BUSINESS IN CONTEMPORARY SOCIETY

The Theory of BusinessHow it worksWhy it works

What’s in this unit…

The Business Cycle Sectors of Activity Types of Organisation Obtaining Finance Objectives and Entrepreneurs Stakeholders Changes in the business

environment

The Business Cycle

Business activity is any activity which provides us with goods and services to satisfy our wants

The output of business activity is the goodsgoods and servicesservices

GOODS

Tangible items

DURABLE GOODS NON-DURABLE GOODS (Single-use)

SERVICES

Intangible Items

The service sector makes up the largest part of our modern economy in Scotland – the majority of employees work in services

Insurance Tourism Education Health Call centres

FACTORS OF PRODUCTION In order to produce goods and

services business need resources. These resources are inputs for business activity

These resources are called the factors of production:-

LANDLANDLABOURLABOURCAPITALCAPITAL

ENTERPRISEENTERPRISE

LAND Natural resources,

such as oil, water and land itself

LABOUR The people that

work for the organisation including mental and physical work

CAPITAL The man-made

resources – factories, machinery, transport etc

ENTERPRISE The human effort

and will to provide the goods – the entrepreneur

The Cycle of business is… The constant production of goods

and services to satisfy the needs and wants of the consumer

Needs – food and shelter Wants – luxury goods

The Business Cycle is also:

Sectors of Industrial Activity There are 3 sectors of industry

PRIMARY SECTORPRIMARY SECTOR – business involved in exploiting or extracting natural resources

SECONDARY SECTORSECONDARY SECTOR – businesses that are involved in manufacturing and construction

TERTIARY SECTORTERTIARY SECTOR – services (aka Service Sector)

TYPES OF BUSINESS ORGANISATION

Local NationalInternational

The UK is a Mixed Economy

Private Sector Public Sector

That sector of the Economy run by individuals and groups

That sector of the Economy run by local and central government

SECTORS

All businesses can be categorised into one of 3 different sectors or TYPES

PRIVATE SECTOR PUBLIC SECTOR VOLUNTARY SECTOR

THE PRIVATE SECTOR

Most organisations operate in this sectorOrganisations owned by individuals

The Private Sector

Not-for-profit

Profit making

Incorporated

Unincorporated Voluntary

Organisations

Charities

Youth Clubs etc

Private Limited Companies

PLC’s

Holding Companies

Soletraders

Partnerships

No separate legal entitySeparate

legal entity

SOLE TRADER – a business owned and

managed by one person ADVANTAGES

Very simple to set up You get to make all the decisions You get to keep the profit

DISADVANTAGES Borrowing is difficult Unlimited liability Lack of assistance and advice – being

on your own

Survival of a small business Entrepreneur with:- High motivation to succeed Self-discipline Organisational ability Self-belief The ability to relate to others Self-starting and initiative Leadership Adaptability

As well as these:-

A marketable ideaA sound business

planAppropriate

training

PARTNERSHIP

A business owned and controlled by 2-20 people

Partnership agreement required ADVANTAGES

Shared responsibility Specialisation More money can be invested

DISADVANTAGES Unlimited liability Arguments Difficulties if partners wish to leave

LIMITED COMPANIES

PRIVATE LIMITED COMPANY – Ltd PUBLIC LIMITED COMPANY – plc

Most businesses now prefer to set up as a limited company – the costs involved have decreased and it is becoming simpler.

Details … Limited companies can be set up on

the internet They have limited liability Shareholders are required by law You must register with the Registrar

of Companies Complete 2 legal documents –

MEMORANDUM OF ASSOCIATION AND ARTICLES OF ASSOCIATION

The difference…

Ltd – can only sell shares to individuals with the full agreement of the existing shareholders

Plc – can sell shares to anyone who wants to buy them on the stock exchange

ADVANTAGES

Shareholders HAVE LIMITED LIABILITY

Ltd does not have to disclose their annual reports

Plc – easier to plan, develop and expand because people are more willing to invest

DISADVANTAGES

Must be registered and may have to disclose financial information

Large organisations can be difficult to manage

There are costs in setting up

THE FRANCHISE:-

Where one business pays for the right to run under the trading name of another.

The owner of the name is called the franchiser

The person who runs and owns the business is called the franchisee

ADVANTAGES

Expansion of the company with little difficulty or input

New business has existing name and image

New business will have support of parent company

Product innovation is shared

DISADVANTAGES

Bad publicity in one area could affect the whole company

Franchiser can tell the franchisee exactly what to do

A percentage of profit has to be paid to the franchiser

MULTINATIONAL COMPANIES A company that has branches in more

than one country There are many benefits to be

gained:- Cheap labour and premises Increased market share Tax evasion Government grants through FDI Transportation costs are cut Trade barriers can be avoided

Disadvantages

Ability to relate to the people of the country in question.

Cadbury's made a blunder with its campaign for the Temptations range. "I'm too good to share. What am I? Cadbury's Temptations or Kashmir?"

“It's always a risky thing to make your brand topical," he says. "Joking apart this is a war that has claimed 36,500 lives since 1989."

Can cause unemployment by putting local firms out of business

May not be socially responsible in less developed countries

They are so powerful that small governments cannot control them

QUESTION TIME

Discuss how the following factors may influence a company’s decision to locate abroad?

