Influences and Challenges of the Business Environments PDF

**INFLUENCES AND CHALLENGES OF THE BUSINESS** Terms and Definitions ===================== -------------------------- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------...

**INFLUENCES AND CHALLENGES OF THE BUSINESS** Terms and Definitions ===================== -------------------------- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ Control Organisational structure Organisational culture Vision Mission statement Human resources Suppliers Competitors Deforestation Redressing Nepotism Retrenchment Go- slows Trade union A work stoppage as a form of protest or to strengthen one's bargaining position These are actions that include strikes or go slows A market where there is no control over who may provide goods and services or over the prices that can be charged Statistical data relating to the population and particular groups within it. Often incudes age, gender, income groups and occupation. The classification of people according to their attitudes, aspirations and other psychological criteria. Greater trade and collaboration between businesses or people in different countries which is enabled by technological advances and communication. This is an environment that is comprising of the ecological elements such as natural disasters, air pollution, water pollution, deforestation, waste products or natural resources These are private-public partnerships which are formed between government and private enterprise -------------------------- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ 1 COMPONENTS OF THE MICRO, MARKET & MACRO ENVIRONMENTS. (RECAP) =============================================================== +-----------------------+-----------------------+-----------------------+ | - The business | - Customers/Buyers; | - - - - - - | | mission and | are the | | | objectives, | | | | | | | | - its management | | | | | - Suppliers include | | | | factories and | | | | providers of | | | - its resources and | goods and | | | its culture are | services that | | | primarily | businesses obtain | | | controlled by the | or buy to operate | | | enterprise's | their businesses. | | | | | | | | - Intermediaries/Ag | | | | ents; | | | | who help to | | | | promote, sell and | | | | distribute | | | | products to | | | | consumers. | | | | | | | | - Competitors; that | | | | sell the same | | | | Products or | | | | services may have | | | | a greater impact | | | | on the market of | | | | the business. | | | | | | | | - A regulator; is a | | | | person or | | | | organization with | | | | official power to | | | | control an | | | | activity and make | | | | sure that it is | | | | done | | | | satisfactorily/ma | | | | ke | | | | rules by which | | | | enterprises in | | | | the different | | | | industries must | | | | abide. | | | | | | | | - Strategic allies; | | | | refer to two or | | | | more businesses | | | | that work | | | | together to allow | | | | them to obtain | | | | the expertise | | | | they lack from | | | | another business. | | | | | | | | - Unions; are | | | | employee | | | | organisations | | | | that aim to | | | | improve the | | | | working | | | | conditions of the | | | | labour force. | | +-----------------------+-----------------------+-----------------------+ Microenvironment ================ - Business owners and managers have a great deal of control over the internal/micro environment of business, which covers day-to-day decisions. - They choose the suppliers they purchase/which employees they hire/the products they sell, and where they sell those products. - They use their skills and resources to create goods and services that will satisfy existing and prospective customers. Market environment ================== - Market environment for a business includes company related influences - The market environment refers to influences that have an impact on the success in forming and keeping a sustainable business such as competition and suppliers. - Businesses can influence their competitors by increasing the quality of their products in relation with competitor prices. - The opposite can also be that suppliers' raw materials can influence the quality of business products. Macro environment ================= - The macro environment refers to the major external and uncontrollable factors that influence an organization\'s decision making. - These factors include the economic/demographics/legal/political/social conditions/technological changes and natural forces. - The above mentioned factors affect business performance and strategies. - The external environmental conditions that affect a business are generally beyond the control of management and change constantly. - Creating new uses for a product by finding new customers. - Influencing regulators through lobbying and bargaining. - Initiating bargaining sessions between management and unions. - Influencing its owners using information contained in annual reports. 1.3 Benefits/advantages of involvement in macro environment ----------------------------------------------------------- - The business can more accurately predict future events, threats and opportunities that may arise - The business can contribute to a healthier, more skilled and productive workforce - The business can contribute to wealthier consumers. - Reduced industrial conflict and increase productivity. - The business can accurately promote a cause that is a concern to the society. 2 CHALLENGES OF THE BUSINESS ENVIRONMENTS ========================================= +-----------------------+-----------------------+-----------------------+ | - Difficult | - Competition | - Change in income | | employees. | | levels | | | - Shortage of | | | - Lack of vision | supply | - Political changes | | and mission | | | | | - Changes in | - Contemporary | | - Lack of adequate | consumer | legislation | | management skills | behaviour | | | | | - Labour | | - Unions | - Demographics and | restrictions | | | psychographics | | | - Strikes and go | | - Micro lending | | slows | - Socio-cultural | | | | factors | - Globalisation | | - Skills shortages | | | | among employees | | - Social values and | | | | demographics | | - High employee | | | | turnover | | - Socio economic | | | | issues | | - Employee | | | | absenteeism | | - Socio economic | | | | challenges. | +-----------------------+-----------------------+-----------------------+ 2.1 Explanation of the challenges of the business environment ------------------------------------------------------------- ### 2.1.1 Challenges of the microenvironment ### Difficult employees - Difficult employees may have a negative attitude on new employees. #### Lack of vision and mission statement - Lack of vision and mission statement will hamper meaningful guidance and leadership to employees. #### Lack of adequate managerial skills - Lack of adequate managerial skills will result in the business not achieving its objectives. #### The impact of unions - Trade unions may create tension between management and employees.  Differences between a strike and go slow --------------------------------------------------------------------------------------------------------- -- -Temporary collective refusal of employees to work. -A collective, organised cessation of work by employees to force the employers to accept their demands. -Workers will not be fired if they participate in a protected strike --------------------------------------------------------------------------------------------------------- -- Skills shortages among employees -------------------------------- - Businesses sometimes find it difficult to find suitable employees with skills and experience. High employee turnover ---------------------- - Employee turnover means that employees resign frequently. - Employees' absenteeism reduces productivity and affects profitability. 2.1.2 Challenges of the Market Environment ------------------------------------------ Competition ----------- - Other businesses that sell similar substitute products pose a problem to the success of a business. ### Shortage of supply - Businesses that experience a shortage of supply may lose customers as they may buy from other businesses. ### Changes in consumer behaviour - A business is dependent on its customers to purchase its products. ### Demographics and psychographics - Consumers\' attitudes, interests, opinions and lifestyles determine the characteristics of the consumer ### Socio-cultural factors - Social-cultural factors describe the common behaviour and attitudes of a particular society. #### 2.1.3 Ways in which businesses can overcome competition in the market - Management must ensure that the business differentiates itself from the competitors by tapping into what the customer wants. - Offering more personal services by being responsive to the customer's needs/ expectations. - Charging the lower prices√ than that of the other businesses. - Selling products of a superior quality/new products/services that the customers might be interested in. - By being the best employer that has well trained/knowledgeable staff members that create a better working atmosphere.. 