Business Management (PDF) - IBID 2022 Textbook

Contents Dedication / About The Author.......................................................................... v Author's acknowledgements................................................................................

Contents Dedication / About The Author.......................................................................... v Author's acknowledgements............................................................................. vi About This Book...................................................................................... vii Topic 1: Introduction to Business management Chapter 1 - Unit 1.1 What is a business?.................................................................. 11 Chapter 2 - Unit 1.2 Types of business entities............................................................. 21 Chapter 3 - Unit 1.3 Business objectives.................................................................. 39 Chapter 4 - Unit 1.4 Stakeholders....................................................................... 53 Chapter 5 - Unit 1.5 Growth and evolution............................................................... 65 Chapter 6 - Unit 1.6 Multinational companies (MNCs)..................................................... 89 Topic 2: Human resource management Chapter 7 - Unit 2.1 Introduction to human resource management.......................................... 95 Chapter 8 - Unit 2.2 Organizational structure............................................................ 109 Chapter 9 - Unit 2.3 Leadership and management........................................................ 131 Chapter 10 - Unit 2.4 Motivation and demotivation....................................................... 143 Chapter 11 - Unit 2.5 Organizational (corporate) culture (HL only)......................................... 181 Chapter 12 - Unit 2.6 Communication.................................................................. 191 Chapter 13 - Unit 2.7 Industrial/employee relations (HL only).............................................. 207 Topic 3: Finance and accounts Chapter 14 - Unit 3.1 Introduction to finance............................................................ 221 Chapter 15 - Unit 3.2 Sources of finance................................................................. 225 Chapter 16 - Unit 3.3 Costs and revenues................................................................ 237 Chapter 17 - Unit 3.4 Final accounts.................................................................... 249 Chapter 18 - Unit 3.5 Profitability and liquidity ratio analysis.............................................. 273 Chapter 19 - Unit 3.6 Debt/Equity ratio analysis (HL only)................................................ 287 Chapter 20 - Unit 3.7 Cash flow........................................................................ 299 Chapter 21 - Unit 3.8 Investment appraisal.............................................................. 315 Chapter 22 - Unit 3.9 Budgets (HL only)................................................................ 329 Topic 4: Marketing Chapter 23 - Unit 4.1 The Role of Marketing............................................................. 341 Chapter 24 - Unit 4.2 Marketing planning............................................................... 353 Chapter 25 - Unit 4.3 Sales forecasting (HL only)......................................................... 371 Chapter 26 - Unit 4.4 Market research.................................................................. 377 Chapter 27 - Unit 4.Sa The 7 Ps of the marketing mix - Product............................................ 393 Chapter 28 - Unit 4.Sb The 7 Ps of the marketing mix - Price............................................... 411 Chapter 29 - Unit 4.Sc The 7 Ps of the marketing mix - Promotion.......................................... 425 Chapter 30 - Unit 4.Sd The 7 Ps of the marketing mix - Place............................................... 443 Chapter 31 - Unit 4.5e The 7 Ps of the marketing mix - People.............................................. 453 Chapter 32 - Unit 4.Sf The 7 Ps of the marketing mix - Processes........................................... 457 Chapter 33 - Unit 4.Sg The 7 Ps of the marketing mix - Physical evidence.................................... 461 Chapter 34 - Unit 4.6 International marketing (HL only).................................................. 465 Topic 5: Operations management Chapter 35 - Unit 5.1 The role of operations management................................................. 475 Chapter 36 - Unit 5.2 Operations methods............................................................... 481 Chapter 37 - Unit 5.3 Lean production and quality management (HL only).................................. 489 Chapter 38 - Unit 5.4 Location......................................................................... 505 Chapter 39 - Unit 5.5 Break even analysis................................................................ 523 Chapter 40 - Unit 5.6 Production planning (HL only)..................................................... 539 Chapter 41 - Unit 5.7 Crisis management and contingency planning (HL only)............................... 563 Chapter 42 - Unit 5.8 Research and Development (HL only)............................................... 575 Chapter 43 - Unit 5.9 Management information systems (HL only)......................................... 587 Business Management Toolkit (BMT) Introduction........................................................................................ 603 Chapter 44 - Unit SWOT analysis...................................................................... 607 Chapter 45 - Unit Ansoff's matrix...................................................................... 611 Chapter 46 - Unit STEEPLE analysis.................................................................... 617 Chapter 47 - Unit BCG matrix......................................................................... 635 Chapter 48 - Unit Business plan........................................................................ 641 Chapter 49 - Unit Decision trees....................................................................... 645 Chapter 50 - Unit Descriptive statistics.................................................................. 651 Chapter 51 - Circular business models.................................................................. 663 Chapter 52 - Gantt charts (HL only).................................................................... 673 Chapter 53 - Porter's generic strategies (HL only)......................................................... 679 Chapter 54 - Hofstede's cultural dimensions (HL only).................................................... 685 Chapter 55 - Force field analysis (HL only).............................................................. 691 Chapter 56 - Critical path analysis (HL only)............................................................ 695 Chapter 57 - Contribution (analysis) (HL only).......................................................... 709 Chapter 58 - Simple linear regression (HL only).......................................................... 717 Chapter 59 - Concept based learning................................................................... 725 Chapter 60 - Internal assessment....................................................................... 737 Chapter 61 - External assessment...................................................................... 743 Chapter 62 - Extended essay........................................................................... 753 Index............................................................................................... 759  Chapter 1 Unit 1.1 -What is a business? "It does not take much strength to do things, but it requires a great deal of strength to decide what to do." Elbert Green Hubbard (1856 - 1915), American author and philosopher Contents 1.1 What is a business? SL/HL content Depth of teaching The nature of business AOl Primary,secondary, tertiary and quaternary sectors A02 Challenges and opportunities for starting a business A02 © IBO, 2022 The nature of business(A01) Inputs Processes Outputs Examples: Turning the The output business is a decision-making organization involved A raw inputs into or provision in the process of using inputs to produce goods and/ materials, manufactured of final or to provide services (see Figure 1.1). Inputs are the components, goods or into goods and resources that a business uses in the production process, such as machinery, ➔ the provision ➔ services labour and raw materials. This process generates outputs (also equipment of services known as products). Management guru Peter Drucker said that and labour "there is only one valid definition of business purpose: to create a customer" by creating goods and services that meet the needs and wants of customers. Figure 1.1. The production process The term product can refer to both goods and services. Goods An entrepreneur is the individual who plans, organizes and are physical products, such as smartphones, clothes, books manages a business and its operations, taking on financial risks and food. Services are intangible products, such as haircuts, in doing so. The term was coined by Richard Can tillon ( 1680 - public transport, education and healthcare. Businesses can 1734) an Irish-French economist. Entrepreneurship describes also provide goods and services to other organizations, such as the trait of business leaders who tend to be distinctive in their freight transportation, distribution and insurance. temperament, attitude and outlook who drive the business to achieve its organizational goals. Successful entrepreneurs tend to be creative, innovative and highly passionate. They search for and exploit business opportunities by forecasting and/or responding to changes in the marketplace. 