IB SL Business: Topic 1

Shareholders

Investors who purchase shares of stock in a corporation.

Corporate Culture (as an internal need for changing objectives)

(The accepted norms and customs of a business) Firms with a flexible and adaptable organizational culture are more likely to have innovative objectives over time

External sources of finance

- Share Capital - Loan Capital - Overdrafts - Trade Credit - Government Grants - Donations - Sponsorships - Debt Factoring - Leasing - Venture Capital - Business Angels - Bonds/Debentures - Hire purchase

Advantages of microfinance providers

-Accessibility (help those in poverty to become financially independent) -Job creation (opportunities with beneficial effects on society as a whole) -Social well-being (less likely to take their children out of school, better access to health-care services for their families)

Strengths of a Democratic Leadership Style

-Better morale and motivation among employees as they can express their views and have input

Disadvantages of charities

-Bureaucracy (more legal set up) -Disincentive effects (lack of profit, demotivated staff) -Charity fraud -Inefficiencies (limited liability means those who run charity cannot be personally held liable for any debts) -Limited sources of finance (reliance on solely one source of finance: donations)

Limitations of a Democratic Leadership Style

-Can delay decision-making as more people involved are involved in the process -Not suitable for dealing with large workforce -Clear leadership is required

Disadvantages of a SWOT analysis

-Can overemphasize strengths and downplay threats + a strength is not necessarily a source of competitive advantage -Model is rather static and risks ignoring changing circumstances; shelf life is limited -Is only useful if decision-makers are open about strengths/weaknesses and willing to act upon them -Not typically used in isolation. Better decisions are made with more information so other strategic tools are also used

Role of employees

-Carry out duties within their team or department -Work to achieve targets set by team leader or manager -Make decisions about their job role only -Provide support and assistance to other people in the organization

Role of junior management (supervisors and team leaders)

-Carry out some but not all of the duties of senior management -Involved in making operational decisions -Have direct contact with the workforce they're responsible for

Disadvantages of Market Penetration (Ansoff Matrix)

-Competitors will retaliate to firms trying to take away their customers and market share leading to aggressive reactions such as price wars, thereby possibly harming profits -Once existing market becomes saturated (no longer demand for a product), alternative strategies are required if the business is to continue its growth

Internal needs for changing objectives

-Corporate Culture -Type and Size of organisation -Private VS Public Sector -Age of business -Finance -Risk Profile -Crisis Management -New technologies

Factors affecting the choice of communication method

-Cost -Personal preference -Security issues -Ease of use -Size of business -Location (time zones)

Strengths (SWOT Analysis)

-Current internal capabilities that are favourable compared to competitors -Help the business to better achieve its aims and objectives (e.g. brand loyalty, corporate image/reputation, skilled workers, market dominance, etc.)

Weaknesses (SWOT Analysis)

-Current internal limitations that are unfavourable compared to competitors -May prevent or delay the business from achieving its aims and objectives (e.g. limited revenue streams, limited sources of finance, poor location, demotivated/unproductive workforce, etc.)

Limitations of a Autocratic Leadership Style

-Decisions are top-down so little chance of feedback and resentment can build and become demotivating

Limitations of decision tree analysis

-Delays can change the possibility -Probabilities are only estimates -Based on quantitative data only -Probabilities can be deliberately biased to push an agenda

Disadvantages of cooperatives

-Disincentive effects (low salaries->inefficient workers) -Limited sources of finance (can't raise fund through stock exchange, etc.) -Slower decision-making (democratic) -Limited promotional opportunities (minimize organisational structure thus limits opportunities)

Role of board of directors

-Each may be responsible for a specified area (finance director, marketing director, etc.) -Target setting for long-term -Establish policies and codes of practice -Monitor and control activities

Advantages of Market Penetration (Ansoff Matrix)

-Focuses on markets and products that the business is familiar with -Market expenditure is minimized -Low risk strategy

In what scenario would a business use a SWOT analysis?

-Evaluating a business proposal/idea -Assessing opportunities -Strategic planning -Competitor analysis -Reviewing strategy -Risk assessment

Benefits of growth for a business

-Greater financial strength to withstand changes in external environment -Greater risks to pursue much higher rewards -Profitability brings security + investors and capital

Warning signs of poor motivation

-High absenteeism rates -High labour turnover rates (employees leaving) -Low quality output -Increased number of disciplinary problems

Examples of 'noise' (any barrier to effective communication)

-High costs -Technological breakdowns -Language skills -Poor presentation skills

Strengths of a Laissez-faire Leadership Style

-High levels of motivation as staff feels trusted and valued -Employees feel they have control and can contribute -Suitable for organisations where creativity is important

Benefits of increased motivation

-Higher morale and job satisfaction (improved productivity and quality) -Improves corporate image (helps attract customers and quality staff) -Better industrial relations (reduces conflict and disruption in the workplace) -Lower staff turnover (there's a cost to hiring and training new staff) -HIGHER PROFITS

What does the "altruistic" CSR attitude consist of?

