“This book is a companion for student of Business ‘Management in te Inernational Baccalaureate Diploma Programme. IB Business Management isa component of an exciing education that seeks to "develop inquiring, knowledgeable and ‘caring young people who help to create a beter ‘and more peacefal world through intercultural Understanding ard respec." During the two years of your IB Diploma Programme ‘Business Management Course you wil study a diverse range of ines organizations, allowing you to develop a bust understanding ofthe core principles of modern business activity as well asthe skils needed to manage businesses sucessful. Thestrucure of our books deel based onthe programe in the Subject Guide and covers bath Sundar and tighrLeyel material As wells covering ll the slab content. his book ams ‘> eapue the spit of the 1S learner pros sce pope slowing you to make inks to your ater subjects o TOK end wo the wider wri. Throughout thebook you wilfind the folowing features: Contexts and cencepts Contexts and concepts are essential features of the Diploma Progamme Business Management course. By considering concepts and contexts, a8 ‘ell as content (bs of‘), you should develop a wide-reaching. holistic understanding of business ‘management andits place inthe word Contexts are the cae studies and examples that yu will encounter throughout your course - In {his book, in other resources, and in your own research. By look ng at these examples, you will find real-world centext forthe ideas and principles you lear about You are encouraged 1 analyse and evaluate these examples, and think carefully about the isues tey raise, ‘The Subject Guide has identified six key concepts ‘which underpin all ofthe content in the course. They are: . change culture ethics slobalization Innovation serategy ‘Throughout ths book, wehave aimed to itegrate all six concepts. Sometimes, this is simply as part fof the discussion of the content, but we have also Included some extra ‘conespt boxes’ which identity Additional inks tothe concepts and suggest esearch and activities fr you to take forward in class or as pat of your assessment. These are just Some of our thoughts the concepts can be applied toall areas ofthe course and you should keep ‘hem in mind from the very beginning, Student workpointe ‘These activities encourage you to reflec on ‘what you've learned and zpply new skills. Many ‘encourage you to do your own research, which ‘an be a great opportunity ta find new case studies ‘hich you eould use in asessment. Exam practice ‘Throughout the book, youl find exam and ‘exam-siyle questions to lp you prepare for ‘yur assessment, Many ofthese follow on from ‘case studles, encouraging you to think critically about solutions to real-world problems. We've also Included dedicated chapters on the examination and the internal assessmer. Theory of knowledge ‘We've included lots of links to TOK in the book and encourage you to find more! In common with the other subjecs ins group, Business “Management is concernedwith the activites and attitudes of individuals and societies and the relationships between ther. ‘We hope that this book is useful to you in your studies, The authors, as well s being expers in IB Business Management, are truly international, and hhave tried to reflec this inthe examples and case studies used. Is not expected that this bok wil be your only resource. The business world i ever: changing and the more research you do, the more ‘casestudies you find, and the more questions you ask, the more you will get ou of this course. ‘We wish you the best of luck in your studies and assessment! 14 US tee OY 1.1 An introduction to business management By the end of this chapter, you should be able to: > Explainthe ole of businessesin combining human, physical and financial resources to create goods andservices > Understand the main business functions and heros (human resources, finance and accounts, marketing, and operations) ~ Define primary, secondary tertiary and quaternary sectors > Outline the nature ofbusiness activity in each sectorand the impact ‘ofsectoral change on business activity > Explain the oe of entrepreneurship [and entrepreneur) and {ntrapreneurshp [andintrapreneur in overall business activity > Identify easors for starting up a business or an enterprise Outline commen steps in the process of stating upa business oran enterprise > Examine problems that anew business or enterprise may face > Outine the elements of business plan ‘The role of business: _A business ains to meet the needs and wants of individuals or ‘organizations through any ofthe following actvies: + producing.crops or extracting