Business in a Contemporary Society Int 2


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  • Business in a Contemporary Society Int 2

    1. 1. Int 2 Business Management (Revised) Business in Contemporary Society
    2. 2. Business Cycle Business Cycle Business provides goods/services Consumer buy goods/services Wealth for companies and employees Consumers have money to spend from wages Needs & Wants
    3. 3. Goods and Services <ul><li>Goods are tangible , things we can see and touch like clothes, DVDs, cars etc… </li></ul><ul><li>Goods can be durable or non-durable </li></ul><ul><li>Services are things that are done for us. They are intangible </li></ul>
    4. 4. Needs and Wants <ul><li>Needs – a need is something essential to our lives: food, water, shelter, clothing </li></ul><ul><li>Wants – a want is an additional luxury that makes life pleasurable </li></ul>
    5. 5. Business Activity <ul><li>Business activity is any activity which provides us with goods and services that satisfies human needs and wants </li></ul>Q. How is a nation’s wealth measured?
    6. 6. Factors of Production <ul><li>In order to produce goods and services, businesses need to use resources </li></ul><ul><li>LAND </li></ul><ul><li>LABOUR </li></ul><ul><li>CAPITAL </li></ul><ul><li>ENTERPRISE </li></ul>
    7. 7. Factors of Production <ul><li>Land – natural resources extracted from Earth. Can be renewable or non-renewable </li></ul><ul><li>Labour – physical and mental effort of people in organisations </li></ul><ul><li>Capital – man-made resources, such as buildings, machines, tools </li></ul><ul><li>Enterprise – bringing together the other three factors of production </li></ul>
    8. 8. IPO Input Process Output Raw materials workers Finished Natural resources machinery goods
    9. 9. Sectors of Industrial Activity <ul><li>Primary Sector – businesses involved in exploiting or extracting natural resources (mining, fishing, farming) </li></ul><ul><li>Secondary Sector – businesses involved in manufacturing and construction. Includes utilities. </li></ul><ul><li>Tertiary Sector – Businesses involved in providing services such as banking, tourism, security </li></ul>
    10. 10. De-industrialisation <ul><li>Economies begin in the primary sector and as it grows moves through each sector. </li></ul><ul><li>Reasons for this can be: </li></ul><ul><li>Changes in demand </li></ul><ul><li>Increased overseas competition </li></ul><ul><li>Lack of investment </li></ul><ul><li>Restrictive government policies </li></ul>
    11. 11. Types of Ownership <ul><li>Sole Trader </li></ul><ul><li>Partnerships </li></ul><ul><li>Private Limited Co. </li></ul><ul><li>Public Limited Co. </li></ul><ul><li>Franchises </li></ul><ul><li>Co-operatives </li></ul><ul><li>Charities </li></ul>
    12. 12. Sole Trader <ul><li>One man/woman business </li></ul><ul><li>Sole Trader owns business. Owner and business are the same </li></ul><ul><li>Owner provides own capital (savings & borrowings) </li></ul><ul><li>Profits go to the owner (but responsible for losses) </li></ul><ul><li>Owner controls business, all decisions are theirs </li></ul>
    13. 13. Sole Trader +/- <ul><li>Easy to set up </li></ul><ul><li>Can make decisions quickly </li></ul><ul><li>Personal attention to business </li></ul><ul><li>Profits are not shared </li></ul><ul><li>Can cater for local needs </li></ul><ul><li>Business affairs kept private </li></ul><ul><li>Limited capital </li></ul><ul><li>Unlimited liability </li></ul><ul><li>Commitment (long hours, every day) </li></ul><ul><li>New ideas may be limited </li></ul>
    14. 14. Partnerships <ul><li>A business owned by several people 2-20 </li></ul><ul><li>Deed of Partnership – contract dealing with share of profits, roles and duties, capital contributed, dispute procedures </li></ul><ul><li>Owned jointly but not always equally </li></ul><ul><li>Partnership is an extension of sole trader </li></ul><ul><li>Capital provided by partners </li></ul><ul><li>Profit goes to partners, not always equally </li></ul><ul><li>All partners entitled to participate in management (unless silent partners ) </li></ul>
