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SCHOLAR Study Guide

CfE Higher Business ManagementUnit 1

Authored by:Julie Sanderson (West Calder High School)

Alan Hamilton (Stirling High School)

Reviewed by:Frances McCrudden (The Mary Erskine School)

Previously authored by:Alistair Wylie

Rhona Sivewright

John Murray

Peter Hagan

Heriot-Watt University

Edinburgh EH14 4AS, United Kingdom.

First published 2015 by Heriot-Watt University.

This edition published in 2016 by Heriot-Watt University SCHOLAR.

Copyright © 2016 SCHOLAR Forum.

Members of the SCHOLAR Forum may reproduce this publication in whole or in part foreducational purposes within their establishment providing that no profit accrues at any stage,Any other use of the materials is governed by the general copyright statement that follows.

All rights reserved. No part of this publication may be reproduced, stored in a retrieval systemor transmitted in any form or by any means, without written permission from the publisher.

Heriot-Watt University accepts no responsibility or liability whatsoever with regard to theinformation contained in this study guide.

Distributed by the SCHOLAR Forum.

SCHOLAR Study Guide Unit 1: CfE Higher Business Management

1. CfE Higher Business Management Course Code: C710 76

ISBN 978-1-909633-34-6

Print Production and Fulfilment in UK by Print Trail www.printtrail.com

AcknowledgementsThanks are due to the members of Heriot-Watt University's SCHOLAR team who planned andcreated these materials, and to the many colleagues who reviewed the content.

We would like to acknowledge the assistance of the education authorities, colleges, teachersand students who contributed to the SCHOLAR programme and who evaluated these materials.

Grateful acknowledgement is made for permission to use the following material in theSCHOLAR programme:

The Scottish Qualifications Authority for permission to use Past Papers assessments.

The Scottish Government for financial support.

The content of this Study Guide is aligned to the Scottish Qualifications Authority (SQA)curriculum.

All brand names, product names, logos and related devices are used for identification purposesonly and are trademarks, registered trademarks or service marks of their respective holders.

i

Contents

1 The role of business in society 11.1 Businesses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21.2 Sectors of industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51.3 Sectors of the economy . . . . . . . . . . . . . . . . . . . . . . . . . . . 61.4 Summary questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71.5 End of topic tests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

2 Types of organisations 112.1 Business organisations . . . . . . . . . . . . . . . . . . . . . . . . . . . 122.2 Private sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132.3 Public sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 212.4 Third sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 222.5 Summary questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 242.6 End of topic tests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

3 Objectives 273.1 An organisation's objectives . . . . . . . . . . . . . . . . . . . . . . . . 283.2 Business objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 293.3 Methods of growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 333.4 Case study . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 353.5 Summary questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 363.6 End of topic tests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

4 External and internal environments 394.1 PESTEC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 404.2 Internal factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 444.3 Summary questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 454.4 End of topic tests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

5 Business structures 515.1 Functional groupings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 525.2 Other types of grouping . . . . . . . . . . . . . . . . . . . . . . . . . . . 555.3 Entrepreneurial structures . . . . . . . . . . . . . . . . . . . . . . . . . 565.4 Tall and flat management structures . . . . . . . . . . . . . . . . . . . . 575.5 Centralised, de-centralised and matrix structures . . . . . . . . . . . . 585.6 Summary questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 615.7 End of topic tests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62

6 Stakeholders 656.1 Who are stakeholders? . . . . . . . . . . . . . . . . . . . . . . . . . . . 666.2 Stakeholders' influence and aims . . . . . . . . . . . . . . . . . . . . . 67

ii CONTENTS

6.3 Stakeholder conflict . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 686.4 Summary questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 706.5 End of topic tests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71

7 Decision making 737.1 Decisions types . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 747.2 Evaluation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 777.3 PEST analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 787.4 SWOT analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 817.5 Conclusions from SWOT analysis . . . . . . . . . . . . . . . . . . . . . 847.6 Role of the manager . . . . . . . . . . . . . . . . . . . . . . . . . . . . 877.7 Aids to decision making . . . . . . . . . . . . . . . . . . . . . . . . . . . 887.8 Summary questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 897.9 End of topic tests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90

8 End of unit tests 93

Glossary 98

Answers to questions and activities 1021 The role of business in society . . . . . . . . . . . . . . . . . . . . . . 1022 Types of organisations . . . . . . . . . . . . . . . . . . . . . . . . . . . 1053 Objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1084 External and internal environments . . . . . . . . . . . . . . . . . . . . 1115 Business structures . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1146 Stakeholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1197 Decision making . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1228 End of unit tests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126

© HERIOT-WATT UNIVERSITY

1

Topic 1

The role of business in society

Contents

1.1 Businesses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

1.2 Sectors of industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

1.3 Sectors of the economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

1.4 Summary questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

1.5 End of topic tests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Learning objectives

After studying this topic, you should be able to:

• discuss the different types of business activity which takes place in each of thesectors of industry;

• describe business activity which can take place in each of the sectors of theeconomy;

• describe the reasons for a business to exist.

2 TOPIC 1. THE ROLE OF BUSINESS IN SOCIETY

1.1 Businesses

What is a business?

A business is any organisation which is set up in order to achieve a set of objectives.This includes the obvious objectives such as businesses that sell their products forprofit. It also includes any other organisation that has been set up to achieve otherbusiness objectives. We will consider business objectives in the next topic area. Otherorganisations include charities, local and national government (including education).

It may seem odd to think of schools, colleges and universities as a business but they doeverything that the profit-making businesses do in organising themselves to provide agood or service.

Businesses meet their objectives by fulfilling the wants and needs of consumers, throughthe provision of goods and services. The needs and wants of consumers are complexand ever changing, and every business needs to add value to a basic product to ensurethat it appeals to the target market. Adding value is the result of taking the raw materialsand creating a usable product which can be sold for a higher price than the cost of theindividual parts. It can also be as the result of providing a quality service.

Take a piece of paper and list three local businesses. (You will be using these asexamples to answer questions later.)

Why are businesses important?

Businesses provide us with goods and services. Goods and services allow us to liveour lives the way we do. Before we organised our society with businesses, we would allhave to make our own clothes, build our own shelter, and grow or catch our own food.There would be little time for anything else, so as people we would have been stuckwith a basic existence.

Business has allowed us to live much better lives and continually works to improvethem.

Using the businesses that you identified earlier, list the goods and services that theyoffer.

The production of goods and services

What are goods and services?

Goods are things we can see and touch such as clothes, mobile phones, mp3 players,food. They are described as tangible products and are split into 2 categories: Durablegoods and Non-durable goods.

Durable goods are goods that can be used again and again like computers, mobilephones. They have a reasonable life span. Some will be expensive like boats, whileothers like pens will be cheap. They will not last forever, but we would expect them tostand up to a lot of use.

Non-durable goods are things we can normally only use once like food, drinks, etc.


TOPIC 1. THE ROLE OF BUSINESS IN SOCIETY 3

Services are things that are done for us. They can be described as non-tangibleproducts. Some of our main traditional service industries are organisations involved inbanking, insurance, tourism, education and health.

The service industries make up the largest part of our modern economy in Scotland,with the majority of employees working in services.

Category of goods or services

Go online

For each question categorise the goods or services as:

• durable goods

• non-durable goods

• services

Q1: Can of Coca-Cola

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Q2: Desk

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Q3: Booking a holiday

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Q4: Doughnut

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Q5: Visiting the doctor

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Q6: Newspaper

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Q7: Going to the dentist

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Q8: Car

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Q9: Clothes

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Resources needed for production

In order to produce goods and services businesses need to use resources. Theseresources are the inputs for business activity, with the goods and services that theyproduce being the output of business activity.



These resources used are what we call the factors of production. These are theresources that business needs to produce goods and services.

The factors of production are:

Land: This is all the natural resources such as oil, water, and the land itself. It includeseverything that can be extracted from the land, the sea or the atmosphere or grown onthe land or in the sea. It can also include sunshine which is used with solar panels tocreate electricity.

Labour: All businesses need people to work for them. Some will only need a few.Others, like local government, will need thousands. Labour is the people required tomake the organisation work. It includes all their physical and mental effort.

Capital: These are the man made resources. Elsewhere, capital will be described asthe money invested in an organisation; however, here we use it as an economic term todescribe things like factories, machines, lorries and tools. They have all been createdor produced from natural resources, and are needed to produce goods and services.

Enterprise: This could be described as the most important factor of production,because without it production would not take place. Enterprise is the human effort andwill to provide goods and services. The entrepreneur is the person who brings togetherall the other resources and takes the risks to produce the goods or services.

Supplying the resources

Go online

For each question categorise the sentence as:

• Land

• Labour

• Capital

• Enterprise

Q10: Man made resource needed to make goods and services.

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Q11: The human effort and will to provide goods and services.

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Q12: Natural resources such as oil, water and land.

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Q13: The people required to make the goods and services.

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1.2 Sectors of industry

All business organisations carry out activity which falls into one of four sectors ofindustry.

These sectors of industry are:

Primary sector: This is where raw materials are extracted from the land or sea. Themain activity of a business in this sector will likely be some type of farming, fishing,mining or oil extraction.

Secondary sector: This is where the raw materials extracted in the primary sector aretransformed into usable products through manufacturing and construction. Examples ofthe type of activity in this sector include house builders, clothing manufacturers, foodprocessing factories and oil refineries.

Tertiary sector: Also known as the service industry, this is where the goods producedby businesses in the primary and secondary sectors are provided to the consumer, andwhere services and skills are sold. Examples of activity in this sector include retail,travel agents, banking, hairdressing and government services such as education andhealthcare.

Quaternary sector: This can also be described as the support sector, and activity hereis based around organisations which provide information, especially (but not exclusively)to businesses. IT consultancy, research and development, and consultancy services (forexample management consultants such as Accenture) operate in this sector of industry.

It's important to remember that these sectors all rely upon each other in order to fulfil theneeds and wants of the consumer. There's no point in catching fish in the sea if there'sno business willing to prepare the fish for selling, or no shop to sell the fish from.

Sectors of industry - descriptions

Go online

For each question categorise the sentence as:

• Primary

• Secondary

• Tertiary

• Quaternary

Q14: Businesses that are involved in providing services rather than goods.

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Q15: Businesses that are involved in exploiting or extracting natural resources.

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Q16: Businesses that are involved in manufacturing and construction.

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Q17: Businesses that are providing organisations with ICT support and services.

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Over the last part of the 20th century there have been massive changes to the natureof industry found in Scotland. Traditionally a country with strong primary industrylinks (particularly farming, fishing and coal mining) and also a large number of menemployed in ship building and steel making in the west of the country, there is now amuch larger proportion of employment in the service industry - both in the tertiary andquaternary sectors. Banking and entertainment industry call centres and e-commercehave provided huge numbers of jobs, whilst the coal mines, steelworks and many of theship yards have been closed. Today primary sector jobs can mainly be found in farming,fishing and oil extraction.

Sectors of industry - professions

Go online

For each question categorise the following professions into the correct sector of industry.

• Primary

• Secondary

• Tertiary

• Quaternary

Q18: sewing machinist, builder, baker

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Q19: management consultant, research director, IT consultant

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Q20: window cleaner, doctor, shop assistant

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Q21: farmer, miner, fisherman

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1.3 Sectors of the economy

The reasons for business organisations to exist are varied, and are determined by theobjectives of each organisation. These objectives and purposes can be categorised asfollows:

Private Sector: Business organisations which operate in order to make a profit for theprivate individuals who own them. There are a variety of types of business which fall intothis category - sole traders, partnerships, private and public limited companies - whichwill be discussed later in this course.

Public Sector: Business organisations which are operated by the government on behalfof the tax payer. The public sector includes health services (the NHS), education andlocal council services such as recycling facilities and local libraries.



Third Sector: Organisations which are non-profit, and exist to benefit society. Thereis a wide range of organisations in this sector, including charities, social enterprise andclubs and societies.

Sectors of the economy - descriptions

Go online

Match the sectors of the economy with appropriate description:

• Private Sector

• Public Sector

• Third Sector

Q22: Business organisations which are operated by the government on behalf of thetax payer.

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Q23: Non-profit and social enterprises which exist to benefit society.

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Q24: Businesses which provide goods and services to consumers in order to createprofit for their owners.

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1.4 Summary questions

Summary questions

Go online

Q25: The quaternary sector of industry includes retail organisations.

a) Trueb) False

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Q26: The public sector is made up of government run organisations.

a) Trueb) False

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Q27: Durable goods are those which can be reused over and over again.

a) Trueb) False

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Q28: Extraction of raw materials from the earth or sea takes place in the secondarysector of industry.

a) Trueb) False

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Q29: Charities and non-profit organisations belong in the third sector of the economy.

a) Trueb) False

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Q30: The four factors of production are land, labour, capital and enterprise.

a) Trueb) False

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1.5 End of topic tests

End of topic 1 test

Go online

Q31: Complete the paragraph using following words.

enterprise production capital economy

objectives industry third tertiary

The term "business" can be used to refer to any organisation which is set up to achievea set of ��. Therefore a "business" can exist in any of the three sectors ofeconomy - the private sector, the public sector or the �� sector. Business isvital to the �� of a country. Businesses use the four factors of �� inorder to provide these goods and services for consumers. The factors of productionare land, labour, �� and ��. As well as operating in a sector ofthe economy, business organisations are classified as operating in different sectors of��. These are known as the primary, secondary, �� and quaternarysectors. From removing natural resources from the ground, to manufacturing them intouseable products, then selling them to customers, and offering advice to organisationsat all stages of this process, every business plays a role in this chain of production.

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .



Decide which from the list of sectors below matches following descriptions.

• Primary sector

• Secondary sector

• Tertiary sector

• Quaternary sector

• Private sector

• Public sector

• Third sector

Q32: Where raw materials are converted into useable products.

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q33: Governmental organisations funded by the tax payer.

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Q34: Where the raw materials are extracted from the land/sea.

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Q35: Non-profit organisations such as charities or social enterprises

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Q36: Where a support service is offered to business.

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Q37: Also known as the service industries, where goods and services are provided tothe consumer.

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Q38: Business organisations which exist to make a profit.

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SQA style questions

Go online

Q39: Explain why it can be difficult for business organisations to meet or satisfyconsumers' wants. (2 Marks)

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Q40: Compare the difference between goods and services. (2 Marks)

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Q41: Describe the "factors of production". (4 Marks)

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Q42: Discuss the activity that takes place in the different sectors of industry. (2 Marks)

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Q43: Describe the sectors of the economy. (6 Marks)

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11

Topic 2

Types of organisations

Contents

2.1 Business organisations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

2.2 Private sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

2.2.1 Limited Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

2.2.2 Franchises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

2.2.3 Multinationals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

2.3 Public sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

2.4 Third sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22



Learning objectives


• describe the private sector, public sector and third sector;

• discuss the features of business organisations which operate in each of thesesectors.

12 TOPIC 2. TYPES OF ORGANISATIONS

2.1 Business organisations

Business organisations exist to satisfy consumers' needs and wants by making andproviding goods and services.

These organisations are made up of people working together, using resources toachieve various objectives. These objectives will include producing goods and servicesby changing inputs (the raw materials) into outputs (finished products and services).

All organisations fall into one of three categories:

• Private sector

• Public sector

• Third sector


TOPIC 2. TYPES OF ORGANISATIONS 13

2.2 Private sector

Organisations in this sector are run by private individuals.

For most, the basic aim or objective is to make a profit. Profits are made when theincome from sales (revenue) exceeds the expenditure on costs. Any profits made arethen shared between the owners, in accordance with the rules governing the individualbusiness.

At National 5 level, small business organisations like sole traders, partnerships andprivate limited companies were discussed. At Higher level, the focus is on the followingtypes of organisation:

• Private Limited Companies (LTDs)

• Public Limited Companies (PLCs)

• Franchises

• Multinationals

2.2.1 Limited Companies

As discussed at National 5 level, most new businesses now prefer to set up as limitedcompanies rather than a sole trader or a partnership. Particularly in the case of a privatelimited company, the costs involved have decreased and the legal process has becomemuch simpler. For example, you can now set up a new limited company over the Internet.The shareholders, (a minimum of two are required by law) are those people that owna share of the business, in the form of share certificates, and so are the owners of thebusiness. They enjoy limited liability. This means shareholders can only lose the moneyor capital they have invested in the business, not any of their personal possessions.

To become a limited company a company must be registered with the CompaniesRegistrar and complete two legal documents:

• Memorandum of Association

• Articles of Association

These set out the aims of the business and how it will be run and financed.

The profits are shared out in the form of dividends, each shareholder receiving a certainamount for each of the share certificates they own in the business.

A public limited company (PLC) is a much larger organisation than a private limitedcompany. The main difference in terms of ownership and control of a PLC is that theshares of a PLC can be sold to the public through the stock exchange, whereas privatelimited companies can't trade their shares; they can only sell to individuals who areinvited to buy shares with the full agreement of the existing shareholders.

By selling shares to the public via the stock exchange, PLCs can raise vast amounts ofshare capital, however ultimately control of the company can be lost to outsiders.

Both types of limited company share broadly the same advantages and disadvantages.Where an advantage/disadvantage refers to one only this is highlighted.



Advantages

• Shareholders have limited liability. If the business fails they only lose the amountof money they have invested;

• in PLCs, because you can buy and sell the shares at any time, people are morewilling to invest, the business can raise money by selling more shares to the publicfor big projects, and this means they find it easier to plan, develop and expand;

• because a PLC is such a large organisation, it allows for economies of scale andmeans that the business is less vulnerable to threat of failure;

• in a private limited company shares can only be sold through invitation - usually tofriends and family. This means that for the original owners the advantage of limitedliability is enjoyed whilst retaining control of the company.

Disadvantages

• All companies must be registered with the Registrar of Companies. This meansthey have to disclose some financial information, which the public and theircompetitors can see. There is a cost in setting up and administrating the legalrequirements placed on limited companies;

• the original shareholders (owners) of a PLC can end up losing control to an outsideinterest (possibly through a hostile takeover) due to the public trading of shares -there is no control over who can buy these shares on the stock exchange;

• big organisations can be very difficult to manage efficiently and may experienceeconomic problems on account of their size;

• it is more difficult to keep workers happy and well-motivated in a big organisation.