11 Topic 1: Introduction to Business Management The nature or purpose of business activity is to generate added value. This occurs when there is a positive difference between Common mistake the selling price of a product and the cost of producing the good The terms customer and consumer are often used or service. Added value exists when products are appealing to interchangeably by students, although they have customers, so they are willing to pay a higher price for such different meanings. Make sure you can distinguish items. between the two terms and use them in the right context - customers are the people or organizations Management guru Peter Drucker (1909 - 2005) famously said that purchase a product whereas consumers are the that the only purpose of a business is to create customers, i.e. the ones who actually use the product. These may be the role of businesses is to combine human, physical and financial same entity (e.g. someone who buys and eats a meal), resources to create goods and services in order to satisfy the but not necessarily such as parents (customers) who needs and wants of people, organizations and governments. buy presents for their children (consumers). Needs are the basic necessities that people must have to survive, such as food, water, warmth, shelter and clothing. Wants are people's desires, i.e. the things they would like to have, such as a larger home, a new smartphone, an overseas holiday or a Box 1.1 - Types of products birthday cake. Consumer goods are products sold to the general public, rather than to other businesses. They can be further categorised as consumer durables (products that last a long time and can be used repeatedly, such as electronic devices, motor cars,jewellery, clothes and home furniture), or non-durables (those that need to be consumed shortly after their purchase as they do not last or cannot be reused, such as fresh food items, beverages, medicines and newspapers). Capital goods (or producer goods) are physical products bought by businesses to produce other goods and/or services. Examples include buildings (premises), computers, machinery, tools and specialist equipment. Figure 1.2 - Cakes are a desire, not a need Services are intangible products provided by businesses. The service is not tangible, but the results or experiences are, such as healthcare, transportation, dining, sports (recreation), legal advice, financial Casestudy 1.1 - SteveJobs guidance and education. Steve Jobs (1955 - 201 1), the co-founder of Apple, did not graduate from university because his adopted parents For a business to operate effectively, tasks must be carried could not afford the tuition fees. Instead, he took the out by various functional areas (or departments). These risk of setting up Apple with two friends (Steve Wozniak interdependent functional areas are human resources, finance and Ronald Wayne) in 1976. However, Ronald Wayne and accounts, marketing and operations management. The sold his share of the company within a couple of weeks nature of business requires these main functional areas to work for (just) $2,300. Jobs went on to reinvent computing, together in order to achieve the organization's goals. music and mobile phones, making Apple the highest valued company in the world, just two months before he 1. Human resource management - The human resources died. Forbes estimated the wealth of Jobs to be over $8.3 (HR) department is responsible for managing the personnel billion. of the organization. This includes roles such as human resource planning, organizational structures, management 12  1.1 What is a business? and leadership, motivation and demotivation and dealing 4. Operations management - This functional area of a with industrial/employee relations (see Chapters 7 - 13). business is responsible for the process of converting raw materials and components into finished goods, ready for 2. Finance and accounts - The finance and accounts sale and delivery to customers. Examples of production department is responsible for managing the organization's include the extraction of crude oil, car manufacturing and money, ensuring compliance with legal requirements the provision of travel and tourism services. Operations (such as filing of corporate taxes) and informing those management topics are covered in Chapters 35 - 43. interested in the financial position of the business (such as shareholders and potential investors). Finance and A large organization is able to allocate resources to each of these accounts topics are covered in Chapters 14 - 22. four functional areas, making their roles easily identifiable. In a small business, owned by just one person, each function would 3. Marketing - The marketing department of a business is need to be carried out by the same person. In practice, the responsible for identifying and satisfying the needs and interrelated nature of four functional areas of a business mean wants of customers. It is ultimately in charge of ensuring that the operations management department relies on effective that the firm's products sell. This is done through a series marketers to promote and sell their products. Equally, marketers of activities such as market research, promotion, pricing, can only do their jobs if they have well-made products to sell branding and distribution. The nature of marketing as a and the necessary financial resources to do so. business function is covered in Chapter 23 - 34. Question 1.1 - The businessof education Education is big business. Schools can earn revenue from numerous sources, such as tuition fees (for fee-paying schools), grants from the government and fund-raising events. They might also lease out their facilities (such as classrooms, sports facilities, drama studios and swimming pools) during the evenings, weekends and school holidays. Schools use these revenues to finance their costs, such as staff salaries, utility bills and the maintenance of the buildings. In addition to school fees, parents might also have to pay for items such as school uniform, textbooks, stationery, sports equipment and food. (a) Distinguish between revenue and costs. [4marks] (b) Examine how business functions operate in an organization such as a school. [6 marks] 13 Topic 1: Introduction to Business Management Primary, secondary, tertiary and production companies. The output is then sold to customers, such as other businesses, governments, foreign buyers or quaternary sectors (A02) domestic customers. usinesses can be classified according to the stage of B production (or chain or production) that they are engaged in. These stages are categorized as (i) primary, (ii) secondary, (iii) tertiary and (iv) quaternary sectors. Medium-income countries tend to have a dominant secondary sector that accounts for a relatively large proportion of their country's national output. Economists argue that the secondary sector is the wealth creating sector because manufactured {i} Primary sector goods can be exported worldwide to earn income for the Businesses operating in the primary sector are involved with country. Value is added to the natural resources used during the extraction, harvesting and conversion of natural resources. the production process. For example, the mass production and Examples include agriculture, fishing, mining, forestry and oil export of motor vehicles and consumer electronic products has extraction. Primary sector business activities tend to account helped economies such as Taiwan and South Korea to prosper. for a large percentage of output and employment in low-income However, automation and mechanisation in modern societies countries. Businesses operating in the primary sector in high- have caused a decline in many secondary (manufacturing) income countries use mechanisation and automation, such as industries in terms of employment. combine harvesters, tractors and automatic watering systems. As countries achieve sustained economic growth and development, there is less reliance