Introduction to Business Management PDF

**INTRODUCTION TO BUSINESS MANAGEMENT** [THE ROLE OF BUSINESS] Human/Labor Physical/Land/Natural Financial/Capital [Enterprise]/Entrepreneurship **A business** aims to meet the needs and wants of individuals or organization [RESOURCE INPUTS] *FACTORS OF PRODUCTION* - HUMAN -- the right qu...

**INTRODUCTION TO BUSINESS MANAGEMENT** [THE ROLE OF BUSINESS] Human/Labor Physical/Land/Natural Financial/Capital [Enterprise]/Entrepreneurship **A business** aims to meet the needs and wants of individuals or organization [RESOURCE INPUTS] *FACTORS OF PRODUCTION* - HUMAN -- the right quantity and quality of people - PHYSICAL - the right quantity and quality of materials, machinery or land - FINANCIAL - the right quantity and quality of cash and other forms of money - ENTERPRISE -- "X-FACTOR" -- least tangible: innovative, risk-taking, creative, opportunistic [PRODUCTION PROCESS] - Production processes can take many forms: CAPITAL-INTENSIVE LABOR-INTENSIVE - **Labor-intensive - [ ]**Processes that use a large proportion of labor relative to land or machinery - **Capital-intensive** - Processes that use a large proportion of machinery relative to other inputs, especially labor [BUSINESS FUNCTIONS] - What needs to be done? - 4 main functions of business **Operations, Marketing, HR, Finance** - Specialized vs. One-man-show [BUSINESS ACTIVITY SECTORS] +-----------------------------------+-----------------------------------+ | **GOODS** | **SERVICES** | +===================================+===================================+ | PRIMARY - raw material trough | TERTIARY -- non physical | | farming, mining, extraction, | (product/services) | | trapping, hunting | | +-----------------------------------+-----------------------------------+ | SECONDARY -- where raw materials | QUATERNARY -- services focused on | | are processed on manufactured | knowledge and more efficient | | | functioning of society as a whole | | - Durables or non-durables | | +-----------------------------------+-----------------------------------+ page21image4612848 [SECTORS AND INTEGRATION.] Zašto bi se širio Reasons why: Lower cost, ensure supply, avoid government regulation, increase market power, weaken competitors  [HOW DO YOU MEASURE THE SIZE OF THE SECTOR?] 1. Number of people it employs 2. Relative size in the BDP of the country [GROWTH AND INTEGRATION] **Horizontal** - Refers to a business acquiring or merging with another business engaged in more or less the same activity - e.x. -- merging of two car manufacturers or supermarket chains **Vertical** - Refers to a business acquiring a target company operating in another stage in the chain of production or by internal growth - **Backward vertical integration**: winemaker buys vineyards to harvest grapes - **Forward vertical integration:** wine makes opens a boutique wine store to sell their own wines [PROVIDING INNOVATIVE IDEAS VITAL TO BUSINESS] - **Entrepreneur -- [ ]**An individual who demonstrates enterprise and initiative to make a profit, usually self-employed - **Intrapreneur --** [ ] An individual employed by a large organization who demonstrates entrepreneurial thinking in the development of new products and services [QUALITIES OF ENTREPRENEURS] - New business ventures can be based on a totally new product, service, or approach Personal qualities\ Innovative\ Commitmentand self-motivation Multi-skilled\ Leadership skills\ Belief in oneself\ Risk-taker [STARTUP BUSINESS] - **A** **startup** is a company in the initial stages of business [IMPACT ON ENTERPRISE ON BUSINESS CREATION] 1. **Employment creation\ ** - Self-employment and new jobs for everyone 2. **Economic growth\ ** - Increases GDP growth and living standards 3. **The firm's survival and growth**\ - Large numbers of firms fail\ - New companies taking the place of old ones (e.g. Rijeka) 4. **Innovation and technological change** [CREATIVE DESTRUCTION ] - „Creative destruction" is the process by which market economies progress - The entrepreneur\'s role is to drive the creative destruction process [IDENTIFYING MARKET OPPORTUNITIES] - own skills or hobbies, e.g. dressmaking or car bodywork repairer - previous employment experience, e.g. learning hairdressing skills with an established business - franchising conferences and exhibitions offering a wide range of new business start-up ideas, e.g. fast-food restaurants - small-budget market research -- the use of the internet allows any user to browse business directories to see how many businesses there are in the local area offering certain goods or services. This low-cost research might indicate gaps in local markets that could be profitably filled by the entrepreneur. [PROBLEMS FACED BY STARTUPS] - Competition - Lack of record-keeping - Lack of finance or working capital - Poor management skills - Changes in the business environment [STARTUP IDEAS] There are good ideas all around us: - Start a social media group - Become a ghostwriter - Sell custom-made products online - Start a drop-shipping business - Become an online coach WHY WOULD YOU WANT TO START UP A BUSINESS? 1. Rewards 2. Necessity 3. Challenge 4. Interest 5. Finding a gap 6. Sharing an idea [THE PROCESS OF STARTING UP A BUSINESS] 2 main stages: 1. The business idea 2. Planning page46image45852208 [THE BUSINESS IDEA STAGE] THE FUNDAMENTAL ACTIVITY OF THE BUSINESS The Idea - Market-driven - Determined by the needs of the market - Service-driven - Convince others that the product or service is worth purchasing [THE PLANNING STAGES] 1. ORGANIZING THE BASICS - Where is the business going to be based? - How will the entrepreneur name the business? - What will be its legal structure? - What will be its operational structure? - Is there a sufficient infrastructure to make the business feasible? - Are there suppliers, potential customers, and government services? 