AS business notes

The purpose of business activity

A business is any organisation that uses resources in order to fulfil people´s needs and wants. They add a value to raw materials like for example turning a piece of wood into paper. Business activity uses resources to produce goods or services which make our life easier and more comfortable.

What do businesses do?

Businesses identify the needs of customers or other firms and then purchase and use resources to satisfy those needs. The most common aim of a business is to gain profit or to expand.

Why do businesses need to produce goods and services? Factors of production.

Land: land for buildings and location of the business, and proximity to raw materials (e.g. locating near a forest for wood)

Labour: manual or skilled labour who form the workforce.

Capital: finance needed to start up a business and to pay resources and suppliers.

Enterprise: risk-takers who make decisions and manage the business The concept of added value

A business adds value to their products when sold, so that there is enough capital to pay suppliers. From the added value a business pays, not only suppliers, but other costs such as rent, taxes or their workforce. If a business increases its added value but doesn´t increase the costs, then profit will be made.

The role of the entrepreneur. A good entrepreneur must:

- Have an idea for a new business

- Invest some of their own savings and capital

- Accept the responsibility of managing the business - Accept the possible risk of failure

Characteristics of a successful entrepreneur

Innovation: the must be able to attract customers and make their business stand out from the rest. Invest on the future and in the new ideas.

Commitment and self-motivation: being ambitious and willing to work hard, energetic and focused in every situation.

Multi-skilled: being able to perform several different tasks like producing, promoting and providing a product or service.

Leadership skilled: being able to command tasks and encourage workers. Self-confidence and an ability to “bounce back”: being able to encourage yourself to re-open a business after a previous failure.

Risk-taking: being able to take risks to obtain any type of result, sometimes investing their own money:

Challenges faced by entrepreneurs

Identify successful business opportunities

Most people think it is better to work for them. However when they do, they don’t have a good entrepreneurship. Because they haven´t identified a market need which results profitable. Most new businesses come from sources like:

- Own skill or hobbies: dress making or car repair

- Previous employment experience: working for a successful business allows you to judge whether you will be able to start one yourself.

- Franchising conferences and exhibitions: these offer ideas to star up a new, successful business.

- Small budget market research: internet, newspapers allow you to see local or further opportunities.

Sourcing capital (finance)

Once decided what business to open you then need to consider the capital you will need to start it up. These are some problems with raising capital:

- Lack of sufficient own finance: very limited personal savings - Lack of awareness of the financial support and grants available - Lack of any trading record to present to banks as evidence of past

business success.

- A poorly produced business plan that does not convince investors Determining a location

It is important to minimise fixed costs. Break-even of output level must be kept low. Many entrepreneurs began at home, this meant there where less location costs. But this had its drawback:

- May not be close to potential market

- It lacks status: businesses with own prestigious promises tends to generate

- May cause family tension

- Difficult to separate private from professional life Competition

Common in enterprises unless the business idea is unique. Entrepreneurs may have to offer betters consumer services or lower prices. Older businesses have more market knowledge.

Building a customer base

When beginning, a business must gain a certain number of customers. Long-term strength of business depends on encouraging customers to return. Why do new businesses often fail?

Lack of record keeping

Many entrepreneurs give more importance to consumer needs and think they can remember all. A shop called “busy florist” may not remember:

- When the next delivery is due?

- Whether last week´s flowers have been paid - If cheques have been paid

- How many hours, the shop assistant worked last week. Lack of record keeping

Capital is needed to pay day-a-day cost and, in general, to maintain the business a float. Holding stock and paying suppliers are essential uses for capital.

Poor management skills Managers should:

- Leadership skills

- Cash handling and cash management skills - Planning and coordinating skills

- Decision-making skills

- Marketing, promotion and selling skills Changes in the business environment

New competitors can appear, new legal changes, economic problem for consumer or new technology advances are just a few examples of what can change in business environment

Common types of entrepreneurship business Primary sector

- Fishing: beginning with a small boat already owned by the entrepreneur - Market gardening: cash crops

Secondary - Jewellery making - Dress making - Building trades Tertiary sector - Hair dressing - Car repair - Restaurant - Child minding

Impact of enterprise on a country´s economy

- Employment creation: most businesses will employ not only themselves, but local people too

- Economic growth: increases the outputs of goods and services will increase the gross domestic product (GDP)

- Firm´s survival and growth: create more employment, increase economic growth and it will take the place of fail business

- Innovation and technological change: innovation and creativity are added to a dynamism in economy

- Exports: supplying other countries will increase the country´s export value

- Personal development: development of useful business skills

- Increased social cohesion: unemployment creates social problems but with successful businesses this is evicted.

Most social enterprises share this features:

- They directly produce goods or provide services

- They have social aims and use ethical ways of achieving them - They need to make a surplus or profit to survive as they cannot

rely on donations as charities do. Social enterprise-objectives

- Economic: make a profit to reinvest back into the business and provide some return to owners

- Social: provide jobs or support for local, often disadvantaged, communities

- Environmental: protect environment and manage the business in an environmentally sustainable way

Economic activity and the problem of choice

There are insufficient goods to satisfy everybody. Little resources don´t let business satisfy all our needs and many times they have to make decisions on whether to choose one or the other

Opportunity cost

It is the second best option which is given up by the business.

Chapter 2: business structure

Firms engaged in farming, fishing, oil extraction and all other industries that extract natural resources so that they can be used and processed by other firms. Secondary sector of business activity

Firms that manufacture and process products from natural resources, including computers, brewing, baking, clothes making and construction.

Tertiary sector of business activity

firms that provide services to consumers and other businesses, such as retailing, transport, insurance, banking, hotels, tourism and telecommunications.