The majority of large, well-known businesses in the UK are PLCs - for example, Tesco,British Airways and Next. However, it should be noted that a number of well known andlarge companies (for example Arnold Clark, Baxters and Tunnocks) have retained theirprivate limited status.

2.2.1.1 Case study

Limited companies

Read the information about limited companies, then answer the questions.

Before your business can begin operating as a limited company, it has to be registeredwith the Registrar of Companies (Companies House). Incorporation is the process bywhich a new or existing business is converted into a corporate body. This doesn't haveto be a complex and costly process, but you'll need to be clear about a few thingsbefore you start.

There are requirements that different types of limited company must meet, and theinformation here will help you understand the registration process. It focuses mainly on



private companies limited by shares, but will also highlight some of the specialrequirements for public limited companies (PLCs) and private companies limited byguarantee.

You can handle the registration process yourself, but it is a good idea to seekprofessional advice before you do so to ensure that incorporation is right for you. Acompany formation agent, solicitor or accountant can carry out the process for you, fora fee, as well as offer advice.

Registration documents and forms

To set up as a limited company in the UK, you - or the agent acting for you - will need tosend several documents and completed forms to Companies House.

• A memorandum of Association, giving details of the company's name, locationand what it will do.

• Articles of Association, describing how the company will be run, the rights of theshareholders and the powers of the company's directors.

• Form 10 (Statement of the First Directors, Secretary and Registered Office)giving details of the company's registered office and the names and addresses ofits directors and company secretary.

• Form 12 (Declaration of Compliance with the Requirements of theCompanies Act), stating that the company meets all the legal requirements ofincorporation.

You can order an Incorporation Starter Pack from Companies House.

Types of limited company: Private or public?

Most small businesses that opt for limited company status become private limitedcompanies rather than public limited companies (PLCs).The main differences between them are that:

• PLCs can raise money by selling shares on the stockmarket - private limitedcompanies cannot;

• PLCs must have share capital of at least £50,000;

• PLCs must have two shareholders, two directors and a qualified companysecretary.

Find out more about the special rules that apply to PLCs at the Companies Housewebsite.

A private company limited by shares can convert into a PLC, but it will need tore-register in order to do this. Find out more about re-registering as a PLC at theCompanies House website.(http://www.companieshouse.gov.uk)


http://www.companieshouse.gov.uk


Q1: Type the name of the process by which a new or existing business is convertedinto a corporate body.

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Q2: A memorandum of association gives:

a) the names of associated companies.b) the company's name, location and what it will do.c) a list of the company's products.

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Q3: A public limited company must have at least:

a) one director and one company secretary.b) two directors and one company secretary.c) one director and two company secretaries.

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Q4: What is the difference between a public limited company and a private limitedcompany?

a) Public limited companies have to declare all their activities - private limitedcompanies can be secretive.

b) Public limited companies do not need a minimum share capital - private limitedcompanies must have a minimum £50,000.

c) Public limited companies can raise money by selling shares on the stockmarket -private limited companies cannot.

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2.2.2 Franchises

A franchise is a method of setting up a business which involves two parties:

• a franchiser

• a franchisee

The franchiser is the "parent" company, and owns a brand, product or service. The rightsto use/sell this are then sold to the franchisee. This model of business is frequentlyseen in the fast-food and leisure industries. Examples include McDonalds, RED DrivingSchool, Kip McGrath tutoring and Curves gyms.

When entering an agreement to become a franchisee, the individual or individuals canusually choose their own form of business organisation - a sole trader, partnership ormost usually private limited company. Becoming a franchisee is a long term commitmentwhich requires a very large financial investment (often as much as £250,000 or evenmore).



The franchiser will provide:

• the brand or product(s) being sold;

• a store layout where appropriate;

• advice and training as required to the franchisee;

• marketing on a national scale.

The benefits for the franchiser in allowing branches of their franchise to be set up are:

• it allows growth for their brand without making significant financial investment inproperty and without the need to recruit and train a large workforce of their own;

• it reduces competition: if a franchisee buys into their brand, that means they arenot launching their own product in competition;

• it reduces risk: the risk of failure is shared with the franchisee;

• they retain control over the image and product they have created;

• there is guaranteed income from royalties paid by the franchisees.

Disadvantages for the franchiser are:

• reputation depends on how good the franchisees are;

• bad publicity for one branch affects all;

• franchiser only receives a share of the profits or sales revenue profits depend onthe ability of the franchisees.

The advantages for the franchisee are:

• training and support are available throughout the franchise agreement;

• national marketing campaigns will be conducted by the franchiser on their behalf;

• launching a new business is less of a risk due to using an established brand andproduct;

• all decisions regarding product range and store layout are made by the franchiseron their behalf;

• the franchiser will limit the number of franchises allowed to open in anygeographical area, reducing direct competition for each franchisee.



The disadvantages for the franchisee are:

• "being your own boss but with a boss" - although the franchisee is legallyresponsible for a business, virtually all of the major decisions will be made bythe franchiser;

• royalties need to be paid to the franchiser throughout the franchise agreement;

• operating a franchise limits scope for showing initiative;

• bad publicity or poor performance by a fellow franchisee can have negative impacton whole brand;

• most franchise agreements stipulate that the franchisee is not allowed to beinvolved in any other business interest during the term of the franchise agreement;

• a franchise is an extremely long term (up to 25 years in some cases) and financiallyintensive agreement.

Franchise - terms

Go onlineFor each question categorise the terms into the correct description:

• Franchiser

• Franchisee

• Royalty

• Investment

Q5: The parent company, providing a brand and product.

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Q6: The business buying the right to operate under the established brand name.

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Q7: Regular payment made by the franchisee to the franchiser.

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Q8: Original sum of money required to set up as a franchisee.

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2.2.3 Multinationals

Markets for many goods and services are said to be global. Firms in Scotland will facecompetition from organisations across the world. On the other hand this means that themarkets for their goods and services are worldwide.



Multinationals are normally very large businesses which have outlets or productionfacilities in a number of different countries, and many British businesses have openedfacilities in other countries. There are several good reasons for doing so:

• governments in other countries may offer incentives such as tax concessions orlarge grants to entice them to open there;

• lower wage rates may make the cost of production much lower;

• higher skilled workers may be available for the same or lower cost;

• legislation in other countries may be more relaxed meaning production canbe much cheaper - (working hours, environmental restrictions, minimum wage,building regulations, etc);

• the rate of corporation tax may be lower which means they can keep more of theirprofits;

• the business can then operate competitively in the local market.

• it allows the organisation to grow out with saturated or highly competitive markets;

• the increasing sophistication of ICT means that it is much easier for organisationsto operate as a multinational business, due to the ease of communication;

• the costs of operating across multiple countries is reducing due to usingtechnology to share information across secure networks, and for audio and videoconferencing.

However, there are several factors which may deter organisations from locating abroad:

• legislation in the local country may be too restrictive to operate profitably;

• the local currency may be too weak to allow profits to be converted back at a goodrate;

• there may be a lack of technical expertise or equipment, including poorinfrastructure;

• cultural differences may make the products unpopular for both production and sale;

• The country may be politically unstable.

• Taking advantage of local laws (eg minimum wage, working ages/conditions) canhave a negative impact with customers in the UK, due to a growing awareness ofethical issues such as exploitation of child labour. This can lead to bad publicitywhich can damage a brand.

Structure and operations of a multinational company

Identify a multinational company and research its structure and operations.

Write a short report on your findings (about 250 words) and submit this to your teacher.

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2.2.3.1 Case study

Multinationals

Read the information about international trading, then answer the questions.

Who are the multinationals?

A multinational corporation is a company which operates in more than one country, asopposed to a purely domestic business which has no operations abroad. There arenow approximately 63,000 multinational corporations in the world, and between themthey are responsible for two thirds of global trade and 80% of investment. They are theeconomic force behind globalization.

Many of the world's multinationals have developed into giant enterprises spanning theglobe. The largest have annual sales greater than the entire economic output of manymedium sized countries. On this calculation General Motors is bigger than Norway,Ford is bigger than South Africa and Shell is over twice as big as Nigeria. Of the largest100 economic actors in the world today, 51 are corporations and 49 are countries.

Multinationals share many interests, and pool their considerable power to lobbygovernments for policies which favour them. Bodies such as the International Chamberof Commerce, the European Roundtable of Industrialists and the TransatlanticBusiness Dialogue bring together the leaders of the world's most powerfulmultinationals to influence global policies on trade and investment.

Western governments have responded by giving multinationals an ever greater role informulating international policy. It is now acknowledged that many of the liberalisationpolicies introduced by the world's governments over the past decade have come as adirect result of lobbying work by these groups.

Q9: The 63,000 multinational corporations in the world are responsible for:

a) two thirds of global trade and 80% of investment.b) one third of global trade and 50% of investment.c) 80% of global trade and two thirds of investment.

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Q10: A company with no operations abroad is called? (Type one word in the text box)

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Q11: Which of the statements below is true?

a) Multinationals are generally unable to influence Government policies.b) Multinationals act in isolation since they all have their own interests.c) Multinationals have a large role in formulating international policy.

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2.3 Public sector

Organisations which are owned and controlled by the government and funded throughthe taxpayer.

Publicly-funded organisations

These are organisations set up and owned by the government to provide services tothe public. These are services which the private sector could not provide very well orcould not provide at all. Making a profit is not always that important, however, keepingwithin the budget (money they are allocated from the government) is very important. Inrecent years, this has led to many public organisations having to change to moreprivate sector-like practices in terms of target setting and cost cutting.

Public corporations

These organisations are businesses which are owned and run by the government forus. The best known example of a public corporation is the BBC. The governmentappoints a chairman and board of directors to run them on their behalf.

There used to be many more but these were 'Privatised', (sold on the stock market),such as British Telecom, BP, and the gas and electricity companies.

Government-funded service providers

The government provides us with some services such as the National Health Service,Social Security and Defence. These are services which the private sector would beunlikely to offer to the public in ways that the government or the public would findacceptable.

They are financed by the government in order to carry out their policies in these areas.Each year they are given a set amount of money to spend. Each usually has its ownappointed government minister who has supervisory control and provides guidelines tomanagers as to how the service should be run. The managers then make many of thedecisions as to how the money could be best spent to meet the government objectives.

Local authorities

These provide us with services such as education, housing, leisure and recreation, andstreet lighting. They get their money from council tax, government grants, and fromfees for things like using facilities at sports centres.

Local authorities either set up their own departments to provide these services, or they'contract out' to private companies who receive a fee for providing these services, suchas cleaning or meals for schools. The local authority has to do this, as nationalgovernment legislation insists that some services have to be put out to 'compulsorytendering', where private companies are invited to bid for the work. Those who offer thebest value for money are given the contract for a number of years.



2.4 Third sector

This sector refers to a wide range of non-governmental and non-profit-makingorganisations or associations, including charities, voluntary and community groups,cooperatives, and social enterprise.

Charities and voluntary organisations

These organisations, particularly cooperatives and social enterprises, have aincreasingly important place in our society.

These organisations' main aim is not to make profits, but to raise money for goodcauses, or to provide services to the public which would otherwise not be provided, ornot be provided well. An example of this type of service would be the specialist supportoffered by charities such as MacMillan.

Any profits that charities make are used to help people. They are formed by peoplesharing similar beliefs or concerns who support the charity as volunteers or trustees.

Charities have to be registered with the Charity Commissioners (known as OSCR inScotland) who watch over their activities. To be recognised as a charity theorganisation has to have one or more of the following as their main objectives.

• To relieve poverty

• To advance education

• To advance religion

• To carry out activities beneficial to the community

Once they have been recognised as a charity they are given 'charitable status', whichmeans they do not have to pay some taxes such as VAT and allows "gift aid" to beclaimed on donations, which can increase income by up to 25%.

Another form of voluntary organisation is found in many local communities in the formof local clubs and societies. Many football and cricket teams, playgroups and youthgroups are run as voluntary organisations which rely on member contributions andsubscriptions, and methods of fundraising, to survive. These organisations are set upfor the benefit of their members, and are run by elected members on behalf of the group.

Cooperatives and social enterprise

Examples of social enterprise exist within many local communities - and it's not a newidea! Social enterprise has been a feature of villages and towns for a long time - infact, there is evidence of a type of social enterprise in Ayrshire as early as 1761! Inthose early days, social enterprise was seen in the form of co-operative societies orGothenburg organisations.

A social enterprise is an organisation that applies commercial strategies to maximizeimprovements in human and environmental well-being, rather than maximising profitsfor external shareholders.

Today, whilst we still see co-operatives, we also buy fair-trade produce, and see lots ofsmaller local organisations - like credit unions or small local childcare groups - which



are set up to benefit the buyers and users of the service, not just to make profit forthe owners. These organisations may make a profit, however instead of these profitsbeing returned to the owners, the profits are either shared between the members of thesociety, or reinvested into the business to provide future benefits for the community.

The co-operative society is a common form of social enterprise found throughoutScotland. A co-operative society (like Scot-Mid or the Co-operative chain in Scotland,which has food stores and funeral homes throughout the country) functions like any otherbusiness, until it comes to the issue of profits. In the case of the Co-operative Society,profits are shared amongst their members (customers) in the form of a dividend.

Social enterprises

Are there any social enterprises in your own local community?

You may use the Internet to carry out this research.

Write a short report (200-300 words) detailing what these organisations do, and howthey distribute/reinvest their profits, and submit to your teacher.

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The Dean Tavern

The Dean Tavern in Newtongrange is (and has always been) a busy local pub. Foundedin 1899, it has always operated as a "Gothenburg System" pub, where profits are usedfor the good of the local community.

In the early days of the pub, the profits were shared between the residents of the village- most of whom were employed as miners at the local pit, the Lady Victoria Colliery.Today, although the mine is long gone and the village is much larger in size, there is stilla strong community spirit, and whilst the pub profits are not split between local families,they are used for the good of the local people. This means that a number of localvoluntary organisations, for example the children's gala, the pipe and brass bands, andBrownie and Scout groups, all receive an annual donation towards their running costs.They can also apply for an extra grant if they require funding for a special project - forexample, a local football team tour to Germany.

Q12: Can you suggest a reason why the Dean Tavern would choose to operate as aGothenburg and redistribute any profits to the local residents?

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Q13: Taking into account the changes that have happened in society, can you suggesta reason for the change in profit distribution, so that profits are given to local voluntaryorganisations rather than individual residents?

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Summary questions

Go online

Q14: Which type of business organisation can lose control to outsiders?

a) Charityb) PLCc) Franchise

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Q15: Shares for a PLC can be sold on the stock exchange.

a) Trueb) False

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Q16: Which party in a franchise agreement makes royalty payments?

a) Franchiseeb) Franchise

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Q17: Which of the following organisations does not make dividend payments?

a) PLCb) Cooperative societyc) Franchise

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Q18: What is the purpose of a social enterprise?

a) To make a profitb) To use any money raised to further the venture

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Q19: There is no disadvantage to becoming a multinational organisation.

a) Trueb) False

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Q20: A charity exists to:

a) raise awareness of and funds for a chosen cause.b) to make a profit Provide a service to the public.

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Q21: The public sector is funded by the taxpayer.

a) Trueb) False

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End of topic 2 test

Go online

Q22: Complete the sentences using following options.

a) meaning they can force smaller organisations out of business.

b) meaning PLCs will find it easier to attract shareholders.

c) which will be costly to produce.

d) meaning large amounts of finance can be raised.

e) as they have greater confidence it will be paid back.

f) or the company may be fined/have legal action taken against them.

g) resulting in poorer profit results for the first few years.

h) which might mean investors can plan a hostile takeover.

1. Shares can be sold on the stockexchange

2. PLCs often dominate theirmarket/dictate market prices

3. Lenders are more likely to give money

4. Investors will have limited liability

5. Initial set-up costs will be high

6. There is a large amount of legislationwhich must be complied with

7. PLCs have no control over who buysshares8. PLCs are required by law to publishannual accounts

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Q23: Complete the sentences using following words.

taxes private donations

trustees government ministers

• A public sector organisation is owned by the �� whereas a third sectororganisation is owned by (but does not benefit) �� individuals.

• A public sector organisation like the NHS is controlled by government ��or their appointed managers whereas a charity operating in the third sector iscontrolled by a board of �� .

• A public sector organisation is mainly funded through �� whereas a thirdsector organisation is funded through �� or fundraising activities.

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SQA style questions

Go online

Q24: Describe the main characteristics of the following types of business organisation.(3 Marks)

1. PLC

2. Multinational

3. Franchise

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Q25: Explain why a business organisation may decide to trade internationally. (3 Marks)

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Q26: Describe two advantages for the franchiser of this type of business structure. (2Marks)

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Q27: Describe the main reason for the existence of a charity. (3 Marks)

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Q28: Explain why becoming a PLC may mean that the original shareholders could losecontrol of their business. (2 Marks)

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Q29: Describe the purpose of a social enterprise. (3 Marks)

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Q30: Compare a private sector and public sector organisation in terms of ownershipand finance. (4 Marks)

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27

Topic 3

Objectives

Contents

3.1 An organisation's objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

3.2 Business objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

3.3 Methods of growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

3.4 Case study . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35



Learning objectives


• identify business objectives;

• differentiate between strategic and tactical objectives;

• describe different objectives;

• describe why objectives may change for an organisation.

28 TOPIC 3. OBJECTIVES

3.1 An organisation's objectives

All organisations have objectives. These objectives will differ from organisation toorganisation and may be dependent on the type of organisation.

Objectives help to identify:

• the specific goals of the organisation;

• how they are to be achieved;

• the eventual end result.

Objectives may be split in any organisation and identified as being either:

Strategic objectives:

Strategic objectives are those objectives which are identified and set by the top layer ofmanagement in the organisation. They outline the main goals and aims of theorganisation.

Tactical objectives:

Tactical objectives are made in the light of strategic objectives and are more focussedin their nature. They identify how the strategic objectives of the organisation can beachieved through the performance of each department within the organisation.

An organisation's objectives

Choose an organisation that you know, visit its website and list its objectives.

For example: http://www.tesco.co.uk.

Visit another organisation's website - preferably one selling similar products - and listand compare its objectives.

For example: http://www.sainsburys.co.uk.

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Business objectives of a publicly - funded organisation.

How do the business objectives of a public funded organisation differ from a commercialcompany?

You may use the Internet to research this.

