1. What is a business and why do they exist? 2. Aims and Objectives

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1 1. What is a business and why do they exist? Why set up in business? Some reasons: Fed up with working for someone else, Quality of life, Buzz of success, Feel in control, financial reward, I could do better than that! The world of work is made up of many different types of organizations. They employ millions of people to do different types of jobs. A business is a specific type of organization which exists to sell products (goods or services) to customers. Customers can be private individuals, like us, or other businesses. Why do businesses exist? Every business exists for a purpose. It may sell goods or services. Businesses must make a profit to exist. They need to know what they want to do and how they want to do it in order to attract and keep customers. Therefore, all businesses must have aims and objectives that identify what they wish to achieve. 2. Aims and Objectives Aims are what the business wants to achieve, e.g. make a profit, be the best, attract new customers, etc. Objectives are the targets that businesses set themselves to help them to achieve their aims. Aims are important to businesses because having some targets and goals gives them a purpose and helps to focus what they do. The aims of an organization often include to: create a profit or surplus funds, sell or provide goods or services, survive, expand, maximize sales, improve product quality, beat the competition, provide voluntary services, be kind to the environment. Objectives are often set in financial terms. That means that the objective is expressed in terms of a financial outcome that is to be achieved. Those could include: Desired sales or profit levels, Rates of growth, Amount of cash generated. Organizations are divided into two sectors: private and public. The sectors have different aims as they do different things. Private sector businesses aim to make a profit to survive. They are usually owned by private individuals or groups. Public sector organizations are owned or controlled by the government or regional authorities. They are not businesses because they are not seeking a profit; most of their money comes from funds that are acquired through taxes. However, public sector organizations often have similar aims to businesses, because they also need to run efficiently. SMART: Organizations set themselves objectives to help them to achieve their aims. Many set Specific, Measurable, Achievable, Realistic, Time based. Here is an example of an aim with its SMART objective: Aim: To make a profit. Objective: Increase sales by 10% in the next six months 1

2 Mission Statement: Definition: A sentence describing a company's function, markets and competitive advantages; a short written statement of your business goals and philosophies. e.g: Facebook: Facebook s mission is to give people the power to share and make the world more open and connected. Google: Google s mission is to organize the world s information and make it universally accessible and useful. 3. Public and Private Sector Businesses Private Sector Public Sector Businesses privately owned and run. Sole Trader Partnerships LTDs PLCs Franchises Charities Voluntary Organisations -Businesses owned and run by government - Health Service (NHS) - Schools - Emergency Services - Armed Forces - Refuse Collectors (Bin Men) Aim to make money For owners and Shareholders Aim to provide a good quality Service for the public How funding for the Public Sector works: Government Taxpayers Public Services The Chancellor s Budget

3 International Economies Command Economy An economy where most consumer goods are produced by the public sector. North Korea Free Market Economy Where over 60% of consumer goods and services are produced by private businesses. Canada Mixed Economy Where over 40% of consumer goods and services are produced by the state. UK The Public Sector and Nationalisation The Public Sector: Business Activity owned, financed and controlled by the state through government or local authorities Government key departments set policy and monitor implementation Local Authorities County Councils, District Councils, Parish Councils Health Trusts - NHS Public Corporations BBC Objectives of Public Sector Activity: Access available to all regardless of location or income Quality high quality services that do not cut corners Affordability services offered at prices that are cheaper than private sector or free at the point of use. Equity available to anyone whatever their background, status, income, class, race, religion, etc. Most Public Sector Organisations provide services that the government believe are needed for the benefit of the UK. It would prove difficult or unethical to charge people for their individual use of these services. Social objectives are important to these organisations, for example to provide a service to remote communities. Advantages of Public Ownership: Jobs - Usually protected, reducing unemployment. Resources - Key supplies, e.g. water and energy, can be guaranteed and controlled. Essential services - Health, education, housing and transport are guaranteed for everyone. The main argument for public ownership is that the whole population benefits rather than just those who can afford to pay privately. 3