on the primary sector in terms of employment and national output, partly because there is little added value in primary sector production. For example, low-income countries can only sell tea leaves and coffee beans at relatively low prices. Nevertheless, the primary sector is important for all countries. For example, even though less than 4% of France's national output comes from the primary sector, the country benefits immensely from its agricultural exports sold all around the world. Figure 1.4 - Construction is part of the secondary sector {iii) Tertiary sector Businesses that operate in the tertiary sector specialize in providing services to the general population and other organizations. Examples of industries in the tertiary sector include retailing, transportation and distribution, banking, finance, insurance, healthcare, leisure and tourism and entertainment. Figure 1.3 - Agricultural farming is part of the primary sector Note that physical goods can be transformed in the process of providing a service. This happens in a restaurant when the chef prepares a meal with fresh ingredients. Nevertheless, the focus {ii} Secondary sector is on the people who are providing the service - the chef and the waiting staff who serve the diners - rather than on the tangible Businesses that operate in the secondary sector are involved product itself. in manufacturing or construction. Examples include clothes manufacturers, publishing firms, breweries and bottlers, construction firms, electronics manufacturers and energy 14  1.1 What is a business? In high-income countries, the tertiary sector tends to be the The four business sectors are linked through the chain of most substantial sector in terms of both employment and production which tracks the stages of an item's production, output as a percentage of grossdomesticproduct (the value of the from the extraction of raw materials used to make the product country's output each year). For example, in the USA and UK, all the way through to it being delivered to the consumer (see around 80% of the labour force work in the tertiary sector. The Figure 1.1). decline of the manufacturing sector in high-income countries also signifies their growing reliance on the tertiary sector. Primary production Manufacturing Services (tertiary and quaternary output) Consumers Figure 1.5 - Public transportation is part of the tertiary Figure 1.7 - The chain of production sector All four business sectors are interdependentbecause each sector {iv) Quaternary sector relies on the others to remain in existence. For example, raw This is a sub-category of the tertiary sector. Businesses that materials such as crude oil, would not be extracted if there operate in the quaternary sector are involved in intellectual and was no need for oil refinery whilst there would not be any knowledge-based activities that generate and share information. need for oil refiners if there were no customers for the oil, Examples include information communications technology such as motorists and airline companies in the tertiary sector. (ICT), research and development (R&D), consultancy services Likewise, firms in the secondary sector rely on their suppliers and scientific research. For example, pharmaceutical companies for stocks to ensure that their production targets are met. invest heavily in R&D to create innovative products, develop Businesses are also interdependent as they all need energy, ICT new production methods, improve efficiency and to tap into facilities, manufactured producer goods, financial services and markets. The quaternary sector exists mainly in high-income management consultants. countries as it requires a highly educated workforce. It is also the sector in which high-tech and e-commerce businesses High-income countries are able to exploit the tertiary and invest for further growth and evolution. quaternary sectors as the main contributors to national output and employment. Businesses such as Apple and Samsung see themselves as operating in the services sector (they outsource production of their smartphones and computer hardware to manufacturers such as Foxconn). Apple realise that there is more added value in the tertiary and quaternary sectors - rather than receiving one-off payments from selling manufactured equipment, it can receive a flow of revenue from offering after- sales services such as maintenance and support services. Figure 1.6 - Information Communications Technology (ICT) is part of the quaternary sector 15 Topic 1: Introduction to Business Management Question 1. 2 - Production Sectors Study the data below and answer the questions that follow. A, Band C represent three countries: France, Bangladesh and the Philippines (although not necessarily in that order). Structure of employment(%) A B C Agriculture 33 4 45 Manufacturing 15 24 30 Services 52 72 25 (a) Identify the countries A, Band C. [3 marks] (b) With reference to the data above, explain your answer to Question 1.2 (a). [6marks] https:/ /en. wi ki ped ia.org/wi ki/List_ of_ countries_ by_sector_com position_ of_the_ labor_force Challenges and opportunities for of time, which may require marketing know-how and large starting a business (A02) amounts of money. esults from around the world consistently show that Cash flow problems - Financing working capital (the R around 20-25 per cent of new businesses fail to survive their first year. A new business is likely to face challenges which must be dealt with immediately to prevent them from money available for the daily running of a business) is a major challenge for many business start-ups. A business might have a lot of stock, such as raw materials, semi- escalating and threatening its survival. The challenges for finished output or finished goods that it cannot easily turn starting up a business include any combination of the following: into cash. Customers might demand a lengthy credit period (typically between 30 to 60 days) enabling them to buy Lack of finance - All businesses need finance for the now and pay later, so the business will not receive the cash purchase of fixed assets, such as premises, buildings, payment until the credit period is over. However, during machinery and equipment. However, start-up firms and this time, the business still needs to pay for its on-going most owners of new or small businesses do not have the costs such as wages, rent, utility bills, taxes and interest credentials to secure sufficient funding without major payments on bank loans. challenges. Even if entrepreneurs are able to some borrow money, the funds may be insufficient or the relatively Marketing problems - Marketing challenges arise when high interest charges might seriously affect the cash flow businesses fail to meet customer needs, thereby resulting position of the business (see Chapter 20). Hence, new sole in poor sales and a lack of profitability. Supplying the traders (see Chapter 2) often have to remortgage their own right products to the right customers at the right price is homes to raise the finance needed, thereby offering the especially crucial for new businesses. However, small and lender more collateral(financial security) in case they fail new businesses might lack the expertise to do this. Quite to repay the loan). often, the key to small business success is to identify a niche (or gap) in the market and then fill it. For example, back in Unestablished customer base - A major challenge facing the 1990s, Amazon identified huge opportunities of using new businesses is attracting customers, i.e. building a broad the Internet as a channel of distribution for books and and loyal customer base. The problem is intensified when other products. European airline carriers such as easyJet there are well established competitors that already operate and Ryanair identified early on the niche market for no- in the market. Customer loyalty is built over a long period frills (budget) air travel. 