2. REFINING THE BUSINESS IDEA THROUGH MARKET RESEARCH - Gaps in the market are rarely obvious - Do your homework -- explore the market - How will you conduct market research? - Who will be the target market? - Can the new business test its concept? - What will be its unique selling proposition (USP)? - How will the business communicate with the market? 3. PLANNING THE BUSINESS - A written document that defines in detail a company's objectives and strategies, the market it operates in, and its financial forecasts -- and how it will achieve them [BUSINESS PLAN] 1. IMPORTANCE - Very important when setting up a new business - Helps obtain financing - Investors will not provide finance unless clear details have been given about every aspect of the business - Walks the entrepreneur through the planning process - The financial and other forecasts contained in the plan can be used as the targets that the business should aim for 2. PURPOSE - Support the launch of a new organization or business idea - Attract new funds from banks, grant providers, or venture capitalists - Support strategic planning - Identity resource needs - Provide a focus for development - Work as a measure of business success 3. USERS - Can be of real benefit to the stakeholders of new business: - Helps make judgement about the viability of the new idea and the changes of owners to succeed - Financial forecasts in a business plan can act as a budgets and control benchmarks - Updated versions of the plan can be used to apply for additional funding, to attract additional partners or to supply dana for the experts - Employees will find that planning helps identify specific objectives and targets and gives focus to their work - Suppliers may be able to tell from the parts of the business plan that are communicated externally whether it is worthwhile establishing a long-term trading relationship with the business 4. CONTENTS - Executive summary - An overview of the new business and its strategies - Description of the business opportunity - Details of the entrepreneur; what is going to be sold, why and to wham ***[PUBLIC VS. PRIVATE SECTOR]*** PUBLIC SECTOR -- the portions of the economy owned or controlled by the government - E.g. government services, public schools, state-owned corporations PRIVATE SECTOR -- the portion of an economy not controlled or owned by the government ***[PROFIT-BASED ORGANIZATIONS]*** - The main aim is to generate profits - Profit-based / Commercial: sole traders, partnerships, privately held companies, publicly held companies PROFIT = TOTAL REVENUES - TOTAL COST ***[SOLE TRADE]*** FEATURES: - The sole trader (proprietor) owns and runs the business - No legal distinction between the business and the sole trader - Limited funding - The business is geographically close to the customer - Privacy and limited accountability - In general, registering the business is relatively easy, inexpensive and quick ADVANTAGES: - All profit from the business belongs to the sole trader - Complete control over all the important decision - Flexibility in terms of working hours, products and services, and changes to operations - Privacy, as sole traders generally do not need to divulge information - Minimal legal formalities - Close ties to customers, which can give a competitive advantage DISADVANTAGES: - Complete dependence on one person most of the time - Competing against established businesses all by oneself can be a daunting challenge - Stress and potential ineffectiveness because the sole trader makes all the decisions, often with limited time to make them and limited opportunity to seek advice from others - Lack of continuity in the event of a serious accident or the owner's death - the business itself may not continue - Limited scope for expansion as the owner spends all his or her time running the business - In general, there will be limited capital - May also create a burden on the business - The focus will be more on having sufficient cash for day-to-day operations than on looking to the future - Unlimited liability of the owner for any faults, debts, or mistakes made ***[PARTNERSHIP]*** FEATURES: - The business is owned and managed by more than one person - Popular with professional people with related qualification - Decisions are made jointly by the partners - No legal distinction exists between the business and the partners - Finance is usually more available than for a sole trader business - The business operated as a partnership can often offer a more varied service than a sole trader - Some partners may be sleeping partners (a.k.a. \'silent\') - Partnerships typically have a greater degree of accountability than a sole trader - The deed of partnership includes information about: *responsibilities, financing, division of profits, liabilities, procedures for changing circumstances* - Partnerships are typically more stable than sole traders and have higher likelihood of continuity - Partners do not necessarily share all the profits equally ADVANTAGES: - More efficient production through specialization and division of labor - Due to different skills being brought on board - More partners = more expertise - Better access to finance because of greater stability and lower risk - Partners help each other out in emergencies or absences - Higher chance of continuity, the business doesn't have to end if the partner dies or leaves the partnership DISADVANTAGES: - Unlimited liability -- legal responsibility for all business debts of other partner/s - Lower access to loans from banks and other financial institutions - An individual partner does not have complete control over the business - Profits have to be shared among the partners - Partners may (and will!) disagree, which could break up the partnership ***[COMPANIES OR CORPORATIONS]*** - Business and owners of the business are 2 separate entities - The liability of the company is distinct from the liability of the owners - The business has legal existence in its own right - The company keeps the