4 Disadvantages of Public Ownership Higher costs - Providing these services means higher costs, and higher taxes. Inefficiency - Large non-profit making organisations suffer from diseconomies of scale Government interference - Politicians' interference can negatively affect the efficiency of an organisation Nationalisation There are times when the government has to step in to take control of privatised companies. This can happen for a number of reasons A company that provides a vital service/product can no longer continue A company is not operating in the best interests of the public Examples of Nationalisation: HBOS Northern Rock British Aerospace The Public Sector and Privatisation There used to be many more Public Sector organisations in the UK than there are today. In 1981 The Government began selling off public sector organisations to private individuals by selling shares in them (privatisation) there were major flotation's Major flotation's of public sector organisations: British Petroleum 1983 British Gas 1986 British Airways and Rolls Royce 1987 Water & Electricity Boards British Rail 1996 The reasons given for privatisation were that it would: Improve government finances. That it would improve the efficiency of these firms as a result of more competition in the private sector. It was also hoped that it would encourage more people to buy shares. 4

5 What happened to firms after privatisation? Changes were made to increase efficiency. Firms faced competition. Profit became the most important objective for privatised firms. 60 billion was raised from share sales between 1981 & Different types of business ownership Sole Traders Partnerships Types of Businesses Private Limited Company LTD Multinational Companies Franchises Public Limited Company PLC Sole Traders A sole trader is an INDIVIDUAL who may or may not employ other people, but who OWNS and operates the business and who has UNLIMITED LIABILITY. It is the simplest form of business ownership. Unlimited liability: Sole traders have unlimited liability. This means that the owners are personally responsible for paying debts if the business goes bankrupt. Advantages of Sole Traders EASY TO SET UP: It is easy to set up a sole trader. A person can set up a business immediately. EASY TO RUN: Easier to run than any other types of business. The owner is in sole charge. TAX ADVANTAGES: Taxed differently e.g. NI contributions are lower; there are no legal fees to set up. CONTROL: The owner is in sole charge can make whatever changes they want. CAPITAL: The amount of money needed to set up a sole proprietorship is often small PROFITS: All the profits of the business are kept by the owner PRIVACY: Only the Inland Revenue & Customs and Excise need to know about the finances of a sole trader FLEXIBILITY: Many sole traders have some choice about when they work 5

6 Disadvantages of Sole Traders UNLIMITED LIABILITY: If the business does very badly and has lots of debts, as a sole trader you must pay off these debts even if it means selling all your possessions, like a car LACK OF CONTINUITY: The sole trader IS the business; it may not survive if the sole trader stops work ILLNESS: The business may stop if the sole trader is ill LONG HOURS: Sole traders work really long hours to keep their business afloat LIMITED SPECIALISATION: Sole traders carry out jobs in the business themselves DIFFICULTY OF RAISING CAPITAL: may have to borrow the money from a bank, who may only agree to it if they pay a high interest repayment rate. Partnerships PARTNERSHIPS: A group of people (often with similar interests) who come together to share the workload and responsibility of running a business. Minimum 2 Maximum 20 Partnership Examples: Lawyers, Architects, Accountants Why Partnerships?: The main reason is usually to expand the business by an increase in capital or to gain specialist skills that are required for the business to develop Who owns a partnership? : The business is owned by the partners equally e.g. if there are 3 partners then they will each own a third of the business, this is the case unless stated otherwise in the deed of partnership. Who manages the business? : The partners share the control of the business equally unless the partnership agreement states otherwise. In many partnerships each partner may run a separate department. Deed of Partnership How profits and losses are to be shared. How much money each partner has put into the business How much each partner gets paid salary. The working arrangements of the partnership e.g. who has responsibility for which part of the business Arrangements for removing a partner or adding a partner to a business. Arrangements for ending the partnership and the dividing up the assets once the partnership is dissolved. Advantages of forming a partnership Easy to set up. Business can gain professional help through taking on a qualified partner. New Partners - New Ideas Extra partners bring extra capital Responsibility for running the business (both decision making and workload) is shared Finances are kept private Division of labour leads to greater expertise Disadvantages of forming a partnership Unlimited liability for the debts of the business Finance still limited Lack of continuity No consultation required (Deeds of Partnership are only recommended) Decision making more complex 6

