IBDP BUSINESS MANAGEMENT - Pragyan IB Y1 C A business is a decision-making organization involved in the process of using inputs to produce goods and provide services. The basic objective of a business is to use the inputs which are the scarce resources and make suitable outputs that satisfy the 3 economic questions; what, how, and for whom to produce. Factors of Production/Inputs (5 Ms) (1) Man/Labour (2) Machine/Capital (3) Material (4) Money (5) Management Goods: Physical Products eg. Cars, Computers Services: Intangible products eg. Haircuts, Bus rides Needs: The basic necessities that a person must have to survive Wants: These are people’s desires, that is the things they would like to have. Consumer Goods: Products sold to the general public, rather than to other businesses. Capital Goods: Physical products bought by businesses that help them produce other goods and services. Services: Intangible products provided by businesses. The main functional areas of a business; Human Resources -> The HR Department is responsible for managing the personnel of the organization. They are likely to deal with issues like workforce planning, recruitment, training, appraisal, dismissals, and redundancies Finance and Accounts -> The finance and accounts department is in charge of managing the organization’s money. The main objective of this department is to ensure accurate reporting and recording of financial documentation to comply with legal requirements and to inform those interested in the financial position of the business. Marketing -> The marketing department is responsible for identifying and satisfying the needs and wants of customers. It is ultimately in charge of ensuring that the firm’s products sell. They achieve these through a series of activities such as market research, test marketing, advertising, and branding. 4 P’s of marketing: Product: Ensuring that goods and services meet the customer’s requirements Price: Using pricing strategies to increase sales of a product Place: Distributing the product Promotion: Making sure the customers know about the firm’s products. This is often done via mass media. eg. Television. Operations Department -> They are responsible for the process of converting raw materials and components into the finished goods that are ready for sale and delivery to customers. Note: A large organization is able to allocate resources to each of the four functional areas, making their roles easily identifiable. In a small business owned by just one person, each function would need to be carried out by the same person. The objective behind this is to reach certain roles and targets a business has in mind which for most businesses is satisfying consumer needs and wants in a profitable manner. Process of Production: Market Research -> Feedback -> Production Department asks for resources -> Finance provides necessary funding -> HR hires suitable labor/workers to carry out the task. [Therefore the 4 functional areas are inter-connected] Business Sectors Businesses can be classified according to the stage of production that they are engaged in. 1. Primary Sector - Businesses operating in the primary sector are involved with the extraction, harvesting, and conversion of natural resources. (Least Value Addition) 2. Secondary Sector - The manufacturing or construction sector that uses raw materials to manufacture or construct finished products. 3. Tertiary Sector - Businesses in the tertiary sector specialize in providing services to the general population. Eg. Retailing, Transportation, Leisure, Tourism and etc. Sector Change: Refers to a shift in the relative share of national output & employment that is attributed to each business activity to the manufacturing & service sectors which have higher added value. The Roles of a Business 1. Producing crops or extracting raw materials 2. Creating a product 3. Providing a service All Businesses need 1. Human Resources 2. Physical Resources 3. Financial Resources 4. How goods or services are made; Resource Inputs 1. 2. 3. 4. Human -> Right quality/ quantity required for product/ service. Physical -> Right quality/ quantity of materials. Financial -> Right amount and type of finance. Enterprise (Entrepreneurship) -> Desire to combine the first 3 successfully. 5. Production processes can be; 1. Capital Intensive: Uses large amounts of land and/or machinery 2. Labour Intensive: Uses a lot of labor relative to other inputs. Product Outputs can be; 1. Goods: Tangible products(can take home - Ipad, Car) 2. Services: Intangible ( Can’t take home - Karate Class, Massage) Business Functions · Human Resources · Marketing · Finance and Accounts · Operations Management or Production Business Integration 1. Vertical · Backward: Secures raw materials supply · Forwards: Secures product sales output 2. 3. Horizontal · Removes Competition · Provides geographical diversity · Provides product diversity · Allows economies of scale Entrepreneurs V. Intrapreneurs 1. Entrepreneurs -> The individual demonstrates enterprise and initiative in order to make a profit. They plan, organize, and manage a business who take financial risks and are remunerated in the form of profit. 2. 