16  1.1 What is a business? People management problems - Business start-ups may lack experience in hiring the right staff with all the necessary Box 1.2 - Examplesof start-up costsfor a skills. This can lead to poor levels of labour productivity new business and the need to retrain staff or to rehire people, all of which can be very expensive and time consuming. Moreover, Buildings, such as alterations, fixtures and fittings and new businesses might not know the ideal organizational insurance costs. structure (see Chapter 8) or the most practical methods of staff motivation (see Chapter 10) that best suits their Capital equipment, such as office furniture, telephones, organizational needs. computers, Wi-Fi, machinery, tools and motor vehicles. Production problems - It can be challenging for business Human resources, such as recruitment, induction and start-ups to accurately forecast levels of demand so they training costs. are more likely to either over produce or under produce. Overproduction tends to lead to stockpiling, wastage Legal and professional fees, such as the costs of and increased costs (see Chapter 40). By contrast, solicitors, licenses and permits. underproduction leads to dissatisfied customers and a loss of potential sales. Marketing costs, such as market research, advertising and promotional campaigns. Legalities - It is necessary for businesses to comply with all necessary legislation, including business registration Premises, such as purchase costs, mortgage deposit procedures, insurance cover for staff and buildings, payment or rental deposit costs. consumer protection laws and rules about intellectual property such as copyrights, patents and trademarks (see Chapter 42). The paperwork and legal requirements of setting up a new business can be cumbersome, confusing, time consuming and expensive. Any oversight could result Poor location - Businesses face a dilemma in the location in the business having to pay compensation or financial decision: busy areas offer the highest potential number of penalties. This would obviously damage the already customers, but the premises in these areas will also cost vulnerable cash flow position of business start-ups. the most (see Chapter 38). Fixed costs, such as rent or mortgage payments, account for a large percentage of total High production costs - New businesses are likely to have costs for many businesses. An aim for any new business is high set-up costs (see Box 1.2) and running costs due to to reach break-even as soon as possible, by keeping fixed the large amount of money needed to purchase or pay for costs down. This is one reason why many entrepreneurs set capital equipment, machinery, stocks (inventory), rent, up small businesses that operate initially from their own advertising, insurance and so forth. Smaller businesses will homes (which also has some tax advantages). Jeff Bezo, also be at a cost disadvantage as they cannot benefit from the founder of Amazon, started his online business in his economies of scale (see Chapter 5). By contrast, economies garage. Of course, this option is not suitable for businesses of scale allow larger and more established businesses to where location (see Chapter 38) plays a key factor in benefit from lower average costs of production due to business survival. the size of operations, such as being able to get discounts from their suppliers for large bulk purchases or being able External influences - All businesses, irrespective of size to borrow money at a lower interest rate because of their or how long they have been in operation, are prone to larger size and financial collateral. exogenous shocks (see Chapter 46) that create a challenging trading environment, such as a global financial crisis or the outbreak of a pandemic. However, larger and more established firms tend to be better resourced to handle these external influences. Hence, new businesses face the added challenge of being more vulnerable to external shocks which also means the potential for business failure is greater. 17  over $215 billion) own over 50% of the shares in Walmart, the world's largest retailer. The Mars family is the second wealthiest family, with an estimated wealth of $120 billion. Mars Inc., a privately held company (see Chapter 2) that produces confectionary, processed foods and veterinary services is a multigenerational family business that was founded in 1911. Challenge - Some people might view setting up and running a business as a personal challenge. It is this challenge that drives them to perform and what gives them particular satisfaction. Being successful in business boosts self-esteem. This is perhaps one reason why multi- Figure 1.8 - The COVID-19 pandemic caused havoc for billionaires such as Warren Buffet, Carlos Slim and Li Ka- businesses across the world shing continued to work past the official retirement age. Autonomy - Working for someone else means exactly that. However, there are many potential opportunities for starting Employees have to follow the instructions and rules set by up a business. These opportunities can be remembered by the the organization that they work for, such as the conditions mnemonic GET CASHe. of employment, working hours, employment benefits and holiday entitlement. Conversely, being self-employed Growth - Entrepreneurs tend to benefit personally when means that there is autonomy (independence, freedom of there is an appreciation in the value of their businesses, choice and flexibility) in how things are done within the especially as property and land tend to increase in value organization. Essentially, this opportunity refers to the over time. This is called capital growth. It is quite common benefits of being your own boss. for the capital growth of a business to be worth more than the value of the owners' salaries. Bill Gates, who co- Security - Similarly, there could be a greater sense of job founded Microsoft in 1975, made his fortunes mainly from security for someone who is their own boss. By contrast, the capital growth of Microsoft, the world's largest software employees can be dismissed, made redundant or even maker. replaced by technology. Although the risks are great, being self-employed also makes it potentially easier to Earnings - The Chinese have a saying that "You can never accumulate personal wealth (financial security) to provide get rich earning money from working for someone else." higher funds for (early) retirement. That is because the potential returns from setting up your own business can easily outweigh the costs, even though Hobbies - Some people might want to pursue their the risks are high. It is common that entrepreneurs earn passion or to turn their hobby and interests into a business far in excess of salaries from any other occupation that opportunity. Successful entrepreneurs have a passion for they might otherwise pursue. Tim Cook, CEO of Apple, what they do and this is made easier if the nature of the is reported to have an annual remuneration package of work is directly related to their personal interests. Top around $265 million whilst Elon Musk, Tesla'sCEO, is paid selling author, J.K. Rowling is an example. Jamie Oliver, around $595 million a year! the celebrity chef, has set up several of his own restaurants. Internet entrepreneur Mark Zuckerberg became the world's Transference and inheritance - In many societies, it is the youngest billionaire when he was just 23 years old, having cultural norm to pass on assets, including businesses, to the co-founded Facebook and becoming the company's CEO. next generation. Many self-employed entrepreneurs view their business as something that they are able to pass on In summary, people set up their own businesses due to the (transference) to their children (inheritance) to give them opportunities to satisfy their personal desires - such as to fulfil a sense of financial security that might not be possible if a personal vision, to have the opportunity to achieve success, to they chose to work for someone else. The Walton family be their own boss or simply to live a more extravagant lifestyle (the richest family in the world with an estimated wealth of (if and when the business becomes a 'success'). However, a 18  1.1 What is a business? significant number of new businesses fail to survive. There are The reasons for setting up a business can vary from one country three inter-related reasons or challenges behind this: a lack of and culture to another. For example, only a few legal procedures cash in the business, poor cost control and substandard or weak are needed to establish a business in Singapore, Hong Kong and management and leadership. New Zealand, thus promoting an entrepreneurial culture where creative and innovative businesses can thrive. In other places, such as Chad, Libya and Myanmar, a risk-taking entrepreneurial Keyconcept culture is not so apparent, so there is relatively little change and How important is creativity for business success? sustainability is more of an issue. Essentially, the nature of business activity is to satisfy the needs and desires of customers whilst fulfilling the organization's own objectives, such as profit, growth and corporate social Theory of Knowledge {TOK) responsibility (see Chapter 3). In the long run, all businesses must generate profit or surplus in order to survive, although Reflect on the opportunities for starting up a business. there will be similarities and differences in how for-profit and How do reason and emotion interact to affect the not-for-profit organizations go about doing this (see Chapter decision-making process? Isemotion or reason more 2). Complexities in the global corporate world mean that important in this process? change, ethics and creativity are central to the sustainability of businesses. Theory of Knowledge {TOK) Casestudy 1.2 - Paul Buchheitand Gmail To what extent is luck an essential part of being Creativity and the ability to adapt to change are crucial successful in business? How does this impact the skills to compete successfully in the corporate world. knowledge needed to succeed as an entrepreneur? Paul Buchheit, an employee of Google, is credited as the creator of Gmail. In 2001, he programmed the first working version of Gmail in just one day(!) and was the lead developer. He left Google in 2006 and worked at Facebook until 2010. In 2011, Buchheit won The Economist Innovation Award for the computing and Business ManagementToolkit telecommunications field. Discusshowthe useof a business plan(seeChapter48) can help entrepreneursto tackle the challengesand opportunitiesof startinga business. Keyconcept Discuss the extent to which sustainable business practices can enhance an organization's chances of Whatis a business? and the key financial success. concepts Business activity is the process of turning inputs (land, labour, capital and enterprise) into outputs (finished goods and services) in order to meet the needs and wants of different customers. Irrespective of the country or culture, all businesses strive to add value in the production and provision of goods and services as part of their sustainable business strategy. 