7 Limited Partnerships You may have seen the letters LLP after the name of some businesses. A recent change in the law now allows partnerships to operate as limited liability partnerships. Many solicitors are choosing to operate this type of business organisation. Private Limited Companies (LTD s) A Private Limited Company is a type of company that offers limited liability to its shareholders but that places certain restrictions on its ownership. Well over 95% of limited companies in the UK are private it is by far the most common form of limited company. Are a type of company Companies are usually larger than partnerships/sole traders They can be local companies and multi-national giants. When a company is limited it means that the owners have limited liability. The owners are only responsible for the amount that they have invested, not personally. If you have put 1000 in then that is all you will lose. A LTD is usually small to medium size and sells shares privately to family and friends. They receive dividends in return. The founder usually owns 50% of the shares. There must be at least 1 director and 1 shareholder, who can be the same person. Shareholders vote for a board of directors who run the business. The company must have the words Limited or LTD in its name. Public Limited Company (PLC) Public Limited Companies are the biggest type of private businesses in the UK. A public limited company ('PLC') is a company that is able to offer its shares to the public. They don t have to offer those shares to the public, but they can. A PLC is usually large and sells shares to the public You need a minimum of 50,000 capital to set up a PLC The money is raised by issuing shares on the stock exchange. Shareholders have Limited Liability Anyone (over 18) can buy shares in a PLC Shareholders nominate directors to run the company Accounts must be published and made available to anyone who wants to see them. There are some specific requirements for a PLC which must be met: The minimum number of shareholders must be two (a private limited company only needs one shareholder) The Company Secretary must be a qualified person (in a private company the secretary does not need to be qualified) The minimum number of Directors is two (just one needed for a private company) To set up a PLC you need to work through a set procedure: 7

8 The Procedure to set up as an LTD 2 Documents need to be sent to the Registrar of Companies: Memorandum of Association states the companies details. The Company s Names The Address of its registered office A statement of limited liability The amount of share capital to be raised The purpose of the company The Articles of Association states how the company is going to be run. Rights of shareholders Appointment of Directors Rules about meeting Procedures of AGM Registrar at companies house issues a Certificate of Incorporation when they are satisfied with all the details given in the 2 documents. 8

9 The Procedure to set up as a PLC Memorandum of Association and Articles of Association sent to Registrar of companies Registrar Issues Certificate of Incorporation Company Issues Prospectus Shares are Issued Registrar draws up Certificate of Trading Company can Begin Trading Takeover This is when one company buys another company. They do this by buying up 51% of the shares of the company. Merger This is when two companies join together. A combination of two or more companies in which the assets and liabilities of the selling firm(s) are absorbed by the buying firm. Although the buying firm may be a considerably different organization after the merger, it retains its original identity. Franchises A franchise is a marketing arrangement allowing another business to trade in the same style as an existing business Key terms: Imagine a company has a great and successful business. It wants to expand but it doesn t want the problems and expense of opening more stores so it sells the business idea. If you buy a franchise it is a business in a box, as well as signage and training you get support of a national company and a brand that customers already know. Franchisor The person or business who offers to franchise to other businesses its trading methods, products and business logos Franchisee A person or business buying the franchise Royalty A payment made to the franchisor based on the sales turnover of the franchise 9

10 Assessing a franchise opportunity Location of franchise Successes of other franchises What the business is / how it operates Competition in same market sector How long the franchisor has been in business and how financially secure it is Training and support offered. Conditions and restrictions (I.e. how long is agreement, how it is run) Initial and on-going costs I.e. McDonalds initial cost is between 150,000 and 500,000 Advantages of franchises Disadvantages of franchises A designated area of operation, with no competition from other franchises made available from the same company. A tried and tested business idea. Logos and products which are usually already established in the market. National advertising and promotion campaigns may be paid for by the franchisor. Training and advice on how to run the business. Reduced risk of business failure. All supplies must usually be purchased from the franchisor at the price which they determine. A large amount of initial capital may be required. Annual royalty payment based on profit or sales revenue may be required. The owner of the business may not have total control over the way in which the business operates. The business may not make enough profit to help cover the cost of the initial payment. Losses have to be paid for by the franchisee. Other forms of business ownership: Charities A charity is defined by the Charities Act 2006 as: A body or trust which is for a charitable purpose that provides benefit for the public They: Are run by trustees who are volunteers Do not set out to make a profit Instead they will want to make a surplus Most are regulated by the charity Commission Voluntary Organisations A voluntary group is: A collection of individuals who work together without monetary reward for the benefit of the community Many voluntary groups are charities So the same rules apply They may employ staff who are paid! 10