profit and decides what to do with them - Owners may receive a share of profits at the distraction of the company - Share of profit = dividends, proportional to share - Individual owners only pass (share) part of the business - Hence the name *shareholders* ***[SHAREHOLDERS]*** - The price of the share(s) they hold may increase in value if the company is performing well - The sky is the limit - The company issues a portion of the company profits as dividends - The shareholder has limited liability - The price of the share(s) they hold may decrease in value if the company is performing poorly - The company may decide NOT to issue any dividends - Individual shareholders may not have any say in decision-making -- \'atomistic' - Separate legal existence = Limited liability - Enhanced status as a sort of recognition - Good source of financing - Improved changes of gaining further finance - Increased stability  ***[PUBLIC VS. PRIVATE]*** - Private Public - \'Going public\' through an Initial Public Offering (IPO) - Process of offering shares of a private company to the public - Public Private - Privatization -- a process of selling public sector companies to the private sector - Public sector companies = companies owned by the public sector - Publicly owned/listed companies = private companies owned by the general public - MAIN DIFFERENCE -- Private company can only sell the shares privately ***[COMPANY]*** FEATURES: - The shareholders own but do not turn the business - The business and the owners and divisible - The legal existence and many of the details are legally recorded and matters of public record - Greater finance is generally available - A company is held to a high degree of accountability - Compared to other forms of business organizations, companies have greater stability and a higher chance of continuity ADVANTAGES: - Access to finance is easier than for sole traders and partnerships - The investor has limited liability - There is continuity - There are possibilities for expansion - An established organizational structure exists DISADVANTAGES: - Setting up a company can take time and cost a great deal of money to fulfill the necessary legal requirements - Selling shares, especially if the company „goes public", does not guarantee that the desired or intended amount of finance will be raised - Owners risk partial or entire loss of control of the business - There is a loss of privacy - A company has no control over the stock market - A company has limited control over who buys its shares **[FOR-PROFIT SOCIAL ENTERPRISES]** - Going beyond profits - A business that advances a social purpose in a financially sustainable way - Human, social, or environmental well-being - Social aim takes priority over growth, sales, and profits - Making a profit is not the same as maximizing a profit - Private sector companies - Public sector companies - Cooperatives ***[COOPERATIVES]*** - Business organization owned and operated by its members, who share any profits - Many members, each taking an active part in running the business - Financial cooperative - Housing cooperative - Workers' cooperative - Producer cooperative - Consumer cooperative COMMON FEATURES: - Profit is important but not a priority -- social aims take precedence - A high degree of collaboration exists between the business and the local community - Cooperatives are more democratic than other typical for-profit companies or organizations - The business operates the same functions as any other business ADVANTAGES: - Favorable legal status - Strong communal identity - Stakeholder community benefits DISADVANTAGES: - Decision-making is complex and time-consuming - Capital may be insufficient for growth and financial strength ***[NON-PROFIT SOCIAL ENTERPRISES]*** FEATURES: - Main aim; NO PROFIT whatsoever - Surplus revenue is used to advance the social purpose for which the business was set up - Profit is not generated - Donations are important - Unclear ownership and control ADVANTAGES: - Help people or causes in need - Foster a philanthropic spirit in the community - Foster informed discussion in the community about the allocation of resources - Can be very innovative DISADVANTAGES: - Intense lobbying from non-profit social enterprises can lead to socially undesirable goods - Employees of non-profit social enterprises have a passion and zeal that serve poorly to an organization or its cause - Irregular funding ***[NON-GOVERNMENTAL ORGANIZATIONS]*** - An umbrella term describing a variety of social enterprises that support a socially desirable cause - Single issue - Broad spectrum - Apolitical - Highly political ***[CHARITIES]*** - Providing as much relief as possible for those in need and unable to help themselves - MAIN DIFFERENCE FROM NCO\'s Focus is on philanthropy Exempt from taxes 1.3. ***[VISION AND MISSION STATEMENTS]*** - **Vision statement** -- a philosophy, vision, or set of principles that steers the direction and behavior of an organization - **Mission statement** -- states a company's purpose and explains why the business exists. - Generally includes the business aims and, whether expressly stated or implied, indicates its most important value page8image63601072  COMMON BUSINESS OBJECTIVES - Business objectives - Articulated, measurable targets that a business must meet to achieve the aims or long-term goals of the business must be specific and measurable - Strategic objectives - Long-term goals of a business that indicates how the business intends to fulfill its mission - Include performance goals, such as increasing market share or improving profitability - Set by BoD with top executive management - Tactical objectives - Short -- to medium-term targets that -- if consistently met -- will help the business reach its strategic goals - Set by executive management working with mid-level management ***[EFFECTIVENESS OF THESE STATEMENTS]*** ADVANTAGES: - They quickly inform groups outside