19 Topic 1: Introduction to Business Management REVIEWQUESTIONS Goods are physical products produced and sold to customers, such as laptops, books, contact lenses, perfumes and children's 1. What is a business? toys. 2. How do goods and services differ from each other? Needs are the basic necessities that a person must have to survive, including food, water, warmth, shelter and clothing. 3. How do needs and wants of consumers differ from each other? Primary sector refers to businesses involved in the cultivation or extraction of natural resources, such as farming, mining, 4. How do customers and consumers differ from each other? quarrying, fishing, oil exploration and forestry. 5. What are the four functional areas of a business? Production is the process of creating goods and/or services, adding value in the process. 6. What are the four business sectors of the economy? Quaternary sector is a sub-category of the tertiary sector, 7. How does a business add value to its goods and services? where businesses are involved in intellectual and knowledge- based activities that generate and share information, such as 8. What is meant by the chain of production? research organizations. 9. What are the main challenges for business start-ups? Secondary sector refers to businesses concerned with the construction and manufacturing of products. 10. What are the main opportunities for business start-ups? Services are intangible products sold to customers, such as the services provided by airlines, restaurants, cinemas, banks, health and beauty spas, schools and hospitals. KEYTERMS Tertiary sector refers to businesses involved with the provision Adding value is the practice of producing a good or service of services to customers. that is worth more than the cost of the resources used in the production process. Wants are people's desires, i.e. the things they would like to have, such as new clothes, smartphones, overseas holidays and Businesses are organizations involved in the production of jewellery. goods and/or the provision of services. Consumers are the people or organizations that actually use a product. Customers are the people or organizations that buy the product. Entrepreneurs are the people who manage organize and plan the resources needed for business activity in pursuit of organizational objectives. They are risk takers who exploit business opportunities in return for profits. Entrepreneurship refers to the collective knowledge, skills and experiences of entrepreneurs. Figure 1.9 - Holidays are common wants (desires) 20  Chapter 2 Unit 1.2 - Typesof businessentities "Toopen a businessis very easy; to keep it open is very difficult." - Chinese Proverb Contents 1.2 Types of business entities SL/H L content Depth of teaching Distinction between the private and the public sectors AO2 The main features of the following types of organizations: AO3. Sole traders. Partnerships. Privately held companies. Publicly held companies The main features of the following types of for-profit social enterprises: A03. Private sector companies. Public sector companies. Cooperatives The main features of the following types of non-profit social enterprises A03. Non-governmental organizations (NGOs) © IBO,2022 Distinction between the private and the public sectors {A02) rganizations that operate in the private sector are Organizations that operate in the public sector are under 0 owned and controlled by private individuals and businesses, rather than by the government. They differ in size, ranging from those owned and run by just one the ownership and control of the government. They typically provide essential goods and services that would be underprovided or inefficiently provided by the private sector, person, to large multinational companies that operate across e.g. health care, education, social housing and the emergency the world. The main aim of most, although not all, private services. Organizations that are partially or wholly owned by sector organizations is to earn profit for its owners, i.e. the the government are called public sector companies (or state- positive difference between a firm's sales revenue (the money owned enterprises, such as the UK's Transport for London, earned from selling its products) and its costs (production Singapore Airlines, Airports Authority of India and Canada expenditures such as wages and rent). Post (postal services). 21 Topic 1: Introduction to Business Management Casestudy 2.1 - Australia Post Australia Post (www.auspost.com.au), established in 1809, is a state-owned enterprise providing postal services. It employs more than 35,000 people across its network of over 4,330 retail outlets, enjoying revenues in excess of AUD7.5bn (USDS.45bn). Figure 2.1 - Emergency services are provided by the public sector Reasons for public sector business activity include: To ensure that everyone has access to basic services such as To create employment opportunities, e.g. governments education, health care, museums, public parks and public tend to be a large employer of teachers, doctors and nurses. libraries. To stabilise the economy, e.g. many private sector To avoid wasteful competition as the government is able commercial banks were nationalised (bought by the to achieve huge economies of scale (cost savings from government) during the global credit crisis of 2008 to operating on a large magnitude) in the provision of certain prevent further financial turmoil. Government intervention services, such as postal services and national defence. throughout the COVID-19 global pandemic also helped to stabilise the world's economies. To protect citizens and businesses through institutions such as the Police and the courts that govern the country's law and order system. Question 2.1 - The private and public sectors Education, housing and healthcare services can be provided by both private sector businesses and the public sector. (a) Distinguish between the aims of organizations operating in the public sector and the private sector. [4marks] (b) Examine how housing provided by a housing cooperative might differ from that provided by a private sector business. [6 marks] 22  1.2 Types of business entities Types of organizations (A03) An important legal point about sole traders is that the business is unincorporated. This means the owner is the same legal he main features of the following types of organizations: entity as the business itself. As there is no legal difference T (i) sole traders, (ii) partnerships, (iii) privately held companies and (iv) publicly held companies. A03 © IBO, 2022 between the business entity and the owner, the sole trader could lose his/her personal possessions if the business collapses (as the owner is personally responsible and liable for all the debts of the business). Most businesses that operate in the private sector aim to make profit. After all, a business can only survive in the long term Many well-known companies started as sole traders. For if it is profitable. Profit-based business entities differ in terms example, Chanel (The House of Chanel) was started by Coco of ownership and control (you do not have to run a business Chanel in 1910 and has a huge global presence today. Marks simply because you own it), how they raise finance and how & Spencer was set up in 1904 by partners Michael Marks and the profits are distributed. The four main types of profit-based Thomas Spencer (who originally operated as sole traders). organizations are sole traders, partnerships, privately held Multinational retailer Tesco was started in 1919 as a sole companies and publicly held companies. proprietorship by Jack Cohen. In 1945, Sam Walton started his business with personal savings of $5,000 and a $20,000 loan from his