-Humanitarian and unselfish behaviour -Do what they can to improve society (donate money to charity, invest in local community projects, etc.) -They do this regardless of profit

Disadvantages of microfinance

-Immorality (unethical as lenders profit from the poor and unemployed) -Limited finance (small amounts of money are given to borrowers out of high risk of failure to repay loans) -Limited egibility (not all poor individuals qualify for microfinance, risks have to be minimized by ensuring borrowers can repay loans)

Advantages of cooperatives

-Incentive to work (enhances staff motivation and productivity) -Decision-making power (democracy) -Social benefits (for community) -Public support (they believe in the cause)

Objectives of Owners (shareholders)

-Increase revenue -Profit maximization -Return on capital invested

Benefits of decision tree analysis

-Issue is displayed clearly and logically -All potential options can be seen at the same time -Considers the risks involved -Likely costs shown (not just returns) -Visual stimulus and therefore a tangible insight

Investment appraisal: Payback period Disadvantages

-It may encourage a short-term approach to investment (Ignoring the potential gains in the long-term) -The contribution per month is unlikely to be constant as demand is prone to seasonal fluctuations -The focus is on time rather than profits

Motivators at work

-Job enlargement (variety) -Job enrichment (complexity and challenge) -Job empowerment (delegation of decision-making)

Objectives of Employees

-Job satisfaction -Increased wages/salaries/benefits -Improved working conditions -Improved contract of employment

Role of CEO

-Leads the team of directors -Formulates organizational objectives with BOD -Communicate with directors (Problems, decisions, etc.) -Devise and implement corporate strategy

Why is poor communication bad for businesses?

-Low morale will exist if staff feel out of touch, loss of confidence and sense of direction -Errors and reworking will rise if staff are not fully aware of what they have to do -Loss of competitivity due to lower productivity and increased errors -Lack of control

Objectives of customers

-Low prices -High quality

Objectives of Managers

-Motivated staff -Increased productivity -Reduce cost -Increase revenue -Profit maximization -Good relations with employees

Internal sources of finance

-Personal funds -Family and friends -Working capital (sales are greater than day-to-day running of business) -Retained profits (revenue is greater than expenses) -Selling assets

Factors to consider when deciding on alternative sources of finance

-Purpose -Cost -Amount -External factors -Financial situation -Status and size of the firm -Time

Strengths of a Autocratic Leadership Style

-Quick decision-making -Appropriate when workforce is unskilled

Role of management

-Responsible for day-to-day decision making and the implementation of the organization's policies

Before recruiting new workers, one needs to assess:

-Routine tasks and responsibilities -Skills and training needed -Qualifications and personal attributes -Rewards needed to recruit for position

Advantages of a SWOT analysis

-Simple and quick method -Wide range of applications -Can help determine organization's position in the market and therefore aids the formulation of business strategy -Encourages foresight and proactive thinking in decision-making process -Reduce risks of decision-making by demanding objective and logical thought processes

Choice of source of finance depends on...

-Size of business -Type of business -Time frame -Purpose of finance -Cost

Advantages of charities

-Social benefits -Tax exemptions (exempt from corporate tax) -Tax incentives for donors -Limited liability -Public recognition and trust

Benefits of ICT communication

-Speeds up communication between parties -Drives down the cost of communications -Increases the distance people can communicate -Increase the frequency of communications

External needs for changing objectives

-State of Economy -Government Constraints -Presence and Power of Pressure Groups

Advantages of Market Development (Ansoff Matrix)

-The firm is familiar with the product being marketed

Limitations of ethical behaviour in business

1. Compliance costs (e.g. organic food is more expensive to harvest than GM foods) 2. Lower profits (If compliance cost cannot be passed onto consumers in the form of higher prices, it is likely profits will fall) 3. Stakeholder conflict 4. Ethics and CSR are subjective (views on morals depend on personal beliefs)

What does the "self-interest (non-compliance)" CSR attitude consist of?

-The role of the business is to generate profit for the owners -Governments are the ones responsible for sorting out social problems -Whilst pursuing profit, firms become more efficient and prosperous, therefore helping society indirectly (through employment, wealth creation and corporation tax payments)

Investment appraisal: Payback period Advantages

-The simplest and quickest method of investment appraisal -Can be useful for firms with cash flows problems as such firms can tell how long it will take them to repay -Allows a firm to see whether or not it will earn enough in net cash flow to repurchase the asset before it needs to be replaced -Can be used to compare different investment projects with different costs by calculating the payback period for each option -Assesses only the short term, so pay-back calculations are less prone to forecasting errors

Limitations of a Laissez-faire Leadership Style

-Time-consuming and relies heavily on people's good will to achieve goals

Why are aims and objectives important for businesses?

-To measure and control (performance of business as a whole) -To motivate (inspires managers and employees to reach a common goals) -To direct (provide clear focus and sense of purpose)

Disadvantages of a private limited company

1. Legal set up may be complicated or expensive 2. Since profits are only shared between shareholder it may be harder to motivate and control workers who do not hold shares

Causes of dissatisfaction at work

-Working conditions, Salary, Status, Security, etc. (hygiene issues) -Pay rises don't motivate (they become expected) but pay should not be below industry averages

Advantages of a public limited company

1. Limited liability 2. Can Raise large amounts of capital through stock exchange 3. Continuity 4. Grow large enough to reap economies of scale 5. Productivity (specialist directors) 6. Tax benefits (pay corporate tax, not income tax)

Disadvantages of Sole Proprietorship

1. Limited sources of finance 2. Unlimited liability 3. Lack of continuity 4. Workload and stress 5. High risk 6. Limited economies of scale (cannot exploit benefits of larger scale production, reduces competition and profit)

Motivation factors

1. Achievement 2. Recognition for achievement 3. Interest in the job 4. Responsibility for tasks 5. Advancement to higher level tasks 6. Personal growth

List the hierarchy of objectives

1. Aim (e.g. maximize shareholder value) 2. Corporate objectives (e.g. increase profits of all divisions by 10% a year) 3. Divisional objectives (e.g. within 1 region, to increase market share by 10% and decrease overheads/expenses by 5%) 4. Departmental objectives (e.g. Finance: decrease long-term borrowing by 5%) 5. Individual targets (e.g. Sales staff: increase sales by 5% per client)

What is the link between aims, objectives and strategies?