2.1.4 Challenges of the macro environment ----------------------------------------- Change in income levels ----------------------- - Factors such as unemployment/high interest rate can leave consumers with less disposable income. ### Political changes - A change in government can result in political instability and scare away potential investors. ### Contemporary Legislation ### Labour restrictions - The government has passed a number of laws which impose restrictions on businesses labour practices. ### Micro lending - Micro lending is granting of small loans to people who cannot obtain credit from banks. ### Globalization/international challenges - Globalisation refers to the exchange of products/services/capital and labour across boundaries/countries. ### Social values and demographics - People's values influence some of their buying behaviour habits as they buy products that they identify with. ### Socio economic issues - Businesses are faced with many challenges of poverty, unemployment, inadequate education, skills shortages, crime and HIV and Aids. 2.1.6 Examples of Contemporary Legislation ------------------------------------------ National Credit Act ------------------- Consumer Protection Act ----------------------- Employment Equity Act --------------------- - This act is there to eliminate unfair discrimination in the business against race, colour, age, gender, religion or disability. - This Act ensures that the previously disadvantaged people fully participate in the economy. Basic Conditions of Employment Act ---------------------------------- Labour Relations Act -------------------- Skills Development Act ---------------------- Compensation for Occupational Injuries and Diseases Act/COIDA ------------------------------------------------------------- ADAPTING TO BUSINESS CHALLENGES OF THE BUSINESS =============================================== Terms and Definitions --------------------- +-----------------------------------+-----------------------------------+ | Term | | +===================================+===================================+ | Information | | | | | | management | | +-----------------------------------+-----------------------------------+ | Strategic response | | +-----------------------------------+-----------------------------------+ | Merger | | +-----------------------------------+-----------------------------------+ | Takeover | | +-----------------------------------+-----------------------------------+ | Alliances | | +-----------------------------------+-----------------------------------+ | Hedging | | +-----------------------------------+-----------------------------------+ | Networking | | +-----------------------------------+-----------------------------------+ ### 1 Introduction - Businesses operate in dynamic business environments that pose many challenges on their operations. - The profitability and success of businesses depend on how they respond to challenges posed by the internal and external business environments. - Businesses operate within the political context of the country, therefore changes in governance of the country can have a negative impact on businesses. - There is an increasing trend for people to move freely between countries and for businesses to trade across international borders. - Businesses need strong relationships to succeed in the market place. Ways business can adapt to the challenges of the MICRO environment ------------------------------------------------------------------ +-----------------------+-----------------------+-----------------------+ | | | **RECOMMENDATION** | +=======================+=======================+=======================+ | | | Businesses can deal | | | | with difficult | | | | employees as by | | | | revisiting the | | | | recruitment & | | | | induction policies. | +-----------------------+-----------------------+-----------------------+ | | | Businesses need to | | | | develop strategies to | | | | deal with different | | | | types of | | | | personalities. | +-----------------------+-----------------------+-----------------------+ | | | Management must have | | | | a clear vision which | | | | is understood and | | | | communicated to all | | | | employees. | +-----------------------+-----------------------+-----------------------+ | | | The vision and | | | | mission statement | | | | must have to be | | | | implemented in a way | | | | that shapes the | | | | internal environment. | +-----------------------+-----------------------+-----------------------+ | | | A business manager | | | | needs to be skilled | | | | in technical aspects | | | | of their job and in | | | | dealing with | | | | employees. | +-----------------------+-----------------------+-----------------------+ | | | Managers need good | | | | interpersonal and | | | | conflict resolution | | | | skills. | +-----------------------+-----------------------+-----------------------+ | | | Managers need to deal | | | | fairly and | | | | transparently with | | | | trade unions. | | | | | | | | They need to build | | | | relationships with | | | | union representatives | | | | so that positive | | | | negotiations strikes | | | | can be avoided. | +-----------------------+-----------------------+-----------------------+ 3 Ways business can adapt to the challenges of the MARKET environment --------------------------------------------------------------------- **RECOMMENDATION** ------------------------ -- ------------------------------------------------------------------------------ Businesses must take into account its entry and operation within the market. Conduct research and identify customer needs. Socio cultural factors 4 Ways in which businesses can adapt to challenges of the MACRO environment --------------------------------------------------------------------------- - Information management - Strategic responses - Mergers, takeovers, acquisitions and alliances - Organisational design and flexibility - Direct influence of the environment and social responsibility ### 4.1 Information management - Information must be recorded/stored/easily retrieved and effectively used. - Businesses need to implement an effective information management system which is accessible and useful to all staff. - They should invest large capital into IT system to update business operations. - Modern IT solutions enable businesses to satisfy customer needs faster and better. - Business may benefit from an increase in market share and profitability. ### 4.2 Strategic responses - Management needs to design strategic responses to various challenges by analysing all information, identifying stakeholders' involved. - Get a clear picture of each stakeholder's viewpoints and requirements - Businesses need to be aware of new competitors in the market and they must be able to strategically respond to threats. - They must make strategic plans to remain sustainable in a competitive market. - Correct strategic responses assist businesses to identify the most important features of their products. ### 4.3 Mergers, takeovers, acquisitions and alliances - Business sometimes have to make quick decisions to survive as a result of challenges from the business environments. - They may implement mergers, takeovers, acquisitions and alliance as solutions to respond to the challenges of the environments. Mergers ------- - This occurs when two companies join together and form one new business. - When two businesses, usually by agreement become one. - If it is a public company, then the shareholders will swop their shares in one company for the equivalent value of shares in the new merged company. Takeovers --------- - The purchasing of a company by another company usually against the will of their targets. - Businesses that take over existing companies by buying out its shares until the business has controlling interests. Acquisitions ------------ - A business buys another business at an agreed price. - It usually occurs to private companies that are not listed. Alliances --------- - These are agreements when two or more businesses work together to achieve their objectives. - Organisations with similar interest choose to work together for the mutual benefit of both organisations. - They remain separate and merely co-operate with one another. ### 4.4 Organisational design and flexibility - Organisational design describes how a business structured and how it communicates its culture. - It is a process to integrate people/information/technology of an organisation so that it improves the profitability of the business. - Businesses need to be flexible in their organisational design and strategies so that they can compete in a changing market. - They need to change the organisational design to adapt to a specific challenge. ### 4.5 Direct influence on the environment and social responsibility - Direct influences on businesses usually results from legislation/trade agreements and competitor strategies. - Successful businesses and their environment adapt to the unavoidable influences by creating a competitive environment. - Influence its suppliers by signing long term contracts. - Create new uses for a product by finding new customers. - Influence regulators through lobbying and bargaining. - Initiate bargaining sessions between management and unions. - Influence its owners using information contained in annual reports. #### 4.5.2 Social responsibility - Increasing pressure in the business environment is forcing businesses to become more socially responsible by giving back to communities. - A business code of conduct should take into consideration the norms and values of the community in which it operates. - When a business makes a commitment to environmental and social responsibilities it will deliver a tripple bottom line which includes planet, people and profit. - Environmental friendly campaigns - Making donations to charity organisations - Engaging in economic development - Charity community projects - HIV and Aids awareness programs Benefits of CSI projects for businesses --------------------------------------- - Increases employees' morale and job satisfaction when they are involved in social responsibility programmes. - CSI projects may be used as a marketing strategy to promote their products. - CSI projects promote teamwork within businesses. - May attract experienced employees/increase the pool of skilled labour which could increase productivity. - The business enjoys the goodwill/support of communities. 