raw materials fromthe earth creating aproduet providing service. ‘Some businesses focus on one activity. A business may grow olives or ‘manufacture ransstos, Other businesses engage in multiple activities ‘Afarm that grows olives may convert the olives into olive ol fr sale ‘under its ow label, Sometimes a business will cluster several related activities or sometimes even engage in activities thatare generally isin. Regardless. a business inputs resources end processes them to {generate the desired ousput In tis fachion, the husnese adds value (Gometimesrelerred to a3 “added value") to the inputs and is rewarded for doing so either by gaining revenue (sles for satstying what Is wanted or by gaining recognition for saislying whats needed, “Many activites or organizations that most people would not consider ‘abusines” ronetheless operate under many busines principles. AllBE eee ee saan wraooucrion o eusiness wanacencar QT organizatous sist have human, physteal, and financlal resources, thus. Production processes ca take many forms: ‘many religious organizations (churches, mosques, synagogues, et, = Capital intensive processes use a large proportion of land or hares and ter yes of areaiatins suchas cbs are ina cena machinery relative to other inputs, especialy labour. Sometimes the sense a busines. Needs and want ae different olive we all need the land or machinery may have proprietary or special qualities (land basics ~food and water, dothing and shelter ~ and many business: righ in a resource or specialized equipment with unique features), or _provide for our needs. Other businesses provide for our wants, Religious the land and the machinery imply costa great deal due othe scale ‘onganizations, caries, clubs, ete. all provide services or products tat ofthe operation (an automobile factory, for example). ee _ Se rier Slee tee cca ema sparse ol lomraripaaiemenet ererenpeter irae. s arena Figure 1. intensive operations may involve flrly low-skilled workers but can —— Peers (nme | | petoasupa antec lw: a a ear Se yen et ee + Services ~ these are intangible and the buyer does nat physically take them home. They include, for example, a karate class, a medical ‘examination, andthe International delivery of package. Real sales fare a servic: the retailers provides the service of having an array of roduts for consumers to purchase. Business functions Allbusineses. fom small sat-ups to huge conglomerates, are organized on the same lines, by funtion ~what isto be done, There ae four key functions Resource inputs Processes teadd valve Productoutpus | ae Figure 1.4. summary bsnes sty + marketing ‘The resource Inputs can be categorized a follows 4 finance and accounts + Hluman~the right quaty and quent of people required to make + operations management or production the product or provide the service, All businesses, even highly | automated ones, stil require human Input even f only one person. | Otters require many individuals, often with diferent sil sets, | ‘Physical ~ the right quality and quantity of mates, machinery, and land space required 10 make the product or service. Even Intemet businesses require some office space anda computer Financial ~ the right quality and quantity of cash and other fooms of, ‘money required 10 make the product or service. “Enterprise the last tangible Input but cucaly important for Dosiness. ek the busines idea and che wilt see the other elements ‘beenme a functioning and ideally having busines. Enterprise fs sometimes reiered to as “entrepreneurship, whic tay often ‘asthe connotation of high-tech an cutng-edpe snes ' compote, eiepones, socal media. Enterprise, though, exists in all yes uf usinss, including the everyday awe-mowing Serves, \ insituconal laundry services, rick manufacturing etc) Figue:.t2.Dusnesfnctonsinaamal ucnes adage business enablesPEE ‘The only diference between the two types of business thatthe owner ‘or owners ofa smaler business have to deal with these functions ‘temacives wid a leiges business can afford hire spectalized ‘managers todo the same Jobs organized in separate departments ‘The role of business departments 1s larger busireses these managers will Jocus on thie function and in doing so help the business achieve its overall objectives. Some examples are se out below. Table 4.1.4. Business functions Ensuting that appropiate peope are employed tomake the product or service and thatthe people are suitably rewarded for doings, To | sccompieh hae gat he HR parmant | | must recut people vaio them, at times dani temanddeumioe pepe | + compensation Fr iance and aseunts | Ensuring hat approprste funds re made salable to make the producto