Changes in business activity

The importance if each sector in an economy changes constantly.

secondary sector manufacturing industries in developing countries. In simple terms: it is the movement of the secondary sector of business activity, to the tertiary, or the best example being of catching fishes to exporting them. Benefits

- Total national output increases and this raises average standard of living - Increasing output of goods which leads to lower imports and higher

exports

- Expanding manufacturing businesses create more jobs - Value is added to the countries’ output of new material Problems

- Social problems such as encouraging people to move from the country to the town

- Increase of country´s imports costs Private sector & public sector

The private sector comprises businesses owned and controlled by individuals or groups of individuals

The public sector comprises organisations accountable to and controlled by central or local government.

Mixes economy

Economic resources are owned and controlled by both private and public sectors Free market economy

Economic resources owned largely by the private sector with very little state intervention

Command economy

Economic resources owned, planned and controlled by the state. Sole trader

This is a business in which one person provides the permanent finance and, in return, has a full control of the business and is able to keep all profits for himself. Advantages of a sole trader

- Easy to set up

- Owner keeps all profit

- Able to choose times and patterns of working

- Able to establish close personal relationship with staff and customers. - Business can be based on the interests skills of owners

Disadvantages of sole trader

- Unlimited liability: all of owner´s assets are potentially at risk - Intense competition from bigger firms

- Owner is unable to specialise in areas of the business that are most interesting

- Difficult to raise additional capital

- Long hours often necessary to make business payments - Lack of continuity

Partnership

A business formed by two or more people to carry on a business together, with shared capital investment and usually, shared responsibly

Advantages of partnerships

- Partners might specialise in different areas of business management - Shared decision-making

- Additional capital injected by each partner - Business losses shared between the partners

- Greater privacy and fewer legal formalities to make the business Disadvantages of partnerships

- Unlimited liability for all partners - Profit is shared

- No continuity and the partnership will have to be reformed in the event of the death of one to the partners

- All partners bounds by decisions of any of them - Not possible to raise capital from selling shares Private limited company

A small to medium sized business is owned by shareholders are often members of the same family. This company cannot sell shares to the general public

Shares

A certificate confirming part ownership of a company and entitling the shareholder owner to dividends and certain shareholder rights

Shareholder

A person or institution owning shares in a limited company Advantages of private limited companies

- Shareholders have limited liability - Separate legal personality.

- Continuity after a shareholder’s death

- Original owner is still often able to retain control

- Able to raise capital from sell of shares to family, friends and employees - Greater status that unincorporated business

Disadvantages of private limited companies - Various legal formalities

- Capital cannot be raised by selling shares to the general public - Quite difficult to sell shares

- accounts must be sent to companies house to deal with financial accounts and affairs

Public limited company

It is a limited company, often a large business, with the legal right to sell shares to the general public- share prices are quoted on the national stock exchange. The biggest example is BP (British petroleum)

Advantages of public limited companies - limited liability

- separate legal identity - continuity

- ease of buying and selling shares for shareholders, which will then encourage further investments on public limited companies

- legal formalities in formation are vast

- cost of business consultants and financial advisers when creating such a company

- fluctuation of the loss and price affect in a great way to share prices - Legal requirements are vast concerning any big decision in the company.

Every year a meeting is needed for the decision needed plus all other decision needed to take.

- Risk of takeover due to the availability of the shares on the stock exchange.

- Direct influenced by short term objectives of major investors Legal formalities in setting up a company

Memorandum of association

This states the name of the company, the address of the head office through which it can be contacted, the maximum share capital for which the company seeks authorisation and the declared aims of the business

Articles of association

This document covers the internal working and control of the business – for example, the names of directors and the procedures to be followed at meetings will be detailed

These two are simply two papers needed to change from a private to a public sector, explaining the change and some information about the company. Cooperatives

This is a very common form of organisation which includes these features. - All members contribute to run the business: decision making, sharing

workload

- All members have one vote at important meetings - Profits are shared equally among members

Advantages of cooperatives - buying in bulk

- Working together to solve problems and take decisions

- Good motivation of all members to work hard as they will benefit from shared profits

- Poor managements skills, unless professional managers are employed - Capital shortages because no sale of shares to the non-member general

public is allowed

- Slow decision making if all members are to be consulted on important issues

Franchise

A business that the uses the name, logo and trading systems of an existing successful business. The biggest and most successful example is MacDonald’s Advantages of franchises

- Fewer chances of new business failing as an establishes brand and product are being used

- Advice and training offered by the franchiser - National advertising paid for by the franchiser

- Suppliers obtained from established and quality-checked suppliers - Franchiser agrees not to open another branch in the local area Disadvantages of franchises

- Share of profits or sales revenue has to be paid to the franchiser each year - Initial franchise license fee can be expensive

- Local promotions may still have to be paid for by franchisee - No choice of suppliers or suppliers to be used

- Strict rules over pricing and layout to the outlet reduce owner´s control over his own business

Joint ventures

This is when two or more businesses agree to work closely together on a particular project and create a separate business to do so.

Advantages of joint ventures

- Costs and risks of a new business venture are shared

- Different companies might have different strengths and experiences and they therefore fit well together

- They might have their major markets in different countries and they could exploit these with the new product more effectively than if they both decided to “go it alone”

Disadvantages of joint ventures

- Styles of management and culture might be so different that the two teams do not blend well together.

- Errors and mistakes might lead to one blaming the other for mistakes - The business failure of one of the partners would put the whole project at

risk

Holding company

A business organisation that owns and controls a number of separate businesses, but does not unite them into one unified company

Public corporations

A business enterprise owned and controlled by the state – also known as

nationalised businesses. Public corporations don´t belong to the private sector, unlike public limited companies.

Advantages of public corporations

- Managed with social objectives rather than solely with profit objectives. - Loss-making services might be still be kept operating if the social benefits

is great enough.

- Finance rose mainly from the government. Disadvantages of public corporations

- Tendency towards inefficiency due to lack of strict profit targets. - Subsidies from government can also encourage inefficiencies

- Government may interfere in business decisions for political reasons.