5 Lobbying, networking and power relations ------------------------------------------ ### 5.1.1 Meaning of lobbying - Lobbying refers to the process of trying to influence legislation or parliamentary decision making. - It involves acquiring public support for an issue such as children or animal rights. #### 5.1.2 Reasons why businesses lobby - Businesses lobby their regulator or supervisory body in order to try influence prices, policies, regulations and other decisions made by the regulator or the supervisory body - Businesses or people lobby or change laws like, child labour laws, clean air and water laws, municipal regulations, etc. - Their views are important and heard, thus making a difference and giving solutions to business challenges. - Lobbying advances businessmen's cause and builds public trust. #### Hedging against inflation - Businesses use hedging to protect their financial investments by spreading the risk. - Businesses invest surplus fund so that its value grows at a faster rate than inflation. #### Bargaining sessions between management and unions - These sessions enable employees to negotiate with employers as a group to protect employees' rights. - Bargaining sessions prevent labour strikes and provide critical information to people in power - Businesses make sure that their representatives are trained/skilled to negotiate own their behalf. - The purpose of bargaining sessions is to find a win-win situation for all parties. #### Influencing supervisory body/regulators - There are large number of supervisory bodies and regulators who operate in the business environment. - Businesses take an active role in professional bodies. ##### 5.2 Networking ###### 5.2.1 Meaning of networking - It refers to a coordinated activity where people who have a similar objective meet and exchange information and ideas. - It is a tool that is used by businesses to increase sales ### 5.2.2 Examples of networking - Formal networking: Organised local, provincial and national chambers of business, industry and commerce. - Informal networking: Social and less organised coordination. - For instance business managers often network while playing golf, attending sports events or getting involved in social programmes. - Social media and the internet: New and cheap ways of businesses to network via on line forums and business groups ### 5.2.3 Importance/Advantages/Benefits of networking - Businesses can attract new customers resulting to increased market share and profitability. - Networking can be an excellent source of new perspectives and business ideas. - Plays a role in the marketing and expansion of a business. - Assists businesses in making future business decisions. - Businesses can gain support when representation to various authorities is planned. #### 5.3 Power relations ##### 5.3.1 Meaning of power relationship - Power relations can be described as a measurement of a business's ability to control its environment and the behaviour of other businesses. - A business forms relationships with its environment and markets. ### 5.3.2 Ways businesses can form power relations #### Strategic alliance/Partnership agreements - Businesses form partnership agreements in order to benefit each in each other's involvement. - These partnership alliances help parties involved to benefit in infrastructure development and scarce skills. #### Persuasion of large investors - If a business has a powerful investor, the business can often benefit from the relationship so that it can gain credit more easily and better deals from suppliers. - Businesses invite powerful influential people to sit on their board of directors in order to get advice from those people. #### Company representatives' influence - This representative fulfils an important function in trying to persuade investors to invest in a particular business practice. - Businesses must invest time and energy to recruit the right person for this job.  ### Terms and Definitions **TERM** **DEFINITION** -------------------------------------- ---------------- Economic crime Inefficient use of natural resources Population growth Strikes Corruption Dumping Sexual harassment Piracy Ethical conduct Patent Copyright Trade mark Workplace forums inflation Retrenchment Patent Trade union Strike Lock-out Industrial action Trade union Strike Lock-out #### 1 CONTEMPORARY SOCIO-ECONOMIC ISSUES Meaning and impact of contemporary socio-economic issues on businesses **1.1. Low income levels** #### Meaning of low Income levels - South Africa has one of the greatest inequalities in income in the world. - This is due to the largest differences in salaries between high earnings and low earners. #### Impact of low income levels on businesses - Leads to a decrease in the demand for goods and services resulting to a fall in turnover and lower profits for businesses. - People who earn low salaries and wages may become disheartened this will influence productivity in a negative way. - Consumers shift to cheaper brands of certain products. - Poverty can lead to crimes such as shoplifting and robberies - Businesses will have fewer profits and will not have money to expand. **1.2 Inflation** #### Meaning of Inflation - Inflation refers to the general increase in the prices of all products in the country. - It leads to a decrease in the purchasing power of money. #### Impact of inflation on businesses - Inflation increases the costs of raw materials and other inputs. - This leads to optimum productivity whereby businesses has to produce the maximum possible output using the least possible input. - It decreases consumer spending resulting to decreased sales and profitability. - Employees may be retrenched which increases unemployment and decreases buying power even further. #### Meaning of social, cultural and democratic issues - Social and cultural factors have an impact on the market environment because they shape the way people live/work/produce/consume etc. - Demographic factors are defined as the characteristics of the population of a country e.g. #### Impact of social, cultural and democratic issues on businesses - Different groups of people with different cultures will behave differently as consumers, which will affect the business marketing strategy and sales. - New fashion and cultural trends create different kinds of consumers which may result in the reduction of sales for existing products. - Some businesses may not keep abreast with current trends and they may lose their market share. ##### 1.4 Economic crime ##### Meaning of economic crime - Economic crime is also known as white collar crime, it includes the following criminal activities: #### Impact of economic crime on businesses - Loss of income if the money was stolen from a business - Loss of jobs if a business closes down. - Businesses lose investors. - Leads to a decrease in investors' confidence resulting in poor economic and business growth. **1.5 Ethical misconduct** #### Meaning of ethical misconduct - These are socio-economic issues that occur inside the business that also present threats and challenges to businesses. - Ethical can be defined as acting in ways that are consistent with a person's value. #### Types of Ethical Misconduct #### Sexual harassment #### Corruption - Refers to any act of dishonesty such as bribery/theft/collusion/kickbacks etc. - It occurs when two parties enter an illegal but mutually beneficial agreement. #### Mismanagement of funds - Mismanagement of funds refers to the wrongful use of funds that do not belong to a person/employee e.g. irregular expenses. - This involves dishonest activities in which a person entrusted with authority in a business abuses his/her position of trust in order to achieve some personal gain. #### Impact of ethical misconduct on businesses - Employees who have been victims of sexual harassment may experience a lack of concentration/anxiousness/productivity. - Corruption and mismanagement of funds will lead to a loss of income. - Corruption undermines businesses and negatively influences investment. - Business owners involved will face criminal charges. - It may result to bad publicity and loss of customers/potential investors. **1.6 Population growth** #### Meaning of population growth - The word population refers to the number of people in a country. - A population experiences growth when the number of people are born in a particular year exceeds the number of people who dies during the same year. #### Impact of population growth on businesses - Excessive growth increases unemployment and crime. - The municipal and health services may be expensive resulting in the consumer having less money to spend on other products. - More land will be used to build houses which means a decrease in agricultural land and a decrease in basic food supply. - Consumers will have less income and businesses will have a decrease in sales **1.7 Illiteracy** #### Meaning of illiteracy - Illiteracy refers to a person who cannot read or write. - Many illiterate people cannot find work as most jobs require some reading and writing skills. #### Impact of illiteracy on businesses - Business sometimes needs to employ people even though they do not have the correct skills. - Training of these employees can be very costly and the business suffers a financial loss. - Employees without the correct skills can also be the cause of accidents in the workplace and this could impact on the image of the business. - Difficult to market products to people who cannot read or write. **1.8 Lack of skills** #### Meaning of lack of skills #### Impact of lack of skills on businesses - Businesses cannot find candidates with adequate skills and experience. - Businesses end up appointing a candidate who lacks certain skills resulting in poor