the business what the central aim and vision are - They help to motivate employees, especially where an organization is looked upon, as a result of its mission statement, as a caring and environmentally friendly body - Employees will then be associated with these positive qualities - Where they include ethical statements, they can help to guide and direct individual employee behavior at work - They help to establish in the eyes of other groups 'what the business is about'. DISADVANTAGES: - Too vague and general so that they end up saying little that is specific about the business or its future plans - Based on a public relations exercise to make stakeholder groups 'feel good' about the organization - Virtually impossible to analyze or disagree with - Rather 'woolly' and lacking in specific detail, it is common for two completely different businesses to have very similar mission statements ***[OTHER ISSUES WITH MISSION STATEMENTS]*** - On their own, mission statements are insufficient for operational guidelines - Do not tell managers what decisions to take or how to manage the business - Their role is to provide direction for the future and an overall sense of purpose - Worthwhile in PR terms - There has to be a link between vision statements, mission statements, and strategies! ***[AIMS VS. OBJECTIVES]*** AIMS - Long-term goals of the business -- what it wants to achieve in the future - A vision statement is a summary of these aims (sometimes literally, sometimes in a modified manner) - Must be specific and measurable OBJECTIVES - Medium -- to short-term goals - Clarify how the business will achieve its aims and reach its vision S -- SPECIFIC - The objective should be clear and well-defined - It should relate to the nature of the business and be unambiguous - Apply it directly to that business - Instead of 'should grow', try to increase market share or expand the number of salespeople - e.g. a hotel may set an objective of 75% bed occupancy over the winter period -- the objective is specific to this business M -- MEASURABLE - the objective should be easy to measure - Once you quantify something, you can set it to become an effective target - Make sure you use units of measurement, as they are observable... and measurable - E.g. to reduce loss of energy by 15%, sell 2000 bikes per month A -- ACHIEVABLE - If an objective is impossible to achieve, the whole ordeal is pointless - Often objectives are set in a way that is beyond reasonable - Very demotivating to staff who are trying to reach targets - Achievable goals reduce dissonance and distractions - Important to know how other aspects of business are going to support these objectives - Realistic objectives -- achievable when compared with the resources of the company - e.g If you know that the absolute maximum insurance policies an insurance salesman can place over a month's time is 45, and you give her a target of 100, they will give up and do the minimum R -- RELEVANT - Objectives should be of use to the company - Do they distract from the main purpose or support it - They should be expressed in terms relevant to the people who have to carry them out - If it's outside of the employee's area of responsibility, it's irrelevant - E.g. telling a janitor that a new sales campaign with increased sales targets is underway T -- TIME-SPECIFIC - A time limit should be set when an objective is established - Not only a deadline but a time frame - Setting a goal without a time limit is an exercise in futility - E.g. the company needs to implement new ISO quality procedures by year-end ***[INTERLINKING AIMS, OBJECTIVES, AND STRATEGIES]*** - Interlinking ensures - Coordination between all divisions - Consistency with strategic corporate objectives - Provision of adequate resources - Management by objectives BUSINESS STRATEGY - A business strategy -- plan to achieve a strategic objective in order to work towards the aims of the business - They involve a careful analysis of: - Where the business is - Development of a plan (strategy) of how to get where the business wants to be (aims) - Careful consideration of how to implement the strategy - A periodic evaluation process (in well -- run organization) to determine whether the plan is working or, after a specific period of time, has worked ***[BUSINESS TACTICS]*** - Tactics are short-term, smaller-scale, or routine decisions about how an organization intends to achieve its aims and objectives on a day-to-day basis - A plan to achieve a tactical objective to work towards the strategies of the business - Achieving the strategies will lead to reaching the aims of the business - The tactic should be - Short term - Executed by middle managers - Flexible and easier to change - Focused on measurable targets - Alignment between strategy and tactics is imperative - Sound strategy and poor tactical plan - Poor strategy and sound tactical plan ***[NEED FOR CHANGE]*** - Objectives change because of changes in either of these environments INTERNAL - Changes in the conditions within the business EXTERNAL - Anything outside of the business that has a bearing on its operation or performance - STEEPLE ***[CHANGE IN THE INTERNAL ENVIRONMENT]*** - Within the control of an organization - LEADERSHIP: A change of leadership can lead to a change in aims - HR: Changes in hiring policies or pension plans can have a significant impact - ORGANIZATION: when a company acquires another one or gets through a merger - PRODUCT: the company's product or entire product line may change due to regulatory issues - FINANCE: coming up with new ways to identify sources of finance - OPERATIONS: coming up with better methods to produce or deliver the core product ***[CORPORATE SOCIAL RESPONSIBILITY ]*** - A philosophy of doing business - A view that business, rather than focusing solely on increasing shareholder value, should contribute to the economic, social, and environmental well-being of society - Is maximizing shareholder value the absolute imperative in business? - Should companies do more than just make money for shareholders? - Philanthropy - Generous salaries/bonuses - Flextime - WFH - environment ***[WHY ORGANIZATIONS SET ETHICAL OBJECTIVES?]