Your answer should be in the region of 100 words.

When you have finished show your work to your teacher.

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http://www.tesco.co.uk

http://www.sainsburys.co.uk

TOPIC 3. OBJECTIVES 29

3.2 Business objectives

As discussed at National 5 level, business objectives will differ according to theorganisation in question. Objectives studied at National 5 level included:

• Profit maximisation

• Survival

• Sales maximisation

• Provision of a service

At Higher level, in addition to these objectives, the following are introduced:

• Corporate and social responsibility

• Growth

• Satisficing

• Managerial objectives

Each of these objectives is fundamental to the continued existence of an organisation.For many organisations, the objective of maximising profits will be their primaryobjective, however this does not apply to all organisations. For example, a voluntaryorganisation does not have profit as its main objective. It exists to provide a service tothose in need and the provision of the services required would be amongst its mainobjectives.

As with people, the aims of an organisation will constantly change. Think about it: whenyou were a young child, you perhaps aimed to learn to swim or ride a pony. As youbecame more proficient at these skills, your aims perhaps changed, and you may havewanted to win competitions in these sports. Also, it was likely that your personal aimsdiffered from those of your friends and family.

As a business moves from starting up to becoming a larger organisation, the objectivesof the organisation will change. Whilst initially survival will be the primary concernfor any organisation, as the business (or charity) becomes more established, this canchange to enable the business to grow or reach different customers. Objectives canalso be impacted by the external environment - for example in times of recession,an organisation which had previously looked to maximise profits may find survival tobecome a more pressing objective.

Objectives are also determined by the purpose of an organisation - as alreadydiscussed, a private sector organisation aims to make a profit, which will never be theaim of a charity.



Profit maximisation

Profit maximisation is where an organisation strives to make the highest level of profitpossible.

All commercial organisations are concerned with making profits. A profitable businessmeans making money for its owners and stakeholders.

Profit maximisation is not enough for the continued success of the business. Thegrowth and development of the business as a whole is also important.

Survival

Survival as an objective is literally the aim of continuing to trade as an organisation.

All organisations, given a choice, would like to survive into the future. Survival is one ofthe main business objectives but it is dependent and related to the business objectivesof profit (maximisation) and growth.

Sales maximisation

Sales maximisation is literally where an organisation tries to achieve the highest volumeof sales possible.

Commercial organisations which offer goods or services for sale are concerned withmaking money. Profit maximisation can be achieved through sales maximisation e.g.increased sales mean increased revenue, which may increase profits.

Provision of a service

Most businesses provide some type of product or service, however there are sometypes of organisations for which the provision of a service is their main concern. That isto say, they may not be concerned with profits or growth but only in providing a serviceto their customers.

The typical type of organisation that is concerned with providing a service is a charity.

Corporate and social responsibility

Many businesses nowadays are concerned with how the public perceives them andhow they treat the environment. This is called social responsibility and is an area ofconcern for all businesses.

Growth

Whilst it is not a pre-requisite for survival that a business should grow, it is necessaryfor all businesses to develop if they wish to survive.

The methods that an organisation can use to grow are discussed below.



Social responsibility can cover the following areas.

• Working conditions

• Treatment of the environment

• Business associations

Businesses that are not socially responsible may find that they attract the interest ofpressure groups, have their products boycotted by consumers and are not an attractiveproposition for investors.

Satisficing

An organisation which aims for "satisficing" as an objective is literally looking to hold asatisfactory position - in other words to be "good enough" (but no more than that).

An organisation which looks to achieve an objective of satisficing may have a future"ideal position" in mind, but is acknowledging that it may not be possible to reach thatposition at the present time - perhaps due to a recession, lack of staff or lack of finance.

Managerial objectives

Managerial objectives exist in an organisation where managers have their ownobjectives which may operate alongside or contrary to the main business objectivese.g. they may wish to increase their own salary or position within the company.

It is important for a company to ensure that managers do not allow their personalobjectives to impact on the decisions made on behalf of the organisation - for exampleawarding themselves a pay rise to satisfy their personal managerial objective ofincreased salary in a climate where the organisational objective is survival, requiringreduced costs.

Other business objectives which may be identified include:

• innovation;

• management performance and development;

• productivity;

• physical and financial resources;

• public responsibility;

• employee performance and relations;

• environmental concerns;

• maximisation in the use of available resources;

• public profile.

Identify the business objectives

Go online

For each question decide whether the business objective is:



A) Managerial

B) Social responsibility

C) Profit maximisation

D) Survival

E) Sales maximisation

F) Growth

G) Provision of a service

H) Satisficing

Q1: Managing directors award themselves £1 million of share options

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Q2: Let's hope the new advertising campaign is successful

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Q3: Sales are holding steady with acceptable profit levels for shareholders.

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Q4: Sainsbury's have introduce new reusable plastic bags.

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Q5: We need to take on more staff to cope with increased demand.

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Q6: We need to make some employees redundant otherwise we may not exist thistime next year.

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Q7: If we cut prices we will sell more.

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Q8: The local authority announces a new PFI initiative to build 10 new secondaryschools.

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Q9: Morrisons take over Safeway.

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Q10: We need to cut costs as the shareholders are complaining of low dividends.

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Business objectives

First, answer this question.

Q11: Identify eight business objectives.

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Then:

Choose FOUR of the business objectives that you have identified and explain why theymight be important to an organisation.

Submit this work to your teacher.

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3.3 Methods of growth

Organic growth

This is where a company grows naturally, without becoming involved in merging withor taking over another company. This can be achieved through increasing sales andopening new branches, or launching a new product range.

Takeovers and mergers

A takeover is the term used to describe when one company literally "takes over" anothercompany. This usually results in the company being taken over being rebranded - forexample, Safeway was taken over by Morrisons. A takeover can be voluntary (where acompany puts itself up for sale as Safeway did) or hostile (where a large company buysenough shares in another company to force through a takeover - this happened whenKraft took over Cadbury's).

A merger is where two companies integrate on equal terms - a "friendly" combining ofcompanies, where elements of both brands/names will be retained. For example Halifaxand Bank of Scotland became HBoS.

Horizontal and vertical integration

Companies may grow and develop in different ways. Integration of companies occurswhen organisations combine to become larger and more powerful.

Horizontal integration occurs when two companies which operate at the same stage ofproduction merge to become one entity.

The reasons for doing this include:

• market domination;

• avoidance of future takeovers;

• increased efficiency.



Vertical integration occurs when two companies which operate at different stages ofproduction in the same industry decide to join.

Advantages here include:

• increased efficiency;

• less need to contract out work to other companies as more expertise at all stagesof production is now available.

Forward vertical integration occurs when an organisation takes over a customer. Controlcan be exercised over the chain of distribution and supply.

Backward vertical integration occurs when an organisation takes over a supplier givinga guaranteed source of stock.

Diversification

Diversification is the result of the take-over or merger of different firms operating indifferent markets.

The reasons for this include:

• growth and development;

• spread of risk in case one area of the business fails;

• acquisition of assets;

• collection of new knowledge and experience.

Diversification is often a business's response to a change in its market or may be usedas an opportunity to enter new markets. For example, many tobacco companies basedin the UK have moved to diversify into leisure and food industries, to offset the fallingdemand for their core products of cigarettes and tobacco.

Organisations can also choose to reverse the process of growth to focus on key areas.

Deintegration/demerger

This is where an organisation splits into two separate businesses. This allowseach business to focus on their core activity and therefore improve efficiency andperformance. Divestment: This is where a business chooses to sell off (usually lessprofitable or loss making) elements of operations or some assets. This raises financewhich can be invested into improving remaining areas of the business.



3.4 Case study

Volkswagen cars - a social responsibility

Read the article about VW cars, then answer the questions.

If we look at the environmental impact during the life cycle of a vehicle, the usagephase is decisive and has the biggest impact compared with the manufacturing orrecovery phase. Therefore Volkswagen believes it is particularly important from anenvironmental viewpoint to minimise the environmental impact during the usage phase.

The lowest possible fuel consumption is the central aim of Volkswagen engineers intheir work to achieve ecological benefits for the environment and also economicbenefits for customers. In this area, successful examples include the modern FSI andTDI engines as well as the automatic DSG©direct shift gearbox.

The long life span of the vehicle is also important. If the vehicle can be used longer, theburden on the limited raw material resources of our planet and also on the costs to theowner will be reduced.

At the same time, we have also been working on the area of servicing. The servicingintervals for modern Volkswagen models are currently up to 50,000 km (with extendedservicing intervals depending on the model and the usage of the vehicle). Theoccurrence of old oil and other used parts is therefore also lower.

(http://www.volkswagen.co.uk or http://www.vw.com)

Q12: What are the three phases in the life cycle of a vehicle?

a) Manufacturing, usage and recoveryb) Manufacturing, repair and recoveryc) Design, manufacturing and usage

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Q13: Which phase has the most impact on the environment?

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Q14: What is the MAIN aim of VW to reduce the impact on the environment?

a) Lowest price to buyersb) Lowest damage on impactsc) Lowest fuel consumption

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Q15: In what other ways does VW wish to reduce environmental impact?

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http://www.volkswagen.co.uk

http://www.vw.com



Summary questions

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Social responsibility can cover following areas:

Q16: Working conditions

a) Trueb) False

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Q17: Treatment of the environment

a) Trueb) False

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Q18: Employee relations

a) Trueb) False

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Q19: Attracting new investment

a) Trueb) False

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Q20: Production of goods and services

a) Trueb) False

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End of topic 3 test

Go online

For each question categorise the objectives into the correct statements:

• Objective

• Sales maximisation

• Profit maximisation

• Growth

• Social responsibility

• Managerial

Q21: Increasing opening hours and making products available online.

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Q22: Acquiring competitors at every opportunity.

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Q23: Statement.

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Q24: Voting to award director bonuses.

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Q25: Minimising costs whilst increasing selling price.

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Q26: A high profile environmental strategy.

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SQA style questions

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Q27: Describe the role of objectives in business. (6 Marks)

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Q28: Compare strategic and tactical objectives. (2 Marks)

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Q29: Describe four business objectives. (4 Marks)

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Q30: Define the term social responsibility and explain its importance to modernbusiness. (3 Marks)

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39

Topic 4

External and internal environments

Contents

4.1 PESTEC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

4.1.1 Case study . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42

4.2 Internal factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44



Learning objectives


• explain the impact of external and internal factors on a large organisation;

• discuss the importance of corporate culture.

40 TOPIC 4. EXTERNAL AND INTERNAL ENVIRONMENTS

4.1 PESTEC

Several factors exist which can affect the operation of any organisation. Factors thatcome from the external environment are often outwith the control of the organisation.

Changes in the external environment are often referred to by the acronym PESTEC:

P - political

E - economic

S - sociological

T - technological

E - environmental

C - competitive

Political factors

Political factors that could affect the operation of a business include the implementationof government policies. For example, the government controls taxation in the UK. Newlegislation is published continually, and businesses must ensure that they are awareof, and complying with, all legislation that affects them. For example, in March 2013,the budget statement announced new packaging targets for 2013-2017. These targetsensure the businesses cut their packaging and waste. This will allow the UK to meet EUtargets, but places an extra financial burden on business.

Economic factors

Economic factors affecting the operation of businesses may take several forms. Oneeconomic factor, which is completely outside the control of any organisation, is the stateof the economy. The Bank of England sets the interest rates for the UK. An increase ininterest rate will directly affect any business with loans to repay, as the amount borrowedwill increase.

Large businesses may trade internationally. Fluctuating exchange rates betweencountries will affect the price of raw materials or the profit margin on goods sold.

Socio-cultural factors

Socio-cultural factors acknowledge changes in the needs and wants of the population.Tastes change quickly and consumers are rarely loyal to one particular brand or product.They tend to be influenced to a much greater extent by special offers or new features.

Changes in demographics also have an impact and this must be taken into account byorganisations. The changing pattern of employment affects business. For example, theincrease in the number of households where both adults work has driven the increase inonline supermarket shopping, as families choose to spend more time together and lesstime buying weekly shopping. The supermarket chain Sainsbury's was one of the lastto make the move to online sales, and blamed its poor financial performance on the latedecision to do so.

Another social-cultural factor that may impact on an organisation is pressure groups.Pressure groups can exert a negative influence on organisations to the extent that theorganisation may have to alter its plans. An example of an environmental pressure groupis Greenpeace.


TOPIC 4. EXTERNAL AND INTERNAL ENVIRONMENTS 41

Technological factors

Technological factors are relevant today as most organisations rely heavily on the useof information technology in their everyday operation.

Information technology has evolved and the pace of change is very fast. The pace ofchange is such that hardware and software that was up-to-date just last year is nowalready out-of-date. This means that there is a great financial cost for businesses.Money which did not require to be spent a decade ago is now dominating the buyingdecisions of many businesses.

Maintaining a competitive advantage is essential to every organisation.

Environmental factors

Environmental factors are not usually controllable by organisations. The weather is anexample that may have an impact of business. Localised flooding or rail delays due tosnow can delay or halt the production process as businesses fail to receive stock.

Competitive factors

All businesses face competition and this, in turn, influences the way in which theyoperate. Sometimes this may mean changes to the way in which their products andservices are marketed. In other cases it may mean completely redesigning their productrange or changing the way in which they market and sell. Apple and Samsung have beenembroiled in a number of lawsuits over the design of their smart phones and computers,with both sides citing the other as copying their intellectual property. Disagreementssuch as this are very costly and time consuming.

Businesses today must be more ethically aware, as consumers view this with increasingimportance when choosing where to purchase. With information available everywhere,consumers have never been so knowledgeable. The Internet allows consumers a hugechoice of business to purchase from, therefore all businesses must ensure that theyare ethically competitive. This means they must think about where they source rawmaterials, how much they pay workers and how much of a carbon footprint they leavebehind. Customers will go elsewhere if they think a competitor is more ethically aware.

External environment - events

Go onlineFor each question categorise the factor with the correct event:

• Political

• Economic

• Social

• Technological

• Environmental

• Competitive



Q1: From March 2013, unpaid parental leave increased from 13 weeks to 18 weeksfor parents of children up to the age of 5.

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Q2: Mild weather during the month of October has been blamed on a 0.7% decreasein sales.

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Q3: There has been a prolonged rise in the number of 'local' supermarket stores.

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Q4: Tesco launched its own tablet, beating the price point of all other brands.

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Q5: The Bank of England interest rate has been held at a record low of 0.5%.

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Q6: Automated deliveries may be a possibility in the next 5 years, says retail giantAmazon.

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4.1.1 Case study

Diageo offers to sell Whyte & Mackay Scotch whisky arm

Diageo, the world's biggest Scotch whisky distiller, has offered to sell most of its Whyteand Mackay business to appease competition authorities.

It acquired the famous whisky brand when it secured a stake in India's United Spirits inlate 2012. As the deal increased Diageo's share of the blended whisky market to about40%, the Office of Fair Trading (OFT) was concerned this could reduce competition andraise prices for consumers. The OFT is considering Diageo's offer.

Before the merger, there had been "substantial competition" between Diageo's Bell'swhisky and Whyte and Mackay's own-label brand, the OFT said.

"Our investigation considered a wide range of evidence and we concluded that thelikely loss of competition could give rise to higher prices for retailers, and ultimatelyconsumers," said OFT chief economist Chris Walters.

"We are now considering Diageo's offer to sell the bulk of the Whyte & Mackay businesswith the exception of two malt distilleries, to address our concerns."

Garry White, chief investment commentator at stockbroker Charles Stanley, said:"Should the regulator accept the offer to sell the bulk of the Whyte and Mackay business,the price doesn't seem too high to gain a significant position in India - the world's fastest-growing whisky market."

The OFT had been mulling referring the deal to the Competition Commission.

In April 2014, a new body, the Competition and Markets Authority, will become the UK'slead competition and consumer body.

Source: adapted from http://www.bbc.co.uk/news/business-25084764


http://www.bbc.co.uk/news/business-25084764


Q7: What is given as the main reason for Diageo's offer to sell Whyte and Mackay?

a) No longer profitableb) Concerned that the competition commission may force them toc) Want to promote their own label

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Q8: Name the Diageo whisky that was in strong competition with Whyte and Mackaybefore the merger.

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Q9: The Scottish Government is trying to adopt a policy of minimum pricing for alcohol.Name the external environment factor.

a) Politicalb) Environmentalc) Economic

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Q10: Exports of Scottish Whisky continue to rise. Name the external environmentfactor.


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Q11: In the 2013 Budget, the Chancellor reduced the levy on beer but not on spirits, ina move that angered the whisky industry. Name the external factor.


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4.2 Internal factors

Key point

Several factors exist that can affect the operation of any organisation. Factors thatcome from the internal environment can be controlled and changed by decisionmakers within the organisation.

Examples of internal pressures include:

• a change of management;

• the introduction of new technology;

• a change in the company's financial position.

• Corporate culture

All businesses need stability. A high turnover of managers does not provide this stabilityas every new manager, or management team, joining the business will come with theirown ideas and initiatives. There may be a more serious underlying problem if a businessloses managers in quick succession. The business may be offering a level of pay lowerthan that if their competitors, or may be controlled by a board who are unwilling to givea manager the autonomy required to complete their role.

A businesses greatest asset is its employees, who must be nurtured and motivated. Asuccessful business will invest in its workforce to ensure that it gets the best out of them.They realise that employees are the first contact for customers and the efficiency andeffectiveness of employees will determine the profitability of the business.

The ability to invest new sources of capital into a business will also impact on thatbusinesses success. A business may wish to expand into new countries, bring a newproduct to market or run a new advertising campaign. All of these things cost money.The management of an organisation has to decide where that money is going to comefrom. It may look to increase the number of shareholders, for example. Before doing so,the business must be comfortable with the knowledge that an increase in shareholdersreduces the ownership and control of the current owners.

Corporate culture

As previously discussed, the ability of a business to function lies with the managers andemployees who make decisions. The ability for employees to function successfully isoften determined by the culture of the business.

When managers set an ethos of mutual trust and respect, employees feel valued andare empowered to always give their best. There is an increase in workers being giventhe opportunity to work more flexibly, for example they may be allowed to set their ownhours or work from a place of their own choosing. This freedom often encourages loyaltyand can mean that staff work rates can increase.



A businesses corporate culture can be determined by a number of factors:

• Historic decision making processes.

• The size and nature of the business.

• The number of employees involved in the decision making process.