products and services. - Training employees is expensive and productivity will be affected as it takes time for newly trained employees to learn his/her new jobs. - The cost of labour becomes expensive as some businesses recruit candidates from abroad. **1.9 Unavailability of natural resources** #### Meaning of unavailability of resources - Some natural resources such as oil/coal/ water/gold are scarce. - The above mentioned natural resources may be used up if they are not monitored. #### Impact of unavailability of resources on businesses - The unavailability of coal has led in part to a shortage of electricity in South Africa. - Many businesses lose millions of rands because of load shading and power failure. - The lack of transport due to the scarcity of oil which is used to manufacture fuel may affect businesses. - When the supply of natural resources is threatened it may have negative impact on the operation of businesses and hampers the production processes. #### Meaning of inefficiency use of resources - Inefficient use of resources implies that resources are being wasted. - The wasting leads to further depletion of the natural environment and threatens the future supply of natural resources. - More resources are used as the population grows. #### Impact of inefficiency in the use of resources on businesses - Businesses cannot continue with their operations if natural resources are depleted. - Loss of productivity if business operations come to a halt due to unavailability of natural resources. #### Meaning of exhaustion of natural resources - This refers to the over-use of natural resources leading to exhaustion. - Resource depletion occurs mostly in relation to farming, mining and fossil fuel. - Some natural resources may be scarce and possible be exhausted in future. #### Meaning of dumping - It is when goods enter South Africa from other countries at a price that is cheaper than the normal value of the goods because more was produced than what that country can use. - When companies in a developed world send goods that they have been unable to sell in their own countries, to countries in a developing world where they are sold below the normal asking price. - Dumped products are usually cheaper than South African products. #### Impact of dumping on businesses - Loss of profits as some local producers cannot compete with cheaper prices. - Businesses may lose revenue and be forced to shut down their operations. - Can lead to a decrease in local production and loss of jobs. - Local businesses are unable to produce the same products at an equal or lower price. #### Meaning of strikes - A strike can be defined as a collective, organised stopping of work by employees to force their employers to accept their demands. - Strikes is usually the results of a labour dispute and it takes place when employees refuse to work. - The most reasons why employees usually strike include wages, working hours and working conditions. - Businesses may be forced to close down especially those located in townships. - May results in losses of production as employees stay absent from work during strikes.  Many businesses suffer losses as a result of damage to property. - They can lead to violence/assaults/looting/destruction of property and intimidation of workers who do not strike. - Employees can lose their pays for all the days that they strike. - Economy can be jeopardised since production is lost. - Expense of increased salaries and wages is often passed on to the consumer, which causes inflation. - Businesses loose income because productivity is low. #### Meaning of piracy - Piracy is the unauthorised use/reproduction of another person's original work. - Products that are associated with piracy are computer software/DVD/CDs etc. - Many people download music from the internet without being aware that they are #### Impact of piracy on businesses - It can undermines the music/movie industry as they lose money. - Drives up the prices of products in order to compensate for the loss in sales. - Leads to job losses in the industry - The music industry feel reluctant to develop new talents as the element of risk is too high. - May cause damage to the value of the businesses. - The businesses loses out on sales and income which in turn threatens industry  The businesses loses out on productivity and profits. #### 2 Possible solutions to piracy/ Ways in which businesses can deal with piracy Patent - A patent prevents other businesses/people not to produce and sell the same product/ specific service. - Businesses can take out a patent for new inventions and include a sample of their invention with application. - They must register a patent with the patents office in South Africa.  The invention must comply with Patent Act No. 57 of 1978. - They can bring legal proceedings against anyone who uses the invention. √√ #### Trademarks - Businesses can trademarks to identify themselves and their products. - They must register their trademarks with the register of trademarks at the companies and intellectual property registration. - A registered trademark is protected forever provided it is renewed every ten years and a renewal fee is paid. - Claim damages from someone who infringes the trade mark. #### Copyright - Businesses can sue someone who infringes the copyright. - They can also sue someone who sells or distributes works that he/she knew were infringements of copyright. - They can take legal action against people who copy their products. #### 3 Meaning of industrial relations - Industrial relations refers to the relationship between the employer and employees. - It influences the way in which businesses are guided by the Labour Relations Act. #### Strikes - A strike is when employees stop working completely. - Employees do not get paid for the days spent on strikes. - Strikes represent the final stage of dispute/disagreement between management and employees. - The purpose of a strike is to force employers to agree to the demands of the strikers. #### Go-slows - Go slow is a collective industrial action taken by workers in protest against an employer. - Workers work slowly as possible or reduce production output. - Employees still have to be paid as they are doing their work whereas they do not get paid when they go on strike. #### Lockouts - A lockout occurs when an employer locks employees out of a workplace. - Employers often lock employees out during a strike to ensure the safety of their premises, equipment and working conditions. - A lock out is legal if it complies with the requirements of the Labour Relations Act. #### 4 Purpose of the Labour Relations Act - Provides a framework where the employees, trade unions and employers work together to discuss matters relating to employment, e.g. wages, conditions of employment. - Promotes orderly negotiations and employee participation decision making in the workplace. - Promotes resolution of labour disputes. - Promotes fair employment practices. - Outlines the relationship between employees and employers. - Provides simple procedures for the registration of trade unions and employers\' organizations. - Regulates the rights of trade unions and facilitates collective bargaining. - Regulates the effectiveness of bargaining councils and statutory councils. - Establishes workplace forums to promote the interest of all employees in the workplace whether they belong to the trade union or not. - Allows workplace forums where employees may participate in decision making. - Establishes the Commission for Conciliation, Mediation and Arbitration (CCMA) to resolve labour disputes through statutory conciliation, mediation and arbitration. - Endorses the right to strike against retrenchments, and facilitates labour disputes. - Clarifies the transfer of contracts of employment procedures. - Establishes Labour Courts and Labour Appeal Courts to deal with labour issues. #### 5 Trade unions ##### 5.1 Meaning of trade unions - A trade union is an organisation that protects and lobbies for the rights of workers and represent their interest in negotiations with employers. - It is a group of employees who associate together in a particular industry such as mining/steelworks/etc. with the purpose of protecting the rights of their members. - Taking a political action to influence the government strategy. - Establishing minimum economic and legal conditions. - Providing protection for their members. - Engaging in collective bargaining for better terms and conditions. - Assisting workers who have grievances such as disciplinary action/victimization. - Negotiating with employers for decent working conditions/remuneration/ benefits in order to improve the standard of living. - Negotiating recognition of the union and shop stewards by the employer. - Protecting workers against unfair labour practices and dismissal.  