3. Intrapreneurs -> Individuals employed by a company that does the above. I.e new products/ processes. An intrapreneur takes direct responsibility and risks for turning a project or idea into profitable finished products for the organization. :: Innovation is central - Comes in 3 Forms · Marketing reading · Need seeking · Technology driving Reasons for starting a business; 1. Rewards 2. Independence 3. Necessity 4. Challenge 5. Interest 6. Finding a gap 7. Sharing an Idea 8. Process for Starting a Business; 1. Organizing basics eg. What, how and for whom to produce and legal structure 2. Researching the market 3. Planning the business (writing a business plan) 4. Establishing legal requirements 5. Raising the finance 6. Testing the market Problems a new business face; 1. Planning · Poor market research can result in the business idea being flawed as the product fails to meet the needs and wants of the customers · Set-up procedures can be time-consuming and legal procedures may be complicated 2. Finance · Inability to raise sufficient start-up capital to maintain liquidity · Struggle to obtain external finance from banks · Set-up costs may be unaffordable 3. Marketing: Limited budget available for promotion and advertising 4. Human Resources: New unestablished businesses may struggle to recruit suitable and experienced employees 5. 6. Operations Management · New businesses lack established relationships with suppliers which cause delivery and distribution problems · Lack of necessary finance to fund Research and Development 6. Strategic Thinking: Entrepreneurs may lack the necessary skills and experience Process for Starting a Business; 1. Support the launch of a new organization or idea 2. Attract new funds from banks, grant providers or venture capitalists 3. Support strategic planning 4. Identify Resource Needs 5. Provide a focus for development 6. Work as a measure of business success Types of Business Organisation; (1) Sole Proprietor: Advantage; · Quick to create without long expensive set up procedures. The easiest form of organisation. · Owner has complete control and makes all decisions · Decision making is therefore quick · Some tax advantages as a small business · Owners enjoy complete privacy · Very flexible - can change activities easily · Motivational from sense of achievement running one's own business Disadvantages; · Sole traders bears all risks and has unlimited liability · Finance is limited · No one to share ideas with · High workload and stress, long hours of wok · Lack of continuity if sick leave or holiday is required · Cannot exploit economies of scale (2) Partnership; Organisation owned by 2 or more people and mostly upto 20 people that have unlimited liability. They must draw up a deed of partnership to prevent misunderstandings. Advantage; · Able to raise more finance than sole traders · Varied expertise, ideas, and skills · Can share workload and responsibilities · Benefit from specialisation of labour · Continuity when one partner is sick · Silent partners can contribute to capital without having a active role in the business Disadvantages; · Shared profit · More disagreements · Death of a partner can cause the organisation to cease until a new partnership agreement is created · Unlimited Liability · Limited ability to raise capital · Access to finance constrained by number of partners Companies/Corporations; Commercial businesses with limited liability owned by shareholders. In incorporated business there is a divorce of ownership and control (Business is a separate legal entity to owners). They often require 2 documents: Memorandum of Association and Articles of Association to be set up. Once authorities are satisfied then a Certificate of Incorporation is issued and the company can start trading. The shareholders elect a Board of Directors (BoD) to take charge of the strategic direction of the company. There are 2 types of limited companies; Public and Private. Organisational Objectives · Vision Statement: Optimistic and Inspiring declaration that defines the purpose and values of an organisation and where it wants to be in the future. · Mission Statement: It is a clear and concise declaration of an organisations’ fundamental purpose i.e. succinct description of what the organisation does in order to become what it wants to be Aims, Objectives and Tactics; · Aims: Aims are long term goals of an organisation formulated by the senior management team. The aims of an business are often found in its mission statement. · Objectives: Objectives are the targets that an organisations is trying to achieve eg. Maximise shareholder value. They can be strategic (short term), tactical (medium term) or operational (Long term) · Tactics: They are short-term, smaller scale or routine decisions about how a firm intends to achieve its aims/objective on a daily basis. The responsibility of making those decisions is usually delegated to the hierarchy to motivate and inspire workers. They are concerned with reaching more limited and measurable goals. Tactical objectives have specific targets and timelines enabling managers to know when achieved. They are set to facilitate the strategies of the organisation. The organisation often needs to change its objectives due to certain internal and external factors; Internal Factors · Corporate Culture: Traditions and norms within an organisation can change and effect the objectives · Growth and Size or firm: New businesses tend to aim for breakeven/ survival, whereas established firms might aim for growth eg Mergers/ Acquisitions · Change in Senior Management: It can lead to a change in objectives I.e more innovation/technology · Crisis management: A major problem arising, eg. Liquidating