BM 1.1 - 1.3 Grids PDF

1 The nature of business Added Value Businesses exist to satisfy the needs and wants of Added value is the amount added to the value of the their customers by selling goods and services, usually factors of production by a production...

1 The nature of business Added Value Businesses exist to satisfy the needs and wants of Added value is the amount added to the value of the their customers by selling goods and services, usually factors of production by a production process through in return for profit. They do this by combining human, design, marketing, processes, USP etc. This is physical, and financial resources The 4 factors of calculated by subtracting the unit cost of production production) to create goods and services to meet the costs from the selling price. needs and wants of individuals and societies. How do businesses add value: Primary Sector 1. Through transforming raw material into a finished Involves the growth or extraction of raw materials. product E.g. farming, fishing, mining etc 2. Design Secondary Sector Involves the manufacturing or construction of raw materials into finished goods. 3. Quality and efficiency Tertiary Sector Involves the provision of services. 4. Marketing Quaternary Sector (a part of the Tertiary Sector): Entrepreneur Business activity involving the creation or sharing of Combines the other 3 factors of production and takes knowledge and information. It involves using computer a risk to start a business. and digital information technologies. E.g – Secondary and tertiary education, management consultancy, software development A successful entrepreneur needs to be a riser: Challenges businesses face when they first start Risk taker (willing to take calculated business risks) up. Innovative (creative / original thinking) ​ Lack of finance ​ Lack of knowledge, skills, and experiences Strategist (strategic thinking) ​ Lack of market research Enthusiastic (passion / energetic / drive) ​ Long hours Resilient (ability to accept constructive feedback and ​ Poor marketing strategy setbacks). ​ Limited human resources Reasons why people start up a business: Business Plan: ​ Financial reward A detailed description of a new or existing business, ​ Autonomy (being your own boss) including the company’s objectives, marketing and ​ Challenges financial plans. ​ Passions (for the product) ​ Family ties (entrepreneurship in the family) ​ Unfilled market opportunities ​ Making a difference (social enterprise etc) The purpose/advantages of creating a business Contents/sections of a business plan: plan: 1. Executive summary – Provides an overview of the 1. More likely to succeed if their business strategy is organization, its corporate objectives, and intended carefully planned business strategy. This section provides a summary 2. To secure sources of finance by showing the of the business plan. viability of the business. 2. Introduction / Overview – Introduction to the business, its legal status (type of organization), its  2 3. To devise a suitable and feasible business strategy vision and mission statements, and intended aims for growth as strengths and weaknesses of a proposal and objectives. It will also include a brief about key can be understood from a business plan. personnel in the organization (such as the owners or 4. To determine the future needs and direction of the senior executives), and may include an organizational organization. chart. 5. It can be used as an objective method to measure 3. Market analysis – Includes details of the market in actual performance of the business. which the organization operates. It will usually include a competitor analysis, outlining the main rivals in the industry and their respective market share. It should include projected sales figures and marketing opportunities. The market analysis may include a SWOT analysis. 4. Product analysis – Describes the planned product being offered. Ideally, the business plan should show the unique selling points of the proposed product or idea. 5. Financial analysis – Details of the finances of the business. For new businesses, this will include projected cash flows. For established businesses, this will include the latest final accounts (balance sheet and profit & loss account). Needed to secure external sources of finance. 6. Marketing strategy – The market analysis and other parts of the business plan should steer the firm’s marketing strategy. It should include details of the firm’s marketing mix, e.g. pricing strategies, distribution networks, promotional campaigns and product strategy. Private sector definition: Examples: The private sector of the economy consists of ​ Sole traders businesses owned and run by private individuals and ​ Partnerships organizations that usually, but not always, aim to ​ Privately traded companies earn a profit (charities, NGOs and not for profit ​ Publicly traded companies social enterprises). They operate independently of ​ Social enterprises, including cooperatives and the government, although need to operate within the non-governmental organizations rules and regulations in the country. ​ Multinational corporations Public sector definition: Examples: Business organizations that operate in the public ​ Health care services sector consist of those controlled by a regional and/or ​ Education national government, with the main aim being to ​ National defense (national security) provide essential goods and services for the general ​ Emergency services (ambulance, fire and public. Such businesses can, but do not always, police) directly charge customers for such services. Incorporation means that there is a legal difference between the owners of a company and the business  3 itself. This ensures that the owners are protected by limited liability. Unlimited liability (unincorporated) Limited liability (Incorporated) Unlimited liability means that the owners of the Limited liability means that the owners (shareholders) business are responsible for all the debts of the of a company are only responsible for the debts of the company. company up to the amount of money they have If the business goes bankrupt owing money the owner invested in the company. will have to pay all the debts of the company even if it If the business goes bankrupt owing money, the means having to sell their personal possessions such shareholders will only lose the amount they have as their house or car. invested in the company. They will not have to sell their personal possessions to pay for the debts of the Sole Trader and Partnerships are unincorporated and company. have unlimited liability. Privately held companies and publicly held companies have limited liability. Important Types of for-profit (commercial) organisations: People are more likely to invest in privately held 1.