BM Unit 1 - LO1 1

Higher Business Management

Unit 1

Learning Outcome 1

Business in Contemporary Society

BM Unit 1 - LO1 2

UNIT 1 LO1 - BUSINESS IN

CONTEMPORARY SOCIETY

1. Role of Business in

Society

7. Factors affecting

Operation of Business 6. Methods of

Obtaining Finance

3. Business Objectives

4. Role of Enterprise

and the Entrepreneur

2. Types of Business

Organisations

5. Stakeholders

8. Business as a

Dynamic Activity

9. Changes in the

Business Environment

• Creation of wealth

• Production & consumption of goods

and services

• Satisfaction of wants

• Sectors of activity

• Self employed

• Private limited company

• Public limited company

• Voluntary organisation

• Charity

• Publicly-funded organisation

• Multinationals

• Profit maximisation

• Survival

• Sales maximisation

• Growth

• Social responsibility

• Managerial objectives

• Provision of a service

• Identifying business

opportunities

• Franchising

• Combining factors

of production

• Innovation

• Risk taking

• Shareholders

• Customers

• Employees

• Donors

• Management

• Government

• Suppliers

• Banks/lenders

• Tax Payers

• Community

• Internal & external factors

which cause change

• Changes in size of firm

• Need to respond to survive

• Internal & external

• Short & long term

• Share issue

• Loans / banks

• Local Enterprise

Companies (LECs)

• Government

• Finance & other

assistance available

• LECs, banks, local

authorities

• Subsidised premises,

grants, allowances, trade

fairs

• Methods of growth /

downsizing

• Changes in demand

• Demographics

• Competition

• Regional policies

•Labour market

• Privatisation

• EU * Technology

• Environment * ICT

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Learning Intention

Role of Business in Society

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What is a ‘Business’?

Any organisation set up to achieve a

set of objectives

Why are Businesses Important?

They create wealth for a country

They provide goods or services which

satisfy our wants and needs

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Goods and Services

Goods are tangible (ie can be touched) and services are intangible

Services are things done for us e.g. banking, hairdressing

Goods sold to individuals are called consumer goods

Goods can be durable (last a long period of time) and most services and some goods are non-durable(consumed over a short period)

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Description Goods (G) or

Service (S)

Durable (D) or

Non-Durable (N)

1. Volkswagen Golf GTI

2. Walkers Crisps

3. Hire of limo to S6 prom

4. The Herald Newspaper

5. Nail manicure

6. Dell Laptop

7. Kentucky Fried Chicken Meal

8. Higher Bus. Mgt. Lessons

9. Trip to the cinema

10. New shoes

G D

S N

G N

G N

S N

G D

G N

S N

S N

G D

Using the sheet issued to you complete the table:

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What is Business Activity?

Using “resources” to produce goods and services which people require in order to satisfy their “wants”.

Any kind of activity that results in the provision of goods and services which satisfy human “wants”.

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Factors of Production

Land - raw materials, factory site

Labour - people with required skills

Capital - finance to buy equipment, machinery, computers, etc

Enterprise – the idea behind the business, the person willing to take a risk

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Group Research

In your groups decide upon a

Scottish Entrepreneur

Research this entrepreneurs

history - businesses; success;

start-up story etc…

Create a poster detailing their

success to be displayed in the

corridor outside Rm 32

Group

Picker

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Inputs and Outputs

OutputsInputs

Resources

Raw materialsLabour

Machinery‘Organisation’

Goodsand

Services

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Cycle of Business

WANTS

IDENTIFICATION

PRODUCTION

CONSUMPTION

WANTS

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Sectors of Industrial Activity

PRIMARY(Extractive)

MiningFishingFarming

Oil

SECONDARY(Making goods)

ManufacturingConstruction

DurablesNon-durables

TERTIARY(Services)

BankingInsuranceTourism

Distribution

Third world

economies

Developing

economies

Fully developed

economies

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Topic 2 – Types of Business Organisation

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Organisations

Types of Organisation

Private Sector

Profit-making Non-profit-making(voluntary sector)

Public Sector

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Private v Public Sector

PRIVATE SECTOR

Organisations run by private individuals or groups usually to make profits, to raise funds or to provide services e.g. a charity

PUBLIC SECTOR

Organisations set up by the Government to provide services to UK residents. Main aim is not to make profits, but to keep within budget allocated whilst providing the best service possible

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Private SectorOrganisations

Profit-making

Sole Traders (1 owner) Partnerships (2 – 20 owners) Private Limited Companies (50) Public Limited Companies (no limit) Franchises Co-operatives

Non Profit-making

Charities and Clubs

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PRIVATE SECTOR ORGANISATIONS

Read pages 6 – 9 from blue note book

Also pages 9 - 11 in core text book

In jotter, take notes on the following

Sole Trader

Partnership

Private Limited Company (Ltd)

Public Limited Company (PLC)

Definition, Advantages and

Disadvantages in your own words and

abbrievated!