problem or product recall External Factors · Business Cycle · Laws and Regulations · Social Trends · Technological changes Ethical Objectives and Corporate Social Responsibility (CSR) · CSR refers to the concern of a business in committing to behave ethically towards all its stakeholders · Examples: Quality of employee workalike, adopting green practices, socially responsible marketing · CSR involves voluntary actions a business can take, order and above min. Legal requirements in order to address to competitive interests and interests of wider society · Based on what is deemed morally correct in society is provided The reasons why organisations set ethical objectives · As they become more aware of their CSR · Setting and pursuing ethical objectives can increase employee motivation and productivity. It may also be easier to recruit/retain staff · It can reduce negative publicity from news media and pressure groups · The growing use of social media makes it easier for the public to demand transparency · Having good corporate image with customers can lead to competitive advantages eg. Profitable · Form of self-discipline avoiding govt. intervention Negative impacts of operating ethically · The compliance costs of acting in a socially responsible way and extra management time may prove to be disadvantageous to the firm · This may lead to lower dividends which may gain resentment from shareholders · If competitors also have a similar approach then they may have no USP The evolving role and nature of CSR · As a business becomes more established and grows the scale of its operations enlarges eg. Requires more resources and therefore organisational objectives and priorities change · For example the opp. cost for a large multinational that doesn’t act ethically is potentially huge, especially when compared to a small sole trader operating in a remote town · Modern business particle in many countries has shown that CSR has an important role in determining market position. · Attitudes to CSR can change over tie. What was previously considered socially acceptable may change in the future. · Hence changes in societal norms, expectations and values means that firms need to review their CSR policies regularly · Media exposure, pressure group action and educational awareness ensure that an increasing number of businesses actively plan ethical objectives SWOT Analysis A SWOT analysis is a decision making/management tool to assess where business is at the present time and how it is affected by the external environment - also called situational analysis. SWOT: · Strength: Internal factors that reveal what the firm does well compared to rivals eg. High Market Share · Weakness: Internal factors that reveal what the firm does not do well compared to its rivals eg. Poor Customer Service · Opportunities: External factors that ma enable the firm to develop and prosper. eg. Economic Boom · Threats: External Factors that may hinder the firms ability to achieve aims eg. Competition Example; Microsoft Swot Analysis Advantages Disadvantages A useful visual tool to assist managers in the planning process It is only. Snapshot of the current situation for the organisation A decision making tool which can give a good picture of the organisation’s actual position in the market It may need to revised regularly, accounting for changes in the internal and external business environment It encourages an examination of It is subject to some bias as the strategic opportunities for an analysis is based on opinions, organisation eg. Growth not only facts and figures (expansion) or relocation Ansoff Matrix: It is a management growth tool first published in Harvard Business Revue in an article “Strategies for Diversification” by Igor Ansoff in 1957. It is use by businesses to identify and decide their product market growth strategies Market Penetration: Focuses on existing markets and existing products i.e. what it knows and does well. It is a low risk strategy so requires little if any investment in new market research as the firm air to increase revenues by focussing on its exiting products and customers. It increases sales/market share by sharing competitive pricing strategies, customer loyalty schemes and more effective promotion. Market Development: Selling existing products into new markets i.e. the product remains same but is sold to a new group of customers eg. Cars exported to a new country. There is an element of risk as customer tastes vary in different regions/countries. Also added costs of new market research. Nevertheless, if firm knows products well then should be familiar with customer needs and hence minimise some risk. Product Development: It is a growth strategy when a business introduces new products into existing markets. Eg, Carmakers develop new products to replace existing ones. Modifying existing products is also a part of this. It is a medium risk strategy as involves significant investment in R&D. Diversification: Involves marketing completely new products to a new market. It is a high risk growth strategy as fir has limited experience in terms of both the product and the market. · Related Diversification means that the firm remain in the industry they are familiar with. · Unrelated Diversification means completely new industries STAKEHOLDERS Stakeholders Stakeholders are anyone with a direct interest in the functioning or performance of a business or organisation Possible