• The management structure.

• The flexible working practices employed by the business.


Summary questions

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Q12: The availability of finance is an internal factor affecting business.

a) Trueb) False

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Q13: The Bank of England increasing interest rates is an internal factor affectingbusiness.

a) Trueb) False

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Q14: An employee facing a disciplinary hearing is an internal factor affecting business.

a) Trueb) False

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Q15: The government deciding to stop an employee training scheme is an externalfactor affecting business.

a) Trueb) False

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Q16: A flood stopping a fleet of deliveries is an example of a social factor.

a) Trueb) False

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Q17: A change in the exchange rate between the UK and the Euro zone is an exampleof a political factor.

a) Trueb) False

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Q18: An increase in woman working is an example of an economic factor.

a) Trueb) False

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Q19: An increase in the use of automation is an example of a technological factor.

a) Trueb) False

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Q20: The introduction of the Equality Act 2010 is an example of a political factor.

a) Trueb) False

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Q21: The national minimum wage increase is an example of an economic factor.

a) Trueb) False

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End of topic 4 test

Go online

For each of the following external factors, select the possible impact on an organisation.

Q22: Interest rates are rising.

a) Consumers are worried they will have less money to spend.b) Business' expenses will fall.c) Business must be willing to spend more on new equipment.

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Q23: The weather forecasts predicts a severe winter with many weeks of continual snowfall.

a) Consumers are willing to spend more in a product if they feel it will positively benefitothers.

b) A new competitive pricing strategy is adopted.c) Businesses put contingency plans in place to stockpile stock in case there are

problems with deliveries.

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Q24: The Government has announced it is to reduce corporation tax by 5%.

a) Business must be willing to spend more on new equipment.b) Business' expenses will fall.c) Consumers are worried they will have less money to spend.

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Q25: Two similar businesses have opened up in the same town.

a) A new competitive pricing strategy is adopted.b) Consumers are worried they will have less money to spend.c) Business must be willing to spend more on new equipment.

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Q26: 14% rise in the sale of Fair-trade products.

a) Businesses put contingency plans in place to stockpile stock incase there areproblems with deliveries.

b) Consumers are willing to spend more in a product if they feel it will positively benefitothers.

c) Business' expenses will fall.

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Q27: Research findings reveal automation can lower costs by 28%.

a) A new competitive pricing strategy is adopted.b) Consumers are worried they will have less money to spend.c) Business must be willing to spend more on new equipment.



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Decide which area of PESTEC the external factor belongs to.

Q28: The weather forecast predicts a severe winter with many weeks of continual snowfall.

a) Technologicalb) Competitivec) Environmental

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Q29: Two similar businesses have opened up in the same town.

a) Competitiveb) Technologicalc) Environmental

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Q30: The Government has announced it is to reduce corporation tax by 5%.

a) Socialb) Economicc) Political

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Q31: Research findings reveal automation can lower costs by 28%.

a) Technologicalb) Socialc) Environmental

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Q32: Interest rates are rising.

a) Politicalb) Economicc) Competitive

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Q33: 14% rise in the sale of Fairtrade products.

a) Technologicalb) Socialc) Economic

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Q34: Which of the following factors does not affect the corporate culture of a business:

a) the size and nature of the business.b) a competitor changing their prices.c) the flexible working practices employed by the business.

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Q35: Corporate culture can best be described as:

a) the shared values and beliefs of employees and managers.b) the way managers make decisions.c) the level of turnover amongst staff.

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Q36: Which of the following is not an example of an internal factor:

a) a breakthrough in new technology.b) an employee facing a disciplinary hearing.c) an increase in the bonus structure.

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Q37: Staff feeling more motivated and enthused by work is often a direct result of:

a) a change in the weather.b) a manager trying to change the corporate culture.c) the increase in automation in the production run.

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Q38: Internal factors affecting business can be described as:

a) the size and nature of the business.b) a competitor changing their prices.c) the ability of a business to increase its finance.

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Q39: A businesses greatest asset can be described as:

a) the methods of production it uses.b) the competency of its staff.c) the availability of finance.

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SQA style questions

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Q40: Explain the effects that three political factors could have on an organisation. (3Marks)(A different effect should be explained each time.)

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Q41: Describe four external factors (other than political) that could have an impact onan organisation. (4 Marks)

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Q42: Explain two internal problems that can exist when managers try to make effectivedecisions. (2 Marks)

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Q43: Describe three factors an organisation should consider when trying to encouragea positive corporate culture. (3 Marks)

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51

Topic 5

Business structures

Contents

5.1 Functional groupings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52

5.2 Other types of grouping . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55

5.3 Entrepreneurial structures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56

5.4 Tall and flat management structures . . . . . . . . . . . . . . . . . . . . . . . . 57

5.5 Centralised, de-centralised and matrix structures . . . . . . . . . . . . . . . . . 58



Learning objectives


• describe the following internal structures;

◦ Groupings such as function, location, product and customer;

◦ entrepreneurial structure;

◦ tall and flat management structures;

◦ centralised and decentralised management structures;

◦ matrix management structure.

• justify the use of each of the structures described.

52 TOPIC 5. BUSINESS STRUCTURES

5.1 Functional groupings

It is common place for medium and large businesses to organise themselves byfunctional area. Typical functional areas include Research and Development, Marketing,Human Resources, Finance, Operations, Customer Services and Administration.

Research and development

The research and development department are always on the look out for new ideas.Their remit is to bring new ideas to the management board, or look at ways to improveexisting products. An example of this is the squeeze bottle used by Heinz tomatoketchup. In response to customer feedback Heinz introduced a new, more convenientbottle in an effort to prolong the life cycle of the product and stay ahead of thecompetition. This functional area will work closely with the marketing department.

Marketing

The marketing department aims to discover what customers want from the goods andservices they provide. They work closely with the research and development departmentto conduct market research and use this information to develop strategies to ensure thatthe business can meet the needs of customers. They are responsible for ensuring aneffective marketing mix (often referred to as the 7P's)


TOPIC 5. BUSINESS STRUCTURES 53

ProductWhich products are on offer and what is the level of sales? What newproducts are planned? Are products in decline? What can be done toreignite interest in products?

PriceHow much should be charged? Should a high or low price be set? Howcan we ensure that our product is competitively priced whilst ensuring aprofit is made?

PromotionHow can people be made aware about products? What special offersshould be ran? What advertising methods will ensure the correctmarket segment will be aware of products?

PlaceHow can we distribute products? Should products be sold directly tothe customer or through retailers? How can the Internet help to sellmore?

PeopleHow to make sure customers are always satisfied?What level of aftersales service should be given?

ProcessWhat systems are in place to ensure customer satisfaction? How dowe know these systems are effective?

Physicalevidence

What evidence does the business have that they use to verify that itkeeps its promises to customers?

Human resources

The Human Resources department deals with the recruitment, selection, retention,training and development of employees. They are also responsible for ensuringemployees are motivated through the financial and non-financial payment systems.The human resources department will also take account of all government legislationrelevant to human resource management.

Finance

The Finance department is responsible for the payment of wages and salaries. Theyare also responsible for producing financial accounts including Profit Statements andBalance Sheets. They will set budgets for other functional areas and ensure thatdepartments do not overspend.

Operations

The Operations department is responsible for the purchasing or raw materials. Theywork closely with the finance department to ensure that all raw materials are costedand purchased within budget. They will also work alongside the marketing departmentto ensure an appropriate selling price is decided upon. The Operations department,often referred to as the production department, is responsible for the design andmanufacturing of goods. Quality is very important to an organisation and it is thisdepartment that ensures processes are in place.

Customer services

With a growing quaternary sector and increased competition, the role of the customerservices department has increased in recent years. Customers have high expectationsand this department must ensure that a high level of service is maintained. Thisdepartment will put polices and procedures in place to ensure a consistent approachto customer satisfaction. A policy for dealing with complaints must also be introducedas successful businesses rely on returning customers to ensure continued success.



Administration

The administrative department is responsible for the organisation and dissemination ofinformation around the business. This department deals with the storage and retrievalof information. In today's business this information is likely to be stored online.

Grouping by function is a common grouping used by large businesses. It is usedto ensure that the business is run in the most efficient manner. Employees becomehighly skilled in their chosen function, for example, an employee working in theFinance department will be qualified to produce and audit financial accounts. However,businesses organised by function may find that some tasks are duplicated, leadingto waste. Competition can arise between departments and this can cause friction.Communication may be poor between functions, leading to mistakes and more waste.

Despite these disadvantages, grouping by function is a very good way to ensure largebusinesses run smoothly as everyone is accountable.

Department activities

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Q1: Decide which from the list of activities below matches following descriptions.

• Increasing the amount of automation will decrease the manufacturing errors andreduce loss.

• Effective promotion, such as paying a celebrity to endorse your product, mayincrease sales.

• An example is the improvement to the camera on a smart phone.

• Technology such as video conferencing and email ensures business deals can beconducted globally.

• Finding the best borrowing rate will ensure a bank load can be repaid.

• A consistent approach to customer satisfaction is important.

This department is always on the lookoutfor new ideas.This department is interested in settingbudgets to minimise overspends.

This department is interested in theproduction process.

This department is interested in theidentification and fulfilment of customerneeds.This department is interested in ensuringa smooth flow of information across theorganisation.

This department is interested in dealingwith customer complaints to ensurerepeat customers are not put off.

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5.2 Other types of grouping

Geographical grouping

Multinational businesses will often group by geography. This is because operatingacross the world can create problems with time zones, payment rates, customerexpectations, delivery times and corporate culture. Grouping by place also allows fora closer working relationship with local suppliers. This ensures that the optimum qualityand price can be achieved.

One advantage of this type of grouping is that customers benefit from speaking to anemployee with local knowledge. This can result in customer loyalty being achieved.

Inevitably, this will lead to duplication of services across the company.

Product grouping

Large businesses may choose to group by product or services. Under this model, abusiness will be led with a management team. This team will split into the variousproducts or services that the business offers. Disney is an example of a business thatsplits itself by product. The board ensures the overall brand continues to grow. Thebusiness is split into divisions, and each division has a director overseeing that area ofthe business. Disney is split into ESPN, consumer products, Walt Disney Studios, onlineventures, media (including TV and film) and parks and resorts.

Each division operates as a self contained unit, with the board ensuring that the workof all divisions contributes to the overall business strategy and objectives. Each divisioncaters for different market segments and allows staff to increase knowledge and skillsto match that particular product. This allows the business to respond to social changesmore quickly.

Duplication can occur, as each division will have it's own functional areas, leading to anincrease in costs and a reduction in efficiency.

Customer grouping

A business may decide to group by the needs of their different customers. The financialservices business Prudential UK is an example of a business that does this. They offerfinancial advice on a number of matters, such as investments, insurance and taxation.Each team within the business has responsibility for dealing with customers. Customerscan be transferred from one team to another as their needs change.

A business grouping in this way can build up customer loyalty as they can give eachcustomer a personal service. This also means they can respond quickly to customerneeds or changes in taste.

This personal service can be expensive due to higher staff costs. It is also inevitablethat costs will increase due to a duplication of activity across the business. Anotherdisadvantage is that the personal relationship that exists between the business and staffis lost when staff leave or move departments.



Types of grouping

Q2: Fill the gaps with following terms:

• place

• customer

• product

It is common for a business to group its activities according to ��. This isuseful for a company such as Mackie's who produce ice-cream and crisps as it allowseach staff member to have specific knowledge.

Car manufacturers may group their activities according to ��. This would behelpful as the European market is different to the market in the UK, or America.

�� grouping is important to a business like the Royal Bank of Scotland. Theydeal with young savers and provide support for school learners. They also work closelywith businesses and people looking to invest in their retirement.

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Q3: Distinguish between product/service and functional groupings.

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Q4: Discuss the advantages and disadvantages of customer grouping.

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5.3 Entrepreneurial structures

Entrepreneurial structures rely on a small number of people making the key decisionsfor the business. Although more common with small and medium businesses, thereare instances where owners of large businesses remain in control and do not delegateto a large number of people. Michelle Mone is the founder and co-owner of MJMInternational, a multi-million pound lingerie company. She remains in control of thecompany with a very autocratic style of management.

Advantages

• Decisions made quickly by the core team/individual.

• Staff know who they are accountable to.

• Decision-maker does not need to consult staff.

Disadvantages

• Difficult to use in large businesses where many decisions have to be made.

• It can create a heavy workload for decision-makers.

• It can stifle other staff's initiatives and motivations.



5.4 Tall and flat management structures

Hierarchical structures can be either tall or flat. Both can exist successfully in largeorganisations. Tall structures contain many layers of managers whereas managers inflat structures are responsible for more employees.

Managers on the same level will often be responsible for the same number of delegates.This is often linked to the pay grade they receive. The higher up the pyramid a manageris, the more responsibility and pay they will receive.

Image 1: Hierarchical structures in large organisations; tall structure and flat structure

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The number of employees in an organisation will often determine number of levels ofmanagement.

Tall structures

A tall structure has many layers in the hierarchy. As there are many layers the chainof command is longer and communication between the top of the chain and the bottommay take longer. Managers have smaller spans of control and there is less delegation,often resulting in less opportunity for subordinates to take on responsibility.

Decision making can often take longer in a tall hierarchical structure as more managershave to be included in the decision making process. This can lead to a less flexibleorganisation that finds it harder to react to competition.

Tall structure organisations will often be split into functional departments whereemployees have clearly defined roles and responsibilities. Employees working in thesame department usually have expertise or experience in particular areas. This meansthat each worker can become very good at what they do.

Flat structures

A flat structure has a wider span of control. This means every manager has moreresponsibilities and is responsible for a larger number of employees. This can make thedecision making easier and more timely as there are less people to grant permission.

The workload of a manager in a flat structure can be large due to the number ofemployees within their team. This wider span of control can lead to employees feelingmore empowered as subordinates take on some of the teams responsibilities. On the



other hand it can lead to demotivated employees who feel that they are being asked todo more than their job description.

Consultation will also be quick and efficient as the owner and manager can easily meetall the staff face-to-face to discuss any problems that may arise. Another advantage isthat salaries tend to be cheaper as the business does not have to pay a large numberof expensive management salaries.

Summary of differences

Tall structures Flat structures

Many layers in chain of command.Managers responsible for high number ofemployees.

Smaller span of control. Wide span of control.Less flexible as more managers includedin decision making.

Easy decision making as less peopleinvolved.

Employees have high level of expertiseand experience.

Managers have more responsibilities andlarge workload.

Less delegation and less opportunity forsubordinates.

Potential for empowered subordinates.

Employees have clearly defined roles andresponsibilities.

Potential for demotivated employees asdoing more than their job description.

5.5 Centralised, de-centralised and matrix structures

In a centralised organisation a few senior managers will retain the major responsibilitiesand powers whereas decentralised organisations will spread responsibility for specificdecisions across various departments and lower level managers, including branchesor units located away from head office. An example of a decentralised structure isPoundland. Each store has a manager who can make certain decisions concerning theirstore. The store manager is responsible to a regional manager. Promotions and stockdecisions are made centrally, but other decisions such as staff rotas and the placementof special offers is left up to the individual stores.

Senior managers enjoy more control in a centralised structure. Decisions can bemade to benefit the whole organisation, which can result in cost savings as a standardprocedure is adopted. Where strong leadership exists, the whole organisation canbenefit.

On the other hand, staff in a centralised structure do not feel empowered, as they arenot part of the decision making process. This could lead to a lack of motivation andreduced output. Centralised structures do not take account of the skills and knowledgeof staff lower down the organisation.

Successful businesses will often use a mixture centralised and decentralised structuresto ensure a consistent strategic approach is taken across the business, but the skillsand knowledge of staff are not ignored.

Matrix structure

A Matrix structure contains teams of people created from various departments from



across the business. These teams will be created for the purposes of a specific projectand will be led by a project manager. Often the team will only exist for the durationof the project and matrix structures are usually deployed to develop new products andservices. An example is when a business is preparing an event to launch a new product.Employees from across the business will meet for a short period of time to plan thelaunch. After the event, they will return to their original teams.

As a result, matrix structures do not replace traditional tall and short organisationalstructures. They can help to break down traditional department barriers, improvingcommunication across the entire organisation. Employees with a variety of skills areable to work together, which increases the skills set of all employees. This is likely toresult in greater motivation amongst the team members and encourages new ideas tobe developed. This way of sharing resources across departments can make a projectmore cost-effective.

Matrix structures may not always work smoothly. Members of project teams may havedivided loyalties as they report to two line managers. Equally, this scenario can putproject team members under a heavy pressure of work, especially if their usual workactivity needs to be completed. Taking employees from a range of departments canmake coordinating meetings difficult. It can also take team members time to get usedto this new way of working. A further disadvantage is the employees normal workingroutine may be disrupted, meaning a loss of output.



Management structures - descriptions

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Match the following structure types with appropriate description:

• Entrepreneurial structure

• Tall structure

• Flat structure

• Decentralised structure

• Matrix structure

Q5: This structure contains few layers of management meaning managers have alarge span of control.

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Q6: This structure encourages regional managers to make decisions.

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Q7: This structure relies on a small number of people making the key decisions for thebusiness.

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Q8: This structure contains many layers of management, making decision makingslow.

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Q9: This structure contains teams of people created from various departments fromacross the business.

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Management structures - definition and justification

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Match the structure definition with the following justifications:

• It is clear to see who is in charge of who, who should make decisions and howinformation should pass through the organisation.

• This structure work well in smaller organisations and are more responsive tochange.

• This allows new initiative to be developed using the best people from across thebusinesses and gives staff new skills by working with others.

• The business benefits from having a small number of people make decisions as itmeans issues can be resolved quickly.



Q10: Matrix structures are short term and involve different people from across theorganisation working together on a particular project.

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Q11: Hierarchical structures involve a large number of layers of management, eachlayer having responsibility over the layer below.

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Q12: Entrepreneurial structures are used in small businesses where only one or 2people make decisions.

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Q13: A flat structure has fewer layers of management which means each manager hasa larger span of control.