Chapter 3: size of a business

Measuring size of business:  Government:

-Economic growth -Low price inflation

-Low levels of unemployment -Balance of payments

• Investors:

-Investors in a firm may wish to compare the size of the business with close competitors- particularly in order to compare the rate of growth.

- If the business is larger it usually means the business is established reducing the risk of failure.

-Because investors benefit from business success the bigger the business the greater the money they will receive.

• Customers:

-May prefer to deal with large firms as they are more stable and less likely to cease production or fail

Problems for the way of measuring business size

1. First problem: There are several different ways of measuring the size of a business and they are not an exact science.

2. Second problem: There is no international definition of how big or small a business is.

Different measures of size

1. Number of employees: This is the simplest way of measuring the size of a business. The higher the number of employees the bigger the business. 2. Sales turnover: This is the total value of sales made by a business in a

certain period of time. It is usually used when comparing two businesses in the same industry. The higher the sales turnover the bigger the

business.

3. Capital employed: This is the total value of all long-term finance invested in the business. The greater the company is, the greater the amount of capital employed in it.

4. Market capitalisation: This is the total value of a company´s issued shares. This measuring method can only be used in businesses that have shares on the stock exchange (public limited companies). It is calculated by this formula=

5. Market share: Sales of the business as a proportion of total market sales. If a firm has a high market share, it must be among the leaders in the

industry. It is calculated with this formula.

(Total sales of business/ total sales of industry) * 100 Which form of measurement is best?

There is no best measure. The one used depends on what needs to be

established about the firm being compared. This could depend on whether we are interested in absolute size or comparative size within one industry. If an absolute measure of size is required, then it is most certainly advisable to test a firm on at least two of the above criteria and to make comparisons on the basis of these.

The significance of small and micro businesses

 Even though there is no established universal definition for small business, it will be easy to identify them within your own economy. They will employ few people and will have a low turnover in comparison to other firms.  It is now common to make further distinction for very small businesses

which are called micro-enterprises Benefits of encouraging small businesses

 Many jobs are created.  Variety in the market.  Competition.

 Specialist goods and services.

 The large firms of the future are the small firms of today.  Small firms may enjoy lower average costs than larger ones. How governments encourage and assist business

1. Reduced rate of profit tax, will allow the business to retain more profit for its expansion.

2. Loan guarantee schemes- this are government founded schemes which guarantees the repayment of a percentage if the business did fail. 3. The department of trade and industry will give information, advice and

support.

4. Governments finance the establishment of small workshops, to help small businesses overcome certain problems.

Problems faced by small businesses

 Poor management skills or lack of management experience.  Racing short and long term finance.

 Marketing risks from a limited product range.

 Difficulty in finding suitable and reasonably priced premises. Advantages of small businesses

 They can be managed and controlled easily by the owner.  Often able to adapt quickly to meet changing customer needs.  Offer personal service to customers.

 They find it easier to know each worker, and many staff prefers to work for smaller and more human business.

Disadvantages of small business

 May have limited access to sources of finance.

 May find owner/s have to carry a large burden of responsibility if they are unable to afford to employ specialist managers.

They may not be diversified, so there are greater risks of negative impact on external change

Advantages of large businesses

 They can afford to employ specialist professional managers.  They benefit from the cost reduction associated with large scale

production.

 They may be able to set low prices that other firms have to follow.  Have access to several different sources of finance.

 May be diversified in several markets and products so that risks are spread.

They are more likely to be able to afford research and development into new products and processes

Disadvantages of large businesses

 May be difficult to manage, especially if they spread worldwide.

 May suffer from slow decision making and poor communication due to the structure of the large organisation.

May often suffer from a “divorce” between ownership and control, that can lead to conflict

Business growth

 The owners of many businesses do not want their firms to remain small. Why do other business owners and directors of companies seek growth for their business?

 There are a number of possible reasons: -Increased profits.

-Increased market share. -Increased economies of scale.

-Increase power and status of the owners and directors. -Reduced risk of being a takeover target

Internal growth

Expansion of a business within its self by means of opening new branches, shops or factories

External growth

Business expansion achieved by means of merging with or taking over another business, from either the same or a different industry

Merger: An agreement by shareholders and manager of two businesses to bring both firms together under a common board of directors with shareholder owning shares in both businesses.

Takeover: When a company buys over 50 % of the shares of another company and becomes the controlling owner of it.

Chapter 4: business objectives

Every business has an aim in life. Without the objectives the aim of the business should hardly be achieved. In addition, for an aim to be successfully achieved there has to be an appropriate strategy or detailed plan of action in order to ensure that resources are correctly directed towards the final goal.

The most effective business objectives usually meet the “SMART” criteria:

S- Specific: objectives should focus on what the business does and should apply directly to that business. A hotel may set and objective of 75% bed occupancy over the winter period. This objective is specific to the business.

M-Measurable: objectives that have a quantitative value are likely to prove to be more effective targets for directors and staff to work towards. For instance, to increase sales in the south-east region by 15% this year.

A-Achievable: setting objectives that are almost impossible in the time frame given will be pointless. They will demotivate staff who have the task of trying to reach these targets. So objectives should be achievable.

R-Realistic: objectives should be realistic when compared to the resources of the company and should be expressed in terms relevant to the people who have to carry them out. So informing a factory cleaner about “increasing market share” is less relevant than a target of reducing usage of cleaning materials by 20%

T-Time: a time limit should be set when an objective is established – by when does the business expect to increase profits by 5%? Without a time limit, it will be impossible to assess whether the objective has actually been met.

Corporate aim

These are very long term goals which a business hopes to achieve. The core of a business´s activity is expressed in its corporate aims and plans. A corporate aim could be to give shareholders maximum returns on their investment by

expanding the business.

What are the benefits of corporate aims?