Objectives of Stakeholders; (1) Employees: Good working conditions, pay, job security, image (2) Customers: Good Prices, Good Quality, Good company Image (3) Local Community: Good employer, non-polluting, social responsibility, good corporate image (4) Management: Power, Prospects, Pay & Perks, Good Corporate image (5) Shareholders: Good return on investment, healthy share price and dividends rate, corporate image, maximum short term profits, long term growth (6) Government: Meets taxes, Legislations, provides job (7) Suppliers: Good Prices, Stable Demand, Good Corporate image, prompt payers, long term growth leading to increased orders Why should a firm be concerned about their stakeholders? - Attract more investors - Easier to attract good employers - Better government co-operation Internal Stakeholder -> Owners, stakeholders, employees, managers etc. External Stakeholders -> Customers, competitors, suppliers, central and local government agencies, pressure groups, bankers and trade association What gives stakeholders power INTERNAL STAKEHOLDERS EXTERNAL STAKEHOLDERS Power of Hierarchu Control over resources Personal Influence Involvement in business activity Control of Resources Specialist knowledge/skills Specialist knowledge/skills Internal personal links Control of the environment Special Interest Groups (SIG): It is a community within a larger organization with a shared interest in advancing a specific area of knowledge, learning or technology where members cooperate to affect or to produce solutions within their particular field, and may communicate, meet, and organize conferences. Examples; · Industry Trade Groups · Pressure Groups: Boycotting, Lobbying, Public Relations, Direct Action · Local Community · Competitors · Government How to solve a stakeholder conflict? · Use of a conciliation service to align the interest of different stakeholder groups · Use an independent arbitrator to assess the conflicting interests, with the stakeholders groups agreeing to accept the judgement of the arbitrator · Hiring a public relations (PR) consultant(s) to communicate with the local community and to keep other stakeholders informed of the positive aspects of the organisations operations or planned changes. Possible areas of benefit and conflict · Owners of a business may be reluctant to pay higher wages to employees as they seek to use the surplus to distribute profits instead · Directors may want larger bonuses but this may conflict with the shareholders desire for higher dividends · Customers may want lower prices but shareholders may prefer higher prices as this would generate more profits · In the pursuit of efficiency and productivity gains, employers may invest in new machinery, but this may result in redundancies (job losses) for employees · Shareholders may demand a greater portion of profits as dividends, yet this leaves less for marketing, product development or to improve working conditions for employees · In order to deal with conflict some firms apply stakeholder mapping models · Involves organizing various stakeholders into a matrix based on their degree of power and their level of interest in the business · Those with power are key stakeholders · Firms try to meet the needs of as many stakeholders as possible - but prioritise those of the key stakeholders · Managing conflict for large MNC’s is harder than small firms Resolving Stakeholder Conflicts · Relative bargaining power LOW LEVEL OF INTEREST HIGH LEVEL OF INTEREST LOW LEVEL OF POWER Minimal Effort Keep them informed HIGH LEVEL OF POWER Keep them satisfied They are key players · The use of financial rewards linked to employee productivity gains. This helps to motivate workers to perform more effectively hence enabling firm to earn more profits. · Ensuring wider representation of stakeholders in the decision-making process · Improved communications with various stakeholder groups STEEPLE Analysis STEEPLE examines the influences in the external environment of a business operation. Social: Demographic changes are classified as social factors. E.g. Increase in retirement age, an aging population, increase in number of people within an household. Technology: This pertains to how the use of mobile devices and internet technology boosts e-commerce. Businesses often strive to have an online presence. Here, automation and industrial technologies improve efficiency and productivity in the manufacturing process. Use of social network around the world has increase the ability to communicate with customers. Economic: The level of consumer confidence influences the level of demand in an economy. The higher the demand, the higher the prices tend to become which damages the nation’s international competitiveness. A currency appreciation reduces the competitiveness of an exporter’s prices and it will lead to a fall in exports. An increase in the interest rate would make borrowing more expensive and thus discourages investment expenditure, additionally the value of loans will increase. An economic boom is associated with an expanding economy that is high levels of consumption, an income and investment creating many opportunities for businesses. In contrast, a recession occurs when the level of economic activity contracts for at least 2 consecutive quarters. Laws such as censorship or bans on the production of certain goods or services can be a threat to business operations. Environment: The depletion of non-renewable