Take legal action on behalf of members when necessary. - Educating shop stewards and other members' on how to carry out their tasks in the union. ##### 5.3 Roles of trade unions - Serves as mechanism through which employees have a collective voice in the workplace. - Unions communicate to the company's management the members' grievances such as unfair dismissal, low wages and conditions of services. - They ensure that the employers include employees in the decision making process. - They ensure that employees are treated fairly and respected. - Unions are involved with social dialogue regarding poverty alleviation, job creation and wealth distribution. - Ensures that all employees are treated equally in the workplace - Representing the interest of general society and minority groups through media and negotiations. - Influencing government decisions. - Representing employees corporately and individually. - Improving material benefits of their members. - Establishing minimum economic and legal conditions/influencing economic policy and law. - Playing a role as moral institutions that will uplift the weak and oppressed and give them the dignity and justice they deserve. - Protecting workers from unfair labour practices and unfair dismissal. - Take legal action on behalf of members when necessary. **BUSINESS STUDIES** **GRADE 11** TERM ONE ======== **TABLE OF CONTENTS** **TOPICS** ----------------------------------------------------------------- -- Exam guidelines for business environments Terms and definitions Meaning of the primary, secondary and tertiary sectors. Relationship between the primary, secondary and tertiary sector BUSINESS SECTORS ---------------- - Explain the meaning of the primary, secondary and tertiary sectors. - Visit any local business enterprise and establish the link/relationship between these sectors - Discuss/Explain/Describe the link/relationship between the primary, secondary and tertiary sector. Terms and Definitions --------------------- ---------------- -- Forestry Mining Forward link Backward link Manufacturing Insurance Interdependent Interrelated ---------------- -- 1 Meaning of business Sectors ----------------------------- ### 1.1 Meaning of the primary sector - The primary sector is responsible for the extraction of raw material from the nature.  This sector deals with extraction of raw materials and natural resources - Natural resources which are not man made like coal, gold, fish and livestock are extracted from this sector - The resources that they extract are forwarded to the secondary sector of the economy for the production of goods. - Examples the primary sector industries; mining, mining, fishing, agriculture, forestry and farming ### 1.2 Meaning of the secondary sector - This business sector is responsible for changing the raw materials acquired from the primary sector into useful products. - It includes the manufacturing factories, construction and energy generation. - The secondary sector will involve the actual manufacturing on the furniture. - This business would buy the raw material (The timber) from the suppliers and turn them into finished products. - Examples of the secondary sector industries; manufacturing, clothing, food processing, building and construction are found in this sector. ### 1.3 Meaning of tertiary sector - This sector renders services to the public and businesses. - Provides services and bring finished products to the final consumer. - It includes services from transport, banking, legal and health. - Examples of the tertiary sector industries; distribution, banking, insurance, tourism, transportation, entertainment, retail and legal services. 2 The relationship between the primary, secondary and tertiary sector --------------------------------------------------------------------- - The primary sector depends on the secondary sector for manufactured goods such as machinery/equipment/fertilisers e.g. a farmer may require seeds from another farm - The primary sector is dependent on the tertiary sector for its customer needs. - The secondary sector processes the raw materials obtained from the primary sector into more useful products. - The secondary sector depends on the primary sector for raw materials and products. - The secondary sector depends on other secondary industries e.g. BMW needs tyre from DUNLOP another secondary sector player - Secondary sector needs the tertiary sector to sell their processed or manufactured goods and also for services such as banks, insurance, transport and communication - The tertiary sector depends on the primary sector for raw materials that do not need processing by the secondary sector. - The tertiary sector depends on the secondary sector for manufactured goods such as office machines/office furniture/stationery etc. 4 Example of a scenario on the relationship between the business sectors ------------------------------------------------------------------------ - Identify THREE business sectors from the scenario above. Motivate your answer by quoting from the scenario. **MOTIVATION** -- ---------------- - Explain the relationship between the business sectors identified from the scenario above. BENEFITS OF THE COMPANY OVER OTHER FORMS OF OWNERSHIP ===================================================== **TABLE OF CONTENTS** **TOPICS** **PAGES** ----------------------------------------------------------------------------- ----------- Exam guidelines for forms of ownership 3 Terms and definitions 4 Characteristics, advantages & disadvantages of a sole trader 5 -6 Characteristics, advantages & disadvantages of a partnership 6-7 Characteristics, advantages & disadvantages of Close Cooperation 7 Characteristics, advantages & disadvantages of a private company 7-8 Characteristics, advantages & disadvantages of a Personal Liability Company 8-9 Characteristics, advantages & disadvantages of public company 9-10 Characteristics, advantages & disadvantages of a state owned company 10-11 Difference between the private and public company 12 Difference between the private and a Personal Liability Company 12 Characteristics, advantages & disadvantages of cooperatives 12 Benefits of establishing a company over other forms of ownership 13-14 Challenges of establishing a company over other forms of ownership 14-15 Procedure for the formation of companies 15 Legal requirements of the name of the company 15 Memorandum of incorporation/MOI 15 Notice of Incorporation 15 Prospectus 15-16 BENFITS OF A COMPANY OVER OTHR FORMS OF OWNERSHIP ------------------------------------------------- - Discuss/Explain/Describe the characteristics, advantages and disadvantages of the forms of ownership. (Recap) - Distinguish/Differentiate/Tabulate the differences between forms of ownership. - Discuss/Explain the benefits of establishing a company versus other forms of ownership e.g.: - Legal status and liability. o Profit sharing o Ownership and management o Capital and cash flow o Life span and continuity - Taxation - Discuss/Explain the challenges of establishing a company versus other forms according to the above mentioned benefits. - Explain/Describe/Discuss the procedure for the formation of companies. - Discuss/Explain the legal requirements of the name of the company, e.g.: - A company is not allowed to use a misleading name, o A name reservation is valid for six months, etc. - Define the following concepts: - Memorandum of incorporation o Notice of incorporation - Prospectus, i.e. initial & secondary offer - Outline the aspects that must be included in the prospectus. TERMS AND DEFINITIONS --------------------- +-----------------------------------+-----------------------------------+ | | **DEFINITION** | +===================================+===================================+ | Form of ownership | | +-----------------------------------+-----------------------------------+ | Continuity | | +-----------------------------------+-----------------------------------+ | Securities | | +-----------------------------------+-----------------------------------+ | Limited liability | | +-----------------------------------+-----------------------------------+ | Unlimited liability | | +-----------------------------------+-----------------------------------+ | Memorandum of | | | | | | Incorporation (MOI) | | +-----------------------------------+-----------------------------------+ | Sole Trader /Sole proprietor | | +-----------------------------------+-----------------------------------+ | Partnership | | +-----------------------------------+-----------------------------------+ | Co-operative society | | +-----------------------------------+-----------------------------------+ | Company | | +-----------------------------------+-----------------------------------+ | Public company | | +-----------------------------------+-----------------------------------+ | Private company | | +-----------------------------------+-----------------------------------+ | Personal liability | | | | | | company | | +-----------------------------------+-----------------------------------+ | State-Owned company | | +-----------------------------------+-----------------------------------+ | Partnership Article | | +-----------------------------------+-----------------------------------+ | Prospectus | | +-----------------------------------+-----------------------------------+ | Annual General Meeting (AGM) | | +-----------------------------------+-----------------------------------+ | Directors | | +-----------------------------------+-----------------------------------+ 1. SOLE TRADE /SOLE PROPRIETOR Definition ----------------------------------------- ### Characteristics of a sole trader - One person can form a sole trader and is easy to start. - It is inexpensive to start and the owner does not have to pay tax. - There are no legal and administrative formalities in the formation of a sole trader. - The profit of the business is belongs to the owner as there is no distinction between the owner and the business. - A sole proprietor is not a legal entity and agreements are entered into by the owner in his\\her personal capacity. - Business has unlimited liability and the private possessions of the owner can be used to pay the debts of the business ### 2 Advantages and disadvantages of a sole trader ---------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------- -Owner makes all decisions. -Unlimited liability which means the owner is responsible for all debts incurred by the business -Requires little capital to start. -Cash flow is often a problem. -All profits belong to the owner -Growth of business can be restricted due to lack of capital. -Simple management structure. -Not a legal entity and no continuity -Can easily adapt to the needs of the client/customer. -Difficult to attract highly skilled and knowledgeable employees. -No legal process and requirements. -The owner is responsible for providing all the capital needed. -The assets of the business belong to the owner. -If the owner does not have enough knowledge/experience the business may fail. -There is personal encouragement and personal contact between the owner and customers. ---------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------- 2 PARTNERSHIP ------------- ### 2.1 Definition - A partnership has two or more partners who own the business. - These owners share the responsibility of the business and they share the financial and management decision of the business. 