- They become the starting point for the entire set of objectives on which effective management is based.

- They can help develop a sense of purpose and direction for the whole organisation if they are clearly and unambiguously communicated to the workforce.

- They allow and assessment to be made, at a later date, of how successful the business has been in attaining its goals.

- They provide the framework within which the strategies or plans of the business can be drawn up. A business without a long-term corporate plan

or aim is likely to drift from event to event without a clear sense of purpose

Mission statement

This is a statement of the business´s core aims, phrased in a way to motivate employees and to stimulate interest by outside groups. Here are some examples of some mission statement:

A-level College: “to provide an academic curriculum in a caring and supportive environment”

British telecom: “to be the most successful worldwide telecommunications group”

Unigate: “we are committed to consistent profitable growth as the means by which we can provide attractive returns to shareholders, be a responsible employer and support the communities in which we operate”

Microsoft: “to enable people and businesses throughout the world to realize their full potential”

Google: “to organize the world´s information and make it universally accessible and useful”

Merck: “provide society with superior products and services by developing innovations and solutions that improve the quality of the quality of life and satisfy customer needs, to provide employees with meaningful work and advancement opportunities and investors with a superior rate of return. Evaluation of mission statements.

Some mission statements can be “interchangeable”, and can apply to any business. This of course is a limitation of this mission statement.

Some arguments used in favour of mission statements are:

- They quickly inform groups outside the business what the central aim and vision are.

- They can prove motivating to employees, especially where an organization is looked upon, as a result of its mission statement, as a caring and

environmentally friendly body. Employees will then be associated with these positive qualities.

- When they include moral statements or values to be worked towards then these can help to guide and direct individual employee behavior to be detailed working.

- They are not meant to be detailed working objectives, but they help to establish in the eyes of other groups “what the business is about.

On the other side, mission statements are often criticized for being:

- Too vague and general, so that they end up saying little that is specific about the business or its future plans

- Based on public relations exercise to make stakeholders group feel good about the organization

- Virtually impossible to really analyse or disagree with.

- Often rather wooly and general so it is common for two completely different businesses to have very similar mission statements

Corporate objectives

These are simply the steps a business has to follow in order to achieve its corporate aim.

Common corporate objectives 1. Profit maximization

Profits are essential for rewarding investors in a business and for financing further growth and expansion. Profits are also necessary to persuade business owners – or entrepreneurs – to take risks. However there are serious limitations with this corporate objective:

- The focus on high short-term profits may encourage competitors to enter the market and jeopardize the long-term survival of the business.

- Many businesses seek to maximize sales in order to secure the greatest possible market share, rather than to maximize profits. The business would expect to make a target rate of profit from these sales.

- The owners of smaller businesses may be more concerned with ensuring that leisure time is safeguarded. The issues of independence and retaining control may assume greater significance than making higher profits.

- Most business analyst’s asses the performance of a business through return on capital employed rather than through total profit figures.

- Other stakeholders rather than owners and shareholders will give priority to other issues. For example security for the workforce or environmental issues for the local community.

- It is very difficult to assess whether the point of profit maximization has been reached, and constant changes to prices or output to attempt to achieve it may well lead to negative if the market is growing

This basically means aiming to achieve enough profit to keep the owners happy but not aiming to work flat out to earn as much as profit as possible. Just being satisfied with what you do?

3. Growth

Larger firms will be less likely to be merged or taken over and should be able to benefit from economies of scale. Managers will be motivated by the desire of seeing the business achieve its full potential. However business objectives based in growth do have limitations:

- Expansion which occurs to rapidly can lead to cash-flow problems - Sales growth might be achieved at the expense of lower profit margins - Larger businesses can experience diseconomies of scale

- Using profit to finance growth – retained profit – can lead to lower short-term returns to shareholders.

- Growth into new business areas and activities can result in a loss of focus and direction for the whole organization.

4. Increasing market share

It is possible for an expanding business to suffer market share reductions if the market is growing at a faster rate than the business itself. Benefits from having a high market share are:

- Retailers will be keen to stock and promote the best-selling brand.

- Profit margins offered to retailers may be lower than competing brands as the shops are so keen to stock it – this leaves more profit for the producer - Effective promotional campaigns are often based on “buy our product with

confidence – it is the brand leader” 5. Survival

This is usually the keen objective of most businesses. The high failure rate of new businesses means that to survive for the first two years of trading is an important aim for entrepreneurs.

6. Corporate social responsibility

This concept applies to those businesses that consider the interests of society by taking responsibility for the impact of their decision and activities on customers, employees, communities and the environment. There are other reasons for these trends in business objectives – increasingly, consumers and other stakeholders are reacting positively to businesses that act in green or socially responsible ways. Examples are:

- Retailers that emphasise the proportion of their products made from recycled materials.

- Businesses that refuse to stock goods that have been tested on animals, or foods based on genetically modified ingredients

7. Maximising short-term sales revenue

This could benefit managers and staff when salaries and bonuses are dependent on sales revenue levels. However, if increased sales are achieved by reducing prices, the actual profits of the business might fall

8. Maximising shareholder value

This could apply to public limited companies and direct management action towards taking decisions that would increase the company share price and

dividends paid to shareholders. These targets might be achieved by pursuing the goal of profit maximization.

Important issues relating to corporate objectives Some important issues relating to corporate objectives are:

- Must be based on the corporate aim and should clearly link in with it - Should be achievable and measurable if they are to motivate employees. - Need to be communicated to employees and investors in the business.

Unless staff are informed of the objectives and their own targets that result from these, then the business is most unlikely to be successful. Effective communication is vital

- Will form the framework of more specific departmental or strategic objectives

- Should indicate a time scale for their achievement – remember SMART. Conflicts between corporate objectives

- Growth versus profit: achieving higher sales by raising promotional expenditure and by reducing prices will be likely to reduce short-term profits.