*** - Building up customer loyalty - Creating a positive image - Developing a positive work environment - Reducing the risk of legal redress - Satisfying customers' ever-higher expectations for ethical behavior - Increasing profits - Should a company be held against the same ethical/moral rules and principles as a person? ***[THE IMPACT -- WHAT HAPPENS WHEN YOU IMPLEMENT ETHICAL OBJECTIVES?]*** - Everyone is affected - The business itself -- costs are likely to rise - Competitors -- expect a reaction - Suppliers -- forced to adjust accordingly - Customers -- increased trust and brand loyalty - The local community -- improved relationships - Government -- recognition and incentivization ***[HOW ETHICAL OBJECTIVES ARE LINKED TO CSR]*** CSR - A business should operate with the view of having a positive impact on society - An overarching concept - Broader, less specific ETHICAL OBJECTIVES - Specific goals that a business may set for itself based on established codes of behavior ROLE MODELS - Being a good corporate citizen / setting the bar high for everyone else - Adopting sustainable business models  ***[IDENTIFYING A RELEVANT STRATEGY]*** GROWTH STRATEGIES - Best achieved by combining the strengths of a business with market opportunities - Produces the most positive short-term strategy - Should be pursued when confident that there are no big issues in any other areas DEFENSIVE STRATEGIES - To be adopted when the business is at its most vulnerable - When threats and weaknesses exist in combination, act quickly to defend - Most negative short-term strategies, but may be necessary for survival RE-ORIENTATION STRATEGIES - Adopted when a business focuses on addressing the weaknesses in order to be able to pursue the available opportunities - Positive and long-term strategies - Main assumption: address weakness first, and then re-orientation the business in a new direction DEFUSING STRATEGIES - Designed to eliminate threats in the market by focusing on the strengths of a business - Neutral and medium/short-term strategy - Main assumption: no need to look for new market opportunities, just defuse the threats - Focus on core strengths THE ANSOFF MATRIX AKA Product/Market Expansion Grid - Helpful for planning growth strategies - Looks at the growth potential in terms of product and market, considering both existing markets and products, as well as new ones COMBO TOOL - Works well with STEEPLE, SWOT, and Porter's 5 Forces - Fundamental framework - Markets = elastic concept MARKET PENETRATION - Occurs when a business grows by increasing its market share - You grow by selling more of your existing products to the current market - Considered the safest option, but opportunities may be limited - Relies heavily on: - Brand loyalty promotion in order to encourage repeat customers - General promotion to lure customers away from competition - Key factors to increase the chance of success: - Growth potential of the market - Strengths of customer loyalty - Power and ability of competitors MARKET DEVELOPMENT - Expand the market by looking for new markets and market segments within the existing market - You grow by selling existing products to the new market in a new country,... - Considered riskier as a strategy as the business may not understand new markets - requires different approaches, 'thinking outside the box' - Key factors to reduce the risks of market development: - Effective market research - Having local knowledge on the ground - Having an effective distribution PRODUCT DEVELOPMENT - Development of new products for existing markets - You grow by selling new products to your existing markets - Genuinely new products - Upgrades or variations of existing products - Product development is riskier as much depends on customer loyalty to original products - Key factors to reduce the risk of product development: - Effective market research - Having a strong research and development system - Having first mover advantage DIVERSIFICATION - Introducing a new product into a new market - You grow by offering new products to new market segments - The riskiest growth strategy to be pursued as it combines two elements of risk - Lack of familiarity and experience in the new market - Untested new products - Key factors to reduce the risks of diversification - Effective market research - Due diligence testing to determine the attractiveness and cost of entering the market - Recognition of existing business - Possible tie-ups with other business with the necessary experience 1.4 - Any individual or groups of individuals who have a direct interest in a business because the actions of the business will affect them directly - They have a stake or interest in the business - May be direct -- financial (creditors, lenders, suppliers, employees) - May be indirect -- community, wider environment WHEN MONEY CHANGES HANDS - **Market stakeholders** -- those with whom the organization has a commercial relationship customers, suppliers, lenders - **Non-market stakeholders** -- there is no commercial relationship media, community DIRECT OR INDIRECT IMPACT - **Primary stakeholders** - Those directly affected by, or affecting the organization - Employees, suppliers - **Secondary stakeholders** - Only have an indirect relationship with the organization - Media, NGO's INSIDE OR OUTSIDE the most common categorization **INTERNAL STAKEHOLDERS** - Individuals or groups that work within the business - **Shareholders** focus on returns on their investments - **The CEO or managing director** focuses on coordinating the business strategy and delivering profits and returns that satisfy the shareholders - **Senior managers** focus on the strategic objectives