service To accomplish this goa te finance and accounts | department must forecast requirement, keep accurate rect, procure financial resources from various provider, and ensure proper payment for goods and series aquired 0 operate the business Marsating Ensuring that the business afer product or sevice thatis desired bya sufciet umber of people or businesses fr profitable operations, Toaccomplish this goo, the marketing apartment must use appropiate stateges to promote, price, package and distibate the producto service Sowranemnegenentor”Exsuingtot apropritepocessesare used production imorderta make the producto service and ‘thatthe product or service is ofthe desied 4uality To accomplish tis goa, the operations management or production department ‘must contol the quantity an flow of stock, Aetermine appropriate methods of production, and, intodays competitive wor 0k ar ways to produce the good or service more L __ettcieny Allubesefuvettons are tnterdependemt. For example, ifthe marketing ‘department determines that 2 product needs to be made differently asa result of changes in consumer taste, the operafons management : _saavroouenonosusness once i a ‘or production function must redesign its processes, at least to some degree. That redesign may requlte financial resources, which the finance dlepartment must procure. The redesign may influence the number land type of people working in the business, which would have to be ‘coordinated with the HR function. “the character of the interdependence can change overtime. Initially businesses typically focus om survival, with HR, finance and accounts, marketing, and operations management or production all geared toward that end, Once a business established inthe marketplace its prioritles may change. For example, a business may plan wo diversity {produce ther goods or services), which places new requirements on ‘each ofthe four business departments, Ifa business is very successtul, then growth and even contol of the market might become a priority, ‘which could require significant modifications to the diferent business departments. “The strength of a particular business depends upon how successully aligned the four fanctions are, Is the business producing 2 desired good for service forthe marke It alms at? Are the right people aroducing the food or service, and are those people rewarded appropritely (financially find noa-finandially)? Small businesses often have an advantage in that they can respond quickly to changes in the marketplace. On the other hand, linge businesses generally have greater resources, wider reach, and ‘more name recognition. However, even a business dominating a market mus remain vigilant, Large businesses, when they become complacent, can fail Kodak Formostef the 20th century, Kodak dominated “the US photographic fim market. However, because ofthe invaducton of ital hongraphy [the eehnalogy fr which Kodak ‘self acaly develope), the business began to ee sales ofits photographic lm aecine. ‘By heat 1990s, the company was staring to stuggl financially. The ast yer in which the company made profi was 2007 andin 2012 Kodak ied for bankruptcy. Since then, the company has made several tempts 0 revtalzethe busines through redirection of peratins and sale of assets. though ‘the busines emerged rom bankrupey in September 2013, healt prospects forthe ftureare uncertain Kodak’ carlgcamaraa madehome photography peteiblafor ‘many people. The company contnuesto dominate the market ‘troupe much of the 200 contaSectors of business activity ‘Busines activity takes place in a numberof lferen areas: nthe toca community, in a country, or even within the global community. ‘Trahtonaly economists have grouped busines activity into diferent sectors a8 set ot in Tle 11-2 Table 1.4.2 Sectors of business activity Primary 2 Fig hing even tapping Tay, overnments closely mantar activites inthe primary sector Goods fram he secondary sector can take mang farms such asconsumr gurbes, ran-curabe onsumer goods, and capital goods. For most ofthe 1Sthand 2th centuries much Secondary secondary sect producton occured in what are refered to today a "developed counties” | Since the 19706, however ranufacurersin developed counvis have been facnginceasng : ompetion om manufacturing hms oeatedin developing nations” and "emerging a mame [Alsences are provided inthe eriary set, sometimes using manufactured products ‘These services canbe financial sure, heateare, eeation, vansport secu, and many ‘others. As manufacturing (the socandary sect) has sited a developing counties, the teriaryseetorhas gown aimponance developed courvies. Seve such banking, Insurance, ransportatin,rtal