    15. 15. Partnership +/- <ul><li>More capital </li></ul><ul><li>Excessive hours can be cut down </li></ul><ul><li>More ideas may be generated </li></ul><ul><li>Specialisation can occur </li></ul><ul><li>Limited partnerships </li></ul><ul><li>Actions of one partner binds all </li></ul><ul><li>More discussion and consultation </li></ul><ul><li>Limitation on number of partners </li></ul><ul><li>Unlimited liability </li></ul><ul><li>Partnership ends if a partner dies </li></ul>
    16. 16. Private Limited Companies (Ltd.) <ul><li>Organisation owned by a group of individuals (2+ shareholders) </li></ul><ul><li>Memorandum/Articles of Association </li></ul><ul><li>Owned by Shareholders (usually family) whose main function is to elect Board of Directors </li></ul><ul><li>Money raised by share issue or borrowing </li></ul><ul><li>Ordinary Shares & Preference Shares </li></ul><ul><li>Profit shared between shareholders or retained by company </li></ul>
    17. 17. Private Ltd. +/- <ul><li>More capital </li></ul><ul><li>Limited liability </li></ul><ul><li>Owner can retain control </li></ul><ul><li>Company does not die if owners die </li></ul><ul><li>Must be registered with Registrar of Companies </li></ul><ul><li>Harder to motivate & control workers </li></ul><ul><li>High set up costs (legal and administrative) </li></ul><ul><li>Diseconomies of scale </li></ul>                                
    18. 18. Public Limited Companies (plc) <ul><li>Org. owned by a group of individuals, has plc after name </li></ul><ul><li>Certificate of Incorporation approved by Registrar of Companies </li></ul><ul><li>Shareholders 2+. Shares sold on stock exchange. Prospectus prepared to attract shareholders </li></ul><ul><li>Capital raised by share issue or borrowing </li></ul><ul><li>Profits shared between shareholders or retained by company </li></ul><ul><li>Board of Directors = Divorce of ownership and control </li></ul>
    19. 19. plc +/- <ul><li>More capital </li></ul><ul><li>Employ specialists </li></ul><ul><li>Limited liability </li></ul><ul><li>Company does not die if owners die </li></ul><ul><li>Shares can be issued through stock exchange </li></ul><ul><li>Formation expensive (legal & administrative costs) </li></ul><ul><li>Must publish accounts </li></ul><ul><li>May become too large to manage effectively </li></ul><ul><li>Decisions more difficult to arrive at </li></ul><ul><li>Diseconomies of scale </li></ul>
    20. 20. Franchise <ul><li>Is when a Business/individual buys a license to operate a well known firm </li></ul><ul><li>Owned by Franchisor </li></ul><ul><li>Franchisee pays Franchisor to get license as well as a royalty </li></ul><ul><li>Franchisees runs business on Franchisor’s guidelines </li></ul>
    21. 21. Franchise +/- <ul><li>Franchisor provides a lot of support; training to start business, equipment, materials, advice, brand name </li></ul><ul><li>Take over a successful, winning formula </li></ul><ul><li>Franchisee doesn’t have complete freedom </li></ul><ul><li>May not agree with decision placed upon you </li></ul><ul><li>Royalties paid to Franchisor </li></ul>
    22. 22. Co-operatives <ul><li>Organisations set up to benefit workers or consumers </li></ul><ul><li>Retail – owned by workers and shoppers </li></ul><ul><li>Producer – owned by workers </li></ul><ul><li>Retail – every pound spent receives dividend or voucher </li></ul><ul><li>Producer – money comes from workers who share profits and share a salary </li></ul><ul><li>Board of Directors (who may also be workers) </li></ul>
    23. 23. Co-operatives +/- <ul><li>Less conflict between workers and managers   </li></ul><ul><li>Workers should be more motivated </li></ul><ul><li>Difficult to grow and find additional capital   </li></ul><ul><li>New workers may not be able to raise capital needed to join co-op </li></ul>