​ Sole traders companies and publicly held companie because they 2.​ Partnerships have limited liability and therefore their personal 3.​ Privately held companies processions are protected. This makes it easier for them to raise capital for expansions and therefore they 4.​ Publicly held companies are usually bigger companies. 1.​ Sole trader definition: Advantages of sole traders: A sole trader is a for-profit business owned by a single ​ Owner keeps all of the profits if the business person, although this person can employ as many succeeds. people as needed. Owner keeps all profits, makes all ​ They complete control over decision making - decisions. Unlimited liability. they are their own boss. ​ It is the quickest and easiest type of business to set up. ​ Enjoys privacy as they don’t have to publish their accounts to the public. Disadvantages of sole traders: 2.​ Partnership definition: ​ Limited finances for set up as only one owner A for profit business owned by two or more people and also hard to get external finances as high (up to 20). Examples are partnerships of doctors, risk involved. Therefore limited ability to solicitors, dentists and accountants. Usually unlimited expand - sole traders usually stay small liability. ​ Unlimited liability ​ Workload high. There is no one else to share ideas with or to ask questions. Also, no one to cover if case of illness of if owner takes a holiday. ​ No economies of scale (covered later) Deed of partnership Aegal contract signed by the owners of a partnership. The formal deeds specify the name and  4 responsibilities of each partner and their proportion of any profits or losses. Advantages of being a partnership (rather than a Disadvantages being a partnership sole trader) Lack of capital- Up to 20 partners can invest but still - More access to capital- There are more partners to find it difficult to raise large amounts of money as invest in the business (up to 20). Also, Partnerships shares cannot be sold. can attract investments from sleeping partners. Sharing the profit- Profits are usually shared out - More expertise- Partnerships have more owners between the partners. (partners) than a sole trader, so can normally call Unlimited liability- All partners, with the exception of upon more expertise (2 heads are better than 1 etc). sleeping partners, are jointly liable for the Also allow for specialisation economies of scale. partnership’s debts/actions - Less financial risk- Liability or risk is shared among Conflict of interest- Partners may have all the partners. disagreements over business decisions. Also - Enjoys privacy - don’t have to publish their decision making is slower than for a sole trader accounts to the public. 3.​ Privately held companies: Advantages of being a privately held company For-profit businesses owned by (limited - usually 50) Sell shares to raise finance- Can select/choose up shareholders. Shares cannot be advertised for sale to 50 shareholders - help raise capital for expansions (only able to sell shares to family and friends). Limited etc liability. Does not need to publish accounts, hence More expertise- Often large enough to have “privately held” directors who specialise in a particular area. Can gain economies of scale. Maintain control- Because it can select its shareholders, it is able to keep control of the business more easily than a publicly held company. If a shareholder wishes to sell up (sell all their shares), their shares are offered to the existing shareholders first. Limited liability- Shareholders (owners) are protected by limited liability. This means they only risk what they have invested in the company. Greater privacy - does not have to make financial accounts public Disadvantages of being a privately held company 4.​ Publicly held company definition Restricted share selling - only to family and friend, For-profit businesses owned by shareholders. Shares therefore a limit on finance that can be raised. can be sold to anyone via the stock exchange. More expensive to operate than a sole trader or Number of shareholders unlimited therefore great partnership. For example, there are higher legal fees ability to raise finance. Limited liability. and auditing fees (for checking and approving of the financial accounts). Advantages of being a publicly held company Disadvantages of being a publicly held company Selling shares to the general public- Public held Lack of privacy - Have to publish an annual report, companies can sell shares to any member of the which details their financial position. Competitors can  5 public on the stock exchange. This allows them to use this information to try to out maneuver the raise large amounts of capital for expansion etc company. Limited liability - makes investing in these Administratively difficult and expensive to set up companies more attractive and run. For example, there are high costs of Economics of scale- Very large businesses therefore complying with the rules and regulations of the stock able to get economies of scale. market. Losing control- As shares are available to anyone in the general public, existing shareholders can be subject to hostile takeover bids and can lose control of the business if an individual or business purchases 50% or more of the available shares. Diseconomies of scale - covered later Social enterprises: Types of for-profit social enterprises. Aim to provide a solution to important social or 1.