES. This includes the service f sales fr the GOODS frm the SECONDARY sectr. Examples f secndary sectr businesses include: TRANSPORT PROVIDERS (eg rail netwrks and airlines) HAIRDRESSERS SALES STAFF RETAIL STAFF 4 QUATERNARY SECTOR BUSINESSES Smetimes certain types f service businesses are described as belnging t the QUATERNARY sectr. This is a knwledge-based sub categry f the tertiary sectr which is respnsible fr develpment activities rather than prviding a simple r discreet service t cnsumers. Examples f quaternary business activities include: CONSULTATION SERVICES EDUCATION RESEARCH AND DEVELOPMENT ACTIVITIES FINANCIAL PLANNING SERVICES Businesses usually invest in quaternary activities t help them grw thrugh prducing innvative ideas, develping new prductin methds (that will cut csts), creating future branded prducts (that will tap int new markets), etc. As yu can see frm the abve descriptins f businesses by utput, all f the businesses in a cuntry frm different parts f the verall PRODUCTION CHAIN f that cuntry. This is an imprtant idea because it means that different businesses in a cuntry are ften INTERDEPENDENT. This means that they will affect each ther by their actins and rely n each ther t be able t keep ging. This means that they shuld try and supprt each ther where pssible. 52 BEST Ltd Licensed t: Turnbull High Schl

54 Over time in the UK ecnmy, there has been a decrease in the number f businesses wrking the primary and secndary sectrs (eg cal mining, steel wrking, ship building), and in increase in the number f businesses wrking in the tertiary and quaternary sectrs (eg cmputer gaming, banking, retail). Sme f the reasns fr these changes include the fllwing. INCREASED OVERSEAS COMPETITION IN PRIMARY AND SECONDARY SECTORS Sme primary and secndary jbs have been lst in UK because businesses in ther cuntries have been able t d this wrk mre cheaply r t a better standard and s cnsumers have used these businesses instead f British nes. INCREASED SCOTTISH EXPERTISE IN THE TERTIARY AND QUATERNARY SECTORS The UK has becme a develped ecnmy which results in an increase in tertiary and quaternary wrking due t the cnsequent high levels f educatin and emplyee skill, and expertise in many types f service and research business. BEST Ltd Licensed t: Turnbull High Schl 53

55 INTERNAL STRUCTURE The term INTERNAL ORGANISATION describes hw a business has chsen t rganise its staff and management s that it runs effectively and efficiently. The internal rganisatin f a business is cncerned with the fllwing. 1 STAFF GROUPINGS The term STAFF GROUPINGS refers t the different ways that businesses can rganise the activities f their staff. The main staff grupings which can be used by businesses are as fllws. a FUNCTIONAL GROUPING Here a business rganises its staff int teams based n their FUNCTION (the type f wrk that they are respnsible fr). These teams are ften knwn as DEPARTMENTS r DIVISIONS. The mst cmmn FUNCTIONAL departments that businesses create can be seen belw. Wrker Type Descriptin Examples f Wrk FINANCE These wrkers will lk after the mney f the business. Paying bills Paying wages Banking mney Financial recrds MARKETING These wrkers will cme up with ideas fr new gds r services and hw they will be sld. Creating prducts Setting prices Advertising Market research OPERATIONS These wrkers will actually make the gds and services that have t be sld. String materials Making prducts Checking quality HRM These wrkers will help t make sure there are enugh wrkers and that they are wrking well. Recruiting wrkers Training wrkers Wrkers recrds Wrkers discipline 54 BEST Ltd Licensed t: Turnbull High Schl

56 The main BENEFITS f using a functinal gruping can be seen belw. Staff are recruited t carry ut wrk that best suits their skills and qualificatins. This will maximise the quality f their wrk and in turn the utput and prfitability f the business. Staff are recruited t carry ut wrk that best suits their skills and qualificatins. This can increase jb satisfactin fr staff and s mtivate them t wrk t their full ptential. In turn the utput and prfitability f the business can increase. Staff can cncentrate n ne type f task and s becme experts in this kind f wrk. This will increase the quality f their wrk and the efficiency f the business. Specialised departmental knwledge can be used by ther staff eg HRM can assist ther departments with staffing issues. This pl f expertise can can be used t increase the decisin making and effectiveness f all departments and the perfrmance f the business as a whle. The main DRAWBACKS f using a functinal gruping can be seen belw. Staff specialisatin can create inflexibility. This can limit hw the business can deply and use its verall wrkfrce t respnd t custmers changing needs. Functinal departments may becme fcused n their wn pririties and bjectives. This can cause cnflict and s decrease the effectiveness f the business as a whle. Fr example, finance may fcus n lwering csts and s nt be willing t assist HRM by supprting a rise in wages. In large rganisatins, functinal departmental teams may becme very large and s cmmunicatin delays and prblems can ccur which will decrease their effectiveness. BEST Ltd Licensed t: Turnbull High Schl 55