of their functional areas - **Middle managers** focus on the tactical objectives of their functional areas - **Foremen and supervisors** focus on organizing tactical objectives and formulating operational objectives - **Employees and their unions** focus on protecting their rights and working conditions **EXTERNAL STAKEHOLDERS** - Individuals or groups that are outside the business - **Government (at all levels)** focuses on how the business operates in the business environment - **Suppliers** focus on maintaining a stable relationship - **Customers and consumers** focus on the best product that meets their needs - **People in the local community** focus on the impact of the business in the local area - **Financiers** focus on returns on their investments - **Pressure groups** focus on how the business has impacted on their area of concern - **The media** focuses on the impact of the business in terms of news stories - NB: Competitors are considered to be stakeholders because they can affect business operations! - NB: *Grey areas exist!* - Employees living in community where business is located - In democratic societies, employees also vote - Consultants are both internal and external - Small stakeholders in large companies are so marginal that they are considered external page11image62996896 CONFLICT BETWEEN STAKEHOLDERS\' INTERESTS - Groups of people with a common interest may also have differences of opinion - Although all stakeholders have a stake, their focuses are different - Any decision of importance may elicit different reactions from different stakeholders - Fractions may result and alliances may be formed as each stakeholder tries to achieve their desired outcome - A successful business tries to keep stakeholders *sufficiently* *satisfied most of the time* - Especially true for large, publicly traded companies Ex. Who would be the concerned stakeholders? How would they react? pay rise, reduction in workforce, WFH policy STAKEHOLDER ANALYSIS - Comparative closeness of stakeholders to decision-making - Under the approach, **owners** and **managers** are central to decision-making - Everyone else is further removed - Decision-makers try to satisfy those stakeholders closest to the center 1.5 THE IMPACT OF THE EXTERNAL ENVIRONMENT ON A BUSINESS ENVIRONMENT VS. ECOLOGY - Environment - A much wider term - Goes way beyond ecology and includes conditions external to the business - External elements can exert a strong influence on growth and evolution - Vice versa or not? business can influence the external environment in a limited manner - Are they left without any options? this is why contingency plans exist THE PLANNING PROCESS - STEEPLE highlights all the external elements - Difference between PEST, PESTLE, and STEEPLE? - PEST -- political, economic, social, and technological - PESTLE -- political, economic, social, technological, legal, and ecological - STEEPLE -- political, economic, social, technological, legal, ecological, and ethical THE IMPACT ON GROWTH OF CHANGES IN STEEPLE FACTORS - If any of the STEEPLE factors change, this will have an impact on the company's: objectives, strategy, and growth and evolution - Keep in mind -- not all businesses react to change with the same degree - Businesses that are flexible and can adapt to change will be more successful - Planning based on STEEPLE helps determine changes to environmental factors ECONOMIES AND DISECONOMIES OF SCALE[^1^](#fn1){#fnref1.footnote-ref} - ECONOMIES OF SCALE -- scale of operation refers to the size or volume of output - When a business increases its scale of operations, it produces more in greater volume if it has become more efficient during this process, it has achieved economies of scale - *Economies of scale --* reduction in average unit cost as a business increase in size - *Diseconomies of scale --* increase in average unit cost as a business increase in size COMMON STEEPLE INFLUENCES  CONGLEMERATION -- different companies (Adidas, coke) MEASURING EFFICIENCY - FIXED COST - Costs that do not change as production changes - Doesn't matter how much the business produces, they remain the same - Lease, utilities, insurance, salaries, subscription - VARIABLE COSTS - Costs that vary as production changes - They adjust accordingly depending on the level of production of goods or services - Raw materials, hourly wages WHEN A BUSINESS EXPANDS: - It may experience efficiencies that further decrease average unit costs / aka *Economies of scale* - It may experience inefficiencies that increase average unit costs / aka *Diseconomies of scale*  INTERNAL ECONOMIES OF SCALE  EXTERNAL ECONOMIES OF SCALE INTERNAL DISECONOMIES OF SCALE  EXTERNAL DISECONOMIES OF SCALE REASONS FOR BUSINESS TO GROW - **Survival** - large firms have a greater chance of surviving. They are less likely to fail and less likely to be taken over by another firm. - **Economies of scale** - large firms typically enjoy economies of scale, which translate into greater profits, higher returns, and a healthier balance sheet. - **Higher status** - large firms have greater status than smaller ones. However fashionable some clothing brands may be, working for a larger firm such as Abercrombie & Fitch or Benetton can provide status to employees and can motivate managers and other employees. - **Market leader status** -- McDonald's is the market leader in fast - food restaurants in most of the industrial world. All by itself, McDonald's can shape market habits, giving it a competitive advantage. - **Increased market share** - large companies that have a large market share can control the market by determining prices and deciding which services will be the industry standard. REASONS FOR BUSINESS TO STAY SMALL - **Greater focus** - because customers do not expect small business to all things to all people, small businesses can focus investments where they want and where they believe the greatest profitability lies. They