1. Aims state what an organization wants (e.g. to become the number 1 supplier of a product) 2. Objectives state what the organization needs to achieve in order to get what they want (e.g. increased market share) 3. Strategies are the actions to facilitate an organization to meet it's objectives (e.g. expanding into overseas market)

Factors to consider when starting a business

1. Business Idea 2. Finance 3. Human Resources 4. Enterprise 5. Fixed Assets 6. Suppliers 7. Customers 8. Marketing 9. Legal issues

Advantages of a cash flow forecast

1. By showing periods of negative cash flow, plans can be put in place to provide additional finance (e.g. owners capital) 2. If negative cash flow appears to be too great, plans can be made to reduce these (e.g. cutting down on purchase of materials or machinery) 3. A new business proposal will never progress beyond the planning stage unless investors and bankers have access to a cash flow forecast

Advantages of Mergers and Acquisitions

1. Can expand quickly 2. Can increase revenue 3. Enter new markets 4. Reduce competition 5. New skills 6. Reduces risk

List potential issues that some businesses face

1. Cash flow 2. Marketing 3. Unestablished customer base 4. People Management 5. Legalities 6. Production 7. Lack of finance/capital 8. High costs of production 9. Poor location 10. External influences

What do shareholders receive in return for purchasing shares?

1. Dividends 2. Capital growth in the shares 3. Some voting power in decision-making of company

What are the benefits of privatization?

1. Efficiency gains 2. Lower costs of production 3. Increased choice for consumer 4. Incentive to innovate because of increased competition 5. Less financial burden (government no longer has to use tax-payers money) 6. Source of government revenue (government typically sells assets to private individuals/organisations)

Disadvantages of Mergers and Acquisitions

1. Executives have to figure out how to pay for merger 2. Managers have to decide on new management after the merger 3. Marketing departments have to learn how to blend product lines and brands 4. Have to deal with layoffs, transfers and changes in job titles 5. The organizational cultures may clash with their differing values

Examples of unethical behaviour in business

1. Exploitation of workforce and suppliers (often in LEDCs) 2. Financial dishonesty (e.g. deliberate misrepresentation of its financial accounts) 3. Environmental neglect/damage 4. Exploitation of customers (e.g. tobacco, alcohol, gambling services, etc.)

Disadvantages of a public limited company

1. Financial info must be provided to all shareholders 2. Communication problems as size increases 3. Dilution of ownership 4. Far more bureaucracy in setting up and running 5. High compliance costs to running on the stock exchange

Identifying market opportunities

1. Gap in the market 2. Innovative idea/creation 3. Gap in niche market 4. Patents/copyright (unique product) 5. Developing entrepreneur's personal skills and abilities

Reasons for starting a business

1. Growth (Capital worth more than current salary) 2. Earnings (Ideally earning more than current salary) 3. Transference & Inheritance (Gifted a business) 4. Challenge 5. Autonomy (Independence and Freedom of choice) 6. Security (Financial) 7. Hobbies

Steps in preparing a cash flow forecast

1. Identify cash inflows 2. Identify cash outflows 3. Calculate total inflows 4. Calculate total outflows 5. Calculate net cash flows 6. Calculate closing balance 7. Transfer closing balance to opening balance of following month

2 ways to improve cash flow

1. Increase inflows (overdrafts, short-term loans, sales of assets, sale and leaseback, reduce credit terms, debt factoring, etc.) 2. Decrease outflows (delay payments to suppliers, delay spending on capital equipment, lease equipment, etc.)

Advantages of ethical behaviour in business

1. Increased customer loyalty 2. Improved staff motivation and morale 3. Cost cutting (e.g. being environmentally-friendly can reduce the amount of excess packaging, avoid litigation costs due to unethical or irresponsible activities, etc.) 4. Improved corporate image

Aims of public sector businesses

1. Job creation/provision 2. Provides goods and services at an affordable price to all to help increase people's standards of living

Disadvantages of a cash flow forecast

1. Mistakes can be made in preparing the revenue and cost forecasts or they be drawn up by inexperienced entrepreneurs or staff 2. Unexpected cost increases can lead to major inaccuracies in forecast 3. Wrong assumptions can be made in estimating the sales of the business (e.g. poor market research, making the cash flow forecasts inaccurate)

Levels of strategy a business can adopt

1. Operational strategies - day-to-day methods used to achieve tactical objectives, improves efficiency of organisation 2. Generic strategies - affect the business as a whole, how can we gain a competitive advantage in order to meet goals? 3. Corporate strategies - they are used to achieve strategic long-term objectives of an organisation

The hierarchy of needs

1. Physiological needs (food, sleep, shelter, etc. → Salary) 2. Security needs (daily structure/routine → Job security, retirement income, maternity leave, sick leave, etc.) 3. Social needs (love and belonging, acceptance as part of group → Provide a sense of teamwork and belonging) 4. Esteem needs (self-respect and sense of achievement → Status in workplace, promotions, input into decision-making process, etc.) 5. Self-actualization (drive to be the best one can be → Freedom to exploit their talents in the job they excel at, promotions, etc.)