father-in-law and went on to establish Walmart as the (i} Sole traders world's largest retailer. A sole trader (or sole proprietor) is an individual who owns his/her personal business. The owner runs and controls the business and is the only person held responsible for its success or failure. It is the most common type of business ownership across the world. Examples include self-employed decorators, plumbers, mechanics, restaurateurs, private tutors and freelance photographers. Casestudy 2.2 - eBay Sole traders may choose to work alone or they might employ other people to help run the business. Sole proprietorships The eBay concept was created in 1995 by entrepreneur are often small family-run businesses and can be set up with Pierre Omidyar in response to difficulties his fiancee a relatively small amount of capital. Start-up capital is usually encountered when she was trying to sell collectibles obtained from personal savings and borrowing. such as PEZ candy dispensers. Omidyar started a sole proprietorship, using a prototype called Auction Web, to sell these and other goods to a growing online community. Three years later, in 1998, eBay became a publicly held company, making Omidyar a billionaire at the age of 31. Figure 2.2 - A sole trader is a business entity owned by a single person 23 Topic 1: Introduction to Business Management Table 2.1 - The advantages and disadvantages of sole proprietorships Advantages of sole proprietorships Disadvantages of sole proprietorships Few legal formalities - Sole traders are quite easy to set up and Unlimited liability - As an unincorporated business, there start-up costs are usually much lower in comparison to starting is no limit to the amount of debts that a sole trader is legally other types of business entities. responsible for if the business fails. Profit taking - The sole trader is the only owner and therefore Limited sources of finance - Sole traders often find it difficult receives all of any profits earned by the business. This gives the to secure funds beyond personal savings. Growth can also be sole trader an incentive to work hard and to become successful. problematic due to the lack of sources of finance available to sole traders. Being your own boss - Sole traders do not take orders from High risks - Statistically, sole proprietorships have the largest anyone, have flexibility in decision-making (such as dictating risk of failure. The presence of larger and more established their own working hours) and self-esteem from being firms creates a huge threat to the profits and survival of smaller successful. businesses. Personalised service - Sole traders can provide a personalised Workload and stress - Owners often have to do their own service to customers. Larger businesses might not have the accounts, marketing and human resource management. The time to get to know all their customers, so their services often sole trader is unlikely to be equally effective in these different become generic and impersonal. roles, so there is added workload and stress. Privacy - Unlike other types of business entities, sole traders Limited economies of scale - A sole trader is not able to enjoy privacy as they do not have to make their financial exploit the benefits of large-scale production, so their prices records available to the general public, i.e. the owner enjoys might be less competitive compared with those of larger rivals. confidentiality (although the accounts can be scrutinised by This tends to reduce the competitiveness and profits for the the relevant tax authorities). sole proprietor. Quicker decision-making - There are no other owners to Lack of continuity - The running of the business can be consult, so sole traders can make decisions quickly and jeopardised if the owner is not present. If the owner decides to independently based on their own needs and preferences. go on holiday or becomes ill, the business might have problems in continuing. Question 2.2 - Flowersby Cam Cam Tran is a sole trader who operates a small florist shop called Flowers by Cam in Montpellier, France. She arranges and delivers flowers to local hospitals, hotels and schools in the local area. At times, she receives large orders for weddings and funerals. She is also busy as a single mother of two school- aged children. (a) Define the term sole trader. [4marks] (b) Examine the costs and benefits to Cam Tran operating her business as a sole trader. [6 marks] 24  1.2 Types of business entities {ii} Partnerships If a legal contract is drawn up, known as a deed of partnership A partnership is a for-profit private sector business owned (or partnership deed), then it is likely to include: by two or more persons. For ordinary partnerships, the maximum number of owners is 20 (although this can vary from The amount of finance contributed by each partner one country to another). The few exceptions to this rule include professions such as solicitors and accountants where issuing The roles, obligations and responsibilities of each partner shares is prohibited. How profits or losses are to be shared between the partners Like sole traders, partnerships are financed mainly from the personal funds of each owner. However, partners can pool their Conditions for introducing new partners funds together to raise more finance than sole traders. They can also raise money from owners who do not actively take part Clauses for the withdrawal of a partner in the running of the partnership but have a financial stake in it. These investors are called silent partners (or sleeping partners) and are eligible for a portion of any profits earned by the partnership. At least one owner must have unlimited liability, as partnerships are unincorporated businesses, but typically all partners share this liability. Although it is not a legal requirement, most partnerships create a formal legal agreement between each of the partners. Without a contract, profits or losses must be shared equally amongst the partners who have the same rights in the running of the business. Figure 2.3 - Partnerships consist of two or more owners Table 2.2 - The advantages and disadvantages of partnerships Advantages of partnerships Disadvantages of partnerships Financial strength - Partnerships have more financial strength Unlimited liability - Legally, partnerships are responsible than sole proprietorships as there are more owners who can for their debts 'wholly or severally' meaning the debts can be invest in the business, yet they are still fairly easy to set up. repaid by either one partner (wholly) or shared among the In general, it is also easier for partnerships to secure external partners (severally). The rare exception is with limited liability sources of finance due to the lower risks. partners who have been elected to have limited liability. Specialisation and division of labour - Unlike sole traders, A lack of continuity - Problems may exist if a partner leaves partners can benefit from shared expertise, shared workload the firm or passes away because the partnership deed becomes and moral support. For example, a law firm might have partners invalid, i.e. it has to be set up again. It is possibletoaccommodate who specialise in corporate law, divorce law and criminal law. some changes in a deed of partnership, although solicitors will As a result, its client base is likely to be much larger. need to spend time (and money) on drafting the new contract. Financial privacy - Like sole proprietorships, partnerships do Prolonged decision-making - In comparison to sole traders, not have to publicise their financial records. Therefore, they can decision-making is likely to take longer as there are more enjoy a fair degree of financial privacy. owners involved. Disagreements and conflict might also occur. Cost-effectiveness - Partnerships can be more cost-effective Lack of harmony - Disagreements and conflict within than sole traders as each partner specializes in certain aspects of partnerships is common, but there must also be mutual trust. their business, thus raising labour productivity and operational Each partner is legally and financially accountable to all others, efficiency. so a mistake made by one person can reduce the profits for every partner. 