​ Private sector companies environmental issues. They can be revenue and profit 2.​ Public sector companies generating. 3.​ Cooperatives However, they are not always revenue-generating so Types of not for profit social enterprises: they often need financial funding, such as -​ Social enterprise that reinvests all its profit non-governmental organizations (NGOs). into the business -​ NGOs -​ Charities 1.​ For-profit private sector companies social 2. For-profit public sector social enterprises enterprises A for-profit public sector social enterprises bid for ​ operate in the private sector of an economy contracts from regional or local governments, who ​ are revenue-generating, profit-seeking outsource some essential services to for-profit organizations businesses. An example of this is when a local ​ purpose of its existence is mainly concerned council contracts a private firm to carry out recycling with social goals which are at the centre of its services. operations. Advantages for government of this arrangement: For-profit social enterprises have social objectives and use ethical practices to achieve these goals.  6 They earn their revenues and profit in socially ​ May lower cost as contracted company may responsible ways and use the surplus to directly be able to provide the service more benefit the society or the environment rather than efficiently than the government distributing the profit to owners in the form of ​ Allows government more time to concentrate dividend payments. on other issues Advantages to the company who wins the contract: ​ A consistent demand for the essential services they provide However, governments must maintain some oversight to ensure that the service is being carried out as expected, and they must ensure that if the business runs into financial trouble, the public will not lose access to the service. 3. Co-operatives Advantages of social enterprises A type of for profit social enterprise owned by 1. Making an Impact in the Society members (customers or employees of the 3. Easy Marketing by stressing social credentials cooperative) who run the cooperative. Their aim is to create value for members by operating in a socially Disadvantages of social enterprises responsible way. Any profits earned are shared 1. Have to compete with commercial businesses between their members. All employees have a vote which may be more professionally ran to contribute to decision-making. Advantages of a co-operative include that: ​ there are equal voting rights for members ​ this structure encourages member contribution and shared responsibility ​ Limited liability ​ there is no limit on the number of members Disadvantages of a co-operative include that: ​ members have equal voting rights regardless of investment - which may not suit an investor-driven business ​ legal limits on payments of dividends on shares may not suit an investor-driven business Non-profit social enterprise - NGO Advantages of NGO NGO function independently of any government and - Strong anti-poverty orientation of activities in areas are established to serve a social or political goal where government cannot reach - Working closely with project beneficiaries and such as a humanitarian cause or the protection of communities who receive help the environment. - Enjoy the trust of beneficiaries as they have no E.g. NGOs might focus on activities in areas political motives - non governmental involving health emergencies, education, infrastructure, advocacy of minority rights etc Criticisms of NGOs Vision statement definition:  7 -​ They’re small in size to make a significant A statement of what an organisation would like to positive impact achieve in the long term. Must inspire. -​ NGOs may not be fully aided by the host government as they may fear political influence Mission statement definition: Objectives A statement of the business aims to do right now in Business objectives are the clearly defined and order to achieve the vision statement measurable targets of an organization, used to to achieve its overall goals (aims). If the vision statement expresses what the company would like to accomplish, the mission statement Examples include "to generate greater shareholder describes what it actually does (aims). value by targeting new market segments" or "to achieve sales growth of $500 million in the Asia Pacific region in 2022”. Operational Objectives should be SMART Objectives a business may have, which are: Specific - It must be a clear and focused statement 1.​ growth, Measurable - Achievement can be checked and 2.​ profit, measured, it should have a numerical value. 3.​ protecting shareholder value Agreed - Must be agreement from those who have to 4.​ ethical objectives meet the objective that they will reach it. Realistic - It should be realistic for the business/employee to achieve this objective and relevant to their role. Time based - Without a time-limit it is impossible to assess if an objective has been met. Time limit is usually no longer than a year. Ethical objectives The goals of a business based on a set of values or moral beliefs and guidance of the environment in which it operates. They should cover all the actions of an organisation and guide its decision-making process and strategies/behaviour. Examples of an ethical objective Advantages of acting ethically: ​ improving the overall wellbeing of workers -Improved corporate image-can be used in ​ honesty and fair treatment with regards to advertising -Increased customer loyalty dealings with customers and suppliers -Cost cutting - Ethical behaviour can help to cut ​ adopting green (clean / renewable) certain costs, e.g. being environmentally friendly can technologies reduce the amount of (excess) packaging. ​ pursuing sustainable growth strategies -helps the firm to avoid litigation costs ​ observing and respecting intellectual property -more able to hire the most skilled staff rights of others ​ using socially responsible advertising, and corporate governance (such as financial integrity and transparency).  