Causes of cash flow problems

1. Poor Credit Control (keeping track of who has paid and who has not, who is keeping to agreed credit terms, which customers don't pay on time - inefficiencies here can negatively impact cash flow) 2. Lack of planning (cash flow forecast help in predicting future cash flow problems for a business. If problems can be predicted then managers can take early action and make interventions) 3. Allowing customers too much credit (businesses have to offer credit to be competitive. customers will go for credit terms because it improves their cash flow. A balance needs to be made between how much and how long) 4. Rapid expansion (business has to pay for increased expansion and for increased wages and materials months before it receives cash from additional sales) 5. Unexpected events (unforeseen increases in costs, a breakdown of a delivery van that needs to be replaced, or a dip in predicted sales income, a competitor reduces prices - can all impact negatively)

What are some tools that can be used to identify market opportunities?

1. Price analysis 2. Target Market analysis 3. Domestic competition 4. Competitive analysis 5. Location analysis report 6. SWOT analysis report 7. Marketing Plans 8. Identifying trends

Advantages of Sole Proprietorship

1. Privacy 2. Few legal formalities 3. Personalized service 4. Being your own boss 5. Receives all profits

Advantages of Partnership

1. Privacy 2. More financial strength 3. Cost-effective (specialization results in productivity) 4. Benefit from specialization (different people specialize in different skills)

Chain of production

1. Production 2. Manufacturing 3. Services (tertiary and quaternary output) 4. Consumers

Aims of private sector businesses

1. Profit Maximization 2. Survival and Expand 3. Share price and wealth creation 4. Social Issues 5. Sales and sales revenue 6. Efficiency 7. Quality and innovation 8. Image and reputation 9. Environment

Advantages of a private limited company

1. Profits are only shared between shareholders who are quite often supportive family members 2. Limited liability 3. Continuity 4. Grow large enough to reap economies of scale 5. Productivity (specialist directors) 6. Tax Benefits (pay corporate tax, not income tax)

Driving and restraining forces for growth

1. Reap the benefits of larger scale production (economies of scale) 2. Larger market share to get better market standing and market power 3. Means of survival in competitive environment

Role of mission and vision statements

1. Serve to unify all people and corporate culture in an organisation 2. To have a clear purpose of what the business is trying to achieve 3. Outlines the organisation's values 4. States the underlying purpose of the business' existence

Why do we have public sector organisations?

1. So that everyone has access to necessary services 2. To avoid wasteful competition (economies of scale) 3. Protect citizens and businesses through institutions 4. Reduce unemployment rate

List examples of ethical objectives

1. Treating and paying employees fairly 2. Reducing pollution by using environmentally-friendly production processes 3. Treating customers fairly (e.g. fair return policy)

Disadvantages of Partnership

1. Unlimited liability 2. Jointly and severally liable (large amounts of trust needed) 3. Longer decision-making processes 4. Lack of continuity

How do businesses measure growth?

1. Value of sales (revenue) 2. Market share (sales percentage of industry total) 3. Value of capital employed 4. Number of employees hired

Hygiene factors

1. Working conditions 2. Salary 3. Status 4. Security 5. Policy administration 6. Relationships (with supervisors, subordinates and peers) 7. Personal life

Steps in the process of starting a business

1. Write a business plan 2. Obtain start-up capital 3. Obtain business registration 4. Open a business bank account 5. Marketing

Sole traders/proprietors

A business owned by one person that employs other people. The owner is legally the same as the business (e.g freelance writers, tutors, landlord etc.)

Private limited company

A business owned by shareholders with limited liability but whose shares cannot be bought by or sold to the general public (e.g. chanel, ikea, etc.)

non-profit organization

A business whose goal is to provide a service to benefit society rather than to make a profit (e.g. SPCA)

Business

A decision-making organization involved in the process of using inputs to produce goods and/or provide services (outputs)

Market share

A firm's sales revenue as a percentage of the industry's total revenue firm's total revenue / total industry revenue x 100 = %

Example of Related Diversification (Ansoff Matrix)

A leather shoe producer starts a line of leather wallets or accessories

Example of Unrelated Diversification (Ansoff Matrix)

A leather shoe producer starts manufacturing phones

Vision statement

A long-term picture of what the business ideally wants to become and what it will look like if it gets there. Can be slightly unrealistic. (e.g. SPCA: "Our vision is for all animals to live a life free of cruelty and suffering.")

Growth

A means of survival as competitors are also likely to strive for growth

Entrepreneur

A person who organizes, manages, and takes on the risks of a business.

Business plan

A report detailing how a business will achieve it's aims and objectives: 1. The business (type of business, objectives) 2.The product (goods? services?) 3. The market (competitor analysis, expected growth of industry, etc.) 4. The finance 5. The personnel (human resources) 6. The marketing

Managerial Economies (Internal Economies of Scale)

A sole trader often has to fulfill the role of marketer, accountant and production manager Large firms can divide managerial roles by employing specialist managers Specialization leads to higher productivity Higher productivity means that the average costs can decrease

Social auditing

A systematic evaluation of an organization's progress toward implementing socially responsible and responsive programs

Bureaucracy (Internal Diseconomies of Scale)

Administration, paperwork and company policies, etc. Likely to increase as a business grows This makes decision-making more time consuming and adds to the costs of the business but is unlikely to contribute to any extra output of goods/services to the customer Can also make communication more difficult, worsening working relationships, again contributing to higher unit costs

Finance (as an internal need for changing objectives)

Amount of available finance will determine the scale of a firm's objectives (e.g. huge sum of money needed to expand into overseas market)

Skilled labour (External Economies of Scale)

An abundance of skilled labour may exist in the local area, perhaps through government aided training programmes or reputable education and training facilities This provides local businesses with: •A suitable pool of educated and trained labour •Thus helping to cut recruitment costs without compromising productivity levels

Capital employed

The value of the firm's capital investment for the business to function

Public limited company

An incorporated business organization that allows the general public to buy and sell shares in the company via a stock exchange (e.g. apple, coca-cola, etc.)