11 Co-operatives Co-operatives are businesses formed by people who want to work together. They are a bit like limited-liability partnerships. The main benefit is that there should be no conflict between the main stakeholders they are the same people. They can be identified by the following features: A company owned by at least 2 members Shares are sold privately to members Members have LIMITED LIABILITY Each member has one vote Profits belong to the members and are shared equally The value of shares does not change Worker Co-ops Workers invest equal amounts of money Decision-making is shared Profits are shared Producer Co-ops Producers often set these up to share the costs of: Marketing Distribution Selling Consumer Co-ops Originally set up to: Buy in bulk Reduce prices This is the best known type of co-op Is it a good idea to be a Co-op? Advantages 1. Finance can be raised from members 2. Buying in bulk reduces costs 3. Members have limited liability 4. Members are likely to work hard, since they get to share the profit 5. It encourages members to get involved in the local community. Disadvantages 1. It can take a long time to make decisions 2. More members means profits have to be shared with more people 3. Not all members can be involved if the co-op becomes large 4. Only big, easily available sources of finance are the owners capital and retained profits, this makes expansion difficult. 5. The value of the share decreases in value Social Enterprises A social enterprise is a business whose objectives are primarily social, and whose profits are reinvested back into its services or the community. 11

12 Social enterprises are organisations that: Are led by an economic, social, cultural, or environmental mission consistent with a public or community benefit; There are no shareholders or owners, social enterprises are free to use their surplus income to invest in their operations to make them as efficient and effective as possible. Examples of Social Enterprises: Turning Point, the Eden Project, the Big Issue, and Jamie Oliver s Fifteen restaurant. Multinational Companies A multinational company is one that operates in more than one country, and typically operates in a number of major global markets. The three main developed trading areas of the world are North America, The European Union, and South-East Asia (and Australasia). Examples of multinationals are Coca-Cola, Cadbury, McDonalds, Kellogg's, Apple, and many more. An important characteristic of these organisations is that they have well established corporate brands that are widely recognised - for example, Coca-Cola is the second best known expression in the world after OK. Location of business The decision where to locate is one of the most important decisions a business takes. Make the right decision, and the business may flourish and become successful. Make the wrong decision, and the business may find it very difficult to succeed. 12

13 Factors affecting location of business It is rarely one factor which affects the decision to locate in a particular area but a combination. Much will depend on the type of business activity. A bakery producing bread and cakes will usually need to be located near to the market it is serving. Government and location: Some of the ways the government influences location decisions are described below. Regional Development Agencies (RDA s) Nine RDA s operate in England. Their work is to encourage business development in the area that they represent. Giving grants to encourage inward investment Grants for small business start-ups Organising training Improving the infrastructure Other examples of factors affecting location Availability of and access to raw materials The cost of the location Access to and nearness to markets Availability of labour Climate and physical geography Transport and infrastructure. 6. Business Sectors Businesses provide both goods and services, and often depend on each other. Production is the process of taking resources and changing them into products and services. The three sectors: Primary: Produces raw materials using natural resources Secondary: Manufactures goods using the raw materials. This sector is currently on the decline. A couple of reasons are because of cheaper imports and the use of machinery. Tertiary: Provides a service by selling the manufactured goods. This sector employment has gone up. Some reasons for this are due to an increase in leisure time, a rising population, increased wealth of people, people living longer and more shops opening. Interdependence Before they can be sold goods have to be made. Before they can be made the raw materials must be obtained or grown 13

