Enterprise What do businesses do? - Identify needs of consumers and purchase factors of production to produce goods/services to satisfy these needs Goods: physical and tangible goods sold to the general public e.g. food and drinks Services: non-tangible products sold to the general public e.g. hotels, insurance Factors of Production: Land: all natural resources (renewable and non-renewable) e.g. coal, fish, water, wood, metal Labour: all human effort available for production; manual and skilled workers Capital: not just finance needed bu all human made resources of production e.g. machinery, tables, combs Enterprise: the entrepreneur that takes the risk of setting up a business and uses the factors of production to product goods and services to make a profit. It provides a managing, decision-making and coordination role. e.g. Elon Musk, Steve Jobs Adding Value All businesses aim to sell products at a higher price than cost of goods sold; Adding Value: The process of increasing the worth or value of resources by working on them. NB: Value added is not profit made as part of the value goes towards other business expenses Ways of Adding value: • painting/colouring • Limited edition • Speed Increasing quality Packing • • • Accessories • Printing • USP • Reduction in waste • Change material • Brand • Cost-cutting • Transport worldwide • Better customer service Opportunity Cost - There aren’t enough factors of production to satisfy all our needs and wants because we are limited by the resources - there are scarce - Consumers must choose which method is best to produce with the scare resources Opportunity Cost: what has to be given up by not being chosen; the next best alternative sacrifice SxTeri Page 1 Qualities of an entrepreneur - Enterprise is another name for a new business venture - There is always an element of risk when staring a new venture, but without risk, there is no reward. Why take the risk? Reasons for starting your own business: • Own boss • Total control over decisions • Experience • Creative freedom • • • • Improve level of pay Own hours / life balance Guarantee of job Ambition Makings of a successful entrepreneur: • Innovative • Social skills • Risk taker • Leadership Organised • • Motivation • Initiative • Confidence • • • • Determination Diligence Open minded Innovative • Intelligent • Hard worker • Perseverance What a business needs to succeed 1. Identifying successful business opportunities 1. Thought showers • Coming up with ideas on random 2. Personal Interests • If you enjoy a subject, make it into a business e.g. baking 3. Expertise 4. Business Experience • If you worked in the industry beforehand; skills are transferrable 5. Observation 6. Innovations • Can be from science or reworking of a similar product 2. Determining a location Optimal Location: a business location that gives the best combination of quantitative and qualitative factors Factors affecting location: • Cost of land • Infrastructure space/availability • • Nearness to market • Accessibility • Competition • Labour • Type of business • Crime 3. Sourcing Capital • Lack of sufficient own finances due to limited personal savings • Lack of awareness of financial support and government grants available • risky bank loaner due to lack of experience in industry → no loans • Lack of business plan which puts off potential investors SxTeri Page 2 4. Competition • New business may be competing against its rivals for - Larger pool of resources - customer/market knowledge and understanding - Customer loyalty - Lower prices 5. Building a customer base At the start, there will only be a few customers but they must grow this so they will be able to survive in the short and long term. The ability to win over new customers and retain their customers is essential. Why many businesses fail early on 3 main reasons: 1. Poor analysis of the market (lack of demand) 2. Right ideas but poor execution of the plan i.e. poor management skills, failure to control cask flow, high faculty purchasing 3. Changes in the external environment Business enterprise in the development of the country Employment Creation • Less people claiming employment benefits means more money the government can spend on its infrastructure which can help increase the supply and demand of goods and services Economic Growth • More businesses providing more jobs will cause supply and demand to increase which leads to and increase in GDP (how economic growth is measured) Innovation and technological changes • New businesses can lead change in an industry due to their innovative and creative ideas. This can lead to an industry becoming more competitive internationally More exports to sell • Increases a country’s international competitiveness and economic growth Social Enterprise - Motivates by creating organisations that help other people or society → not a charity as they do not rely on donations to run the business - Makes money by socially responsible ways - Not