ane wholesale, ang consutancy have become expecially eet Import — ‘This seco, a subgroup of he trary sector provides services that are especialy focused ‘nknowiedge. Generally speaking various types of e-services and those involving, nd web-based services ae considered quatemary. This sectors pica of "postindustia? economies an, thus, many businesses inthe developed word engage In Teetary Ouatemary themed usteary activites, ‘These sectors are typically linked in wha is relerzed to a the production chain or chain of production. A chain of production Js the steps through the diferent sectors that must be made to turn ‘aw materials into a consumer good that is marketed. For example, ‘many types of raw material (metals, rubber, materials to make plastic and glas, ete) are extracted (primary sector) and processed into the ‘materials (secondary sector) that automobile paris manufacturers and automobile manufactures tur into automobile pars (secondary sector). The automobile pars are then used on an assembly line to make automobiles (secondary secon) The cars are shipped (certary sector) to automobile dealerships, which sell the cars to consumers (tertiary seco). Automobile dealers also typically provide after-sale service (oll ‘changes, tune-tps, and even major repairs), also in the tertiary sector. Sometimes, befote consumers purchase cas, they read magazine oF online reports about automobile features and service records. Sometimes ‘his information is free and provided by the government, but in other ‘axes this type of information is produced by for-profit companies that sell information. Ths type of busines sin the quaternary sector. ‘raw materas ae arqured inte prmary sect: ni can be by extraction, mn cause ofthe scarce natre of many resources inthe primary sector ar because ofthe potentalte damage agi envionment, Inthe secondary sector raw materi are processed usualy by manufacturing Goods Bec thinker ‘Think of same everyday products shat you use and imagine del production chain. Consider: ‘+a cerry ple yout purchase 1s ashatcboard + acaliphone ‘What primary, secondary, terior, and quate-mary bu Involved in the production. distabution, and marketing ofthese praduas As businesses grow, they often acquire other businesses. Sometimes this is “horizontal” growth, which refers toa business acqlring or merging with another business engaged in more or ess the same activity. for example, when two airlines merge or when one chain of grocery stores purchases another. When horizontal Integration occurs, the new business (the combination of the two that merged or were involved in the acquisition) will have increased marketshare. ‘Atother times, Dusineses grow “vertically” by acquiring other businesses involved inearier or late stages in the chain of production or by ‘beginning operations in an earlier stage theovgh internal oth. Ifthe ‘activity ofthe business acquired or entered sealer inthe chain, such a5 «lumber company purchasing forest reserves to harvestts own trees, thicproces ls called backwards vertical integration, Wien a business purchases another business or enters another business, the proces is ‘ailed forward vertical integration. For example, a farm producing ‘organic crops and meats might open a retall store o @restzurant that sells ‘the omganie ood and meats produced on the farm. ‘Horizontal integration is usually intended to increase market share and marker power and to lake advantage of economies of scale. Vertical integration occurs for varied reasons: ‘Lowering transaction costs ~transactons between businesses ‘ypleally have transaction costs. These are eliminated ‘+ Ensuring reliable supply ifthe vercal integration isbackward (or ‘petream') the pseeam stage can teat the “downtream” sage as a preferred customer in terms of quantity, availability, and price. «Avoiding government regulation ~ such as price contol, taxes. ot ‘explicit regulation of various stages through integration, «Increasing market power -if integration is successful (thai if towers ‘css, the business has greater Hexblity in setting its pices to others land can use varios pricing strategies to increas its matket power. 4» Eliminating or weakening the market power of other businesses! 