57 b PRODUCT OR SERVICE GROUPING Here a business rganises its staff int teams based n the PRODUCT r SERVICE that they prvide t cnsumers. Fr example, Virgin culd have ne grup f staff dealing with air travel, ne grup f staff dealing with financial services, ne grup f staff dealing with music, etc. The main BENEFITS f using a prduct r service gruping can be seen belw. Staff can becme experts in the best way t prvide ne specific prduct. This expert prvisin will increase prduct quality and in turn sales and prfits. By having seprate grupings fr each prduct, the perfrmance f each prduct can be easily tracked. This can help the business identify which prducts shuld be kept and develped in rder t maximise prfits. By having seprate grupings fr each prduct, the perfrmance f each prduct can be easily tracked. This can help the business identify which prducts are unsuccessful and s shuld be drppped t minimise lsses. By having seprate grupings fr each prduct, the perfrmance f each prduct can be easily tracked. This can be used t develp mtivatinal cmpetitin between departments as they try t imprve the perfrmance f their particular prduct cmpared t thers. This can result in an increase in sales acrss the prduct range and s increased prfits. The main DRAWBACKS f using prduct r service grupings can be seen belw. Cmpetitin between prduct grupings can result in teams being unwilling t help each ther. This can negatively affect verall business perfrmance. Each prduct gruping may require their wn functinal sub grup (ie staff fr marketng, finance, etc). This duplicatin f functinal activities acrss all f the different prduct gruings can be very cstly and inefficient. BEST Ltd Licensed t: Turnbull High Schl 56

58 c CUSTOMER GROUPING Here a business rganises its staff int teams based n the different types f CUSTOMER that they deal with. An example f custmer gruping culd be Direct Line which has sales staff t help private insurance custmers and ther staff t deal with business custmers. The main BENEFITS f using custmer grupings can be seen belw. Staff can becme experts in the best way t satisfy a particular type f custmer. This expert prvisin can increase custmer satisfactin and lyalty. This can mean increased prfits frm repeat sales and recmmendatins t thers abut using the business. Staff can get t knw the changing needs and wants f their specific custmers. This can allw them t update the prducts f the business accrdingly. This can result in greater custmer satisfactin, sales and prfits. By having seprate grupings fr each custmer, the prfitability f each custmer type can be easily tracked. This can help the business identify which custmers may require additinal attentin in rder t prevent lsing their business. The main DRAWBACKS f using custmer grupings can be seen belw. Cmpetitin between custmer grupings can result in teams being unwilling t help each ther. This can negatively affect verall business perfrmance. Each custmer gruping may require their wn functinal sub grup (ie staff fr marketng, finance, etc). This duplicatin f functinal activities acrss all f the different custmer gruings can be very cstly and inefficient. BEST Ltd Licensed t: Turnbull High Schl 57

59 d TERRITORY GROUPING Here a business rganises its staff int teams based n the different TERRITORIES (places) that the business sells in. An example f place gruping culd be Cca Cla which culd have an American divisin, a UK divisin, an Asia divisin, etc. The main BENEFITS f using territry grupings can be seen belw. Staff can becme experts in the best way t satisfy the demands f lcal peple. This expert prvisin can increase custmer satisfactin and lyalty. This can mean increased prfits frm repeat sales and recmmendatins t thers abut using the business. Staff can get t knw the changing needs f their specific territries. This can allw them t update the prducts f the business accrdingly. This can result in greater custmer satisfactin, sales and prfits ver time. By having seprate grupings fr each territry, the business can maximise prfits by identifying which territries are successful (and s can be further develped) and which territries shuld be withdrawn frm t minimise lsses. By tracking the perfrmance f each territry, mtivatinal cmpetitin between territries as can be develped they try t imprve the perfrmance f their particular area cmpared t thers. This can result in an increase in sales and prfits acrss the differnet territries. The main DRAWBACKS f using territry grupings can be seen belw. There can be language, time zne and legal differences which make it hard fr staff in different territries t supprt each ther effectively. This can decrease the flexibility and perfrmance f the verall business. Each territry gruping may require their wn functinal sub grup (ie staff fr marketng, finance, etc). This duplicatin f functinal activities acrss all f the different territry gruings can be very cstly and inefficient. BEST Ltd Licensed t: Turnbull High Schl 58