External Diseconomies of Scale

An increase in the average costs of production as a firm grows due to factors beyond its control

Type and Size of Organisation (as an internal need for changing objectives)

Any change in legal structure of business is likely to cause a change in it's objectives

Marketplace

Any location or medium used to conduct an exchange or trade

Time frames: long-term

Anytime after the next 5 years. More difficult for managers envisage financial needs this far ahead e.g. commercial loans and hire-purchase agreements

Case Study of Internal/Organic Growth

Apple uses an internal growth strategy by focusing on new product development and launching new products

Examples of private sector organisations

Apple, KFC, Bank of America, etc.

Managerial (Internal Diseconomies of Scale)

As a firm becomes larger: •Managers may lack control and coordination •Span of control is likely to increase and cause communication problems (common with businesses that have operations in different locations throughout the world) This slows down decision-making Workers in larger organizations might feel a sense of alienation which can harm staff morale These issues add to the firm's costs without any corresponding increase in productivity, thereby raising its unit costs

Advantages of a public-private partnership

Benefits from the dynamic and efficiency of the private sector alongside the benefits of public sector funding and support

External growth

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

Partnership

Business organizations in which two or more persons share responsibilities, costs, profits, and losses

Corporation/Company

Business owned by shareholders and has been issued a certificate of incorporation, giving it a separate legal identity than it's owners (limited liability)

Crisis Management (as an internal need for changing objectives)

Businesses may face internal crises (e.g. unexpectedly high rates of staff absenteeism and staff turnover, falling and productivity, motivation problems, liquidity problems, quality standards, etc.)

Private sector organisations

Businesses owned and controlled by private individuals and organizations (large and small)

Non-profit social enterprises

Businesses run in a commercial-like manner but without profit being the main goal (consists of ngo's and charities)

Public sector organisations

Businesses under the ownership and control of the government

Internal Economies of Scale

By operating on a larger scale, a business can reduce its average costs of production due to any combination of the following factors The importance of each depends on the firm.

Examples of public sector organisations

CCTV, Fannie Mae, Coal India, etc.

Average Fixed Cost (AFC)

Calculated by dividing the total fixed costs by the level of output: AFC = TFC ÷ Q

Average Variable Cost (AVC)

Calculated by dividing the total variable costs by the level of output: AVC = TVC ÷ Q

Accounting rate of return

Calculates the average profit of an investment project as the percentage of the amount invested total profit during project's life span ÷ no. of years of project / initial amount invested X 100

Advantage of economies of scale

Can help businesses gain a competitive advantage as lower Average Costs result in lower prices being charged to customers and thus a higher profit margin earned on each unit sold

Working capital cycle

Cash → Materials and Stock → Production → Credit Sales

Merger

Combination of two or more companies into a single firm

public-private partnership/enterprise (for profit social enterprises)

Cooperative arrangement between two or more public and private sectors, typically of a long-term nature to provide services to the population (e.g. fire service)

External Economies of Scale (Internal Economies of Scale)

Cost-saving benefits of large scale operations arising from outside the business due to its favourable location or general growth in the industry

Less financial risk (Advantages of a business being small)

Costs of running a large business are huge so financial risks are also high. Smaller firms can better manage and control their finances

Time frames: short-term

Current financial year. Creditors and lenders to be repaid within 12 months

Value added

Difference between the value of inputs (cost of production) and the value of outputs (i.e goods and services sold to customer)

Democratic Leadership Style

Discuss and involve employees in decision-making. Managers consult staff and take their views into consideration

External stakeholders

Do not form part of the business but have a direct interest or involvement in the organizations e.g. Suppliers, Pressure Groups, Customers, Government, Competitors

Difference between customer and consumer

E.g. Your parents buy your school uniform for you (Parents are the customers, you are the consumer)

Operational NGOs

Established from a given objective or purpose. Tend to be involved in relief based and community projects (e.g. Oxfam and UNICEF)

Internal growth

Expansion of a business by means of opening new branches, shops or factories (also known as *organic growth*)

Market standing/share

Extent to which business has presence in the industry (percentage of market that the firm wishes to secure)

Government Aid (Advantages of a business being small)

Financial support in the form of grants and subsidies can be offered to small businesses to help them start up and develop

Secondary sector business activity

Firms that manufacture and process products whether it be business to business or business to consumer (computers, clothes-making, etc.)

Tertiary sector business activity

Firms that provide services to consumers and other businesses, such as banks, hotels, education and healthcare

Quaternary sector business activity

Focused on information technology businesses and information service providers such as the media, e-service, etc.

Cooperatives (for profit social enterprises)

For profit social enterprises owned and run by their members, such as employees or customers, with the goal of creating value for their members by operating in a socially responsible way.

Aims

General long-term goals of an organisation. Vague and unquantifiable statements (e.g. "to provide high quality education to all")

Government Constraints (as an external need for changing objectives)

Government's rules and regulations can limit what a business might strive to achieve (e.g. environmental protection laws can limit the ability of firms to maximize profit due to the higher compliance costs)

Improved transportation networks (External Economies of Scale)

Help to ensure prompt deliveries Employees who are late due to poor transportation links cost the business money Customers want convenience i.e. easy access to suppliers Congestion increases business costs and reduces sales revenue

Main functions of a business

Human resources, Finance and Accounts, Marketing (product, price, promotion, place), Operations

Risk Profile (as an internal need for changing objectives)

If managers and owners have a relatively high willingness and ability to take risks, the more ambitious objectives are likely to be set (e.g. the pursuit of new innovations)

Revenue

Income a business receives in terms of sales

Technological progress Economies (External Economies of Scale)

Increases the productivity within an industry E.g. the Internet has created huge cost savings for businesses engaged in e-commerce

Primary sector business activity

Industries that extract natural or raw resources that can be used and processed by other firms (e.g. farming, fishing, oil extraction, mining)

Services

Intangible products provided by businesses (e.g. healthcare, transportation, legal advice, education, etc.)