4.1 AN INTRODUCTION TO BUSINESS MANAGEMENTBS Oe ‘commen to all these purposes isthe aim of becoming more profitable. Not always does vertical (or horizontal integration lead to greater profits, 2s It can introduce proportionally greater complexity (cst) than savings. Also, the profitability of itezration can change overtime: Sometimes a Dusiness wil integrate veically only to divest upstream and downstream stages at another time (csem may T T Figure 1.1.3 Business sectors and ypes of tegration Sectoral change 1.1 AN INTRODUCTION 10 BUSINESS » Businesses that can anticipate or adapt co the changing environment can do well even in industries that are perceived as “in decline. In general, developed economies have moved away ftom the primary seco. In both Canada and Austala, however, two primary sector industries have done remarkably wel organic farming in Canada and wine production in Australi. Another example is Germany: as one of the most developed feconomies ofthe world It has a stvong quaternary sector. However ‘German businesses have retained two o its long-standing strengths high-quality engincering and a strong secondary sector, “The process of shifting from one proportional weighting of secs inant ‘economy to a different weighting (shifting from an economy based on the ‘primary sector to an economy based onthe Secondary sector, for example) fan produce strains on resources, suchas human resourees. Secondary sector businesses may require specialist skills that may bein shert supply. Financial ezources, 00, willbe diverted from one sector to ancther Finally, ant economy mostly based in the teary oF quaternary sectors wll require fewer physical resources (as these will not be needed asmuch in the production of intangible services as or tangible goods). Oth tains ‘an occur as well. As an economy shifts to the secondary sector, egsation. land other protecions against envizonmental damage are often weak, and Inanufacturing firms in developing countries often do more danage to the ‘environment than manufacturing in developed economies. Entrepreneurship and intrapreneurship oth entrepreneurs and intrapreneuts ae vital o busines activity te they provide the impetus for innovative products and new business Sppontunites.Eneepreneuts re spall selemployed (or were centr {Dbve start-up of busines for whch they woe) Ineepeneurs re {Employed by rge organization and develop new produc or services coor ST Lace developed (lowincome) economies = yar = weary @ Developing (middle income) economies = que € Developed (bighincome) economies Figure 4.44. Sieofeectors ‘The sizeof each sector ofthe economy may change because, Just as individuals or businesses grow and develop, so too will countries. ghee Sates Economists usualyy measure the size ofeach secor interme ofthe ‘number of people employed by the industees in that sector. The {or the benefit oftheir employers (which usually benefit them, the ‘ntrapreneurs, as wel). Both entrepreneurs and intrapreneurs must, obsess sana Nindess"? balance the risk of failure against the likelihood of success for new {raion patter et tn igure ae they bays nse or busines ventures They af both types of people who want 0 ces & arate eee iretey ects cern Startup lhe fora new producto ora woe new business. Gp) Closely related to changing economies are what some schdarshave tea termed “social technologies". The more advanced a sector, the more complex are the reeded socal contexts for businesses to thrive, Thus, whereas raw material extraction Is often possible with relavely few skilled workers ard large numbers of low-skilled workers, the quaternary sector relies both an highly skilled workers (producers and managers of Information) and consumers ~ people and businesses that want and have the ability to make use of advanced information, Thus, move developed economies typically see social technologies and economies advance in tandem: asthe economy develops, socal technologies improve: as socal technologies improve, economies develop. Developments are not, however, linear, Technological innavation in one atea {for example computerized word processors) and is related workers (individuals knowledgeable about operating word processrs) can ‘make other technsloges and occupations obsolete, such as typewriters and typists. Thus, while some occupations become obsolete, New ones ‘emerge (hich are often perceived a8 “high sil) A Innovation is central ro what entrepreneurs and intrapreneuts do, This, typically comes in one of three forms’ «market reading: observing customers and competitors and then ‘making small changes 10 existing products «need seeking: communicating with curent and potential customers to determine their needs «technology driving: lavesting in research and development and following opportunites offered by technological capabilies. ‘Sometimes people imagine that “innovation” always involves new technologies (computers, telephones, electronics, etc), but ned-seeking innovation often occurs simply because someone understands that « need ensts for otherwise ordinary products