60 The decisin abut which staff gruping which shuld be used by a business is usually influenced by the fllwing factrs. SIZE OF BUSINESS MARKET (eg multinatinal businesses may wish t use territry grupings) TYPES OF CUSTOMERS SERVED (eg variety in custmers may suit custmer gruping) RANGE OF PRODUCTS SOLD (eg prduct gruping des nt suit single prduct businesses) In many businesses (especially large nes), this decisin abut what will be the best gruping will invlve a cmbinatin f grupings rather than ne alne. Fr example, a large cmpany may chse t use prduct grupings first and then gegraphical grupings within these larger divisins t allw them t tailr these prducts t specific areas. The decisin abut which staff gruping t use t rganise activities is imprtant. This is the case because the fllwing prblems can arise frm a pr chice. LACK OF CUSTOMER SATISFACTION AND LOYALTY FALLING SALES DUE TO INFLEXIBILITY AND DIFFICULTIES IN COPING WITH CHANGES HIGH COSTS OF UNNECESSARY DUPLICATION OF RESOURCES COMMUNICATION BREAKDOWNS WHICH AFFECT EFFICIENCY LOST PROFITS FROM STAFF DIVISION AND A LACK OF CO-OPERATION POOR STAFF MOTIVATION REDUCING OUTPUT AND PROFITS? 59 BEST Ltd Licensed t: Turnbull High Schl

61 2 MANAGEMENT STRUCTURE The term management structure refers t the PLANNED way that a business is MANAGED and CONTROLLED. T create the management structure fr a business, the fllwing decisins will have t be made. WHICH PEOPLE WILL BE IN CHARGE (at varius levels) WHO WILL HAVE DECISION MAKING AUTHORITY (at varius levels) HOW INFORMATION IS TO BE COMMUNICATED The answer t each f the abve decisins will depend n the fllwing factrs. THE ORGANISATION TYPE (eg PLCs will managed by the Bard rather than wners) THE SIZE OF THE ORGANISATION (eg bigger businesses usually have mre managers) MANAGEMENT STYLES USED (eg cntrlling managers may nt share decisin making) THE PRODUCT MARKET (eg fast mving markets will require flexible management) TECHNOLOGY AND ICT AVAILABLE (eg using ICT t cmmunicate may mean less managers) This situatin means that (due t different results t the abve decisins) the management structure f businesses will vary. This is even the case when businesses have similar features (ie similar size, financing, etc). 60 BEST Ltd Licensed t: Turnbull High Schl

62 The main frmal management structures which are used by businesses can be seen belw. a HIERARCHICAL STRUCTURE The hierarchical (aka TALL r PYRAMID) management structure is the traditinal structure fr mst UK businesses, and the main FEATURES f it are as fllws. MANY DISTINCT LEVELS OF MANAGEMENT PYRAMID SHAPED STAFFING STRUCTURE (ie many lw level staff few senir managers) CENTRALISED DECISION MAKING (ie main decisins made by few senir managers) TOP DOWN DECISION MAKING (ie senir managers get thse belw them t fllw their decisins) CLEARLY DEFINED SPECIALISED STAFF ROLES USUALLY INVOLVES FUNCTIONAL STAFF GROUPINGS Examples f hierarchical rganisatins include Multinatinals, the Plice and the Army. The main ADVANTAGES f this structure are as fllws. Strng tp dwn leadership frm tp managers means that all staff are clear n what shuld be dne. This can help the business mve frward tgether in a way that implements decisins effectively and s helps it achieve its bjectives. The senir managers shuld be well qualified and expereinced in making decisins effectively. This can help the business by imprving the verall effectiveness f the decisins and in turn the perfrmance f the business. The high number f managers in the business can ensure that staff are clsely supervised and supprted. This can mean that the perfrmance f staff can imprve and s enhance the perfrmance f business. The large number f management psts creates many pprtunities fr prmtin. This can be mtivating fr staff wh wish t prgress and s can increase the quality and quantiity f their wrk. The specific psts in this structure can allw staff t fcus n their single jb in the business this can decrease staff stress (and s increase jb satisfactin and mtivatin) and imprve the quality f their wrk. 61 BEST Ltd Licensed t: Turnbull High Schl