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Sole Trader

DEFINITION - Owned and managed by one person (the owner)

Simple to set up without many legal formalities

Owner makes all the decisions and has complete control

Owner keeps all the profits – no need to share!

Borrowing from bank can be difficult or more costly

Unlimited liability if business fails – can lose house etc

Lack of help and support or even cover during holidays

Examples – self-employed builders, hairdressers, local shop owners

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Partnerships

DEFINITION - Owned and controlled by partners between 2 and 20 people. Common for doctors, lawyers etc.

Share responsibilities

Partners can specialise

Allows more money to be put into business

Unlimited liability if business fails – can lose

Fall out between partners

Disruption when partners leave and new ones join

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Limited Companies

DEFINITION - Owned by shareholders and

commonly run on a day-to-day basis by paid

employees (Board of Directors)

PUBLIC LIMITED COMPANIES (PLC) – Can

sell shares to the general public on the Stock

Exchange

PRIVATE LIMITED COMPANIES (Ltd) – Can

only sell shares to individuals on the

agreement of all existing shareholders (no

more than 50 shareholders)

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How to Set up a Limited Company

REGISTER – with Companies Registrar

LEGAL DOCUMENTS – Prepare the Memorandum of Association and Articles of Association which lays out rules and objectives of company

LIMITED LIABILITY – company has a separate legal identity and shareholders cannot be forced to pay company debts if it fails

DIVIDENDS – Share of profits paid to shareholders on the basis of number of shares owned

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Private Limited Companies (Ltd)

Shareholders have limited liability

responsibilities

Still a measure of privacy - Ltds do not need to

publish their annual accounts.

Need to disclose some financial information than

Bigger organisations are difficult to manage

More difficult to keep staff motivated

Set up costs and running costs (e.g.

accountants to complete PAYE returns)

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Public Limited Companies (PLCs)

Shareholders have limited liability responsibilities

Shareholders can re-sell shares on Stock Market if they need to raise cash

PLCs can raise money for new projects easily

Need to disclose financial information

Bigger organisations are more difficult to manage than partnership or sole trader

More difficult to keep staff motivated if they feel distant from Board of Directors

Legal set up costs most expensive of all business organisations

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Multinationals

Receive tax concessions

Lower wage costs

Legislation may help cheaper production

costs

Lower taxation rates

May be political unrest or a weak currency

May be lack of expertise

Large businesses who produce in different countries

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Voluntary Sector

DEFINITION – Exist to raise money for good causes or to provide a service which would otherwise be left unsatisfied

Examples?

Oxfam

Local football team

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Public SectorOrganisations

Public Corporations

BBC and Royal Mail

Local Authority Services

Education, Housing, Police, Social Services

Government-funded Service ProvidersNHS, Social Security, Defence

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Class Questions

Discuss the role of business in modern society with reference to wealth creation, production and consumption and satisfaction of human wants. (6 marks)

Identify and describe three different types of business organisations (6 marks)

List three advantages and three disadvantages of running a public limited company compared to running a private limited company (6 marks)

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STOP HERE

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Business Objectives

Survival

Profit Maximisation

Growth

Good Reputation

Sales Maximisation

Social Responsibility

Providing a Service

Managerial Objectives

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The Entrepreneur

Develops a business idea – perhaps by seeing a gap in market or desire to innovate

Acquires and then combines other factors of production e.g. finds ways to raise finance

Undertakes most of the start-up decision making

Carries the risk of losing the money they invested

Anita Roddick, Richard Branson,

James Dyson, Marth Lane Fox

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Past Paper Question

Q25

Describe the role of the entrepreneur (4 marks)

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In pairs for 25 minutes …

Research the biography of any entrepreneur

Prepare a 3 slide presentation on this individual

Areas to cover could include

How did they identify their business opportunity at the beginning?

What risks did they take or problems did they overcome along the way?

What sector of industrial/business activity are they involved with?

What type of organisation structure was their business at the start and what structure is it now?