- Short term versus long term: lower profits and cash flow may need to be accepted in the short term if managers decide to invest heavily in new technologies or in developing new products that might lead to higher profits in the longer term.

- Stakeholder conflicts (ch5) Changes to corporate objectives

1. A newly formed business may have satisfied the survival objective by operating for several years, and now the owners wish to pursue objectives of growth or increased profit

2. The competitive and economic environment may change, so the entry into the market of a powerful rival or the start of an economic recession may lead a firm to switch from growth to survival as its main aim.

3. A short-terms objective of growth in sales or market share might become a longer-term objective of maximizing profits from the higher level of sales.

Factors that determine the corporate objectives of a business Corporate culture

This can be defined as the code of behavior and attitudes that influence the decision-making style of the managers and other employees of the business. Culture is a way of doing things that is shared by all those in the organization. The size and legal form of the business

Large businesses, perhaps controlled by directors rather than owners, such as most public limited companies, might be more concerned with rapid business growth in order to increase the status and power of the managers. This is often as a result of a “divorce” between ownership and control, which nearly always exists in large companies with directors who don´t own it.

Public-sector or private-sector businesses

State-owned organizations usually don´t have profit as a major objective. Their aims can vary, but when the service they provide is not “charged for”, like education and health services, then a financial target would be inappropriate. Instead, “quality of service” measures are often used such as the maximum days for a patient to wait for an operation.

The number of the years the business has been operating

Newly formed businesses are likely to be driven by the desire to survive at all costs – the failure rate of new firms in the first year of operation is very high. Divisional, departmental and individual objectives

This is the hierarchy of objectives (starting from top to bottom with an example): - Aim: to maximize shareholder value

- Corporate objectives : to increase profits of all divisions by 10% per year.

- Division objectives : within one region, to increase market share by 10% and cut overheads by 5%

- Department objectives : marketing increase profit margins by 7% - Individual targets : (marketing department) introduce five more clients

to the business each year

Divisional objectives must be set by very senior managers to ensure: - Coordination between all divisions

- Consistency with corporate objectives - Those adequate resources are provided. Management by objectives (MBO)

This is a method of coordinating and motivating all staff in an organization by dividing its overall aim into specific targets for each department, manager and employee.

Ethical influences on business objectives and decisions

Ethics are the moral guidelines that determine decision making. The ethical code is a document detailing a company´s rules and guidelines on staff behavior that must be followed by all employees. For example:

- Should a toy company advertise its products to young children so that they “pester” their parents into buying them?

- Is it acceptable to take brides in order to take place an order with another company?

- Is it acceptable to feed genetically modified food to cattle? Evaluating ethical decisions

Adopting and keeping to a strict ethical code in decision making can be expensive in the short term:

- Not taking brides to secure business contracts can mean failing to secure significant sales.

- Limiting the advertising of toys and other child related products to just adults to reduce pesters power may result in lost sales.

However, perhaps in the long terms there could be substantial benefits from acting ethically:

- Avoiding potentially expensive court cases can reduce costs of fines

- While bad publicity from being “caught” acting unethically can lead to lost consumer loyalty and long term reductions in sales, ethical policies can lead to good publicity and increased sales

- Ethical businesses attract ethical customers and as world pressure grows for corporate social responsibility, this group of consumers is increasing - Ethical businesses are more likely to be awarded government contracts - Well-qualified staff may be attracted to work for the companies with the

most ethical and socially responsible policies

Chapter 5: stakeholders in a business

Stakeholders are people or group of people who can be affected by and therefore have an interest in any action by an organization. These are the stakeholders, their roles, their rights and their responsibilities.

Stakeholder roles Rights responsibilities Customers 1.Purchase goods

and services

2.Provide revenue from sales, which allow the business to function and expand

1. To receive goods and

services that meet local laws regarding health and safety, design, performance, etc. 2.to be offered replacements, repairs, compensation in the event of failure of the product or service 1.to be honest – pay for goods 2.not to steal 3.not to make false claims about poor service, under-performing goods or failed items

suppliers 1.supply goods and services to allow the business to offer its products to its own customers 1.to be paid on time – as laid down either by law or by the service agreement 2.to be treated fairly by the purchasing business

1.to supply goods and services ordered by the business in the time and condition as laid down by the purchaser contract

Employees 1.provide manual and other labour services to the business to allow goods and services to be provided to customers 1.to be treated within the minimum limits as established by law 2.to be treated and paid in the ways described in the employment contract

3.in most

1.to be honest 2.to meet the conditions and requirements of the employment contract 3.to cooperate with management in all reasonable requests

counties, to be allowed to join a trade union if desired

4.to observe the ethical code of conduct

Local

community 1.provides local services and infrastructure to the business to allow it to

operate, produce, sell within legal limits 1.to be consulted about major changes that affect it (expansion plans) 2.not to have the community´s lives badly affected by the business´s activities

1.to cooperate with the business, where reasonable to do so, on expansion and other plans 2.to meet reasonable requests from business for local services such as public transport

Government 1.passes laws that restrain many aspects of business activity 2.provides law and order to allow legal business activity to take place 3.achieves economic stability to encourage business activity 1.businesses have the duty to government to meet all legal constrains such as producing only legal goods, and to pay taxes on time

1. To treat

businesses equally under the law. 2.to prevent unfair competition that could damage the business survival chances

3.to establish good trading links with other

countries to allow international trade

Responsibilities to stakeholders – how business decisions can be influenced by these.

Responsibilities to customers

It is essential to satisfy customer´s demands in order to stay in business in the long-term. Decisions about quality, design, durability and customer service should consider the customer´s objectives for, in most cases, well-made attractive goods.

Benefits of accepting these responsibilities

Consumer loyalty, repeat purchases, good publicity with customer recommendations, good consumer feedback

Responsibilities to suppliers

If supply is of a poor quality or frequently late, then the same problems will apply when trying to satisfy your own customers.