External factors

Issues which either restrict or aid the performance but are beyond it's control (e.g. political, economic, social, technological, etc.)

Marketing Economies (Internal Economies of Scale)

Large firms can benefit from lower average costs by selling in bulk, thus benefiting from reduced time and transaction costs E.g. A small retail outlet might sell 1,000 cans of Coca-Cola in a month to hundreds of different customers This would cost a lot more than Coca-Cola who can sell 1,000 cans in one transaction to a single customer (such as a supermarket) Global firms such as McDonald's and Nike can spread the high costs of advertising by using the same marketing campaign across the world

Purchasing Economies (Internal Economies of Scale)

Large firms can lower their average costs by buying resources in bulk Small firms can also gain from purchasing economies as they get discounts for bulk purchases However, the larger the order the greater the bulk discount might be, so there is an advantage to being big in business

Financial Economies (Internal Economies of Scale)

Large firms can: •Borrow big sums of money at lower interest rates compared to smaller rivals as larger firms are seen as less risky to financial lenders A large business looking to borrow money will: •Most likely choose a lender that offers the most attractive interest rate There is rivalry amongst the financiers to lend to large businesses By contrast, smaller firms often: •Struggle to raise external finance and are charged higher interest rates on their borrowing

Technical Economies (Internal Economies of Scale)

Larger firms are able to use sophisticated technology to mass produce their products E.g. The Phillips factory in Shenzhen produces complete audio systems within a few seconds The high fixed costs of their equipment and machinery are spread over the huge scale of output, thereby reducing their average costs of production Small businesses do not find it feasible or cost-efficient to buy and use such technology

Cost control (Advantages of a business being small)

Larger firms can encounter diseconomies of scale due to issues with control, coordination and communication

Threats (SWOT Analysis)

Likely external factors that may challenge the company's performance (e.g. pressure group action/protests, social/environmental/legal constraints, economic recessions, new competitors, etc.)

Opportunities (SWOT Analysis)

Likely external possibilities that the business may be able to exploit to its advantage for further development (e.g. economic growth, new markets/locations, technological developments/innovation, etc.)

Strategic objectives

Longer term goals of a business (e.g. Profit maximization, growth, market standing, image and reputation)

Autocratic Leadership Style

Makes all the decisions and prefers not to delegate authority i.e. tells others what to do

Internal stakeholders

Members of the organization Employees, Shareholders/stockholders, Managers and directors

Time frames: medium-term

More than 12 months and less than 5 years e.g. commercial loans and hire-purchase agreements

New technologies (as an internal need for changing objectives)

New tech and innovations can create many new business opportunities thus changing organizational objectives (e.g. use of ecommerce has revolutionized how most businesses operate)

Age of Business (as an internal need for changing objectives)

Newly established firms tend to have break-even and survival as their key objectives. Established firms might strive for growth and higher market share.

Presence and Power of Pressure groups (as an external need for changing objectives)

Pressure groups can force a business to review its approach to ethics

Changing Price - PED (Internal Growth)

Price Elasticity of Demand Responsiveness of demand of a product in comparison to a change in price

Nationalization

Private firms are taken control of by the government

Adding value process

Producing a particular good/service that is worth more than the cost of the resources used to produce it (e.g. A good textbook is worth more to customers than the paper and ink used to publish it)

External/Inorganic growth

Occurs when dealing with outside organizations Such growth usually comes in the form of alliances, mergers with other firms or through the acquisition/takeover of other businesses

Worker cooperatives (for profit social enterprises)

Owned and organised by their employee members (e.g. cafe, tourism, printer, etc.)

Consumer cooperatives (for profit social enterprises)

Owned by customers who buy the goods and/or services for personal use (e.g. housing, health care, financial services, etc.)

Regional specialization (External Economies of Scale)

Particular location or country has a highly regarded and trustworthy reputation for producing a certain good or service E.g. Murano in Venice, Italy is famous globally for its glass products such as vases, jewellery and chandeliers This allows the industry to benefit from: •Having access to specialist labour, subcontractors and suppliers •Thus helping to reduce average costs of production for the industry Its reputation also allows firms in Murano to charge higher prices

Example of movement

Person does task because she needs to (extrinsic)

Example of motivation

Person does task because she wants to (intrinsic)

Customer

Person that pays for goods or services

Consumer

Person that uses the goods or services

Stakeholder

Person/Group who stand to gain or lose from the success or failure of a company

Limited liability

Potential loss a shareholder has if the company fails as the amount invested in the company, not the total wealth of the shareholder (no personal assets are seized to pay debts of company)

Laissez-faire Leadership Style

Prefers minimal direct input into the work of employees. Sets objectives and leaves them to make their own decisions and complete tasks in their own way

Capital goods (producer goods)

Products purchased by businesses used to make other goods and services

Consumer goods

Products sold to the general public

Sectoral change

Refers to a shift in the relative share of national output and employment that is attributed to each business sector over time

Traffic Congestion (External Diseconomies of Scale)