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Summary questions

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Q14: Grouping by customer allows a business to focus on different geographical areas.

a) Trueb) False

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Q15: A business that groups by functional area is more likely to be unresponsive tochange.

a) Trueb) False

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Q16: Customer loyalty can increase if a business offers personal service.

a) Trueb) False

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Q17: A centralized structure is more likely to make use of local knowledge.

a) Trueb) False

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Q18: Span of control is the number of subordinates across the business.

a) Trueb) False

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Q19: A tall structure can often have problems of communication.

a) Trueb) False

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Q20: Matrix structures only happen in the movies.

a) Trueb) False

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Q21: Employees in a decentralized organisation feel empowered.

a) Trueb) False

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End of topic 5 test

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Complete the sentences by selecting one from the options below each question.

Q22: ��structures have a strong head office or several top managers whokeep the major responsibilities and power in the company.

a) Decentralised

b) Centralised

c) Tall

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Q23: The span �� of is the number of employees or ranks of employees forwhich a manager is responsible. If there are a great number of employees, the span isconsidered to be wide and if there are only a few, then the span is narrow.

a) control

b) power

c) authority

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Q24: �� organisations include both tall and flat structures but are always inthe shape of a pyramid or triangle, with only a few people at the top and the number ofpeople in each level increasing on the way down. The span of control goes from thoseabove to those below.

a) Entrepreneurial

b) Hierarchical

c) Matrix

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Q25: �� is someone who has a higher position than someone else in acompany or organisation.

a) A subordinate

b) A superior

c) A coordinate

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Q26: The chain �� of is the way that people with authority in an organisationare ranked, from the person with the most authority to the next one below, and so on.

a) command

b) structure

c) network

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Q27: �� structure is also referred to as a line and staff structure. There are anumber of levels of management and a long chain of command running from the top tothe bottom.

a) A tall

b) A flat

c) A matrix

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Q28: �� structure is similar to a tall structure in that it is also a line structure.However, there are relatively few levels of management making the chain of commandmuch smaller and widening the span of control.

a) A flat

b) A centralised

c) A matrix

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Q29: �� structure will have people from various sections of the businessworking together in teams which are created for specific projects and time periods andsupervised by a project manager.

a) A matrix

b) A centralised

c) A decentralised

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Q30: �� structures spread the responsibility across various sections of thebusiness.

a) Flat

b) Centralised

c) Decentralised

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Q31: �� is a company or other group of people that works together for aparticular purpose.

a) An organisation

b) An institution

c) A constitution

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SQA style questions

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Q32: Describe four main characteristics of an entrepreneurial structure. (4 Marks)

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Q33: Distinguish between a centralised structure and a decentralised structure. (2Marks)

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Q34: Compare the use of functional grouping with product grouping. (3 Marks)

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Q35: Discuss the use of customer grouping for an organisation. (3 Marks)

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65

Topic 6

Stakeholders

Contents

6.1 Who are stakeholders? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66

6.2 Stakeholders' influence and aims . . . . . . . . . . . . . . . . . . . . . . . . . . 67

6.3 Stakeholder conflict . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68



Learning objectives


• identify and describe internal and external stakeholders;

• describe the conflict of interest and interdependence of stakeholders.

66 TOPIC 6. STAKEHOLDERS

6.1 Who are stakeholders?

Stakeholders in business are those people who have a key interest in the business.Their interest as a stakeholder will differ according to the type of business in which theyhave an interest.

Stakeholders in business may include:

• Shareholders

• Customers

• Employees

• Donors

• Management

• Government

• Suppliers

• Banks

• Other lenders

• Taxpayers

• Community

• Local government

• Investors

• Members

• Committees

• Board members

• Pressure groups

Internal stakeholders in an organisation include owners, shareholders, managers andemployees.

External stakeholders in an organisation include customers, the local community,pressure groups, government, suppliers and bankers.

Internal and external stakeholders

Go onlineQ1: Categorise each type of stakeholder as either internal or external.

1. Donors 7. Management 13. Government

2. Board members 8. Community 14. Taxpayers

3. Pressure groups 9. Local government 15. Other lenders4. Employees 10. Shareholders 16. Customers

5. Members 11. Suppliers 17. Banks

6. Investors 12. Committee. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .


TOPIC 6. STAKEHOLDERS 67

6.2 Stakeholders' influence and aims

Stakeholders have an effect on all businesses as they may be able to exert controlor influence decisions which have to be made. The degree to which they are able toexercise their influence will be determined by their degree of involvement or relativeinterest in the company. For example, within a public limited company, a shareholder inpossession of 35% of the shares in a company will be regarded as a greater stakeholderwhen compared to an employee holding 1% of the shares.

The amount of influence that a stakeholder can exert on a company will also bedetermined by the circumstances under which the influence is exerted. For example,a company may normally regard its owners as the key stakeholders in the business.However, imagine the scenario where a company is polluting the local environment. Inthis case, the local community may be able to exert a great deal of pressure and holdgreater influence compared to the owners even although the local community is not amajor stakeholder.

Examples of the different aims that stakeholders have in an organisation include:

• Customers interested in obtaining the best prices and the highest quality.

• Employees concerned about job security and future prospects.

• Suppliers wishing to receive payment for their goods as soon as possible.

Examples of the influence that stakeholders can exert on organisations include:

• Lending institutions having the power to grant or refuse applications for loans.

• Managers making decisions on a day-to-day basis.

• The community as a whole persuading business to carry out its wishes.

• Shareholders exerting their right to vote at the Annual General Meeting of a limitedcompany.

Interests of stakeholders

Go onlineQ2: Match the type of stakeholder to each example of interest given. Choose from:

Type of stakeholder

A) Owner - private shareholders

B) Non managerial staff

C) Government

D) Senior management staff

E) Trade unions

F) Customers

G) Creditors

H) Local community



Examples of interest

1. VAT 8. job security 15. profit

2. environmental issues 9. customer care 16. involvement3. financial return 10. jobs 17. credit score4. minimum wage 11. value 18. targets

5. direction 12. taxation 19. legislation

6. quality 13. working conditions 20. new contracts7. liquidity 14. rates of pay 21. performance

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6.3 Stakeholder conflict

Successful business must constantly change. It is inevitable that whilst somestakeholders are pushing for a change, others will fight against it. One example is aboard of directors who, in a bid for cut costs and run a more efficient business, willwish to increase the amount of machinery in the production process. Employees willinevitably raise concerns about job losses and may fight against these changes.

Another example is the expansion of business and the effect that expansion plans mayhave on the local community. Tesco have a strategic plan to increase the number ofstores they operate. They have faced fierce opposition of the years from local residents,concerned about the changes to their local landscape, or the negative affect a newsupermarket may have on local businesses. In every case, Tesco must balance theirexpansion plan with the wishes of the local communities in which they operate, for inorder to be successful they must persuade these local community groups to shop withthem.

To avoid conflict, stakeholders must work together for the benefit of the business. Forexample, an employee arguing for a wage rise may be told that profits must first increase.An increase in profits can only take place if customers spend more. This may happenif customers views are taken on board by managers. This is known as StakeholderInterdependence - understanding that stakeholders can share aims and the actions ofone stakeholder can directly affect another.

Was Royal Mail sold too cheaply?

With £27bn of investors' money having chased shares priced at just £1.7bn, and withRoyal Mail's share price trading at more than 450p this morning, compared with the330p a share the government is receiving, there is a certainly a case for saying thegovernment could have got more.

However if the shares had been priced at around this morning's market price, at say450p, the Exchequer would have received £2.7bn. So should taxpayers be raging thatthey've lost a potential windfall of £700m, which would not have paid off the trillion poundnational debt but would have paid for a couple of miles of High Speed 2?



Also the price range for the privatisation shares was set by the government at atime when prevailing opinion was that this was a risky declining business hobbledby lamentable industrial relations; it was only in the course of the share sale thatinvestors noticed a parcels operation growing very nicely, an endowment of potentiallyvaluable properties in city centres and the fat income the company is promising to payshareholders.

What is particularly striking is that Royal Mail's own people are confident that they are ina business that will prosper: I have learned that 15,000 Royal Mail employees, almost atenth of the workforce, have paid £52m to buy Royal Mail shares (in addition to the freeshares being handed to all Royal Mail employees).

However, what some may think is odd - including, presumably, ministers - is thatinvestors have completely ignored the risk that Royal Mail could imminently be broughtto a grinding halt by a strike. The frenzy to buy Royal Mail shares probably tells youquite a lot about the extent to which better-off people think the economy is recovering -which the government is not going to rage about.

That said, a 36% gap between market price and privatisation price is far wider thanwould normally be thought necessary to whet punters' appetite for future privatisation(remember that the Department for Business Innovation and Skills has another 30% ofRoyal Mail to flog, probably next summer, so ministers would not want to burn investorsbuying in this initial share offer).

So they know that if the share price stays at this level for weeks and months, they willbe vulnerable to criticism - and, probably, to a ticking off by the National Audit Office.

Labour's spokesman on all this, Chuka Umunna, in chastising Cable and Fallon forallegedly selling Royal Mail too cheaply, has in effect been shouting - at the mostsensitive period of privatisation - "the government is selling five pound notes for 50p,fill your boots."

Whereas the capitalist Tory Fallon and leftish Lib Dem Cable have been saying to retailinvestors, "I'd take care if I were you, this stock-market game can be a bit dangerous."

So what is quite striking is that 700,000 people with a bit of money to spare votedUmunna, by stampeding to apply for the shares - though whether they are natural Laboursupporters is another thing altogether.

Here is the intriguing political calculation.

If Royal Mail shares stay at these levels, the government may well in time be found guiltyof having privatised the company too cheaply.

But ministers have just delivered a tidy windfall of £187m to 690,000 people who've beenallocated £750 of shares each. That is a potential profit of almost £250 for each of them.

Adapted from www.bbc.co.uk/news

Q3: From the case study, identify stakeholders interested in the privatisation of RoyalMail.

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www.bbc.co.uk/news


Q4: Describe the conflict of 2 of these stakeholders.

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Q5: Do you think the Government issued the shares too cheaply? Use the Internet tofind the current share price of the Royal Mail.

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Summary questions

Go online

Q6: A stakeholder is someone who has a claim in an organisation.

a) Trueb) False

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Q7: A shareholder is not an internal stakeholder because they may not be employedby the organisation.

a) Trueb) False

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Q8: Internal stakeholders include those employed by an organisation.

a) Trueb) False

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Q9: External stakeholders include those who have lent money to an organisation.

a) Trueb) False

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Q10: Employees have a greater stake in an organisation than a shareholder who owns60% of the shares in the organisation.

a) Trueb) False

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End of topic 6 test

Go online

Q11: Stakeholders have no interest in the success or failure of an organisation.

a) Trueb) False

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Q12: A customer is an example of an internal stakeholder.

a) Trueb) False

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Q13: A pressure group is an example of an external stakeholder.

a) Trueb) False

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Q14: Conflict may arise between different groups of stakeholders when they do not holdthe same interest in the organisation.

a) Trueb) False

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Q15: A shareholder who owns 40% of the shares in an organisation will be able to exerta greater influence compared to a customer who is a member of the public.

a) Trueb) False

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Q16: Stakeholders may often hold views that are in conflict with the main objectives ofthe organisation.

a) Trueb) False

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SQA style questions

Go online

Q17: Describe the interests stakeholders have in an organisation. (4 Marks)

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Q18: Describe how external stakeholders can support business. (4 Marks)

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73

Topic 7

Decision making

Contents

7.1 Decisions types . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74

7.2 Evaluation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77

7.3 PEST analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78

7.4 SWOT analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81

7.5 Conclusions from SWOT analysis . . . . . . . . . . . . . . . . . . . . . . . . . . 84

7.6 Role of the manager . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87

7.7 Aids to decision making . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88



Learning objectives


• describe types of decisions an organisation can make;

• describe the use of SWOT analysis;

• describe the use of PEST analysis;

• identify the costs/drawbacks of using a SWOT analysis.

74 TOPIC 7. DECISION MAKING

7.1 Decisions types

Both managers and employees make decisions. The impact of these decisions willdirectly affect the success of the organisation.

In order to make good decisions there are processes that managers should go throughto make sure that they are making the best decision to achieve the organisational goals.Organisational goals are the targets that have been set by the senior management forthe organisation to achieve.

Some decisions are very easy to make and may have little or no impact on anythingelse. For example, every day you have to make a decision about what to eat or whatmusic to listen to. These are routine decisions that we normally don't have to spend along time thinking about; they are sometimes second nature.

Some decisions take a little longer to make. For example, if one of your long term aimswas to buy a new car next year, you then have to decide how you are going to pay forit. This will involve some budgeting decisions in order that you can save money. Manydecisions will now be influenced by your aim to purchase a new car.

Other decisions may be about what we want to do in the future e.g. the career path thatwe wish to pursue. These decisions may take some time to make, and we don't makethem very often.

It is the same in business. Managers are paid to make decisions which influence therunning of the business. Some of these decisions, just like those in our daily lives, areeasy and routine but others are more challenging.

Here are some examples of business decisions that managers may have to make.

• Whether or not to recruit more staff. More staff will cost the business money, but alack of staff could affect customer supplies, and so lose business.

• New product development. Managers have to decide whether the cost ofdevelopment will be too high, or should the company risk losing customers in thelong run by not developing a new product.

Managers must make decisions from a number of different options. Effective decisionsare those decisions which will achieve the desired goals or aims of the organisation.

These decisions can be categorised as strategic, tactical or operational.

Strategic decisions

• These are the 'medium-term' decisions about where the organisation wants to bein the future.

• They concern the overall purpose and direction of the organisation.

• They are often (but not always) made by the most senior managers and the ownersof the organisation.

• They don't go into great detail about how these decisions will be achieved.


TOPIC 7. DECISION MAKING 75

• Major policy statements represent strategic decisions.

• There are many variables to consider about the future of the organisation and, assuch, are non-routine decisions.

Examples:

• To increase market share by 20% within 10 years.

• To maximise sales in the next financial year.

• To have 100% customer satisfaction.

Strategic decisions define the aims or objectives of the organisation. All businesseshave objectives. The managers of the organisation will be judged on their effectivenessby how they set and how well they achieve these objectives.

Tactical decisions

• These are the generally shorter-term decisions about how the strategic decisionsare going to be achieved, but are likely to have long term consequences for theorganisation.

• They are often made by middle managers within the organisation, in finance,operations, human resources and marketing.

• They are based on achieving the goals or the aims of the organisation.

• They go into detail about what resources will be needed and how they will beused to achieve the aims. E.g. if the strategic decision is to grow then the tacticaldecision is to open new shops.

• They will be subject to change as Political, Economic, Socio-cultural, Competitiveand Technological factors change.

Examples:

• To increase the number of staff employed.

• To issue more shares on the stock market to fund a new factory.

• To merge with a competitor.

• To increase selling price.

• To reduce costs.



Operational decisions

• These are generally short-term 'day-to-day' routine decisions.

• They can be made by all levels of management, but mostly by lower levelmanagers and supervisors.

• They are made in response to relatively minor but sometimes important problemsthat arise each day or week, so they are routine and repetitive.

Examples:

• Arranging work rotas.

• Dealing with customer complaints To issue more shares on the stock market tofund a new factory.

• Ordering materials from suppliers.

• Dealing with daily enquiries.

Decision types

Go online

At this stage there is an online activity. If however you do not have access to the internetyou may try the question which follows.

Q1: Identify each of the following decisions as either:

• strategic

• tactical

• operational

1. Expand operations into 3 new countries next year

2. Decrease our number of employees

3. Increase market share by 15% in the next 3 years

4. Increase sales

5. Answer customer queries

6. Order stationery supplies.

7. Decide on the product range for the next 3 years

8. Takeover our biggest competitor

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7.2 Evaluation

An important part of decision making is finding out how well your decision makingworked. This is called evaluation.

• Were the objectives of the decision met?

• What happened that was not expected?

If things did not go to plan then some changes may be needed. All decisions may not besuccessful for a number of reasons. They could be due to internal factors such as pooremployee relations, or external factors such as changes in the economy. It is importantthat managers evaluate their decisions and make adjustments if necessary. Qualitydecision making depends on checking at all stages, so any necessary changes can bemade and the organisation can best meet its objectives.



7.3 PEST analysis

We discussed earlier how external influences can be grouped under the headings:

• Political

• Economic

• Socio-cultural

• Technological

• Environmental

• Competitive

Looking at these areas is also known as PEST analysis which organisations often carryout in conjunction with the SWOT analysis, as it allows for a better view of the businessenvironment.Using these headings the organisation can look more closely at the areas.

Political:

• Government type and stability.

• Freedom of press, rule of law, levels of bureaucracy and corruption.

• Regulation and de-regulation trends.

• Social and employment legislation.

• Tax policy, and trade and tariff controls.

• Environmental and consumer-protection legislation.

• Likely changes in the political environment.

Economic:

• Stage of business cycle.

• Current and projected economic growth, inflation and interest rates.

• Unemployment and labour supply.

• Labour costs.

• Levels of disposable income and income distribution.

• Impact of globalisation.

• Likely impact of technological or other change on the economy.

• Likely changes in the economic environment.



Socio-cultural:

• Population growth rate and age profile

• Population health, education, social mobility, and attitudes to these

• Population employment patterns, job market freedom and attitudes to work

• Press attitudes, public opinion, social attitudes and social taboos

• Lifestyle choices and attitudes to these

• Socio-Cultural changes

Technological environment:

• Impact of emerging technologies

• Impact of Internet, reduction in communications costs and increased remoteworking

• Research and development activity

• Impact of technology transfer

Environmental:

• Impact of weather on primary sector industries

• Impact of weather on product distribution

• Increasing consumer awareness of environmental issues

• Protest groups

Competitive environment:

• Impact of emerging and established competitors

• Use of promotional advertising of competitors

• Impact of destroyer pricing by competitors

• Advancement of technology and production techniques by competitors

Political

The major source of potential threats or opportunities politically is when thegovernment decides to introduce new laws, or alter taxation rates. For example,increases in the taxation on petrol are a threat to car sales, so manufacturers producecars with more fuel-efficient engines. The introduction of the minimum wage was seenas a major threat to many small businesses. However, this did not result in thelarge-scale unemployment that was predicted.



Economic

How the economy is performing has a major influence on the level of success of abusiness. Those organisations which are very dependant on borrowing will find theircosts rising and falling with the interest rate, and so therefore will their profits. Thismakes businesses less likely to borrow money for major projects when rates are high.

Interest rate also affect consumer spending. When rates are low consumers are muchmore likely to borrow and spend money. This in turn creates more sales for business.However, it is also true that when rates are high they will borrow and spend less,decreasing the level of sales.