may have lower profits than larger businesses but often they have greater profitability and higher returns on investment. - **Greater cachet** - small businesses sometimes have more cachet, a greater sense of exclusiveness, than larger businesses. As a result, some small businesses are able to charge more for their goods and services, leading to higher profit margins. - **Greater motivation** - having more prestige can motivate managers and other employees. Sometimes, as well, employees are motivated by the idea that they matter to the business. Very large businesses sometimes have a hard time conveying the sense that all employees matter. - **Competitive advantage** - being small, providing a more personalized service, and being flexible can give a competitive advantage. - **Less competition** - sometimes a market is so small (a true niche market) that big businesses do not even want to consider getting involved. This situation often means a market with limited competition. DIFFERENT WAYS TO GROW - INTERNAL GROWTH - Occurs out of the existing operations, slowly and steadily, may take a long time - Self-financed, less risky - \'Organic\' - EXTERNAL GROWTH - Expansion happens by entering some types of arrangement - Merger and acquisition takeover - Joint venture - Strategic alliance - Franchise DECISION TREES - A planning tool designed to help simplify complex decisions - Probability tree in mathematics is its close cousin - Offers visual clarity and facilitates making sensible decisions for management 1. When a choice has to be made, the decision is represented by a square node - The possible choices are lines stemming from the node - The choice is written above the line - E.g. A business needs to decide on a location for a new factory the three possible sites are numbered in order to identify them correctly  2. If there are multiple possible outcomes, each is represented by a circle node - Possible outcomes are represented by lines stemming from the circle with the outcome written above the line - The nodes are numbered to help identify them 3. Using whatever data is available, estimate the probability that the outcome actually happens - As with the mathematics probability trees, the sum of all probabilities stemming from one outcome node must always be 1 (or 100%) - The possibilities are put below the line for that particular outcome 4. Using the best data available, make an estimate of the values of that outcome actually happening - These values are written at the end of the line represented by the outcome 5. Again, using the best data available, estimate the costs of the choices being considered - If no costs are incurred in the choice, figure 0 need not be shown - The costs are written under the respective choice lines 6. Now all you have to do is calculate the results - Also known as the Expected Values (EV) - Each outcome node will have an EV based on the following formula: 7. Normally, the decision will fall on the outcome that gives the highest EV - Don't forget the costs incurred! - In order for this method to work, the cost must be subtracted from the EV for each choice! - The EV with the highest value is the winner 8. The decision taken is to build the factory at site A - Indicated on the decision tree by crossing out the choices not taken with the symbol // BENEFITS OF A DECISION TREE: - gives a clear answer to a complex decision - flexible and can be applied to many situations - simple and visually attractive LIMITATIONS OF A DECISION TREE: - based on estimates of both outcomes and probabilities of outcomes - based on quantitative data and so ignores qualitative issues - can be difficult to draw for highly complex decisions with multiple outcomes and interrelated choices MERGERS AND ACQUISITIONS - MERGER - If you join two equal businesses together and form one big combined business - ACQUISITION -- if one business takes over another one by purchasing the majority of its share - If unwanted, it's called a HOSTILE TAKEOVER -- only public companies can be taken over - Result -- a much bigger company - In case of a merger, a new company - In case of an acquisition, an old company with a new division VERTICAL INTEGRATION Forwards vs. Backwards  CONGLOMERATION -- when two or more businesses in unrelated business lines integrate e.g. Unilever products Dove, Magnum,... JOINT VENTURES - Very specific and time-limited - Occurs when two or more businesses agree to combine resources for a specific goal and over a finite period - A new, separate business is formed by parent companies -- it has a legal entity - Temporary, open up new areas of business, facilitate transfer of specialist skills STRATEGIC ALLIANCES - Similar to joint ventures -- there is always the pursuit of a specific goal - Different form joint ventures in several fundamental ways: - More than two businesses form part of an alliance - No new business is created, only an agreement to work together - Individual businesses remain independent - More fluid than joint ventures -- membership can change without destroying the alliance - Ex. STAR ALLIANCE airplanes FRANCHISES - Very attractive form of global expansion -- no need to worry about production - FRANCHISOR - The original business that developed the concept - Sells to other businesses the right to offer the concept and sell the product - FRANCHISEE - The business buying the RIGHT to offer the concept and sell the product - Must abide to the original concept and maintain consistency - Usually knows local markets, conditions, and languages/cultures THE COST OF FRANCHISING 1. You must pay for the franchise itself - You pay for the right to operate a business offering the franchisor's concept and product 2. Must pay royalties - A percentage of sales or a flat fee which goes to the franchisor DIVISION OF RESPONSIBILITIES - The franchisor will provide: the stock, the fittings, the uniforms, staff training, legal and financial help, global