8 Disadvantages of acting ethically Strategic objectives (SMART) -Compliance costs - The costs of being socially Long-term goals that the whole organization responsible are potentially very high. continually strives to achieve. They are used to -Lower profits - If compliance costs cannot be passed achieve the overall mission of the business as an onto consumers in the form of higher prices, the firm’s profitability is likely to fall. organization. They require a greater level of -Stakeholder conflict - Not all stakeholders are keen investment in human and financial resources than on the firm adopting ethical objectives, tactical objectives. Strategic objectives are often -The subjective nature of business ethics - Views related to what the owners of the business want to about what is considered right or wrong depend on the focus on, such as growth, profit maximization, beliefs and principles held by individuals and protecting shareholder value, or ethical objectives. societies. Tactical objectives (SMART) Corporate social responsibility (CSR) Short-term (less than a year) and specific goals of a CSR is the conscientious consideration of ethical and business with definitive timelines for specific functional environmental practices related to business activity. A areas of an organization. Used to ensure that strategic business that adopts CSR acts morally towards all of objectives are being achieved. its various stakeholder groups and the well-being of local communities and society as a whole. Benefits of being CSR ​ marketing opportunities. ​ greater public awareness ​ enhanced image ​ customer loyalty ​ reduced risks of negative publicity The nature of CSR is subjective - what is Despite the advantages of setting ethical considered ‘right’ or ‘wrong’ is: objectives, whether a business acts in a CRS way -Largely based on public opinion (some countries do depends on: not think it is necessary to impose a national minimum The involvement, influence and power of different wage, whilst others don’t) stakeholder groups. -May change over time (i.e. ad campaign targeted at The corporate culture and the firm’s attitude towards young children) (environmental protection was not a CSR and ethical objectives. major issue prior to the 1980s) Compliance costs, i.e. the human and financial resources and costs needed to implement CSR Societal expectations, i.e. the general public’s awareness and concerns for CSR issues. Exposure and pressure from the mass media. Experience - quite oſten it takes a crisis or bad experience to precipitate attention to CSR. Laws and regulations, i.e. legislation that govern how firms conduct themselves in a socially responsible way. Objectives of a business can change over time 1.​ Pressure groups because of: Pressure groups can force a business to change its 1.​ Pressure groups approach to ethics through their lobbying activities. 2.​ Private versus public sector organizations  9 3.​ New technologies Pressure groups may harm a company’s corporate 4.​ Finance image if it is not adopting a CRS approach. 5.​ Risk profile 2.​ Private versus public sector organizations 6.​ Crisis management Public sector organizations do not strive for profit 7.​ State of the economy maximization but to provide a service to the general 8.​ Type and size of organization public unlike privately held companies. 9.​ Government constraints 3.​ New technologies 10.​Age of the business New technologies and creativity can generate many new business opportunities, thus change objectives. 4.​ Finance 8.​ Type and size of organization The amount of available finance will determine the Any change in the legal status of a business entity is scope of a firm’s objectives. For example, a huge sum likely to cause a change in its objectives i.e. moving of money is needed if the business objective is to from a sole trader to a privately hel company expand into overseas markets. 9.​ Government constraints 5.​ Risk profile Some government rules and regulations can limit A high willingness to take risks will lead to more creativity and what a business might strive to achieve. ambitious objectives such as diversification strategies For example, environmental protection laws can limit to enter new markets with new products. the ability of firms to profit maximise due to the higher 6.​ Crisis management costs of compliance. Businesses may face internal crises such falling 10.​Age of the business demand. This will demand a change of objectives. Newly established firms tend to have survival as their 7.​ State of the economy key objective, whereas established businesses might The state of the economy can change business strive for growth and higher market share. objectives. An economic boom provides many business opportunities whereas a recession can threaten business survival. STEEPLE Analysis Businesses need to: A STEEPLE analysis is a planning tool used to study - continually monitor the market in which they 7 factors from the external business environment operate and how the external environment can affect that impacts on its operations and decision making: their operations and profits. Social - plan ahead to react appropriately to changes in the Technological STEEPLE factors that might occur. Economic Ethical Changes in any of the STEEPLE factors can have Political positive or negative impacts on businesses. Legal Environmental 1.​ Social factors 1.