POLITICAL ECONOMICAL SOCIAL TECHNOLOGICAL ENVIRONMENTAL COMPETITION

SOLUTION POLITICAL

Legislation Health and Safety Employment Copyright Tax Govt Grants

ECONOMICAL Interest rates Exchange rates State of the economy Employment/wage rates

SOCIAL Cultural trends Developing tastes

TECHNOLOGICAL Availability of technology Cost of technology Cost of materials Availability of knowledge and skills

ENVIRONMENTAL Availability of raw materials Legislation regarding pollution etc Lack of legislation “ “

COMPETITION New market no competition Too much competition already

exists Competition moved already Reduce costs to compete

THE VOLUNTARY SECTOR

Organisations that do not aim to make a profit but..

To relieve poverty Advance education Advance religion To carry out beneficial activities

THE PUBLIC SECTOR

Organisations that are set up and owned by the Government

Details.. Services which the private sector

could not provide well or could not provide at all.

Current – BBC Past – British Telecom

Many Public Sector Organisations were privatised by the Thatcher Government.

AIR TRAFFIC CONTROL

Most recent example of privatisation

50% share sold to private business

Private business can raise capital more easily than the government

Government-funded Service Providers National Health Service Social Security Defence

Services that the private sector would be unlikely to offer in a way that the government would find acceptable.

Local Authorities

Also provide government funded services-

Education Housing Roads and Transport Leisure Services Street Lighting and Refuse

Funded by Govt Grants, council taxand from users fees

SUMMARY

Organisations

PRIVATE

Sole Trader

Partnership

Private & Public Ltd

MultinationalCharities

PUBLIC

Corporations

Service Providers

Local Authorities

BUSINESS OBJECTIVES

Why do different businesses have different objectives?

What are business objectives?

The goals of the business What the business wants to

achieve They will be shaped by the

various stakeholders They should be well-defined

Mission Statements

Descriptions of the overall aims of the business and its short term and long term objectives

Aimed at stakeholders Often focus on meeting the

needs of the customer

MAIN OBJECTIVES

Survival Businesses in the early stages of

trading

When trading becomes difficult – War

During recession

During threat of takeover

When procedures or policies are changing

Profit Maximisation

Main aim of Private Sector Businesses

Where difference between costs and revenue is the greatest

Established businesses are more likely to aim for this

Growth

To be more competitive

To take advantage of economies of scale

To secure jobs

To increase profits

Image and Social Responsibility

Benefit of having a good image

Comply with legislation

To conform to social attitudes

To keep customers, employees etc happy

What determines business objectives?

The size of the business The age of the business The sector of operation External influences Internal change Risk Business culture

BUSINESS STAKEHOLDERS

Various groups of people who have an interest in the business..

THEY INCLUDE:-

Owners or shareholders Managers Employees Customers Government Suppliers The community

Effect of Stakeholders They may be able to exert

control over or influence decisions

This is determined by their degree of involvement or interest

Percentage of shares Bank withholding funding Employees going on strike Customers not buying the

products

Examples of stakeholder influence..

COMPANY – M&S Employees – withheld information

from management Management – making strategic

decisions Customers – not buying the new

ranges Shareholders – selling shares due to

value Suppliers – suing company for breach

of contract

Relationships/Interdependence

Consumer and business:- Contact when goods and services are

bought Used for market research Pass on information through advertising Consumers make business aware of

expectations Consumers have rights of protection Businesses are dependent on consumers –

activity would not take place if consumers did not buy goods. However consumers can only buy goods if they have income – this they earn by working for business

Stakeholders of Cadbury and their influence:-

EXTERNAL FACTORS

EXTERNAL INFLUENCE

POLITICALImplementation of Government policies

ECONOMICThe state of the economy

SOCIO-CULTURALChanges in needs and wants of the population

TECHNOLOGICALEvolving state of information technology

Examples

POLITICALTaxation Health and safetyLegislation

ECONOMICRising unemployment EU changes

SOCIO-CULTURALMore women in workMore single parentsGreen issues

TECHNOLOGICALCommunicationsInformation handlingManufacturing processesCOMPETITION – WHAT ARE THEY DOING?

Other issues for consideration:- Sources of finance

LEC Banks Local authorities European union grants

METHODS OF GROWTH

Merger Activity

In the 90’s the number of mergers reached record levels. This was caused by:-

Growth in the UK economy Greater competition Improvements in ICT Firms adopting a ‘global’ strategy Businesses were bargain hunting

Types of Merger/Integration

Backward Vertical

SUPPLIER

Forward Vertical

CUSTOMER

LateralSimilar but not

competitionHorizontal

Same Business

ConglomerateDifferent type of

business

Types of Integration

Details..

Reasons for horizontal include:-

An attempt to dominate the market

A desire to become stronger The need for more efficient

operation

Conglomerate - Diversification Response to a change in the

market An opportunity to enter new

markets To spread risk Collection of knowledge and

experience

NAB

1. Comparison of business organisations

Ownership and control

Private Sector and Public Sector organisations

2. Influence of key stakeholders on different types of organisation

3. External factors and how the affect the operation of business

PEST & CO

Practice questionsPractice questions Compare 3 different typesdifferent types of

business organisation in the UK in terms of ownership and control

6

All businesses have stakeholders – what influence do they have ? 4

What changes in the external environment have changed the operation of businesses in the UK? 6