Results from too many businesses being located in an area Deliveries are likely to be delayed due to the overcrowding This increased transportation costs for businesses, contributing to the increase in unit costs of production

Market Penetration (Ansoff Matrix)

Selling existing products in existing markets -Minimal risk -Usually involves seeking to maintain or increase market share (e.g. Coca-cola releasing a Christmas edition coke can)

Market Development (Ansoff Matrix)

Selling existing products in new markets -Medium risk -Usually involves entering overseas market (e.g. Nike expanding into the Chinese market - a new demographic - but with the same products)

Product Development (Ansoff Matrix)

Selling new products in existing markets -Medium risk -Usually involves innovation to replace existing products (e.g. Apple launching a brand new iPhone model every few years)

Diversification (Ansoff Matrix)

Selling new products in new markets -High risk -Usually involves spreading risk (e.g. McDonald's opening a hotel, "Golden Arch Hotel" in Switzerland)

Objectives

Short-term and specific targets an organisation sets in order to achieve it's aims. Quantifiable and measurable (e.g. "To achieve a 95% pass rate within 2 years")

Tactical Objectives

Short-term objectives that affect a segment of the organization (e.g. a department) Specific goals that guide the daily functioning of certain departments or operations (e.g. Sales department: increase sales by 20% within the next year)

Accountability

Shows who is held responsible for performance of what job

Responsibility

Shows who is in charge of whom

Specialization Economies (Internal Economies of Scale)

Similar to managerial economies of scale but results from division of labour by the workforce, rather than the management E.g. Motor vehicle manufacturers that use mass production benefit from having specialist labour such as designers, production staff, engineers and marketers These specialists are responsible for a single part of the production process and their skills and expertise mean that there is greater productivity

Flexibility (Advantages of a business being small)

Small businesses tend to be more flexible and adaptive to change E.g. If a sole trader runs an unsuccessful beauty salon then the business might be changed to something completely different such as a children's toy shop Large firms have large financial commitments and conflicting stakeholder objectives which combine to reduce the ability to change

Personalized Services (Advantages of a business being small)

Small firms are more likely to have the time to devote to individual customers E.g. Staff at a small local convenience store can get to know its customers better as staff are not pressured by high sales targets By contrast, large supermarkets rely on a high number of customers being served with some using self-checkout services

Local Monopoly Power (Advantages of a business being small)

Small firms may enjoy being the only firm in a particular location as larger firms may be reluctant to locate in remote areas This provides an opportunity for smaller firms to establish themselves in an area

Small Market Size (Advantages of a business being small)

Some businesses, such as a local hair salon, are unlikely to attract the attention of large firms due to the very limited size of the market Large corporations may not find it financially worthwhile to compete with these small local firms, allowing them to thrive

Intrapreneur

Someone who works inside an existing organization who sees an opportunity for a product or service and better ways to make them

Tactics

Tactics are short-term methods used to achieve an organisations tactical objectives

Advocacy NGOs

Take a more aggressive approach to promote or defend a cause, striving to raise awareness through direct action such as mass demonstrations (e.g. Greenpeace, Amnesty International, etc.)

Mission statement

Tends to be a simple declaration of the underlying purpose of an organization's existence and it's core values (e.g. SPCA: "To advance the safety and well-being of animals.")

Takeover

The acquisition of control over a corporation through the purchase of a substantial number of it's shares, with or without approval

Opportunity cost

The best alternative forgone when making a decision

Economies of Scale

The lower average costs of production as a firm operates on a larger scale due to an improvement in productive efficiency

Strategy

The medium to long-term plans of action to achieve the strategic objectives of an organisation

Revenue expenditure

The payment of an operating expense (daily-running) necessary to earn revenue

Management

The practice of achieving an organization's objectives by using the available resources of the business

Internal diseconomies of scale

The result of higher unit costs as a firm continues to increase in size i.e. the business becomes outsized and inefficient so average costs begin to rise

extrinsic motivation

The rewards come from benefits and rewards outside of the task (e.g. the salary paid)

intrinsic motivation

The rewards come from engaging IN the task (e.g. the satisfaction of mastering a task)

Leadership

The skill of getting things done through other people by inspiring, influencing and motivating them

Risk-bearing Economies (Internal Economies of Scale)

These savings can be enjoyed by conglomerates (firms with a diversified portfolio of products in different markets) Conglomerates can: •Spread their fixed costs (e.g. advertising, research and development) across a wide range of operations Unfavourable trading conditions for certain products or industries can be offset by more favourable conditions in other sectors of the business E.g. For Conglomerates such as Cheung Kong Holdings, a loss in one area of their business does not jeopardize the business overall

Debtors

They owe you (the business) money

Privatization

To change from government or public ownership to private ownership

What is the main aim of most private sector organisations?