motivated by money and don’t usually financially benefit from venture and use profits to benefit society 3 objectives referred to as the TRIPLE BOTTOM LINE as profit is not the sole objective 1. Economic; to make a retained profit and provide some return to owners 2. Social; to provide jobs or support for local communities 3. Environmental; to protect the environment and to run business sustainably SxTeri Page 3 Business Structures Economic Sectors The economy is split into 3 sectors: 1. Primary Sector • Involves extraction of raw materials 2. Secondary sector • Involves turning raw materials into finished, process or possibly packaged products 3. Tertiary Sector • Largest sector involving providing services • Dominated by tourism. wholesaling, retailing, financial services Public Sector - Organisations owned by the state (aka nationalised industry) - Controlled by government - Not run for profit - Usually services Private Sector - privately owned organisations - Controlled by private individuals or groups - Usually run for profit (excluding social enterprise or charities) Legal Structures Each organisation can be distinguished by: • Who owns it and shares any profits? • Who is responsible for any losses • How is it financed? • Who controls or manages it? Sole Trader Small business In private sector owned, financed and controlled by one individual by employees can be employed managed by one person Finance is raised through personal savings, borrowing or a bank loan All profit goes to the owner Unlimited liability Unlimited Liability Limited Liability • Owner is responsible for debts of business • Shareholders only lose the amount of money they investing in company → shares • Owner and business are legally the same • If business loses money, owner pays using personal • Personal possession not at risk wealth. Possessions at risk • Owners and business are legally separate SxTeri Page 4 Sole Trader Advantages • • • • • • • All profit goes to owner Decisions can be made quickly Flexibility - customer satisfaction Total control Easy set up High degree of control Offer personal service Sole Trader Disadvantages Unlimited liability More stressful Requires work to obtain finance Bank loan difficult to obtain - limited access to capital • Longer hours • • • • Partnership Small business Private sector between 2 to 20 owners Owner and managed by partners Finance is raised by savings and borrowings All profit goes to partners Easy to set up Unlimited liability Partnership Advantages • • • • Greater access to capital Shared responsibility Partner may bring money/resources/skills/ideas Greater opportunity for specialisation Deed of Partnership: legal contract between partner that includes: - $ each get - $ each invested - Responsibilities in the business NB: can include silent partners Partnership Disadvantages • • • • • Unlimited liability have to share the profits All partners are liable for the debts of others Potential conflict → disputes over work load Less control for each individual Limited Companies 2 types - public and private More expensive to set up Larger business Owned by shareholders Controlled by board of directors Managed by appointed managers Finance is raised through selling shares and bank loans Dividends: part of profit given to shareholders. Public Limited Company Private Limited Company • Shares can be traded on the stock exchange and can be bought by members of the general public • Referred to as PLCs • Shares are not available to the general public; can sell shares to family, friends and associates • referred to as LTDs SxTeri Page 5 Legally setting up a limited business - must complete required forms and procedures - Doing this means business becomes INCORPORATED Unincorporated- a business which has not been made into a limited company Memorandum of association: States name of company, address of head office, maximum share capital for which the company seeks authorisation and declared aims Article of Association: covers the internal workings and control of the business e.g. procedures to be followed at a meeting Legal Personality • A limited company is recognised as having a legal identity separate from that of its owners • Company will be taken to court and not the owners although directors can be legally responsible if the company ‘illiquid’ • Directors must act in accordance to aims of business and law Continuity • In a limited company, the death of an owner does not lead to breakup or dissolution • The ownerships continues through the inheritance of the shares Franchise • A company that owns a well know product/service • Allows an individual to buy right to sell good/service and trade under their name Franchise - the business Franchiser - the company sells the rights Franchisee - person who pays for the rights Owned by the franchisee Controlled by the franchiser Managed by the franchisee Financed from savings or bank Profit goes to the franchisee but franchiser takes royalty