63 The main DRAWBACKS f the hierarchical rganisatinal structure are as fllws. The large number f management layers can slw the ability f senir managers t gather infrmatin and implement their decisins. This can mean the busines smay find it difficult t respnd t changes in their market and s fall behind mre dynamic cmpetitrs. All staff belw the senir managers will have t ensure that their actins supprt the decisins that they have made. This can be demtivating fr such staff as they may feel they have n cntrl in the business and/r that their skills may nt be fully utilised. The large numbers f managers at increasingly high salaries can mean that the wage csts in this structure are very high. This can affect the prfitbility f the business. Managing Directr Sales and Marketing Manger Purchasing Manager Sales Supervisr Marketing Supervisr Buyer Buyer Assistant Assistant Assistant Assistant Assistant Assistant Assistant Assistant BEST Ltd Licensed t: Turnbull High Schl 62

64 b FLAT STRUCTURE The flat management structure is a mdern structure fr businesses, and the main FEATURES f this structure are as fllws. FEW DISTINCT LEVELS OF MANAGEMENT DECENTRALISED DECISION MAKING (ie decisins made by different grups f staff) FLEXIBLE STAFF ROLES Examples f flat rganisatins include dctrs surgeries, lawyers, and IT businesses. The main ADVANTAGES f this structure are as fllws. The few levels f management can speed up the ability f decisin makers t gather infrmatin and implement their decisins. This can mean the business may find it easier t respnd t changes in their market and s stay ahead f cmpetitrs. The lw number f managers can mean that the wage csts in this structure are relatively lw. This can imprve the prfitbility f the business. Many different staff can be invlved in decisin making. This can be mtivating fr such staff as they may feel they sme cntrl in the business and/r that their skills are being fully utilised. The main DRAWBACKS f the flat rganisatinal structure are as fllws. Decisins may be based n limited infrmatin in particular areas f the business. This can make it difficult t crdinate actins within the business as whle and s make it prblematic fr it t mve frward cherently and achieve its bjectives. Nt all managers will be equally qualified and experienced t make decisins. This can affect the quality f decisin making and perfrmance in the business as a whle. The lw number f managers in the business can mean that staff are nt clsely supervised and supprted. This can mean that the perfrmance f staff may nt be maximised. The small number f management psts des nt create many pprtunities fr prmtin. This can be demtivating fr staff wh wish t prgress. The variety f respnsibilities in many psts in this may increase staff stress (and s decrease jb satisfactin and mtivatin) and impact n the quality f their wrk. 63 BEST Ltd Licensed t: Turnbull High Schl

65 c MATRIX STRUCTURE The matrix management structure is a mdern structure fr businesses, and the main FEATURES f this structure are as fllws. SEPERATE TEAMS FOR DIFFERENT PROJECTS ARE CREATED FROM A POOL OF MANAGERS NO DISTINCT LEVELS OF AUTHORITY IN TEAMS MANAGERS ARE ALL TREATED AS EQUALS INDIVIDUAL MANAGERS HAVE RESPONSIBILITY FOR PARTICULAR DUTIES MANAGERS WILL JOIN NEW TEAMS WHEN INITIAL PROJECT ENDS Examples f the use f matrix management structures includes il explratin and develpment prjects. The main ADVANTAGES f this structure are as fllws. Individual respnsibility fr decisin making will allw the prject team t make quick and fcused prgress. This can mean the business may find it easier t stay ahead f cmpetitrs. The managers in each team are chsen fr their relevant skills and abilities. This means that each prject has the best peple n it and s result in psitive decisin making and perfrmance. Staff invlved can be highly mtivated by the varirty in their wrk, cntrl f decisin making and the effective use f their skills. This can increase the quality f their wrk and business perfrmance. The flexibility f staff and ability f frm several teams at nce can allw a variety f prductive activities t be undertaken at nce. The main DRAWBACKS f the matrix structure are as fllws. It may be difficult t crdinate actins f all the different teams and s make it prblematic fr the business t mve frward cherently and achieve its bjectives. Prject teams usually need supprt staff t help them with their wrk this csts f several grups f supprt staff can lwer prfits. The flexible and highly effective managers used in the prject teams are usually well paid and s their wage csts can be high. 64 BEST Ltd Licensed t: Turnbull High Schl