    24. 24. Charities <ul><li>An organisation formed to raise money for underprivileged people </li></ul><ul><li>Trustees </li></ul><ul><li>Charities raise money through shops, donations and lottery money </li></ul><ul><li>Surplus after costs goes to the ‘needy’ </li></ul><ul><li>Board of Managers </li></ul>
    25. 25. Charities +/- <ul><li>If charity has status of charitable trust it doesn’t pay tax   </li></ul><ul><li>Looks after less privileged and the environment </li></ul><ul><li>Less money may be donated due to introduction of lottery </li></ul><ul><li>Relies on voluntary workers who may not be paid for work </li></ul>
    26. 26. Public Sector Organisations <ul><li>Businesses set up by an Act of Parliament </li></ul><ul><li>Government provides capital through Treasury </li></ul><ul><li>Govt. appoints Chairman and Board </li></ul><ul><li>They may be natural monopolies </li></ul><ul><li>May be unattractive to private sector due to enormous capital investment </li></ul>
    27. 27. Public Corporations <ul><li>Reasons for being set-up: </li></ul><ul><li>To avoid wasteful duplication and confusion </li></ul><ul><li>To set up and run important non-profitable services </li></ul><ul><li>To prevent exploitation of consumers </li></ul><ul><li>To protect jobs and key industries </li></ul>
    28. 28. Privatisation <ul><li>Is: “The selling off of Public Corporations to the private sector” </li></ul><ul><li>Why Privatise? </li></ul><ul><li>To improve efficiency by introducing competition </li></ul><ul><li>Shareholders in Modern Society </li></ul><ul><li>Privatisation raises huge monies for government </li></ul>
    29. 29. Business Objectives <ul><li>Survival </li></ul><ul><li>Growth and development </li></ul><ul><li>Profit maximisation </li></ul><ul><li>Social responsibility </li></ul><ul><li>Providing a service </li></ul>
    30. 30. Objectives by Business Sector Help people, improve quality of service, cut costs, raise revenue Public Sector Help others, maximise cash collections, offer a service to community Voluntary Sector Survival, profit maximisation, increase returns to shareholders Private Sector Aims/Objectives Type of Business
    31. 31. Entrepreneurs <ul><li>A person who takes an idea and through ability and vision turns it into a good or service. </li></ul><ul><li>Richard Branson, left, is Britain’s most famous entrepreneur </li></ul>
    32. 32. Role of Entrepreneur <ul><li>Identifying business opportunities </li></ul><ul><li>Franchising </li></ul><ul><li>Combining Factors of Production </li></ul><ul><li>Innovation and Risk Taking </li></ul>
    33. 33. Identify Business Opportunities <ul><li>Look for a gap in the market </li></ul><ul><li>Examples: </li></ul><ul><li>McDonald’s Home Delivery in Clydebank? ¹ </li></ul><ul><li>Virgin Galactic ² </li></ul><ul><li>MJM³ </li></ul>
    34. 34. Entrepreneurs and Franchising <ul><li>In order to minimise risks, many young entrepreneurs have taken to using franchises as a means of starting up a business. </li></ul>
    35. 35. Combining Factors of Production <ul><li>The Entrepreneur brings together Land, Labour and Capital. </li></ul><ul><li>Let’s look at Richard Branson at Virgin : </li></ul><ul><li>He would buy or rent the buildings/property (LAND) </li></ul><ul><li>He would hire the staff (LABOUR) </li></ul><ul><li>He would raise the money to start the venture as well as buy machinery/equipment (CAPITAL). </li></ul>
    36. 36. Innovation and Risk Taking <ul><li>Entrepreneurs do not invent but innovate. </li></ul><ul><li>Henry Ford did not invent the automobile but through different innovations such as the assembly line and mass production he helped popularise car use and make it affordable for customers to buy </li></ul><ul><li>Risks involved are usually to do with uncertainty and money. No-one knows for sure if a new venture will be successful. The entrepreneur could go bust… like John DeLorean ¹ </li></ul>
    37. 37. DeLorean Car & Sinclair C5 The DeLorean car bankrupted its owner; the C5 was also a massive flop and ruined Sir Clive Sinclair’s reputation.