Name of some of their major stakeholders

How profitable is their business now? (TIP – look at their company website under “Investor Relations”

You can include hyperlinks to news articles

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Stakeholders

Internal

Shareholders/Owners

Managers

Employees

External

Suppliers

Customers

Banks/lenders Society/Local

Community

National Government

Local Government

Taxpayers

Donors (Charities)

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Stakeholders Answers

Stakeholder objectives and

influences

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Money, money, money …. Businesses need money to start up and

keep on going

The different ways a business can gain

money are collectively called the

SOURCES OF FINANCE

INTERNAL EXTERNAL

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INTERNAL SOURCE OF FINANCE

RETAINED PROFITS

Profits from the business which

have not been distributed to the

owners as a dividend or drawings.

Used to help generate more profits

in the future.

Think of

retained

profits as

being like

“savings”

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Short-term sources of finance 1/3

BANK OVERDRAFTAllows a firm to keep trading when short of cash for a short period of time.

Agreed with bank that firm can withdraw cash for more money than they have in their account

Charged interest

Helps with timing difficulties

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Short-term sources of finance 2/3

DEBT FACTORING

Used by companies who sell goods

on ‘credit’ to customers

Sell the debts to a ‘factor’

Factor gathers the debt and takes a

share of the cash gathered

Avoids cash flow problems

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Short-term sources of finance 3/3

TRADE CREDIT

Negotiate taking a longer period of

time to pay your suppliers

Provides more cash to use

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Activity 7 and 8

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Medium-term sources of finance 1/2

BANK LOANS

Provides cash for a 1-5 year period

Can be used to buy machinery etc

Pay back loan in instalments of equal

payments

Pay interest

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Medium-term sources of finance 2/2

HIRE PURCHASE

Used to obtain equipment or vehicles

Pay equal instalments over a set

period of time

The item is owned by the HP

company until last instalment

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Raising Funds

Team 1 & 7 – investigate selling shares

Team 2 – investigate getting a bank loan

Team 3 & 8 – investigate getting grants

Team 4 – investigate getting a business m

ortgage

Team 5 & 9 – investigate leasing

Team 6 – investigate EU funding

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Long-term sources of finance /2

SELLING SHARES (PLC OR LTD ONLY)

Large amounts can be raised sed to obtain

equipment or vehicles

Pay equal instalments over a set period of

time

The item is owned by the HP company until

last instalment

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External Sources of Finance

Long-term

Capital

M o r tgages

Debentures

Sale and Leaseback

Venture

Medium-term

Bank Loans

Short-term

Overdrafts

Factoring

Trade Credit

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Government Help for Businesses

Local Enterprise Companies

Education/Business Partnerships

Business Start-up Scheme

Loan Guarantee Scheme

Reduced rate of Corporation Tax

Zero Rating (VAT) on Exports

Dept of Trade and Industry - advice, Trade Fairs

Export Credit Guarantee Department

EU - Regional Development Funds

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Other Sources of Help

The Prince’s Youth Trust - help for young people to set up in business

Local Authorities - ‘small business advisers’

Trade Associations - ‘Association of Small Businesses’, ‘Scottish Motor Trade Association’, ‘ABTA’, etc

Local Chambers of Commerce

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Methods of Growth

Integration - 2 firms combining to become bigger

Merger - integration on equal terms

Take-over - one firm’s identity is lost in the take-over. Can be ‘friendly or hostile’

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Integration

Horizontal - firms at the same stage of production

Vertical - forwards towards the customer and backwards towards the raw materials

Lateral - firms with related goods not in competition with each other

Conglomerate/Diversifying - firms operating in completely different markets

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Reasons for Growth

Eliminate competition/increase market share

Achieving greater economies of scale

Security from hostile take-over - more assets

Cutting out “middlemen”

Securing sources of raw materials

Controlling distribution of products

Spreading risks - ‘not having all eggs in one basket’

Smoothing seasonal fluctuations in sales

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De-integration

De-integration - conglomerate selling off firms to concentrate on “core” business

De-merger - subsidiary companies splitting away from the parent company and operating on their own

Divestment - selling off companies

Contracting out/out-sourcing - getting other companies to do work on your behalf

Management buy-out/buy-in - usually a struggling company sold to a management team

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Business as a “System”

Inputs - raw materials and other resources

Processes - transformation into goods

Outputs - the finished product/service to be marketed

Feedback - the reaction of the market

A system is made up of 4 inter-dependent parts:-

Any system is affected by the environment in which it operates

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Internal Pressures to Change

New personnel or management

New technology (the internet)

Change in financial position

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External Pressures to Change(the ‘PEST’ analysis)

Political/legal (legislation, planning, devolved Parliament, etc)

Economic (interest rates, foreign exchange rates, the Euro, etc)

Social (ageing population, role of women, greater general prosperity)

Technological (e-mail, internet)