payments Factors that affect license fee of franchise: - Reputation - Likely turnover - Exclusivity of rights - certain ears - Amount go training and support that is provided Franchise Advantages • • • • • • • Comes with brand name Easier bank loan Easier to get supplies Become multinational Support- resources, expertise Less risky Group support SxTeri Franchise Disadvantages • • • • • Less control Royalty Startup fee Reputation is risky Costs more money Page 6 Cooperation • All members contribute to running of business, workload, responsibilities and decision making • All members have a vote - democratic • Equally shared profits Cooperation Advantages Cooperation Disadvantages • Quicker to solve problems • Good motivation as they benefit from shared profits • • • • Poor management skills Lack of experience/training Finance shortage → no share capital Slow decision making (depends on size) Joint Ventures ↬ Where 2 or more businesses agree to work together on a particular project to create a separate business e.g. Sony Ericsson Join Ventures Advantages Joint Ventures Disadvantages • Shares costs/risks • Benefit from each other’s expertise • Exploit each other’s strengths • Management and culture clash • External forces - law • Only for limited liability companies Holding Companies ↬ Where a business that owns and controls a number of separate businesses but doesn’t unite them into one company - all legally separate. Can operate in different markets. Join Ventures Advantages Joint Ventures Disadvantages • High degree of diversification • Brand will not be tarnished • Easier to manage • Cannot fully benefit from EoS • DoS, hard to make management and culture changes if not united Types of Economies Mixed Economy: economic resources are owned and controlled by both private and public sectors ↬ Certain services are run by the state-run organisations e.g. fire dept. (Public goods) Free-market Economy: owned mainly by private sector with little state intervention Command Economy: owned, planned and controlled only by the state SxTeri Page 7 Size of Business 1. Sales turnover/revenue: • Total value of sales over time. • Must be in same industry • Selling Price x Quantity 2. Capital Employed • Total value of long term finance invested into business • Depends on if capital intensive or labour intensive - inaccuracy • Money spend on man made forms of production 3. Market Capitalisation • Only used for limited companies • Current share price x total number of shares issued • Accuracy depends on fluctuations in stock market 4. Market Share • % sales as a proportion to total market sales • Total sales of business / total sales in industry x 100 • Accuracy depends on competition level 5. Number of Employees • Simplest measure • Only can be used on similar labour intensive businesses NB Profit is not a way → as businesses can get revenue from different sources which distorts results Small vs. Large businesses Small business importance to economy: ⇾ Job creation ⇾ Innovation of goods/services ⇾ More choices for consumers ⇾ Increase completion leads to better service and lower prices for consumers (not in monopolies) ⇾ Offer of specialist goods ⇾ Economic growth - GDP Government Support - Tax breaks for small businesses i.e. lower corporate tax Information, advice and support Non-repayable grants Awards on basis of unemployment locations, size of business and industry Grants can be issued for: Training Recruitment Innovation Economic regeneration Young entrepreneurs SxTeri Page 8 Small Businesses Advantages • • • • • • Total control Flexible Personal service Better working relationships Multitasking Higher employee motivation Large Businesses Advantages • • • • • • Specialists available Economies of scale Price competition Access to finance Diversification More research and development Small Businesses Disadvantages • • • • Limited finance More stress/work No diversification Family conflict → time waster Large Businesses Disadvantages • • • • Difficult to manage Diseconomies of scale Slow decision making → increase product cost Conflicting objectives Family Businesses → businesses actively owned and managed by at least 2 members of same family → most likely small Family Business Advantages Family Business Disadvantages • Commitment: show dedication in growth and passes on to future generations • Performance reliability: have reputation associated with business • Knowledge Continuity: values and experience passed on • Continuity Problems: high failure rates due to lack of skill and abilities in next generation • Traditional: reluctance to change • Conflict: problems in family will reflect on management and make effective decisions less likely Types of Growth 1. Internal Growth ↬ Occurs when firms expands by extending premises from its own resources 2. External Growth ↬ When 2 or more business integrate via a… Merger: 2 or more firms agree to come together under one board of directors Takeover: 1 firm buys the