sources raises concern about the sustainability of business activity Inclement Weather and Climate Change are environmental factors that can cause major threats to businesses An increasing number of businesses use green technologies as part of their operations in order to conserve the planet eg. Renewable Energy Sources or Cradle to Cradle design and manufacturing Firms also have to consider their ecological footprint that is the impact of their business activities such as waste production on the natural environment Firms that take an active approach can benefit from having a positive corporate image. Political: Political Instability due to regional conflict can be a major threat to business activity. The government may use the rate of income tax to manage the economy. Eg. UAE has 0% income tax to encourage the migration of workers. Laws such as censorship or bans on the production or sale of certain goods and services can be a threat to business operations. Some governments use trade protectionist measures to safe guard domestic businesses and jobs. Eg. A tariff on imported goods Governments may impose quota (Quantitative Limits) on the number of foreign products sold or workers brought in the country Governments also provide subsidies as a form of protection for certain domestic industries, example: the French govt. for their farmers A government itself is a large consumer with its various forms of expenditure. Eg. Education and health care services and thus provide huge opporutnities for businesses (A government is often the biggest buyer) Cradle to Coffin: One time use Cradle to Cradle: Reusable Legal: Business must meet certain legal standards that help to reduce any adverse effects from a company’s operations, corporate image and profits. Business must operate within the constraints of employment laws. Laws of maximum working hours, health and safety regulations, an anti-discrimination employment legislation. Ethical: 1.6: Growth and Evolution -> Economies of Scale (EoS) are the cost saving benefits of operating on a large scale i.e. the reduction in unit costs as output grows. Internal; Financial: Larger firms can obtain finance easier and cheaper due to lower risk Managerial: Larger firms can afford greater numbers of specialised managers Production: Fixed costs of production are spread out over a larger volume of output, hence reducing average costs. Marketing: When they advertise many products at once Purchasing: Bulk purchasing materials to reduce delivery costs External Economies: This arises from having specialised back-up services available in a particular region where a firm is located Diseconomies of Scale is when unit costs rise due t firms being too large or too inefficient. This includes; Problems in managing production: Mass production may be difficult to organise and carry out Communication and decision-making: Larger amount of employee numbers make communication more difficult. This also makes decision making much more complex. Poor Morale: Individuals feel unimportant, ignored leading to demotivation Internal: This is caused by problems of co-ordination, control and communication within a firm. This often happens wen the firm becomes larger and organising or managing it becomes harder. Growing too large can also lead to DEMERGERS. Factors affecting choice of scale; Nature of the Industry The needs of the customer Goals of the organisation External: When factors outside the firm increase unit cost Traffic Congestion Higher Rent Labour shortages Growth: Differences between internal and external growth Internal Growth (Organic Growth) occurs when a firm expands using its own resources without involving another firm. External Growth (inorganic growth) occurs when a firm relies on a third party organisation for growth eg. Mergers Key Indicators: Sales, Revenue. Market Share and Number of Employees Methods of External Growth: Mergers, Acquisition (M&A’s) takeovers A takeover or Acquisition involves one company buying a controlling interest (majority stake) in another company. This means the buyer purchases enough shares in the target company to own more shares than any other shareholder, leading to a change in ownership. These are hostile and often result in redundancies of the target firm due to the cost saving desired by the purchasing company. Mergers are simply an agreement reached by 2 companies to form a single larger company thereby benefitting both involved parties. Joint Ventures: A joint venture is an arrangement between 2 or more separate parties to pool their resources together to form a new legal identity Strategic Alliances: This is formed when 2 or more companies join forces to benefit the growth without any fundamental changes to their own L/T strategies. Unlike joint ventures, the formation of a strategic alliance does not create a new organisation. Franchising: Franchising refers to an arrangement between a business (the franchisor) giving the legal rights to other businesses to sell the products under the franchisor’s brand name. Globalisation Globalisation is the growing degree of integration and interdependence of the world economies. Decisions and actions on one part of the world have a direct impact on other parts. A major contributing factor to globalisation is the growth and expansion of MNC’s. There is increasing pressure for MNC’s to market their brands to a worldwide audience. Globalisation has both +ve and -ve effects on