2.2 Characteristics of a partnership ------------------------------------ - An agreement between two or more people who combine labour, capital and resources towards a common goal. - Partners combine capital and may also borrow capital from financial institutions. - No legal requirements regarding the name of the business. - Partners have unlimited liability and are jointly and severally liable for the debts of the business. - Profit is shared according to the partnership agreement. - Partnership does not pay tax partners pay personal income tax. - Auditing of financial statements is optional. - Partners share responsibilities and they are all involved in decision making. - No legal formalities to start, only a written partnership agreement is required. - The partnership does not pay income tax, only the partners in their personal capacities. - Diversity, specialisation and different skills of the partners can be used. - Partnership has no legal personality and therefore has no continuity. - Partners share responsibilities and they are all involved in decision making. ### 2.3 Advantages and disadvantages of partnership --------------------------------------------------------------------------------------------------------------------------- -- -The partners able to put their knowledge and skills together to collectively make the best decisions. -The workload and responsibility is shared between partners. -Partners are able to share resources. -Partners are only required to pay tax in their personal and individual capacity. -The partners have a personal interest in the business. -Can bring in extra partners at any time. -Attract prospective employees with the option or incentives of becoming a partner. -Partnerships are relatively easy to establish. -Partners contribute new skills and ideas into a business -Partners share responsibilities for decision making and managing the business -Partners share any profits and are therefore motivated to work hard. -Raising additional capital to finance further business expansion is easy as there is no limit on the number of partners. -Partners are taxed in their own capacities, which could lead to lower taxation. --------------------------------------------------------------------------------------------------------------------------- -- #### 3 CLOSE CORPORATION ##### 3.1 Characteristics of a Close Corporation - Can have a minimum of one and maximum of ten members who share a common goal. - The word 'close' means that all members are involve and participate in its management. - Each member makes a contribution of some/assets/services towards the corporation. - The name must ends with the suffix CC. - Members have unlimited liability except where the CC has had more ten members for six months or longer. - A CC has its own legal personality and therefore has unlimited continuity. - Auditing of books is optional as members only need an accounting officer to check financial records. - Transfer of a member's interest must be approved by all other members. - Profits are shared in proportion to the member's interest in the CC. **3.2 Advantages and disadvantages of a Close Cooperation** **ADVANTAGES** **DISADVANTAGES** ---------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------- -There are few legal requirements e.g. auditing of financial statements/regular annual general meetings. -Limited growth and expansion since a CC cannot have more than ten members. -A CC is a legal entity and has continuity of existence. -A member of a CC can be held personally liable for the losses of CC if the member acts is incompetent. -Can be converted to a private company and members may become shareholders. -Audited financial statements may be required when applying for a loan. -Members have limited liability -A CC is taxed as if it were a company, which may be higher than personal tax rates. -Owners' interest in the CC does not need to be in proportion to their capital contribution. -Difficult for members to leave the CC as all members must agree to dispose of a member's interest. -CC may be exempted by CIPC from auditing its financial statements. -A CC is taxed on its income and Standard Tax of Company (STC) based on member's dividends/ Double taxation. #### 4 Private Company ##### 4.2 Characteristics of a private company - Requires one or more directors and one or more shareholders. - It needs a minimum of one shareholder and there is no limit on the number of shareholders that a private company may have. - Register with the registrar of companies by drawing up Memorandum of Incorporation. - The company name ends with letters (PTY) Ltd. - A private company is not allowed to sell shares to the public. - Investors put capital in to earn profit from shares. - The company has a legal personality as well as unlimited continuity. - The auditing of financial statements is optional. - Profits are shared in the form of dividends in proportion to the share held. - Shareholders have a limited liability and will not lose their initial capital invested if the business goes bankrupt. - Shareholders have limited liability and a separate legal entity. - Raises capital by issuing shares to its shareholders. - Profits are shared in the form of dividends in proportion to the number of shares held. ##### 4.3 Advantages and disadvantages of a private company **ADVANTAGES** **DISADVANTAGES** ------------------------------------------------------------------------------------------------------------------------------------------ ---------------------------------------------------------------------------------------------------------------- More opportunities to pay less taxation -Requires a lot of capital -Good long-term growth opportunities -The more shareholders, the less profits -Own legal identity and shareholders have no direct legal implications/ limited liability. -More taxation requirements -Board of directors with expertise /experience can be appointed to take decisions -Directors do not have a personal interest -Not required to file annual financial statements with the commission. -Annual financial statements must be reviewed by a qualified person, which is an extra expense to the company. -It is a legal person and can sign contracts in its own name. Difficult and expensive to establish as the company is subjected to many legal requirements -The new Act forces personal liability on directors who knowingly participated in carrying out business in a reckless/fraudulent manner. -Pays tax on the profits of the business and on declared dividends/Subject to double taxation. -Financial statements are private and not available to the general public. -Must prepare annual financial statements. -A company has continuity of existence \- -It is possible to sell a private company as it is a legal entity in its own right. -It can easy raise capital by issuing shares to its members. ### 5 PERSONAL LIABILITY COMPANY #### 5.1 Definition - - ##### 5.2 Characteristics of a personal liability company - - - - ### The disadvantages are also the same as the private company except the directors of the personal liability company have unlimited liability #### 6 PUBLIC COMPANY ##### 6.1 Definition - - ##### 6.2 Characteristics of a public company - - - - - - - - - - - - - ##### 6.3 Advantages and/or disadvantages **ADVANTAGES** **DISADVANTAGES** ------------------------------------------------------------------------------------------------------ --------------------------------------------------------------------------------------------------------- -The business has its own legal identity -Must disclose all financial information -Easy to raise funds for growth through the sale of shares. -Large amount of funds are spent on financial audits. -Shareholder is only liable for the amount which is invested/Shareholders have limited liability. -Stocks have to be traded publicly. -Can appoint a knowledgeable board of directors. -A full report must be submitted to the major shareholders each year. -Buy and sell shares freely. -Difficult and expensive to establish as the company is subjected to many legal requirements -Shareholders can sell/transfer their shares freely. -The more shareholders, the less profit. -The public has access to the information and this could motivate them to buy shares from a company. -Shareholders may be allowed little or no input into the affairs of the company. -Additional shares can be raised by issuing more shares or debentures -Due to legislation, decisions take longer and there may be disagreements. -Strict regulatory requirements protect shareholders. -Financial affairs must be known to publicly, this information could be used to competitors' advantage. ### 7 State owned company #### 7.1 Definition - - #### 7.2 Characteristics of a State Owned Company - - - - - - #### 7.3 Advantages and disadvantages **Advantages** **Disadvantages** ---------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------- -Profits may be used to finance other state departments -May result to poor management as government is not always as efficient as the private sector. -Offer essential services which may