14 E.g. A chocolate bar will need: Ingredients, Machines to mix the ingredients and to share the bar and transport and shops to get the bar to the consumer. This means that each type of business depends upon the others. This is known as interdependence. E.g. Cadburys is reliant on famers for the Cocoa. The chain of production shows that businesses and their customers are highly INTERDEPENDENT. Specialisation When a business is in one particular sector and area. For example, the specialisation of a toy maker is making toys leaving the selling of toys to another specialist. Added Value: As raw materials are made into finished goods value is added. When the product is sold in the tertiary sector more value to the product is added. Businesses grow in three main ways: The growth of businesses Merging with another business: A merger takes place when two or more businesses agree to join together to become one larger business. Taking over another business: This is when one business buys control of another. This is achieved by buying enough shares in the firm to be able to outvote other shareholders. Internal expansion: This is when the business grows by increasing its production, perhaps by building new plant or new shops. Integration There are several different types of integration. Each different type will have different advantages and disadvantages. The main reasons which bring about merger or takeover, regardless of the type of integration, will be the desire of the business starting the merger or takeover process to achieve growth. HORIZONTAL INTEGRATION: Two businesses at the same stage of production. e.g. 2 table makers join together BACKWARDS VERTICAL INTEGRATION: A business takes over or merges with a business at the previous stage of production. e.g. a table maker joins with a tree cutter FORWARDS VERTICAL INTEGRATION: A business takes over or merges with a business at the next stage of production. e.g. table maker joins with a shop DIVERSIFICATION (Conglomerate): Merger or takeover of another business involved in an unrelated business activity. 14

15 7. Stakeholders Any individual or group affected by the activities of a business is known as a stakeholder in that business. There are two types of stakeholders: Internal stakeholders and external stakeholders. Internal Stakeholders are groups involved directly within the Business, I.e. Owners, Managers, Employees External Stakeholders are people interested in the Business that are not directly involved with it, I.e. Suppliers, Customers, Society. Stakeholder examples include: Customers, Employees, Suppliers, The Government, Shareholders, the local community, managers. Their objectives are often different: Customers Value for money Choice Owners Survival in business Managers Salary Company car Status BUSINESS Employees Job satisfaction Good pay Secure future Suppliers Repeat orders Reliable Local Community Jobs Clean environment Support Projects 8. Methods of Organisation When hiring large numbers of staff, organisation is important. Everyone within the company needs to understand their role. Managers need to organise their staff and keep them motivated. As a business grows in size and takes on more staff, managers need to make sure employees understand their role within the company. Organisation is the way a business is structured. Organisation charts are diagrams that show the internal structure of the business. They make it easy to identify the specific roles and responsibilities of staff. They also show how different roles relate to one another and the structure of departments within the whole company. 15

16 An organisation chart Ways to Structure a Business By function: arranging the business according to what each section or department does By product or activity: organising according to the different products made By area: geographical or regional structure By customer: where different customer groups have different needs By process: where products have to go through stages as they are made All businesses will carry out each of these functions but... Not every business will have a separate department that is responsible for each function Small businesses may have one or two people who try and do everything! 16

17 Centralisation: In a centralised organisation decisions about the company are made at head office. Deciding on objectives is done from Head Office. Common systems and procedures are laid down so that economies of scale can be maximised. They can be slow to make decisions and respond to the needs of the market. Decentralisation: The power to make decisions is devolved or given to smaller parts of the organisation. Decentralisation encourages workers to change more quickly as the business environment changes. It gives power to those who are closest to customers, suppliers and to the market. Organisational Structures Managing Director Finance Director Marketing Director HR Director Marketing Manager Marketing Assistant Marketing Assistant Key terms of organisation structure: Hierarchy refers to the management levels within an organisation. Line managers are responsible for overseeing the work of other staff. Subordinates report to other staff higher up the hierarchy. Subordinates are accountable to their line manager for their actions. Authority refers to the power managers have to direct subordinates and make decisions. Delegation is when managers entrust tasks or decisions to subordinates. Empowerment sees managers passing authority to make decisions down to subordinates. Empowerment can be motivational. The span of control measures the number of subordinates reporting directly to a manager. The chain of command is the path of authority along which instructions are passed, from the CEO downwards. Lines of communication are the routes messages travel along. 17