businesses. A lack of international business etiquettes can also cause offence to others. The deregulation of trade restrictions around the world as allowed domestic firms to enter world markets enabling EOS and more customers. Internet technologies also contribute to globalisation – social media makes it easier to connect with other people and carry out e-commerce Globalisation can also help increase job opportunities and hance reduce poverty Reasons for the growth of MNC’s MNC’s benefit from access to larger markets in foreign countries They usually benefit from economies of scale They spread risks by operating in other markets outside their own country MNC’s operate on a large global scale with powerful brand names. Positive impacts of MNC’s include: MNC’s provide significant job opportunities, helping to raise quality of labour force MNC’s are likely to buy local raw materials and components, providing revenue to local suppliers and supporting local industries Consumers in the host country do not hav to rely on local suppliers as they have more choice Similarly, increased competition from MNC’s can force local firms to improve their operational efficiency, quality, customer care and prices The transfer of technical knowledge and benchmarking practices from MNC’s can also benefit local firms Profitable MBNC’s will be taxed by the host government, thus providing added tax revenue to benefit the host economy. Negative Impacts of MNC’s include: Local businesses may lose customers, market share and profit to foreign MNC’s Foreign firms may not be socially responsible especially if rules and regulations are more relaxed in overseas markets resulting in possible employee exploitation. The existence of large and powerful MNC’s can destroy competitors without resources to compete. Not all local firms or people will welcome foreign companies especially if they undermine traditional culture. Lewin’s Force Field Model: Force field analysis provides an overview of the balance between forces driving change in a business and the forces against the change - Parts on the left of the force field -> Driving forces (FOR Change) - Parts on the right of the force field -> Resisting forces (AGAINST Change) - List down all forces and score those forces, the cumulative on the leftand right-hand side will help determine whether or not the change is feasible or not or find out where the forces have to be strengthened or weakened - If forces are in equilibrium then there is NO CHANGE. - The forces may be INTERNAL or EXTERNAL Example: Why change is Resisted: - Self-Interest - Misunderstanding - Low tolerance of Change - Different assessments of the situations Gantt Chart is used a visual organisational planning and is a decision-making tool. It is a chart in which a series of horizontal lines shows the amount of work done or production completed in certain periods of time in relation to the amount planned for those periods. Example: 2.1: Functions and Evolutions of HRM Workforce Planning: This involves analysing and forecasting numbers of workers needed (Example: New recruits for growth and replacement for those that leave) The Human Resource (HR) looks to effectively manage workforce so as to achieve objectives. There planning functions are listed below. Planning functions include: Recruitment Induction Training Dismissal Redundancies Training and Performance appraisals Workforce Planning involves an analysis of historical data relating to the size of the workforce, the workload and mobility (flexibility) of employees, labour turnover rates and demographic trends in society HR planning is also needed to deal with absenteeism. This refers to the number of staff away from work as a percentage of the total staff Successful workforce planning helps a firm to develop advantage for matching HR needs to the firms strategic direction. It enables workers to be trained and motivated. Labour Turnover: (No. of Staff leaving p.a. x 100)/ Total No. of Staff Change in Labour Mobility Occupational Mobility: Refers to ease and willingness of moving rom one job to another Geographical Mobility: Refer to the extent to which workers are willing to move to another area International Labour Mobility: It is even more difficult to achieve. EXPAT workers are often highly rewarded as an incentive for them to move Labour immobility can spring from family ties, relocation costs, higher costs of living etc. Labour Mobility can be improved by offering training and development programmes New Communications Technology New technology makes it easier for large firms to recruit globally Improved computer and mobile technologies mean that flexi-time, homeworking and teleworking become more attractive Training can also be online and done quickly Computerised testing can also help firms assess employee training progress Reduces the cost of business meetings/seminars using skype Filling a Vacancy – Vacancies exist for several reasons A firms expansion People Retire People get Fired Internal Promotion People Die Business restricting leaves gaps People leave for a better job or different career Alternatives to filling a vacancy; Overtime by the remaining workers Restructuring of the work Employing parti-time staff More use of machinery/technology Internal Candidates There will always be an internal candidate interested (unless its for the lowest job) Good way of motivating employees Seen as a feature of a “best practice” employer.