    38. 38. Stakeholders <ul><li>Stakeholders are people with a key interest in a business </li></ul><ul><li>Stakeholders effect businesses by exerting influence over decisions </li></ul><ul><li>Their influence depends on the degree of their involvement or relative interest in company </li></ul>
    39. 39. Identifying Stakeholders <ul><li>INTERNAL </li></ul><ul><li>Owners/Shareholders </li></ul><ul><li>Employees </li></ul><ul><li>Management </li></ul><ul><li>EXTERNAL </li></ul><ul><li>Customers </li></ul><ul><li>Banks </li></ul><ul><li>Investors </li></ul><ul><li>Local government </li></ul><ul><li>Suppliers </li></ul><ul><li>Donors (for Charities) </li></ul><ul><li>Taxpayers </li></ul><ul><li>Community </li></ul>
    40. 40. Stakeholder Aims/Objectives <ul><li>Owners = profits, dividends </li></ul><ul><li>Managers = promotion, job security </li></ul><ul><li>Employees = wages, working conditions, job security </li></ul><ul><li>Suppliers = regular orders, payment </li></ul><ul><li>Customers = low prices, high quality </li></ul><ul><li>Banks = loans repaid on time </li></ul>
    41. 41. Influence of Stakeholders <ul><li>Cabinet </li></ul><ul><li>Backbenchers </li></ul><ul><li>Party Members </li></ul><ul><li>Trade Unions </li></ul><ul><li>Media </li></ul><ul><li>General Public (Voters) </li></ul><ul><li>Pressure Groups </li></ul>Tony Blair is influenced by:
    42. 42. Sources of Finance
    43. 43. Internal Sources of Finance <ul><li>Retained Profits – profit kept by company for future activities </li></ul><ul><li>Selling Assets – money raised by selling off an asset no longer needed </li></ul><ul><li>Both are Short-term </li></ul>
    44. 44. External Sources of Finance <ul><li>Long Term (10 years +) </li></ul><ul><li>Issuing Shares – capital raised by selling shares </li></ul><ul><li>Debentures – a fixed interest long term loan </li></ul><ul><li>Loans – borrowing money, repaid over a time period with interest </li></ul><ul><li>Mortgages – a loan secured for property </li></ul>
    45. 45. External Sources of Finance <ul><li>Medium Term (1-10 years) </li></ul><ul><li>Leasing – renting equipment or premises </li></ul><ul><li>Hire Purchase – acquiring an asset on credit followed by fixed payments. After last instalment purchaser owns asset. </li></ul><ul><li>Loans </li></ul>
    46. 46. External Sources of Finance <ul><li>Short Term (up to 1 year) </li></ul><ul><li>Overdraft – borrowing more money than is available in bank account </li></ul><ul><li>Trade Credit – businesses receive goods first, then pay later </li></ul><ul><li>Factoring – a specialist business collecting unpaid debts for a fee </li></ul>
    47. 47. Additional Sources of Finance <ul><li>LEC – Scottish Enterprise Renfrewshire </li></ul><ul><li>Local authorities – East Renfrewshire Council </li></ul><ul><li>Government Partnerships – Business Gateway </li></ul><ul><li>Grants and allowances – Repayable Grants, Soft Loans, Subsidies </li></ul><ul><li>EU grants – Regional Development Fund & Social Fund </li></ul>
    48. 48. Methods of Growth <ul><li>Merger </li></ul><ul><li>Takeover </li></ul><ul><li>De-merger </li></ul><ul><li>Divestment </li></ul><ul><li>Horizontal integration </li></ul><ul><li>Vertical integration </li></ul><ul><li>Diversification </li></ul>
    49. 49. Methods of Growth <ul><li>Merger – an agreement to bring two firms under one board of directors </li></ul><ul><li>Takeover – when a firm buys over 50% of another firm’s share capital </li></ul><ul><li>De-merger – when a firm is split into two parts </li></ul><ul><li>Divestment – selling off parts of business no longer fitting long-term strategy </li></ul>
    50. 50. Horizontal Integration <ul><li>Occurs when a firm takes over or merges with another firm at the same stage of production. </li></ul>
    51. 51. Vertical Integration Rubber plantation Car showroom
    52. 52. Diversification <ul><li>Diversification is when businesses reduce risk by expanding the number of goods/services they provide </li></ul>
    53. 53. Multinationals <ul><li>What is a Multinational? </li></ul><ul><li>A company with HQ in one country but with bases, manufacturing or assembly plants in others </li></ul>