The exchange rate affects the prices of imported and exported goods. When the poundis valued highly against other currencies the price of our imports becomes cheaper.However, our exports then become much dearer for other countries making them lessattractive and reducing sales levels.

Also, during a recession people have less money to spend on luxury goods, somanufacturers will produce cheaper alternatives until the economy comes out ofrecession.

Socio-cultural

Organisations have to take account of changes in the tastes, lifestyles and attitudes ofconsumers. Tastes in fashions change from season to season and from year to year,so clothing manufactures have to ensure that their latest products meet the consumertastes. More women are working than ever before, and this has had two effects.

Firstly, women themselves have a far greater influence on what is bought within thehousehold.

Secondly, the lifestyles of working women were changed meaning less time to spendon shopping and preparing food, looking after children, and daily household chores.This led to the growth in a wide variety of family convenience foods and fast foodoutlets, a growth in childcare facilities and nurseries, and a growth in small housecleaning companies and ironing services.

Consumers are far more aware of social issues such as third world poverty, healthissues, and environmental concerns. Organisations have adapted their products, theirimage, and their processes to take account of consumers concerns. For example, mostsupermarkets will carry a range of organic produce, a range of fair trade goods, labelthe contents of their products and offer recycling facilities.



Technological

The introduction of new technologies forces change on organisations. Mass productiontechniques allow capital intensive automated processes which are more efficient thanlabour intensive production. Producing 'Hi-tech' consumer goods such as computersuses very sophisticated robotics. As new developments in computer components areintroduced, this requires new automated machinery. Firms have to keep up to date tosurvive.

As these new computers are introduced to some businesses, other businesses willthen need to update their systems.

Environmental

Environmental factors are not usually controllable by organisations. The weather is anexample that may have an impact of business. Localised flooding or rail delays dueto snow can delay or halt the production process as businesses fail to receive stock.24 hour news cycles and Internet stories have made consumer much more aware ofenvironmental issues. Protest groups such as Green Peace attract much more coveragethan in the past.

Competitive

Probably the biggest concern for most businesses is (rightly or wrongly) the actions oftheir competitors. Businesses look at how their product competes in terms of what itcan do, what it looks like, what price it is or what offers are being made and what aftersales service is available.

7.4 SWOT analysis

SWOT analysis is a tool that management can use to help with decision making. It isused to evaluate where the organisation is now and where it should be in the future. Ithelps with:

1. planning;

2. deciding the way forward for the organisation;

3. looking at strategies which could be used.

SWOT analysis considers all internal and external factors. Internal factors are theresources within the organisation. External factors are those things within theorganisation's environment that are happening now or are likely to happen in the future.SWOT analysis depends on identifying internal strengths and weaknesses andexternal opportunities and threats.



Strengths internal areas where the organisation performs well.

Weaknesses internal areas where the organisations performs poorly.

Opportunities external areas in which the organisation could be involved inthe future.

Threats external areas which pose a threat to the organisation e.g.competitors, government, changes in the economy.

SWOT analysis is a tool that can be effectively used for any decision making, however,it is most often used when making strategic decisions and in marketing decisions.

Strengths

The following questions should be considered:

• What advantages do you have?

• What do you do well?

• What relevant resources do you have access to?

• What do other people see as your strengths?

This should be considered from the organisation's own point of view and from the pointof view of the people they deal with. It is important to be honest and realistic.

In looking at strengths, the organisation should think about them in relation to itscompetitors - for example, if all the competitors sell at low prices, then competitive lowpricing is not a strength in the market, it is a necessity.

Weaknesses

The following questions should be considered:

• What could you improve?

• What do you do badly?

• What should you avoid?

Again, this should be considered from an internal and external basis.

Opportunities

• Where are the good opportunities facing you?

• What are the interesting trends you are aware of?



Useful opportunities can come from such things as:

• Changes in technology and markets on both a broad and narrow scale

• Changes in government policy related to your field

• Changes in social patterns, population profiles, lifestyle changes, etc.

• Local Events

• A positive upturn in the economy

A useful approach to looking at opportunities is to look at the strengths and askwhether these open up any opportunities. Alternatively, look at weaknesses and askwhether the organisation could open up opportunities by eliminating them.

Threats

• What obstacles do you face?

• What is your competition doing?

• Are the required specifications for your job, products or services changing?

• Is changing technology threatening your position?

• Do you have bad debt or cash-flow weakness?

• Could any of your weaknesses seriously threaten your business?

Strengths and weaknesses are internal factors. Opportunities and threats are externalinfluences.

SWOT analysis should not be seen as a one off exercise. It should be part of thecontinuing process of evaluating how the organisation is doing now and what it shouldbe doing in the future.

SWOT analysis

Go online

Q2: A small consultancy business might draw up a SWOT analysis from thestatements given. Identify if they are strengths, weaknesses, opportunities or threats.

1. We are able to respond very quickly as we have no red tape, no need for highermanagement approval, etc.

2. Will developments in technology change this market beyond our ability to adapt?

3. Our company has no market presence or reputation.

4. We are able to give really good customer care, as the current small amount of workmeans we have plenty of time to devote to customers.

5. Our business sector is expanding, with many future opportunities for success.

6. Our lead consultant has strong reputation within the market.



7. Our local council wants to encourage local businesses with work where possible.

8. We have a small staff with a shallow skills base in many areas.

9. A small change in focus of a large competitor might wipe out any market positionwe achieve.

10. Our competitors may be slow to adopt new technologies.

11. Our cash flow will be unreliable in the early stages.

12. We have little overhead, so can offer good value to customers.

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7.5 Conclusions from SWOT analysis

SWOT analysis is most often laid out in a grid form as below.

Strengths Weaknesses

Opportunities Threats

In each box under the appropriate heading a list is made, and this provides a snapshotof where the organisation is at this time and what the possibilities are for the future.Having to actually go through the physical process of writing it down allows for agreater degree of thought to go into the process. Discussion will provide itemspreviously not considered.

It is common for a number of people to work on the SWOT analysis with others addingto it during the process. It is probable that different managers will have different viewson each of the elements.

It is also possible that some threats may also be opportunities, depending on how theorganisation reacts to them.

Strengths may become weaknesses very quickly and vice versa.

Drawing conclusions from a SWOT analysis

The purpose of SWOT analysis is to help make decisions. These involve mainly whatneeds to be done now and what is likely to happen in the future. The conclusions willbe the basis for the future of the organisation so it is important that the SWOT iscorrectly interpreted.

The strengths will identify areas where the business is doing well at this present time,and where possibilities for the future exist. For example, having new products in thedevelopment stages ready for launch will provide a very good platform for the businessto progress.



The weaknesses will highlight the areas where attention needs to be paid now in orderto ensure survival. For example, having a high level of borrowing will make thebusiness vulnerable to changes in the economy. As part of the strategic plan stepsshould be taken to reduce borrowing.

Opportunities have to be carefully measured to make sure that the business makes thebest of them. These opportunities could come about from any of the factors mentionedin the PEST analysis. To take advantage of these opportunities the business mustinclude them in their strategic planning.

As with opportunities, threats come from the political, economic, socio-cultural,technological, and competitive forces. It is necessary for the business to take action todeal with these threats to ensure survival.

The SWOT analysis should not be thought of as a one-off process. Evaluation of theconclusions drawn should take place to ensure that decisions were pertinent. Carryingout another SWOT analysis will allow the business to see if their conclusions werecorrect.

Strengths and weaknesses

These are the things that the organisation has control over and refer to the resources ofthe organisation or the factors of production. The skills of workforce and management,including its entrepreneurial skills will be included in the study. How well the capital isbeing used to provide efficient production and distribution will be considered, as will itsfinancial performance and the range of products. These can be compared to the marketleader to analyse how successful the organisation is in these areas.

The strengths and weaknesses will reflect the current position of the organisation.These strengths and weaknesses are often obvious. They may be rarely considered, itis only when management decide to spend time looking at them that they will be dealtwith appropriately. The organisation can build on its strengths, using them to their bestadvantage and work to reduce or get rid of its weaknesses.

When making strategic decisions the organisation will look at all aspects of theorganisation including:

• Human resources

The workforce, including all levels of management, represent an investment bythe organisation, and also a resource which will have strengths or weaknesses inthe quality of the management team, the level of entrepreneurial skills, and thenumbers and skills of the workers.



• Capital

A major strength of an organisation will be its financial performance. A profitablebusiness will have money available to carry out some changes it needs to maketo respond to changes in the market. It will also have the ability to attractinvestment from shareholders or lending from the bank for major changes.

Assets represent investment in the organisation by the owners. The higher thelevel of this investment, the more attractive it is to potential investors and banks.

• Marketing

◦ Product range

◦ Marketing mix

◦ Distribution network

◦ Production process

Opportunities and threats

The organisation cannot directly control these factors. However they will be able totake advantage of any opportunities that come along, and try to avoid or take steps toovercome threats.

The external influences will come from the business environment in which theorganisation operates. Evaluation of these opportunities and threats is critical to thesuccess or failure of the business.

There are many advantages to using a SWOT analysis. It is important for a businessto continually stop and reflect on what it has achieved and the possibilities that existin the future; a SWOT analysis allows a business to do that. Having the ability to turnweaknesses into strengths and threats into opportunities allows the business to growand improve. A SWOT analysis can be shared amongst all staff, giving the business asense of direction and purpose. Tactical decisions can be made as a result of the SWOTanalysis. These decisions can be assigned to specific employees or departments.Carrying out SWOT analysis at regular intervals can allow progress to be recorded.

There are also disadvantages to producing SWOT analysis. The biggest disadvantageis that nothing happens and the production of the SWOT becomes a paper exercise.Threats are external; by their very nature it may not be possible to turn a threat into anopportunity due to factors outwith the businesses control. Businesses who produceSWOT analysis may become complacent and miss future issues. Carrying out theanalysis can be time consuming, meaning the business becomes slow to respond tochanges.



7.6 Role of the manager

There are many management theorists who have their own views of the role ofmanagers.

Henry Mintzberg published his book The Nature of Managerial Work in 1973 with hisfindings of his study of what managers actually do as opposed to what they ought to do.He found that managers perform a wide variety of roles which can be broadly groupedinto 3 areas:

• Interpersonal - the relationships a manager had to have with others.

• Informational - the collecting and passing on of information.

• Decisional - the making of different kinds of decisions.

Henri Fayol, another management theorist, identified what he called the 5 functions ofmanagement:

PlanLooking ahead, seeing potential opportunities or problems anddevising solutions, setting targets, and setting aims andstrategies.

OrganisesArranging the resources of the organisation to be there whenpeople need them and acquiring additional resources ifrequired.

CommandsThis involves the issuing of instructions, motivating staff anddisplaying leadership.

Co-ordinatesMaking sure everyone is working towards the same goals, thatall the work being done fits together, and people are notduplicating work or working against each other.

ControlsLooks at what is being done, checks it against what wasexpected, and makes any necessary adjustments. This is themonitoring and evaluating role of management.

Modern managers are likely also to include:

Delegate

Gives subordinates the authority to carry out tasks. This helpswith motivation and reduces the manager's workload. Theoverall responsibility will still lie with the manager whodelegated the authority.

Motivate

Rather than simply telling workers to work harder, which is notlikely to be successful, you encourage them by helping to themenjoy their tasks through team-working, participation indecision making, and by giving them some powers.



7.7 Aids to decision making

There is a number of tried and trusted ways of helping managers come to generate newideas, to co-operate and finally to arrive at what is hoped to be the best decisions.

Brainstorming

The step-by-step process of the decision-making model may make it difficult to becreative in finding alternative solutions. Brainstorming is when a group meet to try tocome up with as many alternative solutions as possible. Each member of the groupcomes up with as many ideas as they can, no matter how extreme they might appear.All the ideas are written down as they are suggested.

Once every one has finished, the group work their way through each of the ideas inturn discussing the possibilities contained in each. This way they can often come upwith the most creative ideas because it encourages every one to participate in aninformal setting without the members of the group feeling that they are in some waybeing judged.

Benchmarking

This involves comparing what you do with what the very best organisations do. Youcould for example look at what the market leader does and then try to copy them. In thiscase the market leader is the 'benchmark' or ideal standard that you want to achieve.Benchmarking is used widely in operations to ensure quality. However, it is equallyvalid as a method to aid decision making in any of the organisation's functional areas.

Factors affecting quality decisions

There are many factors that will affect the quality of a decision:

• The ability and skill of the manager - if the manager has not had proper training ornot skilled enough to make decisions then a poor decision may be made.

• The appropriate use of decision making models - if the SWOT analysis has beenmisunderstood the decisions taken as a result will bot benefit the business.

• The quality of the information used to make the decision - if out-of-date or basedinformation is used the outcome will be flawed.

• The level of risk taken - the more high risk the better the information must be.

• The managers own interests - are the managers more interested in Managementby Objectives or business growth?

• The finance available to implement the decision.

• The time available to make the decision.




Summary questions

Go online

Q3: To maximize sales in the next 5 years is an example of a tactical decision.

a) Trueb) False

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q4: To merge with a competitor is an example of a tactical decision.

a) Trueb) False

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q5: Arranging work rotas is an example of an operational decision.

a) Trueb) False

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q6: Strengths and weaknesses are external to the business.

a) Trueb) False

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q7: The Role of the manager is to plan, organise and communicate.

a) Trueb) False

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q8: Brainstorming is a suitable aid to decision making.

a) Trueb) False

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q9: Conducting an appraisal is the managers job.

a) Trueb) False

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .




End of topic 7 test

Go online

Complete the sentences using one from the following types of decision making:

A(a) tactical A(a) strategic An(an) operational

Q10: �� decision is made by middle managers whereas ��

decision can be made by anyone in the organisation normally lower level managers.

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q11: �� decision is made daily or short term whereas ��

decision is a medium term decision.

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q12: �� decision carries a medium amount of financial risk but�� decision carries virtually no financial risk.

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q13: �� decision is made to help the smooth running on a daily basiswhereas �� decision is made to help implement the strategic objectives.

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q14: A business deciding to extend weekend opening hours is an example of�� decision making.

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q15: Use following meanings to match with internal constraints that make the decisionmaking difficult.

• Meaning implementing decisions may be difficult.• Meaning the organisation cannot afford to implement the decision.• Meaning that new technology needs to be purchased or decisions shelved.• Meaning a recruitment drive may be necessary.• Meaning a staff training programme may be necessary.• Meaning a simpler solution may need to be found.

Managers may be unable to cope withcomplex decisions.

Staff skills may make the decision difficultto implement.

Finance may be restricted.

The decision may be constrained by thelack of technology.

Staffing levels may be too low for thesuggested solution to be used.

Staff may be resistant to change.



. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q16: SWOT analysis is an example of structured decision making.

a) Trueb) False

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q17: PEST analysis involves looking at the external factors that influence theorganisation.

a) Trueb) False

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q18: SWOT analysis is not often used by organisations as it results in poor decisions.

a) Trueb) False

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q19: SWOT analysis stands for strengths, weaknesses, opportunities and threats.

a) Trueb) False

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q20: The use of PEST and SWOT analysis always guarantees that the right decisionwill be made.

a) Trueb) False

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q21: Which of the following internal areas may be analysed as strengths andweaknesses.

a) Productsb) Financec) Technologyd) HRe) Organisational structuref) Sales and marketingg) All of the above

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .



Q22: Which of the following external areas may be analysed as opportunities or threats.

a) Competitorsb) Suppliersc) Economic climated) Technological changese) Social or demographic changesf) All of the above

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q23: Opportunities and Threats are external to the organisation.

a) Trueb) False

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q24: Strengths and Weaknesses are external to the organisation.

a) Trueb) False

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

SQA style questions

Go online

Q25: Distinguish between a strategic decision and a tactical decision. (3 Marks)

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q26: Describe four main roles of a manager when conducting a staff appraisal. (4Marks)

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q27: Describe the three main types of decision that an organisation could make. (3Marks)

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q28: Explain the factors that could affect the quality of a decision made by a manager.(4 Marks)

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .


93

Topic 8

End of unit tests

94 TOPIC 8. END OF UNIT TESTS

End of unit 1 test

Go onlineFor each sentence categorise each type of organisation.

1. PLC

2. Social enterprise

3. Co-operative

4. Public corporation

5. Franchise

6. Local authority

Q1: An organisation which operates as a business but shares profits in the form ofdividends paid to customers.

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q2: A form of government which looks after local affairs and is funded through counciltax and fees from libraries and leisure centres etc.

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q3: A type of business organisation owned by two or more shareholders, with sharesthat can be sold on the stock exchange.

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q4: This is a private sector organisation which allows a business to sell the right toanother business to use their brand and sell their products.

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q5: An organisation which operates as a business but reinvests any profits for thebenefit of customers or the local community.

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q6: An organisation which is owned and run by the government on behalf of the public.This type of organisation has an appointed chairman and board of directors.

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Decide which of the following factors are internal or external to the business.

Q7: Raising prices as a result of rising transport costs.

a) Externalb) Internal

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .


TOPIC 8. END OF UNIT TESTS 95

Q8: Outsourcing to a recruitment firm to employ more suitable employees.


. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q9: Changing product range as a direct result of customer feedback.


. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q10: Shortening overtime to comply with the Governments new working timeregulations.


. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q11: Deciding to arrange a short term overdraft to pay suppliers of the new productrange.


. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q12: Complete the table using following descriptions.

a) Where an organisation structures itself around the needs of its customers.

b) Where core workers are at the centre and peripheral workers are at the edges.

c) Where there are few levels within an organisation.

d) Where the levels are organised by product / project.

e) Where an organisation is structured depending on the products or services that itprovides.

f) The number of layers of levels within an organisation.

g) Where an organisation is structured using different sections of the country orcountries around the world.

1. Entrepreneurialstructures2. Flat structures3. Hierarchy

4. Matrix structures5. Customer grouping

6. Place / territorygrouping

7. Product / servicegrouping

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .


96 TOPIC 8. END OF UNIT TESTS


customers loans donations economic policies

interest rates industrial action suppliers vote

Employees exert influence by standard of work, the more effort they put in the higher thequality of product. If they are unhappy, they may take �� which will negativelyaffect the business's reputation and output. �� decide whether or not to buyproduct. This can have a huge effect on the business's survival. The Governmentsets �� such as the level of VAT or corporation tax which affect business'sprofit margin. �� can change prices/discounts offered which directly affects abusiness profit margin and it can change credit periods with affects a business cash flow.Banks can vary �� which affects how much a business repays when taking outa loan. They can also decide whether or not to grant �� which means thebusiness may end up paying a higher rate to a different lender. Managers make tactical�� which will affect the future of the business and whether it makes it strategicaims or not. Shareholders are able to �� at AGMs on decisions affecting thefuture direction of the business.

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q14: Complete the table using following objectives.

a) To reward customers and local community

b) Provision of a high quality service

c) Profit maximisation

d) Corporate and social responsibility

e) To raise awareness of a cause

f) Efficient use of tax payer money

1. Private sector

2. Public sector

3. Third sector

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .


shrunk consultancy tertiary

exploitation usable transforming

growing quaternary service

The sectors of industry are known as primary, secondary, tertiary and �� .Each provides a different function within the chain of production. The primary sector isresponsible for the �� of raw materials from the earth or sea. This includesorganisations who are involved in coal mining, fishing or deep sea oil exploration.Although this sector of industry was traditionally strong in Scotland, in recent years


TOPIC 8. END OF UNIT TESTS 97

these industries have �� . The secondary sector is responsible for ��the raw materials into �� products through construction or manufacturing. Awide range of business organisations operate in this area. The �� sectoris now Scotland's most important sector of industry as it accounts for jobs in the�� industry. Tourism, e-commerce and call centres all significantly contributeto the Scottish economy. Finally, the quaternary sector of industry provides businesssupport for all organisations. �� services such as IT or management supportare a �� part of the Scottish economy.

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

SQA style questions

Go online

Q16: Describe two potential business objectives of a public limited company. (2 Marks)

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q17: Describe the role of the quaternary sector of industry. (3 Marks)

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q18: Compare organisations in the public and private sectors in terms of ownership,finance, control and objectives. (4 Marks)

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q19: Discuss the effects of franchising for the franchiser. (5 Marks)

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q20: Explain the external factors that affect multinationals. (5 Marks)

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q21: Describe the internal factors affecting businesses today. (4 Marks)

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q22: Discuss the use of customer groupings to allow a business to stay customerfocussed. (5 Marks)

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q23: Describe the main characteristics of a matrix structure. (4 Marks)

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q24: Explain the influence that different stakeholders can have on a business. (5Marks)

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q25: Describe the conflict that can exist between different groups of stakeholders. (4Marks)

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .


98 GLOSSARY

Glossary

A social enterprise

an organisation that applies commercial strategies to maximize improvements inhuman and environmental well-being, rather than maximising profits for externalshareholders.

Autocratic

a management style where a manager makes all of the decisions.

Capital

the money invested into the business by the owner.

Centralised organisations

where senior managers make key decisions.

Chain of command

the line of communication and authority from the top to the bottom of the hierarchy.

Consultation

where managers ask employees their opinions.

Corporate culture

the shared values, beliefs and ethos of the organisation.

Customer grouping

where an organisation organises itself around the different needs of customers.

Decentralised organisations

where workers have more authority to make decisions.

Delegation

when managers give employees some of their work increasing their responsibility.

Democratic

a management style where a manager delegates and encourages others to makedecisions.

Demographics

characteristics of the population such as age, employment and buying habits.

Durable goods

are goods that can be used again and again.

Entrepreneurial structures

have core workers centred around the key employees usually the founders.

Factors of production

these are land, labour, capital and enterprise.


GLOSSARY 99

Flat structures

have few levels in the hierarchy.

Goods

are things we can see and touch.

Growth

the process of becoming larger as an organisation, either organically throughincreased sales or through mergers/acquisitions.

Hierarchy

the number of layers of levels within an organisation.

Matrix structures

short term project based grouping where staff are used from different departments.

Multinationals

a company which operates in at least two countries.

Non-durable goods

are things we can normally only use once.

Objectives

the goals of an organisation.

Operational decisions

short term, day-to-day decisions made by all employees.

Primary sector

this is where raw materials are extracted from the land or sea.

Private Sector

business organisations which operate in order to make a profit for the privateindividuals who own them.

Profit maximisation

the process of ensuring that the maximum amount of revenue is achieved whilstincurring the lowest possible level of costs.

Public Sector

business organisations which are operated by the government on behalf of the taxpayer.

Quaternary sector

this can also be described as the support sector, and activity here is basedaround organisations which provide information, especially (but not exclusively)to businesses.

Sales maximisation

refers to plans and strategies employed by a business to increase its sales orrevenues to the highest attainable level.


100 GLOSSARY

Secondary sector

this is where the raw materials extracted in the primary sector are transformed intousable products through manufacturing and construction.

Services

are things that are done for us. Service industries produce non-tangible productsunlike manufacturing industries which produce tangible products.

Shareholder

an individual who buys a share in a business, in return for an annual divided.

Social responsibility

how a business is perceived by the public, as an employer, as an environmentallyresponsible organisation, and in terms of contribution to local community.

Span of control

the number of subordinates who directly report into a manager.

Ssatisficing

an organisation which aims for "satisficing" as an objective is literally looking tohold a satisfactory position - in other words to be "good enough" (but no more thanthat).

Staff turnover

the frequency in which staff leave the business and new staff have to be recruited.

Stakeholders

in business are those people who have a key interest in the business.

Strategic decisions

long term decision made by senior managers and owners that affects the overalldirection of the company.

Strategic objectives

are those objectives which are identified and set by the top layer of management.

Subordinate

a worker/employee.

Survival

within the context of a business objective, survival is to continue to trade (andbreak even).

Tactical decisions

medium term decisions made by middle managers to support strategic decisions.

Tactical objectives

are made in the light of strategic objectives and are more focused in their nature.


GLOSSARY 101

Tall structures

have many levels in the hierarchy.

Tertiary sector

also known as the service industry, this is where the goods produced bybusinesses in the primary and secondary sectors are provided to the consumer,and where services and skills are sold.

Third Sector

organisations which are non-profit, and exist to benefit society.


102 ANSWERS: TOPIC 1

Answers to questions and activities

1 The role of business in society

Category of goods or services (page 3)

Q1: Non-durable goods

Q2: Durable goods

Q3: Services


Q5: Services


Q7: Services

Q8: Durable goods

Q9: Durable goods

Supplying the resources (page 4)

Q10: Capital

Q11: Enterprise

Q12: Land

Q13: Labour

Sectors of industry - descriptions (page 5)

Q14: Tertiary

Q15: Primary

Q16: Secondary

Q17: Quaternary

Sectors of industry - professions (page 6)

Q18: Secondary

Q19: Quaternary

Q20: Tertiary

Q21: Primary


ANSWERS: TOPIC 1 103

Sectors of the economy - descriptions (page 7)

Q22: Public Sector

Q23: Third Sector

Q24: Private Sector

Summary questions (page 7)

Q25: b) False

Q26: a) True

Q27: a) True

Q28: b) False

Q29: a) True

Q30: a) True

End of topic 1 test (page 8)

Q31: The term "business" can be used to refer to any organisation which is set upto achieve a set of objectives. Therefore a "business" can exist in any of the threesectors of economy - the private sector, the public sector or the third sector. Businessis vital to the economy of a country. Businesses use the four factors of production inorder to provide these goods and services for consumers. The factors of productionare land, labour, capital and enterprise. As well as operating in a sector of theeconomy, business organisations are classified as operating in different sectors ofindustry. These are known as the primary, secondary, tertiary and quaternary sectors.From removing natural resources from the ground, to manufacturing them into useableproducts, then selling them to customers, and offering advice to organisations at allstages of this process, every business plays a role in this chain of production.

Q32: Secondary sector

Q33: Public sector

Q34: Primary sector

Q35: Third sector

Q36: Quaternary sector

Q37: Tertiary

Q38: Private sector



SQA style questions (page 10)

Q39:

• Consumers' wants may be unrealistic and consumers are fickle.

• Consumers do not know what they want in the future so businesses must anticipatefuture needs.

Q40: Goods are things we can see and touch while services are things that are donefor us.

Q41:

• Factors of production are the resources that business needs to produce goods andservices.

• They are:

◦ land;◦ labour;◦ capital;◦ enterprise.

Q42:

• Primary sector has businesses that are involved in extracting natural resources.

• Secondary sector includes businesses that are involved in manufacturing andconstruction.

• Tertiary sector is the service sector where businesses provide services rather thangoods.

• Quaternary sector is where support and information is provided, for example, ITconsultancy.

Q43:

• The private sector is where businesses provide goods or services to consumerswith the aim of making a profit for the business owners.

• The public sector refers to government run organisations such as the NHS,education and the armed forces.

• The third sector contains charities and other voluntary organisations and socialenterprise.



2 Types of organisations

Limited companies (page 14)

Q1: incorporation

Q2: b) the company's name, location and what it will do.

Q3: b) two directors and one company secretary.

Q4: c) Public limited companies can raise money by selling shares on the stockmarket- private limited companies cannot.

Franchise - terms (page 18)

Q5: Franchiser

Q6: Franchisee

Q7: Royalty

Q8: Investment

Multinationals (page 20)

Q9: a) two thirds of global trade and 80% of investment.

Q10: domestic

Q11: c) Multinationals have a large role in formulating international policy.

The Dean Tavern (page 23)

Q12: Due to the nature of a small mining village community, the vast majority ofresidents would have contributed towards the profits of the Dean, and also there wouldbe few customers from outside the local community. This means it made sense for theprofits to be distributed locally. Most families would be relatively poor, therefore anymoney received back from the pub would be gratefully received.

Q13: A greater number of customers will come from outside the local community, anda much smaller proportion of the local community will use the pub. Also, the villagehas grown in size with a lot of new housing, therefore profits will not stretch as far. Itmakes more sense therefore to share these profits with community groups that benefiteveryone.


Q14: b) PLC

Q15: a) True



Q16: a) Franchisee

Q17: c) Franchise

Q18: b) To use any money raised to further the venture

Q19: b) False

Q20: a) raise awareness of and funds for a chosen cause.

Q21: a) True


Q22: 1d; 2a; 3e; 4b; 5g; 6f; 7h; 8c

Q23:

• A public sector organisation is owned by the government whereas a third sectororganisation is owned by (but does not benefit) private individuals.

• A public sector organisation like the NHS is controlled by government ministersor their appointed managers whereas a charity operating in the third sector iscontrolled by a board of trustees.

• A public sector organisation is mainly funded through taxes whereas a third sectororganisation is funded through donations or fundraising activities.


Q24:

1. PLC: Company with shares traded on the stock exchange which can be bought byany member of the public. Limited liability.

2. Multinational: Very large businesses with a presence in a number of differentcountries.

3. Franchise: A business agreement where the franchiser agrees to allow thefranchisee the right to use the brand name and product in return for a royalty fee.

Q25:

• International trade opens up new business opportunities and allows a globalpresence to be created for the business and its products/services.

• This allows access to a larger market and further development of products.

Q26: Any two from:

• It allows growth for their brand without making significant financial investment inproperty and without the need to recruit and train a large workforce of their own.

• It reduces competition: if a franchisee buys into their brand, that means they arenot launching their own product in competition.

• It reduces risk: the risk of failure is shared with the franchisee.



• They retain control over the image and product they have created.

• There is guaranteed income from royalties paid by the franchisees.

Q27: To raise awareness of and funds for a specific cause.

Q28:

• Because shares can be bought publicly on the stock exchange, meaning that theoriginal owners have no say in who owns shares.

• This means that an outside individual or company could buy a majorityshareholding.

Q29:

• A social enterprise exists to provide goods or services for the benefit of a localcommunity.

• This includes sharing/reinvesting profits for the benefit of that community.

Q30:

• A private sector organisation is owned by private individuals (shareholders)whereas a public sector organisation is owned by the government/taxpayer.

• A private sector organisation is financed through sales of shares, ownerinvestment, bank loan, whereas a public sector organisation is financed throughtaxes.



3 Objectives

Identify the business objectives (page 31)

Q1: Managerial

Q2: Sales maximisation

Q3: Satisficing

Q4: Social responsibility

Q5: Growth

Q6: Survival


Q8: Provision of a service

Q9: Growth

Q10: Profit maximisation

Business objectives (page 33)

Q11: Any eight from:

• Innovation

• Market position

• Management performance and development

• Productivity

• Physical and financial resources

• Public responsibility

• Employee performance and relations

• Environmental concerns

• Maximisation of use of available resources

• Public profile

Volkswagen cars - a social responsibility (page 35)

Q12: a) Manufacturing, usage and recovery

Q13: usage

Q14: c) Lowest fuel consumption

Q15: Long vehicle lifespan and increased service intervals.




Q16: a) True

Q17: a) True

Q18: b) False

Q19: a) True

Q20: b) False



Q22: Growth

Q23: Objective

Q24: Managerial

Q25: Profit maximisation

Q26: Social responsibility


Q27:

• Objectives help to identify the goals of the business, how these goals are to beachieved and the end result.

• Objectives differ in each organisation and they also depend on the type oforganisation.

Q28:

• Strategic objectives outline the main goals and objectives of the organisation andthey are set by the senior management in the organisation.

• Tactical objectives are set to reflect the strategic objectives. They are morefocussed and demonstrate how the strategic objectives can be achieved throughthe performance of each department within the organisation.

Q29:

• Identify any four business objectives from profit maximisation, survival, salesmaximisation, growth, social responsibility, managerial objectives, provision of aservice.

• A suitable explanation should be provided for each objective identified.

Q30:



• Social responsibility is the public perception of the business and how the businesstreats the environment.

• Poor perception can mean that a business may lose business from its customersand it may be more difficult to attract investment from external sources.



4 External and internal environments

External environment - events (page 41)

Q1: Political

Q2: Environmental

Q3: Social

Q4: Competitive

Q5: Economic

Q6: Technological

Diageo offers to sell Whyte & Mackay Scotch whisky arm (page 42)

Q7: b) Concerned that the competition commission may force them to

Q8: Bell's

Q9: a) Political

Q10: c) Economic

Q11: a) Political


Q12: a) True

Q13: b) False

Q14: a) True

Q15: a) True

Q16: b) False

Q17: b) False

Q18: b) False

Q19: a) True

Q20: a) True

Q21: b) False




Q22: a) Consumers are worried they will have less money to spend.

Q23: c) Businesses put contingency plans in place to stockpile stock in case there areproblems with deliveries.

Q24: b) Business' expenses will fall.

Q25: a) A new competitive pricing strategy is adopted.

Q26: b) Consumers are willing to spend more in a product if they feel it will positivelybenefit others.

Q27: c) Business must be willing to spend more on new equipment.

Q28: c) Environmental

Q29: a) Competitive

Q30: c) Political

Q31: a) Technological

Q32: b) Economic

Q33: b) Social

Q34: b) a competitor changing their prices.

Q35: a) the shared values and beliefs of employees and managers.

Q36: a) a breakthrough in new technology.

Q37: b) a manager trying to change the corporate culture.

Q38: b) a competitor changing their prices.

Q39: b) the competency of its staff.


Q40: Any four from:

• Legislation - any appropriate law with an appropriate effect, i.e., new laws on saleof alcohol have to be complied with or face a fine from the government.

• Taxation rates may change which will affect the profitability of an organisation.• Level of NHS funding may affect the number of or the prices charged by private

hospitals.• Government initiatives in education have meant that private public partnerships

have allowed companies to bid to build new schools.• Credit - any relevant government policy with an appropriate explanation of the affect

on the organisation, i.e., giving loans to banks to help with credit crunch in 2009.



Q41: Any four from:

• Economic factors such as a recession can cause customers to have lessdisposable income.

• Interest rates can rise which means borrowing money is more expensive.

• Inflation rate can change forcing up the price of raw materials.

• Social factors such as changes in trends and fashion.

• Changes in patterns of employment can affect productivity.

• The introduction of new technology which is continually changing.

• Competitive factors such as the prices charged by a similar organisation.

• Environmental factors such as the weather/flooding.

Q42: Any two from:

• Finance may be restricted which might mean the organisation cannot afford toimplement the best decision.

• Staff may not agree with the decision and resist the change making it less effective.

• The organisation may have policies in place that are restrictive and the decisionsmay need to be altered to suit policies.

• The decision may be constrained by the lack of technology and mean that newtechnology needs to be purchased or decisions shelved.

• Managers may not have the appropriate skills or initiative to make the bestdecisions and may be unable to cope with complex decisions or situations resultingin a poor decision being made.

Q43: Any three from:

• The organisation needs to take into account the ideas/principles of the owners.

• They need to design appropriate logos, motifs and uniforms.

• They need to consider a corporate design for shops and outlets.

• They have to make staff aware of the corporate culture and image.

◦ This can be expensive.◦ May involve staff training costs.

• Will have large cost implications for changing logos, uniforms etc throughout anorganisation.

• May require the organisation to hold launch events or press conferences.

• Clearly defined policies and procedures.

• Empowerment/employee views.



5 Business structures

Department activities (page 54)

Q1:

This department is always on the lookoutfor new ideas.

An example is the improvement to thecamera on a smart phone.

This department is interested in settingbudgets to minimise overspends.

Finding the best borrowing rate willensure a bank load can be repaid.

This department is interested in theproduction process.

Increasing the amount of automation willdecrease the manufacturing errors andreduce loss.

This department is interested in theidentification and fulfilment of customerneeds.

Effective promotion, such as paying acelebrity to endorse your product, mayincrease sales.

This department is interested in ensuringa smooth flow of information across theorganisation.

Technology such as video conferencingand email ensures business deals can beconducted globally.

This department is interested in dealingwith customer complaints to ensurerepeat customers are not put off.

A consistent approach to customersatisfaction is important.

Types of grouping (page 56)

Q2:

It is common for a business to group its activities according to product. This is usefulfor a company such as Mackie's who produce ice-cream and crisps as it allows eachstaff member to have specific knowledge.

Car manufacturers may group their activities according to place. This would be helpfulas the European market is different to the market in the UK, or America.

Customer grouping is important to a business like the Royal Bank of Scotland. Theydeal with young savers and provide support for school learners. They also work closelywith businesses and people looking to invest in their retirement.

Q3:

• Staff in product/service groupings are organised around a specific product orservice and will have different areas of expertise whereas staff with similarexpertise work together in functional grouping.