majority of shares and obtains full control Reasons to grow: An increase in… • Market share • Power • Greater profit • Reduced risk of takeover • Economies of scale SxTeri Page 9 Business Objectives Terms Aim: a generalised statement of where the business is heading Objective: A long term goal established to coordinate the business. Need to be smart to be effective. Strategy: How the business is going to achieve the corporate objective - medium term. Tactic: short-term policy or decision aimed at resolving a particular problem or meeting a specific part of the overall strategy. → Smart objectives need to be specific, measurable, achievable, realistic and time based. Mission statement: a statement of the business’s core aims/ - summaries corporate objectives - Provides organisation a sense of common purpose → motivate employees - Make stakeholders aware of aims - Focus on corporate values, non-financial objectives, benefits of the business to the community and how consumers are to be satisfied - If ethics and principles mentioned; favours ethical practice over profitability. • Can help change organisational culture: the way the business does things and it shapes its expectations, attitudes and staff behaviour. Key Corporate Objectives Profit Maximisation • When difference between revue and total costs is at its greatest • Shareholders would favour a large value for large dividends Typical Strategies: - research new markets - Increase promotion - Revise pricing policies - Improve customer service - Set performance targets for employees - Reduce costs where possible Profit Satisfying • Aims to achieve enough profit to satisfy owners and don’t want to work excessive hours to get higher profits • Want better work/life balance • Once desired profit level is reached, they focus on other aims Growth • If it grows it will be able to exploit its market poison and earn higher profits. • Benefits shareholders • Benefits employees as better salaries and more job security Typical Strategies: - wider customer base - Research and developing new products - Ensure additional funds are available to meet increase in demands - Establish a brand or become a market leader SxTeri Page 10 Survival • Important during periods of recession or intense competition • At time of crisis - hostile takeover bid Typical Strategies: - establish reason of sale loss - Reduce costs to allow effective competition - Secure long-term financial backing - Improve/change product - Implement effective marketing strategy Increasing market share • Increase proportion of sales of business compared to industry Typical Strategies: - achieve annual growth of 10% - Ensure prices are set to below or equal competitors - Reduct competitors by merging or takeover - Use aggressive promotion to show business strength and competitor weaknesses Corporate Image • Companies fear negative view of them will not purchase their products Typical Strategies: - create a meaningful corporate aim - mission statement - Assess public’s expectations of business - Ensure government requirements are surpasses - Raise public awareness through press release and sponsorships - Engender a feeling of corporate identity of all staff CSR • Corporate Social Responsibility • Fundamental to motives and therefore the ethical actions of the business • Involves duties of an organisation towards employees, customers, society and the environment • benefiting indirect and direct stakeholder or a way of managing a firm’s PR either above the line of below the line. 1. The Workplace - how well employees are treated and their value - How well health and safety is monitored - reduce accidents - Range of salaries - Human rights rejected - Employing from minor ethnic groups 2. The Marketplace - Responding to customer needs - Trade with ethically sound suppliers (might support whistle blowers (snitches) 3. The Environment - using renewable raw materials and recycling inputs - Monitoring pollution and emissions - Talking to pressure groups - Following through with strategies made → an environment audit will be completed to assess impact of business so they can develop strategies to overcome them 4. The Community - extent to which it is communicating with and helping and giving something back to the community Maximising short term sales revenue • Effective when using commission as basis of pay • If selling price is reduced, profit will be negatively affected Maximising shareholder value • Interest of shareholders over other stakeholders often leading to major conflict • Applies to most PLCs SxTeri Page 11 Managerial Objectives Managers may choose to pursue their own objective rather than those made by shareholders. May include: - Maximising leisure time - Maximising financial rewards - pension, salary, bonuses - Seeking to take over competitors - Establishing modern working paretic - Improving professional status Management by Objective A method of coordinating and motivating all staff in an