​ Technological factors Factors related to people, their lifestyles and their Developments in machinery and equipment beliefs (or values). Examples: developed for business operations e.g: ​ An aging population, i.e. the average age of - The advancements in Internet technologies have the population increases (implications for created many opportunities for businesses involved in recruitment and different spending patterns) e-commerce. ​ More women are choosing to have children at - AI an older age.  10 ​ Changes in the net migration rate Technological factors are not necessarily or always ​ An increase in the retirement age – this has positive. They can create huge barriers to entry into an impact on staffing costs, recruitment and certain industries, thereby limiting the degree of retention, and different spending habits. competition on the market. T 3. Economic factors 4. Environmental factors Changes in economic factors that affect businesses. The ecological aspects of business activity that can The different phases in the business cycle include: have positive/negative impacts on organizations. ​ Boom (expansion) – when spending, The ecological environment has direct impacts on the employment and prices rise due to an operations of a business. For example: increase in economic activity in the economy. ​ Businesses that do not consider the impact of ​ Recession – a decline in economic activity, their operations on the environment may face leading to lower employment and falling public scrutiny (pressure groups) and heavy business and consumer confidence levels. penalties (fines) from the government. Those ​ Slump (or trough) – the bottom/lowest point that do take the environment seriously can in the business cycle, with mass-scale benefit from a positive corporate image, and unemployment and falling prices; government more sustainable business model. intervention is likely to occur to rectify the ​ Global warming and climate change have led situation. to more stringent government policies to ​ Recovery – when economic activity and protect the environment. employment start to rise following a slump. 5. Political factors 6. Legal factors The role that governments play in affecting business Changes in the legal systems or laws have a direct operations. Examples include, but are not confined to, impact on business operations, including the the following: production and sale of certain goods and services. ​ The degree of political stability in a country Examples of legal factors: has a large impact on business and consumer ​ Consumer protection laws safeguard the confidence levels. interests of consumers. ​ Restrictions on international trade, such as ​ Employment laws*, such as changes to the the use of quotas (quantitative limits) on the National Minimum Wage, maternity and number of imported goods that can be sold in paternity leave, maximum working hours, the domestic economy. The government might statutory sick leave, health and safety at work, also impose tariffs (import taxes) in order to and anti-discrimination laws. protect domestic jobs. ​ Minimum quality standards must be met in ​ Different tax laws or changes in the tax order to protect consumers and the general system have a significant impact on business public. operations. ​ Laws on environmental protection and climate change can change the way in which a business operates and on foreign direct investment. 7. Ethical factors Advantages of using STEEPLE analysis Essentially, it is about doing the right or moral things STEEPLE analysis provides a brainstorming as part of their corporate social responsibilities (CSR). framework to examine the impact of external factors Examples include: on businesses. As a result, the analysis can be used ​ The fair treatment of workers to examine a firm’s opportunities and threats. ​ Fair trade deals with suppliers  11 ​ Ethical marketing practices Benefits of using a STEEPLE analysis include the ​ Observing intellectual property rights following points: ​ Operations that are sustainable and protect ​ It helps to promote pre-emptive thinking the environment. and helps managers to plan more strategically. This is often more effective than to relying on intuition, emotions or gut feelings. Hence, STEEPLE analysis enables managers to make more informed decisions. ​ Examining the STEEPLE factors enables the business to identify both opportunities and threats. ​ A STEEPLE analysis is quite simple to create. Interpretations of each of the factors should be clear and succinct. ​ As a planning or analytical tool, STEEPLE analysis can help managers make more objective and sensible decisions as they are aware of opportunities and threats. Traditional/linear business models Circular business models (CBM) Focused on costs, revenues, and profits often with a Focus on the long-term environmental consequences short-term outlook. They empathise a linear approach and sustainability matters related to business of products that are created, consumed, and chucked activities. CBMs are designed to turn all the waste away (disposed of) as waste. that businesses and consumers produce into valuable and productive resources to be used again. The OECD's five circular business models are: (i) Circular supply models (i) Circular supply models Emphasis on sourcing sustainable raw materials, (ii) Resource recovery models reducing transportation (and hence emissions), and (iii) Product life extension models minimizing waste generation within the supply chain. (ii) Resource recovery models (iv) Sharing models, and Emphasis recycling, upcycling, and reusing materials (v) Product service system models or components from waste streams, i.e., focus on waste reduction and resource efficiency. (iii) Product life extension models (v) Product service system models Emphasis on offering repair services, spare parts, and Emphasis on shifting the business model from selling refurbishment options to extend the lifespan of products to offering services, thereby enhancing products, thereby promoting product durability and resource efficiency by reducing the number of goods longevity. in circulation. (iv) Sharing models Emphasis on sharing, renting, or leasing of products to maximize their usage and to minimize the need for ownership, thereby reducing resource consumption and waste. 12 Added Value Reasons why people start up a business: (4) Unlimited liability (unincorporated) 5.​ Sole trader definition: 6.​ Publicly held company definition