not be offered by the private sector -Inefficiency due to the size of the business -Prices are kept reasonable/Create sound competition with the private sector to make services affordable to more citizens. -Often rely on government subsidies -Wasteful duplication of services is eliminated -A lack of incentive for employees to perform if there is no absence of other motivator such as productivity bonuses. -Planning can be coordinated through central control. -Government can lose money through the business. -Generates income to finance social programmes. -A lack of incentive for employees to perform if there is no share in the profit. -Jobs are created for all skills levels. -Losses must be met by the tax payer. -Shares are not freely tradable making it difficult to raise capital. -SOC must follow strict regulations for operations to raise capital. -Financial statements must be audited ### 8 Differences between the private and public company -- -------------------------------------------------------------------------------------- -- May no offer shares to the general public. Shares are not freely transferable Minimum of one director. Name must end with Proprietary Limited/(Pty) Ltd. Annual financial statements need not be audited and published. Does not need to publish a prospectus as it cannot trade its shares publicly. The company is not required to raise the minimum subscription/ issue minimum shares. -- -------------------------------------------------------------------------------------- -- #### 9 Differences between the private and a personal liability company **PRIVATE COMPANY** **STATE OWNED COMPANY** ------------------------------------------------------------------------ -------------------------------------------------------------------- The name ends with (PTY) Ltd The name ends with INC The directors are not personally liable for the debts of the business. The directors are personally liable for the debts of the business. #### 10 Cooperatives ##### 10.1 Definition ##### 10.2 Characteristics of cooperatives - Minimum of five members is required to start a cooperative. - Register with the Registrar of Companies - Legal entity and can own land and open bank accounts. - Members own and run the business together and share equally in its profits. - Decisions are taken democratically - They are motivated by service rather than profit - Must register with the Registrar of Cooperatives Societies - The word 'Cooperative Limited' must appear at the end of its name.  They are managed by a minimum of three directors. - The objective of a co-operative is to create mutual benefit for the members. **10.3 Advantages and/or disadvantages of cooperatives** ---------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------- -Access to resources and funding -Decisions are often difficult to reach and time consuming. -Decision making is by a group -Difficult to grow a co-operative. -Each member has an equal share in the business. -Very few promotion positions for staff. -A co-operative can appoint its own management. -It can be difficult to get a loan because their main objective is not always to make a profit. -Members have limited liability -The success of cooperatives depends on the support of the members. -The decisions are democratic and fair -Shares are not freely transferable -Members are motivated because they are working for themselves -All members have one vote regardless of the number of shares held. -Can gain extra capital by asking its members to buy shares. -Co-operatives have continuity of existence -Resources of many people are pooled together to achieve common objectives Profits are shared equally amongst members. ---------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------- ### 11 Benefits of establishing a company versus other forms of ownership #### 11.1 Legal status and liability - A company has its own legal status, trading name and owns its assets. - Shareholders\' private assets are protected as they have limited liability. - The shareholders have no direct legal responsibility. - Companies have their own names and these are protected. **11.2 Profit sharing** - Shareholders share in the profits of the company through dividends #### 11.2 Ownership and management - Shareholders are able to buy and sell shares freely in a public company. - The company is managed by qualified and competent board of directors - A company is less likely to use consultants as it has a larger pool of skills and expertise  Directors are more likely to take risks and allow growth opportunities for the business. #### 11.3 Capital and cash flow - A company may has more investor's to fund the setting up of the business.  Companies have a better cash flow than sole traders. - A company is not limited to the individual contribution of the members' capital. - The long term growth opportunities for companies are really good as there are always possibilities of getting in more investors. - Directors do not have to take out personal loans to grow the business #### 11.4 Life span and continuity - A company has continuity of existence. - Company shares can be transferred/bought/sold.  #### 11.5 Taxation Companies have tax benefits other enterprises do not have  They may obtain tax rebates if they are involved is social responsibility projects. ### 12 Challenges of establishing a company versus other forms of ownership - - - - - - - - - - - - - - #### 13 Procedure for the formation of companies - - - - - - - - #### 14 Legal requirements of the name of the company - - - - - - - - - ### 15 Memorandum of incorporation/MOI #### 15.1 Meaning of memorandum of incorporation/MOI - - - - - - - #### 15.2 Aspects that must be included in the memorandum of incorporation - Incorporators - Nature of the company - Securities of the company - Shareholders and meetings - Directors and officers - Name of the company - Main objectives of the company - Number of shares each incorporator will purchase - Amount of share capital registered - Rules and regulations of the company - Name of the auditor ##### 16 Notice of incorporation  The notice must be lodged together with the Standard Form of Memorandum of ##### 17 Prospectus ###### 17.1 Meaning of a prospectus - A prospectus is a written invitation to the public to buy the securities offered by a public company. - It is a formal legal document giving details about investment offerings to the public. - A prospectus can only be issued by a company and it must be within three months after the date of its registration. - It gives information about the business. ###### 17.2 Meaning of the Initial order offer/IPO - This is when the company issues shares to the public for the first time. - The company must produce a prospectus before undertaking the initial offering. - Most companies undertake an IPO with the assistance of an investment banking firm acting in the capacity of an underwriter. ###### 17.3 Meaning of the secondary offering - A secondary offering is an offering of securities by a shareholder of the company as opposed to the company itself, which is a primary offering - A secondary offering is the sale of new or closely held shares by a company that has already made an initial public offering (IPO) ###### 17.4 Aspects that must be included in the prospectus - Company overview, including the vision, mission and goals of a business - Product or service portfolio - Market analysis and strategy - Management team - The risk and potential of the business - Available financial and share information - Company\'s assets and liabilities - Financial position - Profits and losses - Cash flow - Prospects for growth - Pre-incorporation contracts that have been signed - Date of registration of the prospectus - The minimum subscription BUSINESS STUDIES ---------------- BUSINESS VENTURES ================= **AVENUES OF ACQUIRING A BUSINESS** **TOPICS** ----------------------------------------------------------------------- -- Exam guidelines for avenues of acquiring a business Terms and definitions Reason why entrepreneurs may decide to purchase an existing business. Meaning, advantages, disadvantages and contractual of franchising Meaning, advantages, disadvantages and contractual of outsourcing Meaning, advantages, disadvantages and contractual of leasing Identifying business avenues from scenarios/case studies/statements AVENUES OF ACQUIRING A BUSINESS ------------------------------- - Explain/Discuss/Justify/Motivate the reason why entrepreneurs may decide to purchase an existing business. - Outline/Mention/Discuss/Explain/Describe the advantages, disadvantages and contractual implications of the following business avenues: - Identify/Name business avenues from scenarios/case studies/statements. - Conduct research on the viability and benefits of franchising, outsourcing and leasing Terms and Definitions --------------------- TERM DEFINITION ------------- ------------ Royalties Vendor Franchising Franchisee Franchisor Leasing Lessor Lessee Outsourcing Goodwill Solvent Liquid Profitable **1 Reason why entrepreneurs may decide to purchase an existing business**  Easier to raise finance if the business has a good history/image. - Immediate cash flow as there are already established customers. - Market research has already been done and there is an established customer base. - Distribution/Supply links/Staff/Network is/are already established. - A market for business products or services has already been established. - Existing employees and managers may have experience they can share. - Many business problems have already been solved. 