Supplier loyalty, prepared to meet deadlines and requests for special orders, reasonable credit terms.

Responsibilities to employees

Providing training opportunities, job security, paying more than minimum wages when these are low, etc.

Benefits of accepting these responsibilities

Employee loyalty and low labour turnover, easier to recruit good staff, employee suggestions for improving efficiency.

Responsibilities to local community

Offering secure employment so that there is less local fear of job losses, spend as much as possible on local supplies to generate more incomes. Benefits of accepting these responsibilities

Councils will be more likely to give planning for expansion, community gives financial support

Responsibilities to government

Businesses should pay taxes, complete government statistical and other forms accurately and check export markets

Benefits of accepting these responsibilities

Good relations between governments might lead to success with expansion projects receiving planning permission.

Corporate social responsibility (CSR)

The concept that accepts that business should consider the interests of society in its activities and decisions, beyond the legal obligations that it has

Social audits

A report on the impact a business has on society. This can cover pollution levels, health and safety record, sources of supplies, customer satisfaction and contribution to the community.

Chapter 8: management and leadership

The functions of management – what managers are responsible for

All good managers think ahead. Senior managers will establish overall strategic objectives which will turn into tactical objectives. Planning these objectives and the others the business has will have an important effect on the business

Organizing resources to meet the objectives

Staff need to be recruited carefully and encouraged to take some authority. Each department will perform a certain part of the task Directing and motivating staff

Guiding, leading and overseeing of employees to ensure that organizational goals are being made

Coordinating activities

As the average size of the business units increases, do does the need to ensure consistency and coordination between different parts of each firm increases

Controlling and measuring performance against targets

It is management´s responsibility to appraise performance against targets and to take action if under-performance occurs.

Management roles

Henry Mintzberg (“the nature of managerial work”, 1973) identified 10 roles common to the work of all managers: (3 categories)

Interpersonal roles: dealing with and motivating staff at all levels of the organization

Informational roles: acting as a source, the receiver and transmitter of information

Decisional roles: taking decisions and allocating resources to meet the organization’s objectives.

Role title Description of role

activities Examples of management action to perform the role

1. Informational roles

Monitor (receiver) Collecting data relevant to the business´s operations Attending seminars, business conferences, research groups reading research reports

Disseminator Sending information collected from external and internal sources to the relevant people within the organization

Communicating with staff within the organization using appropriate means

spokesperson Communicating information about the organization – its current position and achievements – to external groups and people

Presenting reports to groups of stake holders (annual general

meeting) and

communicating with the press and TV media

2. Decisional roles

Entrepreneur Looking for new opportunities to develop the business

Encouraging new ideas from within the

business and holding meetings aimed at putting new ideas into effect

Disturbance handler Responding to changing situations that may put the business at risk,

assuming responsibility

Taking decisions on how the business should respond to threats, such a new competitors or changes

1. Interpersonal roles

Figurehead Symbolic leader of the organization

undertaking duties of a social or legal nature

Opening new factories/offices, hosting receptions, giving important presentation Leader Motivating subordinates, selecting and training other managers/staff

Any management tasks involving subordinate staff

liaison Linking with managers and leaders of other divisions of the business and other organizations Leading and participating in meetings, business correspondence with other organizations

when threatening

factors develop in the economic environment

Resource allocator Deciding in the spending of the

organization´s financial resources and the allocation of its physical and human resources

Drawing up and approving estimates and budgets, deciding on staffing levels for departments and within departments

Negotiator Representing the organization in all important negotiations (government, etc.)

Conducting negotiations and

building up official links between the business and other

organizations.

Leadership – the importance of it and qualities needed

It involves setting up clear direction and vision for an organization. Employees will want to follow a good leader and will respond positively to them. A poor leader will often fail to win over staff and will have problems communicating with and organizing workers effectively. The art of motivating a group of people

towards achieving a common objective. A number of personal characteristics have been identified as being common among effective leaders:

- Desire to succeed and natural self-confidence that they will succeed. - Ability to think beyond the obvious – to be creative – and to encourage

others to do the same

- Multi-talented so that they can understand discussions about a wide range of issues affecting their business

- Incisive mind that enables the heart of an issue to be identified rather than unnecessary details.

Important leadership positions in business Directors

They are elected into office by shareholders in a limited company. They are usually head of a major functional department, such as marketing. They will be responsible for delegating within their department, assisting in the recruitment of senior staff in the department and meeting objectives set by board of

directors Managers

Any individual responsible for people, resources or decision making, or often all three, can be termed a manager. They will have some authority over other staff below them in the hierarchy.

Survivors

These are appointed by management to watch over the work of other. This is usually not a decision-making role, but they will have responsibility for leading a team of people in working towards pre-set goals.

Workers´ representatives

These are elected by the workers, either as trade union officials or as

representatives on works councils, in order to discuss areas of common concern with managers

Leadership styles

style Main features drawbacks Possible applications Autocratic 1.leader takes all

decisions 2.gives little information to staff 3.supervises workers closely 4.only one-way communication 5workers only given limited information about the business 1.demotivates staff who want to contribute and accept

responsibility 2.decisions do not benefit from staff input

1.defence forces and police where quick decisions are needed and the scope for “discussion” must be limited

2.in times of crisis when decisive action might be needed to limit damage to the business or danger to others Democratic 1.participation encouraged 2.two-way communication used, which allows feedback from staff

3.workers given information about the business to allow full staff involvement

1.consultation with staff can be time consuming 2.on occasions, quick decision making will be required 3.level of involvement – some issues might be too sensitive (job losses) or too secret( developme nt of new products) 1.most likely to be useful in businesses that expect workers to contribute fully to the production and decision-making processes, thereby satisfying their higher-order needs 2.an experienced and flexible workforce will be likely to benefit most from this style

3. In situations that demand a new way of thinking or a new solution, then staff input can be very

valuable.