18 The staff structures of a tall organisation and a flat organisation Tall organisations have many levels of hierarchy. The span of control is narrow and there are opportunities for promotion. Lines of communication are long, making the firm unresponsive to change. Flat organisations have few levels of hierarchy. Lines of communication are short, making the firm responsive to change. 9. Communication What is Communication? : Simply a method of sending a message from one person or group of persons to another. * Every business needs to communicate. People within the business need to communicate between themselves. * The business needs to communicate with outsiders such as customers, suppliers and government. This means that businesses have to decide what the most effective means of communication is. Internal Communication: - Within the business. External Communication: - Outside the business. Some methods of communication cross over and can be used internally and externally. Verbal Communication: A medium for communication that entails talking using the spoken word, such as talking face-to-face, on a telephone, or as a speech. This type of communication is quick, easy and cheap. Tone of voice and body language can indicate the mood. Methods of verbal communication. Telephone: - Able to speak to people that are not in the same location. Voic - A messaging service which allows the message to be saved and dealt with later. Meetings: - Instant feedback but costly to arrange. Formal meetings will follow an agenda. Presentation: - Allows complex information to be communicated but can take time to prepare. Spoken Message & Discussions: - Can provide instant feedback but no permanent record. 18

19 Non-verbal communication: Non Verbal Communication is communication of feelings, emotions, attitudes, and thoughts through body movements / gestures / eye contact, etc. Research suggests that more than 70% of communication occurs without people having to say a single word. Communications: Written - This method produces a permanent record. - It does take time to produce and time to deliver. SENDER Customer COMMUNICATION A complicated loan Application form RECEIVER Loans department at bank FEEDBACK Confirmation that loan has been granted The communication process diagram Good communication is essential to any business: Accurate advertising brochures avoid disappointed customers. An accurate memo from the personnel department might help clear up a misunderstanding. Barriers to communication: Timing: The message may be sent at the wrong time. Clarity: The sender may not make the message clear to the receiver. The attitudes of the sender or the receiver: The sender may talk down to the receiver so that he or she does not like what they hear. The wrong method of communication may be used: An giving an urgent message will not work if the receiver only checks their once a week. Feedback is not received or is not appropriate: The sender may not check with the receiver that they have understood the message. There is a problem with the means of communication: may not be received if there is a problem with the receivers computer. 19

20 Channels of communication: - Information passes along channels of communication. - These are channels which are recognised and approved by the business. - There are two main types of formal communication: - Vertical Communication: is communication up and down the hierarchy of the business. - Horizontal Communication: occurs when workers at the same level communicate formally with each other. Formal and informal Communication: * Formal Communication: The main types of formal communication within a business are (1) downward where information moves from higher management to subordinate employees, (2) upward where information moves from employees to management and (3) horizontal where information is shared between peers. * Informal Communication: Within a business environment, informal communication is sometimes called the grapevine and might be observed occurring in conversations, electronic mails, text messages and phone calls between socializing employees. TELEPHONE LETTERS CONVERSATION MESSAGES FAX & FORMS VERBAL WRITTEN NON-VERBAL PRESENTATIONS MEMOS REPORTS MEETINGS RECEPTION GRAPHS & CHARTS NOTICES 10. The effect of technology on work Where people work and the nature of the work that they do has changed significantly with developments in technology. Teleworking: Teleworking is a method of workforce planning that allows employees to spend all or part of their working week at a location remote from employers workplaces. Home working is a form of teleworking. Working from home: Many workers are now able to work from home. They may have an office in their home containing a computer, telephone and fax machine. They contact clients by telephone or fax or . Some businesses are using video-conferencing so that workers do not 20

21 This even have to come to work for meetings. Hours of work: ICT has made it possible for people to work at different times. Work does not need to be done during office hours. However, some workers may find that they work longer because there is no restriction on the time they can work. may be good if they want to do this and are paid for it, but it may cause stress and harm a person s work-life balance. Summary: The way in which we work has changed dramatically in recent years. New technology has made it possible for more work to be done at home. This can save money, increase staff motivation and enable them to work with greater concentration. However, working at home is not always possible or desirable. Key Terms 1. Aims and Objectives 2. Public and private sector 3. Types of Business Ownership 4. Business Sectors 5. Functional Areas 6.Communication Methods 7. Specialisation and integration Key Word Objective Aim Mission Statement Public Sector Private Sector Nationalisation Privatisation Sole Trader Partnerships LTD PLC Franchises Franchisor Franchisee Business Sectors Interdependence Stakeholder Functional Area Organisational Structures Hierarchy Chain of Command Span of control Methods of communication Specialisation Horizontal integration Forward vertical integration Backward vertical integration Write in a definition. 21