    54. 54. Why become a Multinational? <ul><li>Companies may become Multinationals to: </li></ul><ul><li>increase market share </li></ul><ul><li>secure cheaper premises and labour </li></ul><ul><li>to avoid tax or trade barriers </li></ul><ul><li>to take advantage of government grants </li></ul>
    55. 55. Multinationals +/- <ul><li>Provide jobs & income </li></ul><ul><li>Improve level of expertise of local workers </li></ul><ul><li>Economies of Scale </li></ul><ul><li>Jobs may only be low-level skills </li></ul><ul><li>Profits go back to home country </li></ul><ul><li>Cut corners </li></ul><ul><li>May exert political muscle </li></ul>
    56. 56. Social Responsibility <ul><li>“ SR is about how companies manage their business processes to produce an overall positive impact on society” - CSR </li></ul><ul><li>Major Concerns </li></ul><ul><li>High Fossil fuel emissions </li></ul><ul><li>Global warming </li></ul><ul><li>Exploitation of workers </li></ul><ul><li>Safety of employees </li></ul>
    57. 57. Social Responsibility <ul><li>Levi’s ‘Sweatshop workers’ </li></ul><ul><li>EuroDisney US culture invades France </li></ul><ul><li>DDT pesticide banned in High income countries, yet sold on to low income nations </li></ul>
    58. 58. Exxon Valdez Disaster <ul><li>1989 Exxon Valdez disaster in Alaska </li></ul><ul><li>11 million gallons of oil spilled over 1,500 mile shoreline </li></ul><ul><li>500,000 birds dead </li></ul><ul><li>4,500 otters dead </li></ul><ul><li>14 killer whales dead </li></ul>
    59. 59. Aftermath <ul><li>Clean-up cost $100 million </li></ul><ul><li>1994 fined $5 billion by US courts </li></ul><ul><li>“ Exxon Valdez synonymous with corporate arrogance and shirking of responsibility” – Alabama court </li></ul><ul><li>Consumer boycott: Exxon slipped from 1 st to 3 rd biggest oil company </li></ul><ul><li>1999 Exxon merged with Mobil </li></ul>
    60. 60. Has Exxon learned it’s lesson? <ul><li>In 2002 ExxonMobil donated: </li></ul><ul><li>$2 million to US Education Alliance Program </li></ul><ul><li>$100 million to Global Climate and Energy Project </li></ul>
    61. 61. Social Responsibility +/- <ul><li>Customer perceives company in good light </li></ul><ul><li>Financial cost </li></ul>
    62. 62. Internal Pressures <ul><li>New personnel in the organisation (settling in time, training etc… especially in senior positions!) </li></ul><ul><li>New technology being used (training, errors, set-up and maintenance costs) </li></ul><ul><li>Change in firm’s financial position (loss of contracts, customers, market share etc…) </li></ul>
    63. 63. External Pressures: PESTEC Analysis <ul><li>Political Factors </li></ul><ul><li>Economic Factors </li></ul><ul><li>Social Factors </li></ul><ul><li>Technological Factors </li></ul><ul><li>Environmental Factors </li></ul><ul><li>Competitive Factors </li></ul>
    64. 64. Political Factors <ul><li>Tax policy </li></ul><ul><li>Employment laws </li></ul><ul><li>Environmental regulations </li></ul><ul><li>Trade restrictions and tariffs </li></ul><ul><li>Political stability </li></ul>
    65. 65. Economic Factors <ul><li>Economic growth </li></ul><ul><li>Interest rates </li></ul><ul><li>Exchange rates </li></ul><ul><li>Inflation rate </li></ul><ul><li>Unemployment </li></ul>
    66. 66. Social Factors <ul><li>Demographics </li></ul><ul><li>Lifestyles </li></ul><ul><li>Structure of the Labour Market </li></ul><ul><li>Trends and fashions </li></ul><ul><li>Attitudes </li></ul><ul><li>Education levels </li></ul><ul><li>Ethnic markets </li></ul>
    67. 67. Technological Factors <ul><li>ICT </li></ul><ul><li>R&D activity </li></ul><ul><li>Automation </li></ul><ul><li>Rate of technological change </li></ul><ul><li>E-commerce </li></ul>
    68. 68. The Environment and Green Issues <ul><li>As the Environment becomes more important due to Global Warming and Ozone Depletion, firms have to act accordingly (as part of being Socially Responsible ). </li></ul><ul><li>What is the Kyoto Agreement ?¹ </li></ul><ul><li>Friends of the Earth and Greenpeace are Environmental Pressure Groups </li></ul>
    69. 69. Competitive Factors <ul><li>Product differentiation </li></ul><ul><li>Price wars </li></ul><ul><li>Profit margins </li></ul><ul><li>Imitators </li></ul><ul><li>Location </li></ul>