Paternalistic 1.managers do what they think is best for their workers 2.some

consultation might take place, but the final decisions are taken by the managers – there is no true participation in decision making 3.managers want workers to be happy in their jobs

1.some workers will be dissatisfied with the apparent attempts to

consult, while not having any real power or influence 1. Used by managers who have a genuine concern for workers´ interest, but feel the

“managers know best” in the end – when workers are young or inexperienced this might be an appropriate style to employ. Laissez-faire 1.managers delegate virtually all authority and decision-making powers

2. Very broad criteria or limits might be

established for the staff to work

within.

1.worker may not appreciate the lack of structure and direction in their work – this could lead to a loss of security 2.the lack of feedback – as managers will not be closely

monitoring

progress – may be demotivating

1.when by

managers are too busy (or too lazy) to intervene 2.may be appropriate in research

institutions where experts are more likely to arrive at solutions when not constrained by narrow rules or management controls McGregor’s theories Theory X

Managers that follow theory X believe that workers: - Dislike work

- Will avoid responsibility - Are not created

Theory Y

Managers that follow theory Y believe that workers:

- Can derive as much enjoyment from work as from rest and play - Will accept responsibility

- Are creative

The best leadership style depends on many factors

- The training and experience of the workforce and the degree of responsibility that they are prepared to take on.

- The amount of time available for consultation and participation

- The attitude of managers, or management culture – this will be influenced by the personality and business background of the managers (whether they have always worked in an autocratically run organization, etc.)

- The importance of the issues under consideration – different styles may be used in the same business in different situations.

Informal leadership

An informal leader is a person who has no formed authority but has the respect of colleagues and some power over them.

Emotional intelligence

The ability of managers to understand their own emotions, and those of the people they work with, to achieve better business performance. These put more emphasis on emotional intelligence:

- Understanding yourself, your goals, your behavior and your responses to people

- Understanding other and their feelings

The more managers that understand these, the more effective they will be. Experts think managers should improve:

Self-awareness: knowing what we feel is important and using that to guide decision making. Having a realistic view of our own abilities and having self-confidence in our abilities.

Self-management: being able to recover quickly from stress, being trustworthy and conscientious, showing initiative and self-control

Social-awareness: sensing what others are feeling, being able to take their views into account and being able to get on with a wide range of people Social skills: handling emotions in relationships well and accurately understanding different social situations, using social skills to persuade, negotiate and lead.

A manager without these emotional intelligences would:

- Attempt projects beyond their abilities but lack self-confidence that targets would be met

- Lack the trust and confidence of others and be so stressed out that they would be difficult to approach

- Fail to take the views of others into account when taking decisions

- Perform poorly in social situations, finding it difficult to talk and negotiate with others, and lacking the ability to build a team

Chapter 9: motivation

What is motivation?

This is the internal and external factors that stimulate people to take actions that lead to achieving a goal. This basically means the desire or workers to see a job done quickly and well. Unmotivated staff will be reluctant to perform effectively and well done jobs.

Content theories of motivation

Taylor and scientific management (1856-1917)

The techniques he used – of establishing an idea or hypothesis, studying and recording performance at work, altering working methods and re-recording performance – are still used today. This could be ways to improve output per worker or productivity following Taylor’s theory:

- Select workers to perform a task

- Observe them performing the task and note the key elements of it - Record the time taken to do each part of the task

- Identify the quickest method recorded

- Train all workers in the quickest method and do not allow them to make any changes to it

- Supervise workers to ensure that this best way is being carried out and time them to check that the set time is not being exceeded

- Pay workers on the basis of results

Mayo and the human relations theories (1880-1949)

Elton Mayo is best known for his “Hawthorne effect conclusions”. His work was initially based on the assumption that working conditions – lighting, heating, rest periods and so on – had a significant effect on workers´ productivity. The

Hawthorne effect is:

- Changing in working conditions and financial rewards have little or no effect on productivity

- When management consult with workers and take an interest in their work, then motivation is improved

- Working in teams and developing a team spirit can improve productivity - When some control over their own working lives is given to workers, such

as deciding when to take breaks, there is a positive motivational effect - Groups can establish their own targets or norms and these can be greatly

influenced by the informal leaders of the group.

Maslow and the hierarchy of human needs (1908-1970)

He was concerned with trying to identify and classify the main needs that people have. He them formed the hierarchy of needs (starting from bottom to top). Physical needs, safety needs, social needs, esteem needs and self-actualization. The hierarchy was interpreted by Maslow as it follows:

- Individuals´ needs start on the lowest level

- Once one level of need has been satisfied, humans will strive to achieve the next level

- Self-actualization, or self-fulfillment, is not reached by many people, but everyone is capable of reaching their potential

- Once a need is satisfied, it will no longer motivate individuals to action – thus, when material needs have been satisfied, the offer of more money will not increase productivity

- Reversion is possible.

Herzberg and the two factor theory (1923-2000) His intention was to discover:

- Those factors that led to them having very good feelings about their jobs - Those factors that led to them having very negative feelings about their

jobs

His conclusions were that:

- Job satisfaction resulted from five main factors – achievement, recognition for achievement, the work itself, responsibility and advancement

- Job dissatisfaction resulted from five main factors too – company policy and administration, supervision, salary, relationship with others and working conditions.

There are three main features of job enrichment and, if these were adopted, then the motivators would be available for all workers to benefit from:

Complete units of work: typical mass production methods leave workers to assemble one small part of the finished product. This is not rewarding, can be boring and repetitive and prevents the worker from appreciating the

importance of what they are doing as part of the overall production system. Feedback on performance

This type of communication could give recognition for work well done and could provide incentives to achieve even more

A range of tasks

To give challenge and to stretch the individual, a range of tasks should be given, some of which may be, at least initially, beyond the workers´ current experience. This, in quite a large measure, ties in with the “self-actualization” level in Maslow´s hierarchy.