advertising, global promotion - The franchisee will: employ staff, set prices, set wages, pay an agreed royalty on sales, create local promotions, sell only the products of the franchisor, advertise locally FRANCHISEE ADVANTAGES - The product exists and is usually well known - The format for selling the product is established - The set-up costs are reduced - The franchisee has a secure supply of stock - The franchisor can provide legal, financial, managerial, and technical help DISADVANTAGES - Unlimited liability for the franchise - Paying royalties to the franchisor - No control over what to sell - No control over supplies - Makes all the global decisions FRANCHISOR ADVANTAGES - Gains quick access to wider markets - Makes use of local knowledge and expertise - does not assume the risks and liability of running the franchise - gains more profits and the sign-up fees DISADVANTAGES - Loses some control in the day-to-day running of the business - Can see its image suffer if a franchise fails or does not perform properly. 1.6 GLOBALIZATION - The process by which the world\'s regional economies are becoming one integrated global unit - It refers to the integration of economies and societies all over the world 1. Global independence today is on a completely different order of magnitude from previous periods 2. A relatively small number of extremely large 'post-national' business POST-NATIONAL - Although the companies have a home of records, they consider no place their home or every place their home GLOBALIZATION -- SIGNIFICANT IMPACT ON GROWTH **Increased competition** - Greater efficiency = more choices for consumers, lower cost of goods and services, higher productivity **Greater brand awareness** - Creating USP (unique selling point) in order to compete with foreign competition **Skills transfer -- two-way deal** **Closer collaboration** - New business opportunities may arise FOREIGN PRESENCE - **A multinational company** is a business that operates in more than one country or is legally registered in more than one country - **A subsidiary is a company** that is owned or controlled by a parent or holding company, usually with more than 50% of the equity - this gives the parent organization the controlling share of the subsidiary - **A global company** also has a presence in multiple countries but the offerings and processes are consistent in each country - It imposes its business model on the country without regard to local norms or tastes page11image6779904page11image6767840  WHY BECOME A MULTINATIONAL? Well, there could be several reasons why someone might want to start a multinational company. One reason could be to expand their business and reach a larger customer base in different countries. By operating in multiple countries, they can tap into new markets and potentially increase their profits. Additionally, having a multinational company allows for diversification, reducing the risk of relying solely on one market. It can also provide opportunities for cultural exchange and collaboration with people from different parts of the world. However, starting and managing a multinational company can be complex and challenging, requiring careful planning and resources. It\'s definitely not an easy feat! 😅🌍 **1. Closer to main markets** -- this will have a number of advantages: - lower transport costs for the finished goods - better market information about consumer tastes as a result of operating closer to them - may be viewed as a local company and gain customer loyalty as a consequence - lower labor rates e.g. much lower demand for local labor in developing countries compared to developed economies - cheaper rent and site costs, again resulting from lower demand for commercial property -- these cost savings can make the 'local' production very efficient in terms of the market in the rest of the world and can lead to substantial exports - government grants and tax incentives designed to encourage the industrialization of such countries - **Improved communications** not only ICT but also transport and distribution networks - Dismantling of trade barriers allows for easier movement of raw materials, components, and finished products - **Deregulation of the world's financial markets** allows for easier transfer of funds and tax avoidance - **Increasing the economic and political power** of multinational companies can be of enormous benefit, especially in middle- and low-income countries. THE IMPACT OF MNCS ON HOST COUNTRIES ADVANTAGES: - **Economic growth** - boost the domestic economy by providing employment, developing a local network of suppliers, paying taxes, and providing capital injections - **New ideas** - may introduce new ways of doing business and new ways of interacting socially - **Skills transfer** - may help develop the skills of local employees, who can then start their own businesses with the skills learned - **Bigger product choice** - the domestic market will benefit as the variety of products will increase - **Short-term infrastructure projects** - Will get help with building infrastructure DISADVANTAGES: - **Repatriation of profits** - The bulk of their profits will be rerouted away from the host country, although local taxes will be honored - **Loss of cultural identity** - the appeal of domestic products, ways of doing business, and even cultural norms may suffer - **Brain drain** - many highly skilled employees may look to work for a multinational company in another country - **Loss of market share** - Domestic producers may suffer - **Short-term plans** - may not plan on staying for a long time -- if lower-cost producers can be found elsewhere, they may move out at short notice ::: {.section.footnotes} ------------------------------------------------------------------------ 1. ::: {#fn1} NB: When refering to economies of scale, always refer to costs as 'per unit' or 'per average unit' cost[↩](#fnref1){.footnote-back} ::: :::