25 Topic 1: Introduction to Business Management Unlimited liability exists to prevent sole traders and partners from making careless and irresponsible decisions in managing their businesses. It makes private individuals accountable for their actions and decisions. However, the risk of loss of private property and personal possessions can deter sole traders and partners from taking risks, choosing to make safe decisions instead. Question 2.3 - EXP EXPis a small Chinese restaurant with take-away service located in London. It was established in 2016 by partners Keith and Tonina Hoang. EXP is run as a partnership with each partner having 50% of the stake in the business. They have a workforce of 12 people, including chefs, counter staff and delivery crew. EXP relies heavily on local customers but faces competition from nearby pizza outlets and Indian and Italian restaurants. EXP's popularity has grown with a loyal customer base. Keith and Tonina had to discontinue with the distribution of take- away menus in the local area as EXPis already operating near full capacity. Keith and Tonina thought it best to maintain the quality of their food and the punctuality of their home deliveries to maintain the reputation that they have established. (a) Define the term partnership in the context of business entities. [2 marks] (bl Explain two advantages of running EXPas a partnership. [4marks] (c) Discuss the costs and benefits of EXPremaining as a small business. [10marks] (iii) Privately held companies Companies are businesses owned by their shareholders. Setting up a company can be complicated and expensive, Shareholders are individuals or other businesses that have e.g. there are rules and regulations that must be obeyed for invested money to provide share capital for a company or shares to be sold on the stock exchange. A stock exchange is corporation. Corporations are sometimes called joint-stock a marketplace for trading stocks and shares of publicly held companies because the shares of the business (or 'stock' as they companies (or public limited companies). Examples include are sometimes known) are jointly held by numerous entities. the London Stock Exchange (LSE) and the New York Stock Exchange (NYSE). Companies are incorporated businesses, i.e. there is a legal difference between the owners of the company (the One reason for such legislation is to protect investors who buy shareholders) and the business itself. The company, being a shares in businesses that they do not run or control. A Board of separate legal entity, has its own legal rights and duties. For Directors (BOD) is elected by shareholders to run the company example, the company, rather than the owners, would take on their behalf. Directors are elected because of their skills and those who infringe copyright and patent laws to court. It also expertise and because shareholders do not necessarily want to means that companies have limited liability - shareholders do get involved in the daily running of the company. The BOD is not stand to lose personal belongings if the company goes into held responsible for the running of the company but is held bankruptcy or liquidation (see Chapter 19). The maximum a accountable to the shareholders. In most cases, each share held shareholder can lose is the value of his/her investment in the equals one vote, so the more shares held by an investor the more company. This is to safeguard investors - imagine an ordinary voting power they have. In reality, individual shareholders tend individual having to share the debts of a large multinational to have very little say as it is the large institutional investors company thats/he had invested in! and directors who hold the majority of the shares in a limited liability company. 26  1.2 Types of business entities For this reason, many privately held companies are run as family Exam tip! businesses. The business will usually have the word 'Limited' or the letters 'Ltd: after its name. However, this practice varies Students often use the words 'business' and 'company' from one country to another. interchangeably. Whilst this can be true, it is important to remember that 'companies' are owned by shareholders, All companies must hold an Annual General Meeting (AGM) so there can only be two types of companies: privately to allow the owners to have a say (or vote) in the running of the held companies and publicly held companies. The term business. There are three main processes at a typical AGM: 'business' also includes other forms of business entities, such as sole traders and partnerships. In summary then, Shareholders vote on resolutions (promises or declarations) all companies are businesses but not all businesses are and the re-election (or sometimes election) of the Board of companies. Directors. Shareholders ask questions to the Chief Executive Officer There are two types of limited liability companies - privately (CEO), Directors and the Chairperson about various held companies and publicly held companies. aspects of the company. A privately held company (or privately owned company) is a Shareholders approve the previous year's financial accounts limited liability company that cannot raise share capital from after the Directors present the annual report containing the general public via a Stock Exchange. Instead, shares are sold information about its financial performance. to private family members and friends. The shares cannot be bought or sold without the prior agreement from the BOD, so that the directors can maintain overall control of the company. Box 2.1 - Ten examples of privately held companies Aldi - Discount supermarket (Germany) Chanel - Fashion and Cosmetics (France) Ernst & Young - Accounting (USA) Huawei - Consumer electronics and technologies (China) IKEA- Home furnishing (Sweden) LEGO- Toys (Denmark) Figure 2.4 - Companies must hold an AGM for their shareholder Mars Inc. - Confectionary (USA) Rolex - Prestigious wristwatches (Switzerland) PriceWaterhouse Coopers - Accounting (USA) Virgin Group - Global conglomerate (UK) 27 Topic 1: Introduction to Business Management Table 2.3 - The advantages and disadvantages of limited liability companies Advantages Disadvantages Raising finance - Companies can raise large amounts of capital Communication problems - Quite often, as a company by selling shares.There are no interest charges and shareholders becomes larger, services and relationships can become more are paid dividends only if the company earns a profit. impersonal to both customers and employees. Limited liability - As all companies have limited liability, it is Added complexities - Running a sole-proprietorship or easier to attract investors as the risks are relatively low for them. partnership is cheaper and less bureaucratic than running a limited liability company. Continuity - Unlike partnerships and sole traders, the legal Compliance costs - Complying with the rules and regulations difference between the company and its owners means it of being a company add to its running costs. This is particularly can continue to operate as a separate legal entity, even with a the case for publicly held companies due to stock exchange change of owners. rules and regulations. Economies of scale - Due to their larger size, companies Disclosure of information - Financial data must be provided to can benefit from economies of scale (lower unit costs of all shareholders. This can be a time consuming and expensive production as the firms grow). For example, it is usually cheaper task as auditors have to be hired and Annual Reports have for a company to borrow money than it is for sole traders or to be published and distributed. Privacy no longer exists, in partnerships as limited companies are less of a financial risk. comparison to that enjoyed by sole traders and partners. Productivity - Companies can hire directors and specialist Bureaucracy- There is far more bureaucracy involved in setting managers to run the firm as there is no need for the owners up and running a company, e.g. in the UK, the Companies Act to be directly involved in the daily running of the business. 2006 states that a minimum of £50,000 ($70,000) must be They are also more likely to employ specialist staff such as issued as share capital. Solicitors must be hired to ensure that marketers, lawyers and accountants. Therefore, the output and all documents are legally accurate. Advertising and promoting productivity levels of limited liability companies are generally the company's initial public offering (IPO) adds to the costs. higher than found in sole proprietorships and partnerships. Hosting the AGM is also expensive. Tax benefits - Sole traders and partnerships pay income tax Loss of control - Whilst sole traders and partnerships retain on their profits. By contrast, companies pay corporationtax on control of their businesses, publicly held companies face the their profits. The highest income tax rate tends to be greater potential threat of a takeover by a rival company that purchases than the rate for corporation tax. Companies also benefit from a majority stake in the business (as shares are openly available a wider range of allowances and tax-deductible costs. for purchase on a public stock exchange). Before limited liability companies can begin trading, two The Articles of Association (or Articles of Incorporation) documents must be produced and submitted to the appropriate - the longer of the two documents, stipulating the internal authorities: regulations and procedures of the company, such as the rights, roles and power of the BOD and shareholders. The Memorandum of Association - a relatively brief Administrative issues are also covered, such as procedures document outlining the fundamental details of the of the Annual General Meeting (AGM), the processes company, such as its trading name, its main purpose, the for the appointment of directors and how profits will be registered business address and the amount of share capital distributed. invested. Once the authorities are satisfied with the above documents and an application fee has been paid, a Certificate oflncorporation is issued to the company. This license recognises the business as a separate legal entity from its owners (shareholders) and allows the business to start trading as a limited liability company. 