• A business grouped by functional departments will be responsible for the wholeorganisation whereas in a product/service grouping each functional area will beresponsible for a specific product or service only.

• In product/service grouping it is easier to identify areas that are performing wellwhereas in functional grouping results tend to be for the organisation as a whole.

• In product/service grouping each department is more responsive to changehowever in functional grouping the organisation can become very large andunresponsive.



• In functional grouping the organisation will have a clear structure but inproduct/service grouping the structure may be less clear and line relationships lessclear.

Q4: Advantages

• Service and product is tailor-made to customer needs.• Promotions can be directed towards specific customer groups.• Customer loyalty is built up due to personal service.• Quick response to change.

Disadvantages

• Is an expensive system, due to high staff costs.• New staff are required if new customer group is formed.• Duplication of resources.• Competition between departments (either advantage or disadvantage depending

on explanation).

Management structures - descriptions (page 60)

Q5: Flat structure

Q6: Decentralised structure

Q7: Entrepreneurial structure

Q8: Tall structure

Q9: Matrix structure

Management structures - definition and justification (page 60)

Q10: This allows new initiative to be developed using the best people from across thebusinesses and gives staff new skills by working with others.

Q11: It is clear to see who is in charge of who, who should make decisions and howinformation should pass through the organisation.

Q12: The business benefits from having a small number of people make decisions as itmeans issues can be resolved quickly.

Q13: This structure work well in smaller organisations and are more responsive tochange.


Q14: b) False

Q15: a) True



Q16: a) True

Q17: b) False

Q18: b) False

Q19: a) True

Q20: b) False

Q21: a) True


Q22: Centralised structures have a strong head office or several top managers whokeep the major responsibilities and power in the company.

Q23: The span of control is the number of employees or ranks of employees for whicha manager is responsible. If there are a great number of employees, the span isconsidered to be wide and if there are only a few, then the span is narrow.

Q24: Hierarchical organisations include both tall and flat structures but are always inthe shape of a pyramid or triangle, with only a few people at the top and the number ofpeople in each level increasing on the way down. The span of control goes from thoseabove to those below.

Q25: A superior is someone who has a higher position than someone else in acompany or organisation.

Q26: The chain of command is the way that people with authority in an organisationare ranked, from the person with the most authority to the next one below, and so on.

Q27: A tall structure is also referred to as a line and staff structure. There are a numberof levels of management and a long chain of command running from the top to thebottom.

Q28: A flat structure is similar to a tall structure in that it is also a line structure.However, there are relatively few levels of management making the chain of commandmuch smaller and widening the span of control.

Q29: A matrix structure will have people from various sections of the businessworking together in teams which are created for specific projects and time periods andsupervised by a project manager.

Q30: Decentralised structures spread the responsibility across various sections of thebusiness.

Q31: An organisation is a company or other group of people that works together for aparticular purpose.




Q32: Any four from:

• One senior member of staff makes all the important decisions.• Decisions are therefore made quickly.• Staff are very rarely consulted on decision making.• Stifles staff initiative as they are not consulted.• Is mainly used in smaller organisations.• Employees know who they are accountable to.• May place over-reliance on key members of staff.

Q33: Any two from:

• In a decentralised structure decision making is delegated to departments whereasin a centralised structure it is made by head office.

• In a decentralised structure staff are more motivated due to empowerment whereasin a centralised structure staff can be de-motivated due to not being consulted.

• In a decentralised structure senior directors have less responsibility whereas in acentralised structure senior directors carry all the burden of decision making.

• Decentralised is often seen as being used in a flatter structure where as centralisedtends to exist in hierarchical structure.

• It is harder to promote a corporate image in a decentralised structure than in acentralised structure.

• In a decentralised structure decisions can be made which only benefit onedepartment but in a centralised structure decisions will be made to suit the wholeorganisation.


• Staff with similar expertise work together in functional grouping but in productgrouping staff are organised around a specific product or service and will havedifferent areas of expertise.

• The organisation will have functional departments which service the wholeorganisation whereas in product grouping each functional area will be responsiblefor a specific product or service only.

• In both methods departments can be more concerned with their own results thanthe organisation as a whole.

• Departments may compete against each other in both forms of grouping.• In product grouping it is easier to identify areas that are performing well whereas in

functional grouping results tend to be for the organisation as a whole.• In product grouping each department is more responsive to change but in functional

grouping the organisation can become very large and unresponsive.• In functional grouping staff will know exactly who to turn to but in product grouping

this may not be the case.• In functional grouping the organisation will have a clear structure but in product

grouping the structure may be less clear and line relationships less clear.




• Marketing can be tailored to specific customers needs.

• Customer loyalty can be easily built up.

• There is a high level of customer care given.

• The organisation can respond to the needs of customers quickly.

• Can be expensive due to high staffing costs to meet customer needs.

• New staff are needed if there is a new customer grouping or product created.

• Competition between customer groupings/departments can exist.



6 Stakeholders

Internal and external stakeholders (page 66)

Q1:

1. external

2. internal

3. external

4. internal

5. internal

6. internal

7. internal

8. external

9. external

10. internal

11. external

12. external

13. external

14. external

15. external

16. external

17. external

Interests of stakeholders (page 67)

Q2: A 15, 3 and 5: B 14 and 8: C 12, 1 and 19: D 21 and 18: E 13 and 4: F 11, 6 and9: G 20, 17 and 7: H 16, 2 and 10

Was Royal Mail sold too cheaply? (page 68)

Q3:

• Shareholders• Government• Royal Mail workers• Investment companies• Trade Unions• Taxpayers

Q4:

• The Government wanted to sell at a lower price, whereas taxpayers may feel thata higher price could have been raised.



• Shareholders wish to receive as many dividends as possible whereas workers werethinking of striking.

• Customers may be concerned that privatisation will result in increased prices,whereas Shareholders will with to maximize profits.

Q5: For example: The Government issued shares at 330p. Today each share is worth497.7p.Based on the information in the example, today's share price is higher than thathighlighted in the case study. This increase indicates that the Government sold theshares too cheaply as the Government did not benefit from this increase.


Q6: a) True

Q7: b) False

Q8: a) True

Q9: a) True

Q10: b) False


Q11: b) False

Q12: b) False

Q13: a) True

Q14: a) True

Q15: a) True

Q16: a) True


Q17: Any four from:

• Customers are interested in the best price for quality products.

• Employees are interested in job security.

• Managers are interested in future promotion prospects.

• Suppliers are interested in receiving payment for supplies.

• Banks are interested in the stability of the organisation in order to repay loans.

• Local community are interested in the social responsibility of the organisation.

• Local community are interested in jobs being created.



• Owners/shareholders are interested in the profits that the organisation makes.

• Government are interested in the firm complying with laws.

• Government are interested in organisations paying taxes.

Q18: Any four from:

• Suppliers can vary the period of credit and/or the level of discount offered to firms.

• Customers support firms by buying their products and increasing advertisingthrough word of mouth.

• Banks have the power to grant loans to firms and to set the rate of interest charged.

• The government can reduce the tax burden faced by business.

• The community as a whole can rally round a local business to show support.

• The local community can influence how businesses in their area behave throughthe local newspapers (e.g. by writing letters for or against things the business hasdone); or through protesting against a business's decisions such as the closure ofa factory.

• Local government can influence business organisations through planning and otherlegislation for which local government are responsible.



7 Decision making

Decision types (page 76)

Q1:

1. strategic

2. tactical

3. strategic

4. tactical

5. operational

6. operational

7. strategic

8. tactical

SWOT analysis (page 83)

Q2:

1. strength

2. threat

3. weakness

4. strength

5. opportunity

6. strength

7. opportunity

8. weakness

9. threat

10. opportunity

11. weakness

12. strength


Q3: b) False

Q4: a) True

Q5: a) True

Q6: b) False

Q7: b) False

Q8: a) True

Q9: b) False




Q10: A tactical decision is made by middle managers whereas an operationaldecision can be made by anyone in the organisation normally lower level managers.

Q11: An operational decision is made daily or short term whereas a tactical decisionis a medium term decision.

Q12: A tactical decision carries a medium amount of financial risk but an operationaldecision carries virtually no financial risk.

Q13: An operational decision is made to help the smooth running on a daily basiswhereas a tactical decision is made to help implement the strategic objectives.

Q14: A business deciding to extend weekend opening hours is an example of a tacticaldecision making.

Q15:

Managers may be unable to cope withcomplex decisions.

Meaning a simpler solution may need tobe found

Staff skills may make the decision difficultto implement.

Meaning a staff training programme maybe necessary

Finance may be restricted.Meaning the organisation cannot afford toimplement the decision

The decision may be constrained by thelack of technology.

Meaning that new technology needs to bepurchased or decisions shelved

Staffing levels may be too low for thesuggested solution to be used.

Meaning a recruitment drive may benecessary

Staff may be resistant to change. Meaning implementing decisions may bedifficult

Q16: a) True

Q17: a) True

Q18: b) False

Q19: a) True

Q20: b) False

Q21: g) All of the above

Q22: f) All of the above

Q23: a) True

Q24: b) False





• A strategic decision is long term whereas a tactical decision is medium term.

• A strategic decision is made by directors/senior managers but a tactical decision ismade by heads of department or middle managers.

• Strategic decisions carry high levels of financial risk whereas tactical decisionscarry less of a financial risk.

• Strategic decisions shape the main objectives of an organisation whereas thetactical decisions help to put the strategic decisions into place.

Q26:

• Plan out the timing and purpose of the appraisal interview in advance to ensure theemployee is fully aware of the purpose.

• Organise a suitable venue and time.

• Control the meeting to allow the employee to have an input into the appraisal.

• Command - may have to tell the employee that the meeting is taking place if theyare unhappy with the appraisal and against it.

• Co-ordinate the appraisal meetings before and after to ensure appropriatefeedback is given.

• Delegate some meetings - peer to peer appraisal or junior managers forexperience.

• Motivate the staff with suggestions during the appraisal and give praise for anyachievements.

Q27:

1. Operational• Day-to-day decisions.• All staff including lower level managers.• Low financial risk decision.

2. Tactical• Medium term.• Made by middle managers.• Taken to achieve strategic decisions.

3. Strategic• Long term decisions.• Shaping the objectives of an organisation.• Taken only by very senior managers.• Carry a large financial risk.

Q28: Any four from:

• The ability and skill of the manager - if the manager has not had proper training ornot skilled enough to make decisions then a poor decision may be made.



• The appropriate use of decision making models.

• The quality of the information used to make the decision.

• The level of risk taken.

• The managers own interests.

• The finance available to implement the decision.

• The time available to make the decision.



8 End of unit tests

End of unit 1 test (page 94)

Q1: Co-operatives

Q2: Local authority

Q3: PLC

Q4: Franchise

Q5: Social enterprise

Q6: Public corporation

Q7: a) External

Q8: b) Internal

Q9: a) External

Q10: a) External

Q11: b) Internal

Q12: 1b; 2c; 3f; 4d; 5a; 6g; 7e

Q13: Employees exert influence by standard of work, the more effort they put in thehigher the quality of product. If they are unhappy, they may take industrial action whichwill negatively affect the business's reputation and output. Customersdecide whetheror not to buy product. This can have a huge effect on the business's survival. TheGovernment sets economic policies such as the level of VAT or corporation tax whichaffect business's profit margin. Suppliers can change prices/discounts offered whichdirectly affects a business profit margin and it can change credit periods with affects abusiness cash flow. Banks can vary interest rates which affects how much a businessrepays when taking out a loan. They can also decide whether or not to grant loans whichmeans the business may end up paying a higher rate to a different lender. Managersmake tactical decisions which will affect the future of the business and whether it makesit strategic aims or not. Shareholders are able to vote at AGMs on decisions affectingthe future direction of the business.

Q14: 1c; 1d; 2b; 2f; 3a; 3e

Q15: The sectors of industry are known as primary, secondary, tertiary and quaternary.Each provides a different function within the chain of production. The primary sector isresponsible for the exploitation of raw materials from the earth or sea. This includesorganisations who are involved in coal mining, fishing or deep sea oil exploration.Although this sector of industry was traditionally strong in Scotland, in recent yearsthese industries have shrunk. The secondary sector is responsible for transformingthe raw materials intousable products through construction or manufacturing. A widerange of business organisations operate in this area. The tertiary sector is nowScotland's most important sector of industry as it accounts for jobs in the serviceindustry. Tourism, e-commerce and call centres all significantly contribute to the Scottish



economy. Finally, the quaternary sector of industry provides business support for allorganisations. Consultancy services such as IT or management support are a growingpart of the Scottish economy.


Q16: Any two from:

• Profit miximisation - where the PLC aims to raise as much profit as possible byselling as many units for as high a selling price as possible, whilst minimizing costs.

• Social responsibility - ensuring that the organisation operates in a way whichallows a positive image for the organisation to be portrayed, for example, throughdeveloping strong links with a charity or through demonstrating good environmentalcredentials.

• Growth - to grow the organisation either organically or through acquisition, tobecome a larger and more successful company.

Q17:

• This can also be described as the support sector, and activity here is basedaround organisations which provide information, especially (but not exclusively) tobusinesses.

• IT consultancy, research and development, and consultancy services (for examplemanagement consultants such as Accenture) operate in this sector of activity.

• Businesses in other sectors of industry need this sector to provide the expertiseneeded to develop their products and services for customers.

Q18:

• Public sector organisations are owned by the government on behalf of thecountry whereas private sector organisations are owned by private individuals(shareholders).

• Public sector organisations are financed through taxes whereas private sectororganisations are funded through a variety of ways, for example, investmentby private individuals, share issues, bank loans, commercial mortgages anddebentures.

• Public sector organisations are controlled by government ministers or civil servants,whereas private sector organisations are controlled by the sole proprietor, partnersor board of directors.

• The objectives of a public sector organisation will include provision of a service,efficient use of tax payers' money, and social responsibility, whereas a privatesector organisation's objectives will include profit miximisation, growth or socialresponsibility.

Q19: Any five from:

• It allows growth for their brand without making significant financial investment inproperty and without the need to recruit and train a large workforce of their own.

• It reduces competition - if a franchisee buys into their brand, that means they arenot launching their own product in competition.



• It reduces risk - the risk of failure is shared with the franchisee.

• They retain control over the image and product they have created.

• There is guaranteed income from royalties paid by the franchisees.

• If one franchisee fails to maintain appropriate standards this can have a negativeimpact on the whole franchise.

• Should a franchisee fail to perform to the required level, they have a very long termcontract which may be difficult to end early.

Q20: Any five from:

• Different governments have different laws - this is an issue for multinationals asthey have to abide by the legislation in both their country of origin and the countrywhere they manufacture.

• Interest rates differ between countries - this makes budgeting difficult as repaymentrates will differ between countries.

• Exchange rates are constantly changing - multinationals transfer goods betweencountries and may lose profit when one currency is weak against another.

• Different countries have differing attitudes to working conditions - this meansmanagers working in more than one country needs to be aware of local customsfor fear of offending the workforce.

• Multinationals operate in a global economy where competition is fierce - the globalmarket place greatly increases the number of competitors operating in a singlemarket.

• Consumers' taste differs from one country to another which means MNCs have togroup product teams by geography to ensure all consumers are satisfied.

• Language differences need to be taken into consideration as consumers have beenoffended in the past when the literal translation of a product in one country meanssomething completely different in another country.

• The cost of installing new technology/access to new technology as there will bedifferent cost structures from country to county - MNCs need to be aware of thiswhen rolling out new technology across their brand.

Q21: Any four from:

• Ability of staff - if staff are knowledgeable and well trained the business is morelikely to be a success.

• Ability of management - a strong leadership team will drive the organisation to meetits objectives.

• Availability of finance - a well resourced business is more likely to meet customerneeds through product availability and the production of quality outputs.

• Availability of ICT - the use of ICT can positively influence the quality and quantityof output.

• Availability of information - the value and quantity of information available will affecta business's ability to make effective decisions.

• Changes in costs - the profitability of a business will be affected if costs are notclosely monitored and controlled.



Q22: Any five from:

• Allows the business to be responsive to customer needs as the employeesunderstand their customer.

• A high degree of personal service can be offered to individual customers as arelationship can be built.

• Business can build up customer loyalty as the customers feel valued.• Will result in higher staff costs for the business as highly trained staff are required.• Duplication of some functional areas which can lead to higher costs than is

necessary.• Different prices and levels of service offered makes forward planning more difficult.

Q23: Any four from:

• Normally set up to carry out a specific project.• Will consist of different specialists from functional areas.• Each team will have a project leader.• Can be motivational to the staff concerned as they get the chance to do something

different.• Gives staff increased experience in different situations.• Is a relatively costly structure if many different teams are required.• Can be difficult to co-ordinate staff from different areas.• Each staff can have two managers, the project manager and their own functional

manager, which can cause confusion and conflict.

Q24: Any five from:

• Employees: Exert influence by standard of work, the more effort they put in thehigher the quality of product. If unhappy, may take industrial action which willnegatively affect the business's reputation and output.

• Customers: Decide whether or not to buy product. This can have a huge affect onthe business's survival. Change of tastes - if the business fails to respond to thecustomers' changing habits it will not be as successful.

• Government: Sets economic policies such as the level of VAT or corporation taxwhich affect businesses profit margin. Sets legislation e.g. minimum wage whichaffects a businesses cash flow through the increased payment of wages.

• Suppliers: Can change prices/discounts offered which directly affects a business'profit margin. Can change credit periods which affects a business cash flow. Mayrefuse to supply if they object to the business' ethical policies which means thebusiness may end up paying more for their supplies.

• Banks: Can vary interest rates which affects how much a business repays whentaking out a loan. Decide whether or not to grant loans which means the businessmay end up paying a higher rate to a different lender.

• Managers: Make tactical decisions which will affect the future of the business andwhether it makes its strategic aims or not.

• Shareholders: Able to vote at AGMs on decisions affecting the future direction ofthe business.



Q25: Any four from:

• Managers will wish to maximise profits whereas consumers will wish prices to staylow.

• Local residents may wish services to be provided which the council taxpayers donot wish to pay for.

• Shareholders may want a larger return on their investment whereas managers maywish higher salaries.

• Employees will want to be sure of their job security whereas directors may wish tostart a programme of enlargement.

• Banks may wish to increase the amount of monthly payments whereas managersmay be concerned about cash flow.

• Suppliers may increase prices which will affect the price customers pay for goods.


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