Job enrichment is the aims to use the full capabilities of workers by giving them the opportunity to do more challenging and fulfilling work.

McClelland and motivational needs theory (1917-1998) He is known for describing three types of motivational needs:

Achievement motivation: a person with the strong motivational need for achievement will seek to reach realistic and challenging goals and job advancement.

Authority motivation: a person with this dominant need is authority motivated. The desire to control others is a powerful motivating force.

Affiliation motivation: the person with need for affiliation as the strongest driver or motivator has a need for friendly relationships and is motivated towards interaction with other people

Vroom and the expectancy theory (1932 - )

He suggested that individuals behave depending on in the ways that they believe will lead to outcomes they value. Individuals have different set of goals and can be motivated if they believe that:

- There is a positive link between effort and performance. - Favorable performance will result in desirable reward - The reward will satisfy an important need

- The desire to satisfy the need is strong enough to make the work effort worthwhile.

Valence: the depth of the want of an employee for an extrinsic reward, such as money or an intrinsic reward such as satisfaction

Expectancy: the degree to which people believe that putting effort into work will lead to a given level of performance

Instrumentality: the confidence of employees that there will actually get what they desire, even if it has been promised by the manager

Motivational theories

Payment or financial reward system Hourly wage rate

Payment to a worker made for each hour worked Piece rate

A payment to a worker for each unit produced Salary

Annual income that is usually paid on a monthly basis Commission

A payment to a sales person for each sale made Performance related pay

A bonus scheme to reward staff for above-average work performance Profit sharing

A bonus for staff based on the profit of the business – usually paid as a proportion of basis salary

Fringe benefits

These are non-cash forms of reward – and there are many alternatives that can be used

Non-financial methods of motivation Job rotation

Increasing the flexibility of the workforce and the variety of work they do by switching from one job to another

Job enlargement

Attempting to increase the scope of a job by broadening or deepening the tasks undertaken

Job enrichment

Involves the principle of organizing work so that employees are encouraged and allowed to use their full abilities – not just physical effort

Job redesign

Involves the restructuring of a job – usually with employees involvement – to make work more interesting, satisfying and challenging

Quality circles

They are voluntary groups of workers who meet regularly to discuss work-related problems and issues

Worker participation

Workers are actively encouraged to become involved in decision making within the organization

Team working

Production is organized so that groups of workers undertake complete units of work

Target setting

As well as making work more interesting and rewarding, the purpose of target setting is to enable direct feedback to workers on how their performance compares with agreed objectives

Delegation and empowerment

They involve the passing down of authority to perform tasks to workers some degree of control over how the task should be undertaken.

Chapter 10: Human resource

management

HRM – roles and purpose

The strategic approach to the effective management of an organization’s workers so that they help the business gain a competitive advantage.

Departments were responsible for just recruiting, training, disciplines and welfare of staff. They tended to be:

- Rather bureaucratic in their approach with an inflexible approach to staff issues

- Focused on recruitment, selection and discipline rather than developing and training

- Reluctant to give any HR roles to any other department managers - Not presented at board of directors level and not part of the strategic

management team.

HRM is broader and more far-reaching in scope. It focuses on: - Planning in work-force needs of the business

- Recruiting and selecting appropriate staff, using a variety of techniques - Appraising, training and developing staff at every stage of their careers - Preparing contract of employment for all staff and deciding on whether

these should be permanent or temporary, full or part-time

- Involving all managers in the development of their staff – emphasis that this is not just an HR responsibility

- Improving staff morale and welfare

- Developing appropriate pay systems for different categories of staff - Measuring and monitoring staff performance

Workforce planning

Analyzing and forecasting the numbers of workers and the skills of those workers that will be required by the organization to achieve its objectives. Workforce planning means thinking ahead and establishing the number of skills of the workforce required by the business in the future to meet its planned objectives. The starting point is always a workforce audit. A workforce audit is a check on the skills and qualifications of all existing workers/managers. Once this has been conducted the next stages in workforce planning are to assess what additional staff and skills might be needed.

1. The number of staff required in the future depends on many factors Forecast demand for the firm´s product

This will be influenced by market and external conditions, seasonal factors, competitor´s actions trends in consumer tastes and so on.

The productivity levels of staff

Of productivity (output per worker) is forecast to increase – perhaps as a result of more efficient machinery – then fewer staff will be needed to produce the same level output

This could influence future workforce numbers in two main ways. Firstly, if the business plans to expand over the coming years then staffing numbers will have to rise to accommodate this growth

Changes in the law regarding workers´ rights

If the government of a country decides to pass laws that establish shorter

maximum wage levels, then there will be a considerable impact on the workforce plan.

The labour turnover

The higher the rate at which staff leave a business, then the greater will be the firm´s need to recruit replacement staff

Recruiting and selecting staff

Recruitment is the process of identifying the need for a new employee, defining the job to be filled and the type of person needed to fill it, attracting suitable candidates for the job and selecting the best one. The recruitment and selection process involves several steps:

1.establishing the exact nature of the job vacancy and drawing up a job description

A job description is a detailed list of the key points about the job to be filled – starting all its key tasks and responsibilities

2.Drawing up a person specification

A person specification is a detailed list of qualities, skills and qualifications that a successful applicant will need to have

3.preparing a job advertisement reflecting the recruitments of the job and the personal qualities needed

The job advertisement can be displayed within the business premises- particularly if an internal appointment is looked for – or in government job centres, recruitment agencies and /or newspapers

4.drawing up a shortlist of applicants

A small number of applicants are chosen based on their application forms and personal details, often contained in a CV.

5.conducting interview – or using other selection methods

Interviews are conducted that will be designed to question the applicant on their skills, experience and character to see if they will both perform well and fit into the organization