28  1.2 Types of business entities Question 2.4- Mars Inc. Mars is a global confectionery and food processing manufacturer with annual sales in excess of $37bn. Perhaps more surprisingly and unusual for a business of this size, Mars is entirely owned by the Mars family, as a privately held company - making it one of the largest family-owned businesses in the world. the company employs more than 130,000 people. The company started with Franklin Clarence Mars (1883-1934) back in 1911 when he and his wife Ethel started making and selling a variety of butter-cream candies in their home in Washington, USA. In 1920, Frank and his son Forrest Edward Mars produced the Milky Way bar - known in Europe and other parts of the world as the 'Mars bar'. It was an immediate success. Today, the portfolio of Mars brands includes Snickers,Wrigley, M&M's and Twix. Having diversified into pet foods, its brands also include Pedigree, Whiskas, Cesar and Sheba. Mars brands are recognised and used in almost every country on the planet. Source: adapted from Mars website (www.mars.com (a) Define the term privately held company. [2 marks] (b) Discuss the decision of the Mars family to keep their business as a privately held company. [10marks] Publicly held companies Whilst a publicly held company shares many similarities Flotation is the term used to describe when a publicly held with a privately held company, it is able to advertise and sell company first sells all or part of its business to external investors its shares to the general public via a Stock Exchange. It often (shareholders). This process is known as an initial public carries the letters 'PLC' after its name, but again this practice offering (IPO). The IPO makes the publicly held company varies between regions (see Box 2.2). Box 2.3 shows examples listed (or registered) on a public stock exchange. Flotation helps of publicly held companies. to generate additional sources of finance for the company. For example, the Agricultural Bank of China raised $22.1 billion in proceeds from its IPO in 2010, the second-largest IPO of all Box 2.2 - Abbreviations for publicly held time. The second largest IPO took place in 2014 when Alibaba companies Group raised $25 billion on the New York Stock Exchange (NYSE). In 2019, Saudi Aramco broke the IPO record by raising Australia Pty. Ltd. (short for'proprietary limited $25.6 billion on the Tadawul Saudi Stock Exchange. company') Germany AG (short for 'AktienGesellschaft' meaning 'shareholder corporation') Nigeria Ltd. (short for'private limited company') Sweden AB (short for'Aktie Bolag' meaning 'limited liability company') UK PLC(short for'public limited company') USA Inc. or Corp. (short for 'incorporated' or 'corporation') Figure 2.5 - The NYSEis on Wall Street, Lower Manhattan in New York City 29 Topic 1: Introduction to Business Management Case study 2.3 - Google On 19th August 2004 Google Inc. floated on the NASDAQ stock exchange following its flotation, thereby becoming a public limited company and raising $2.7bn in the IPO. The shares floated at $85 each but had reached over $600 by 2014 (an increase of over 605% in ten years). By November 2021, Google's share price hit a(nother) peak of $3,037 which represents a rise of 3,473% since its IPO. The largest shareholders of publicly held companies tend to Common mistake be institutional and commercial investors, i.e. companies have shares in other companies. For example, Porsche is the majority It is incorrect to state that privately held companies shareholder of German automaker Volkswagen, which in are smaller than publicly held companies because turn owns a majority of the shares in Audi, Bentley, Bugatti, this is not necessarily the case. IKEA, LEGO, Huawei, Lamborghini, SEAT and Skoda. PricewaterhouseCoopers and Mars are all market leaders in their respective industries. Nevertheless, shareholders of companies face potential risks, despite their liability being limited. Unprofitable companies cannot distribute any dividends. The share price is likely to fall as a result, causing negative capital growth. Shareholders also place their trust in the Board of Directors and senior management team to run the company on their behalf, although the interest of directors, managers and shareholders might conflict (see Chapter 4). For example, managers and directors might decide to improve pay and conditions to address concerns from the Business ManagementToolkit(HLonly) workforce, but this could reduce the amount of funds available for dividends paid to shareholders. Discusshow the useof Porter'sgenericstrategies(see Chapter53) can supportstrategicdecision-makingin privatesectorbusinessorganizations. 30  1.2 Types of business entities For-profit social enterprises (A03} The main benefits of social enterprises are: The main features of the following types of for-profit social enterprises: (i) private sector companies, (ii) public sector They use any financial surplus to benefit others in society, companies and (iii) cooperatives. beyond personal rewards for shareholders and owners. © IBO, 2022 They create employment opportunities, thereby improving ocial enterprises are revenue-generating businesses the economic and social landscape of local communities. S with social objectives at the core of their operations. Whilst commercial for-profit businesses strive to return a profit for their owners, for-profit social enterprises strive to They are run in a transparent way, providing tangible benefits in addition to having a clean corporate conscience return a surplus for social gain rather than personal gain. in the strive to achieve its social mission. Social enterprises can be operated as a non-profit organization There are three main types of for-profit social enterprises: or as a for-profit company. Either way, all social enterprises (i) private sector companies, (ii) public sector companies have two main goals: and (iii) cooperatives. 1. To achieve social objectives and (i} Private sector companies 2. To earn revenues in excess of their costs. Private sector for-profit social enterprises operate in a similar After all, social entrepreneurs (those who use businesses to way to traditional for-profit businesses, but it is what these solve social issues) cannot deliver the social good they desire if organizations do with their profits or financial surplus that they do not manage the financial health of their business. Their sets them apart. For-profit social enterprises reinvest or donate success in helping others depends on their ability to operate as a any surplus to create positive social change. Furthermore, sustainable business, i.e. without a surplus or profit, there is no private sector for-profit social enterprises use ethical business business for the greater good. practises to achieve their social aims related to the needs of local communities and societies. Case study 2.4 - Grameen Bank This means that such private sector companies earn their revenues and financial surpluses in socially responsible ways. In 1983, social entrepreneur Muhammad Yunus To benefit the society, a social business organization conducts established the Grameen Bank in Dhaka, Bangladesh. activities related to the society. Unlike charities that rely on Grameen Bank, often referred to as the 'bank for the donations, private sector for-profit social enterprises need poor' was set up to provide small loans (known as to earn a financial surplus in order to survive and operate microfinance) to those living in poverty so that they as a sustainable business. Earning a financial surplus is also would be able to become financially self-sufficient. important to enable these social enterprises to expand their Instead of operating like commercial banks, the Grameen business activities and outreach programmes. Bank does not require any collateral (financial security) from its borrowers. Private sector for-profit social enterprises produce goods or provide services in the same way as for-profit commercial According to its website (https://grameenbank.org/), organizations. They can also be established as different legal over 97 percent of borrowers are women. The Grameen entities that operate in the private sector, such as private or Bank has assets in excess of $2.8bn and employs more