To make profit and maximize that profit

Increasing Market Rents (External Diseconomies of Scale)

Too many businesses locating in a certain area cases land to become more scarce, increasing market rents This adds to the fixed costs of al businesses in the area without any corresponding increase in output (costs will rise) The high demand for businesses to locate in busy city districts such as: •Manhattan (New York) •Causeway Bay (Hong Kong) •Tokyo (Japan) •The City (London) has resulted in a sustained and continuous rise in the rental value of land in these prime locations

Profit

Total revenue minus total cost

Microfinance providers (for profit social enterprises)

Type of banking service which is provided to people with low income or people that are unemployed

Public VS Private Sector (as an internal need for changing objectives)

Unlike most private sector firms, public sector organizations do not strive for profit maximization but to provide a service to the general public

Situational Leadership Style

Using the right person and the right style for the appropriate situation. Managers and leaders will need to adapt their leadership style (e.g. A Crisis - more authoritarian style is required and Lasseiz-Faire can be adopted when working with skilled and empowered staff)

Internal/Organic Growth

When a business grows organically, using its own capabilities and resources to increase the scale of its operations and sales revenue Typically financed through a combination of retained profits, borrowing and issuing of new shares

Producer cooperatives (for profit social enterprises)

When a group of cooperatives join together and support each other to process or market their products (e.g. farmer cooperatives might unite to buy equipment, fertilizers, seeds, etc. to benefit from bulk-purchase discounts)

Creditors

You (the business) owes the money

current assets

cash and other assets expected to be exchanged for cash or consumed within the next year

Working capital (net current assets)

current assets - current liabilities money available for daily running of business

current liabilities

debts of the business that must be paid within the next year

State of the Economy (as an external need for changing objectives)

e.g. booms (when national income and employment are high) provide opportunities whereas slumps (when employment is high and consumption is low) cause threats

non-durable goods

goods that last a short period of time, such as food, light bulbs, and sneakers

durable goods

goods that last for a relatively long time, such as refrigerators, cars, and DVD players

Liquidity

how easily an asset can be converted into cash

Hertzberg's Two-Factor Theory

hygiene factors and motivators

Factors of production

land, labor, capital

Capital expenditure

money spent by a business or organization on acquiring or maintaining fixed assets, such as land, buildings, and equipment.

Charities

non-profit social enterprises that provide voluntary support for good causes (usually government organisation unlike ngo's)

Non-governmental organisations

private sector non-profit social enterprises that operate for the benefit of society rather than primarily aiming to make a profit

Economic Problem

scarcity forces us to choose, and choices are costly because we must give up other opportunities that we value

Payback period

the amount of time required for an investment to generate cash flows sufficient to recover its initial cost

Horizontal merger

the combination of two or more firms competing in the same market with the same good or service

Vertical merger

the combination of two or more firms involved in different stages of producing the same good or service

Conglomerate merger

the joining of firms in completely unrelated industries

communication

the transfer of information from one party to another

Total Revenue

the value of a firm's annual sales turnover per time period

Maintains corporate culture (Advantages of Internal/Organic Growth)

•A major problem for mergers and acquisitions occurs when two firms with very different cultures form a new company •By contrast, internal growth means there are no problems related with culture clashes and conflicting management styles

Advantages of Internal/Organic Growth

•Better control and coordination •Relatively inexpensive •Maintains corporate culture •Less risky

Increased capital expenditure/Investment (Internal/Organic Growth)

•Can be in the form of internal expansion of the business to new locations •Or the introduction of new production processes and technologies to improve productivity

Advantages of a business being small

•Cost control •Less financial risk •Government Aid •Local monopoly power •Personalized services •Flexibility •Small market size

Average Cost (AC)

•Cost per unit of output •Consists of two components: 1. Average Fixed Costs (AFC) 2. Average Variable Costs (AVC) •Calculated by dividing Total Costs (TC) by the Quantity of output (Q): AC = TC ÷ Q (e.g. If the Total Costs of producing 10,000 t-shirts is $78,000 then the cost of each shirt is $7.80)

Disadvantages of Internal/Organic Growth

•Diseconomies of scale •A need to restructure •Dilution of control and ownership •Slower growth

Less risky (Advantages of Internal/Organic Growth)

•Due to internal/organic growth having the benefits of better control and coordination, being relatively inexpensive and maintaining corporate culture, it is the easiest and least risky method of growth for most businesses •Furthermore, internal growth builds on the strengths of the firm e.g. its brand and customer loyalty

Diseconomies of scale (Disadvantages of Internal/Organic Growth)

•Higher unit costs of production can arise from internal growth •Hierarchical structures tend to be a feature of internal growth, causing communication problems and slower decision-making as a business grows

Dilution of control and ownership (Disadvantages of Internal/Organic Growth)

•If a firm grows by changing its legal status (e.g. from a partnership to a public limited company), then the original owners (partners) have to share decision-making with the new owners (shareholders) •With more owners, decision-making is prolonged and there is more likely to be conflict of interests between the different shareholders

Slower growth (Disadvantages of Internal/Organic Growth)

•Internal/organic growth is slower than external growth •Despite the risks, shareholders may prefer more rapid methods of growth to boost their return on investment

Better control and coordination (Advantages of Internal/Organic Growth)

•It is often easier to grow internally than to rely on external sources •Organic growth also means the firm maintains control, whereas external growth can lead to a loss of control and ownership of the business

Changing price (Internal/Organic Growth)

•More customers tend to buy a product at lower prices •However, if there are very few substitutes for the product, the business will earn more revenue by raising prices •For products in highly competitive markets, a price reduction should generate proportionately more sales revenue

Effective Promotion (Internal/Organic Growth)

•People are more likely to buy a product if they are informed, reminded and/or persuaded about tis benefits •Coca-cola spend $1.9 billion each year on promoting its products which is why it is the world's most recognised brand with sales of 1.9 billion servings per day

A need to restructure (Disadvantages of Internal/Organic Growth)

•Sole traders can control and coordinate their business quite easily •If it grows into a multinational company then the organizational structure has to be changed •Restructuring requires time, effort and money e.g. it requires training and updating of skills •Specialist managers have to be hired as the firm and its workforce grows

Relatively inexpensive (Advantages of Internal/Organic Growth)

•The main source of organic growth is retained profits •The higher cost of external growth means that for many firms internal growth is the only suitable method