organisation by dividing its overall aims into specific targets for each manger, employee or department. Main departments: Finance, Marketing, HR, operations - Each functional objectives must contribute towers the wider corporate objectives - If they don't, business will lose competitiveness, consumers and direction. Factors that determine Objectives Corporate Culture: ethics and principles of the business shapes aims and what business stands for Size and lead ownership of business: smaller businesses have smaller goals so easier to completer Public or Private sector: public don’t focus on profit Number of operating years: In new stages → survival due to low success rate of new enterprises. Larger are optimistic due to larger customer base Ethical influences Ethics: value, attitudes, beliefs and opinion. Business ethics are moral principles that should underpin decision making Ethical Code: an instruction from organisation to employees to indicate how they should react to situations relating to moral values. Common for public sector businesses. Ethics Advantages Ethics Disadvantages • Society: unemployment and pollution likely to reduce, quality of life improved • Marketing: good reputation enhances brand image and reputation - Firms identify niche markets, use environmental friendly nature as USP (organic) - Increase sales and customer loyalty - Opportunity to charge premium price HR: better working conditions so lower labour • turnover - can affect perceptions of new employees - increased ability to attract and retain employees Finance: reduced operating costs, easier to gain • finance • Operations: lower production costs through efficient procedure and recycling, positive relationship with suppliers (trade credit) • Extra costs = reduce profits • Stakeholders all have different views on ethics and these change our time (open shops on Sundays) • Difficulty to monitor staff in large firms (corporate culture may be against it) • Changing cyclical economy: if economy I doing well then business may focus on CSR. During recession more profit aims. SxTeri Page 12 Stakeholders Stakeholders: any individuals or groups with an interest in a particular organisation. Roles Rights Responsibilities Customers • Purchase goods/services • → revue from sales so business can grow • To receive goods that meet local laws • To be offered warrantees and replacements • To be honest-to pay for goods • Not to steal • Not to make false claims about poor service Suppliers • Supply goods and services to allow business to offer products • To be paid on time • To be treated fairly (not be forced to lower prices) • To supply good in time and conditions as laid down by the purchase contract Employees • Provide manual and other labour services to allow business to operate • To be treated within nation law: minimum wage • Treated as in employment contract • Allowed to join trade union • Honesty • Meet conditions in employment contract • Cooperate with management • Abide by ethical code of conduct Local Community • Provide local services and infrastructure to allow it to operate • To be consulted by major changes • Not have lives negatively affect by business activities • Operate with business on expansion, etc. • To meet reasonable requests such as public transport and waste disposal Government • Passes laws to retrain business activity • Provide law to allow legal business activity • Achieve economic stability to encourage business activity • Duty to meet all legal • Treat all business equally constraints, e.g. tax on time • Prevent unfair competition that could affect survival chances • Establish good trading links to allow international trade Lenders • Repaid on time • To be paid any additional costs e.x. interest • Provide finance to business • Provide agreed amount of finance on agreed date for agreed time period Stakeholder Objectives Number of issues arise from different and sometimes conflicting perspectives: - companies claim to care about stakeholders for PR reasons - Firms may find managers stuck in previous culture - Stakeholder approach can lead to many benefits such as more quality employees and new customers Common conflicting aims of Stakeholders - Stakeholder approach may prove to be a fad - short lived trend - Stakeholder objectives can coincide, they can also be basis of conflict - A social audit can be used to get info SxTeri Page 13 Dealing with Stakeholders Win-Lose Approach: business strategy where business focuses on needs of one stakeholder group; in detriment of another. Has to decide prioritisation of needs of different groups. Win-Win Approach: business strategy that aims to balance needs of all groups How changing a business’ objectives can affect Stakeholders • The dynamic environment must change its goals to maintain/improve position in market • Significant impacts will take place e.g. from profit maximisation to survival: employee’s jobs may be lost and customers have less choice SxTeri Page 14