2 Types of avenues of acquiring businesses ------------------------------------------ ### 2.1 Franchising #### 2.1.1 Meaning franchising - Franchising refers to the purchase of a business idea. - The entrepreneur will obtain premises and the right to offer the same products/services, with specific rules and regulations as per the agreement. - Franchising is the practice of using another person's business model and it can be seen both as a marketing and a distribution. - Franchising involves two parties: - **Franchisor**-the person who sells the right to trade in the products/services. - **Franchisee**-the person who purchase the right to reproduce the idea by offering the same products/services. - The franchisor grants the franchisee the right to distribute its products and trademarks for a percentage of gross monthly sales and a royalty fee. Examples of a franchise ----------------------- - McDonalds - Kentucky Fried Chicken (KFC) - Fish & Chips - Food lovers - Filling stations ### 2.1.2 Advantages and disadvantages of franchising Advantages of franchising - It allows businesses to buy a well-known brand which guarantees sales and good return. - Purchasing a franchise is cheaper than starting a new business. - Franchising reduces long-term financial risk. - A business is based on a proven idea and the product and service are tried and tested. - A franchisee can get support from the franchisor, which often includes training, advice, and marketing. - Forms of financing that are not available to the public are often available to franchisees. - Purchasing a franchise could be cheaper than starting your own business. - Businesses are able to use a recognised brand name and registered trademark, which helps with advertising and marketing. - The systems/operations/goods and services are well established. - There is often access to group support from other franchisees and a network of communication and legal advice. - Established suppliers give bulk discounts as they form part of a larger group. - The marketing and advertising costs are shared so they are often lower than for a nonfranchised business. - Management advice is often provided, so it is not necessary to be a business expert. Disadvantages of franchising ---------------------------- - Acquiring a franchise can be an expensive initial layout - There are often restrictions in the agreement and terms of how the business should be operated. - Many creative entrepreneurs feel limited as to how much they can grow/expand their ideas. - One poorly performing outlet may risk the reputation of the entire franchise. - A large portion of profits is paid in royalties, and often the franchisors do not deliver on their promises. - It is often difficult to sell a franchise/terminate a contract. - The start-up cost many be a challenge without assistance from the franchisor. ### 2.1.3 Contractual Implication of franchising - Confidentiality clause. o Tax requirements. o Disclosure documents o Settlement of disputes - How to sell or transfer the franchise - Total investment o How to deal with trademarks, patents and logos. - Advertising policies o The initial duration of the franchise and any renewal rights. o The policies that govern the product or service. o Royalties and service fees payable. - Termination clause and its consequences - Training and operational support provided by the franchiser o The obligations of the franchiser and franchisee o The nature and extent of the rights granted to the franchisee. - The form of ownership that the franchise will operate under ### 2.2 Outsourcing #### 2.2.1 Meaning of outsourcing - - Examples of outsourcing ----------------------- - - - - - - - - - - - ### 2.2.2 Advantages and disadvantages of outsourcing Advantages of outsourcing - Outsourcing allows the business to focus on important business activities rather support activities. - A business has access to resources and equipment for a specific function. - The production team is often shortened and quality is often improved because specialists are performing the function for the business. - A company is able to reduce costs as outsourcing can lead to a decrease in staff, remuneration, control and operating costs. - The business can focus on its vision /goals and to apply its staff more effectively in its core business. - Improved access to skilled people as the outsourced work will be done by highly skilled people without the company having to employ them. - Fixed cost and overhead costs are lower for the business. - Outsourcing will provide continuity during periods of high staff turnover. Disadvantages of outsourcing ---------------------------- - Risk of losing sensitive data and the loss of confidentiality - Risks such as bankruptcy and financial loss cannot be controlled  Lack of Organizational Learning and innovative capacity. - Managing the outsource provider could be more difficult than managing employees. - Confidential issues could be at risk if the information is given to another company who performs the function that is outsourced. - Outsourcing can create a crisis for the business if the outsource provider suddenly terminates its contract. - There may be a lack of personal care/quality as the business is not personally involved in the execution of the function - Hidden costs and legal problems may arise if the outsourcing terms and conditions are not clearly defined. - Losing management control of business functions mean that the business may no longer be able to control operations - Not understanding the culture of the outsourcing provider and the location where you outsource to may lead to poor communication /lower productivity. - Problems with quality can arise if the outsourcing provider doesn\'t have proper processes - If important functions are being outsourced, an organization is mightily dependent on the outsourcing provider. - Outsourcing provider may work with other customers, they might not give full time/ attention to a single company resulting in delays and inaccuracies in the work output. - Labour unions are opposed to outsourcing, especially where labour brokers are used. ### 2.2.3 Contractual implications of outsourcing o Penalties for not delivering the agreed services ### 2.3 Leasing #### 2.3.1 Meaning of leasing - Leasing is the method whereby a business pays for the use of an asset e.g. equipment, land, material etc. - The person who owns the asset is known as the lessor  The lessee is the person who uses the asset. - The lessor will make the asset available to the lessee, who lease the asset in return for an agreed amount called leasing charges. - The leasing fee usually includes a maintenance fee and insurance fee. - The lessor has to repair /replace the asset if needed. - This is a method gives businesses the option of obtaining the use of an asset for a certain period, instead of buying the asset Examples of leasing ------------------- - Office equipment - Vehicles - Trailer - Machines - Clothing rental businesses - Leasing is regarded as an expense for the lessee and is therefore not regarded as debt. - The lessor receives a continual rental income. - The lessor can get quantity discount by buying goods in bulk to supply various lessees. - The lessor receives a continual rental income. - The asset can be returned to the lessor when it is no longer needed. - Makes budgeting and planning easier and it provides better control over cash flow. - Retains ownership of the asset, which can be sold to recover money at the end of the lease - There is no large financial outlay as the cost is spread over a number of months/years. - The lessor normally covers the maintenance/ replaces any damaged parts or equipment. - There are tax advantages as rental payment are calculated as operating costs and therefor tax deductible. - It is easy to lease a better/ newer version of the product without the capital outlay. Disadvantages of leasing ------------------------ - The lessee does not own the asset. - The lessor has control over the financial obligation of the lessee. - Some leases require the lessee to maintain and repair the asset. - A large amount of money is spent on an asset every month, the total of which is a lot more than what the asset is worth. - Maintenance agreements are usually expensive and non-negotiable. - The agreement cannot be ended without a penalty. - The lessee is responsible for maintenance even though they do not own the item. - The total monthly cost can be increased. - The lessor may not be able to sell the asset after the lease if it has not been kept in good condition. - The lessor is committed to the contract and may not reclaim the asset before the lease expires. - The lessee is committed to the contract and may have to pay for the lease even if they have no further use for the item. ### 2.3.3 Contractual implications of leasing - The lease agreement will indicate whether the lessee becomes the owner of the asset after the lease period for a fee or not. - The following details must be stated on the lease agreement: - Names of the parties entering the lease agreement/contract. o Duration/Period of the lease o Detailed description of what is being leased. o Conditions of renewal o The monthly amount payable o Any conditions such as deposits, insurance and security o Details of how the instalment will be calculated. o Any specific conditions for renewing the lease at the end of the contract period. o The procedure and liability for legal costs if a dispute arises. - The procedure if the lessor or lessee become insolvent - Detail of insurance, maintenance and restrictive use, up-front payment and instalments. Example of a scenario on acquiring business avenues --------------------------------------------------- - Identify THREE ways of acquiring a business avenue from the scenario above. **MOTIVATION** -- ---------------- - Outline THREE contractual implications of EACH type of acquiring business avenues identified above - Discuss the advantages of EACH type of acquiring business avenues identified above.