or services, For example, in pee ching noon na pte Cutan Opiaonal yams (20071, Vel 35 soe 3pges 300328 Enreprenur ainda demons “sntepieand nt nore ‘amake ape Intapreneur snindividsatemployedby large organization who emonsintesentrepreneurial thinking the development of new productsor services6 ‘he Une Sues sol charges ad changes in homeowning pattems nena ya have nerd he Seman fern and pre Zovees ainda so ovation fave ocued ie eipment SOME pleat led mest demand bes bon bya ‘icencln he numberof worker poidng ese seve Same cncprenets who undesood ne sca anges sucessful ie prota boss nh sy ier scelhangshvepompedterinds Are penenagest fi sromen nthe woe en hc Unted Sate for eae ene Newbdne ce: th og walig busines, Now tht over women trcheme all orm of he ny he aly pet fen has nner en os dtc inthe howe Some banesesgo tote omesin wich bth pr wor and frac ete amly pron a oon waka the de rin dy Dog ling sees arcnow common m many US ce Professional dog walkers have made the most changes to Famiies working habits Reasons for starting up a business = People art hse many reasons, a mmarned in able 113 Table 1.1.2. Reatoneto stat upa business ‘Working forsomeane else means that you do not geo keep al he rewards yoursel¢Athough some cies aspect ofcaptasm, one central elementisthat those who put theicaital ats (the business onners et th evar, whereas thoes who dont put the capital tik employees) ‘mctve wages or salaies that are ypcally less than the etuon capa sto the owners. Many = Inaviuais wth an entropreneuri spt sometimes feel consrined by bosses, policies, and procedure in ire organiza. Starting yourawn business means that you can set and change the Policies and procedures a you see renee ‘Sometimes businesses ae started by individuals whose postions were made redundant or who could SI ot tind work The nerecniny of ving an incnmela therm tn tring mal usin. ‘Some peopejustwantto see whtherthey can “ake i themssves, Sarina small busines play requires one person perfor al uncions ofthe business (HR, marketing accounts and finance, and parstions management” production), Over ie, the busines isa success the business awner then hasta ean new sks as sor ha rolechanges te accommadate a ager and mare complex operation cd ang interesting businesses are st up by people wih passion for something who want just keep ing what they enjoy doing The business proculng Hawaiian Tope suntan lotan was begun by ern) High-senoal cnemisry teacher whotkad spending te athe beach Man special shops — uta ‘ores lamp stores, allt eothing stores, rare books stores, ané many ater allow thelr owners ta ‘workin anaes for wich theyhave passion. Businesses may ee0rfiné an urtapped opportunity nore t achieve fst mover advantage’ Samatines businesses, ge smal sturbie inn opparuntes fr wrch they werenlekng Tees ‘Ports one ofthe most sveceseh products ofthe :M Capon ar whch evluioned neice ammancaons, was stumbled acessby acident byD Spencer Sive ascietst working at 2M. If ou realy believe in something you may wana slthe idea to ater. Yoga studios, for example, EET EAI |) 2typlcalyownestby people who temselves do uoga and wana spread the ide at yoga ideo ‘enhances quality fife Marketing the idea helps tel business, butoken the gna mativation to pena yoga studio sto spread the ] 1.4 AN INTRODUCTION To AUSINESS MANAGEMENT The process of starting up a business “Te time it akes tc register a business might vary, for example, from {> mines in Singapore co up w # weeks in Auyeuting. Two featutes are ‘common to all sucessful start-ups + the busines idea + planning “The business idea refers tothe fundamental acivty that the business will do, ‘whether Its something basi, such asa house-leaning Servi, or something ‘more sophisticated, for example manufacurin. The businesidea can be ‘market-driven ~ the |, determined by the needs of the market or product ~ lorservice-driven, which means that in some sens the entregreneur forbusiness mist convince others that the product or service worth purchasing. Regardless of whether the new business basi cr sophisticated ‘market- oF product driven, the entrepreneur must have abasic busines ides. ‘Then the entrepreneur should carefully plan the business in order to reduce the many rks assosated with Starting up a busines. Cam Cae) Ca) (eer Roscoe) BD focraicet MD (crores Figure 44.5. Sepsforstarsups 1. Organizing the basiet. The entrepreneur starting a new bnsinese must address severl basic questions: Whereis the business going 10 ‘be based? How willthe entrepreneur name the business? What will, be its egal structure? What wl be is operational structure? Is there 2 sufficient business infrastructure to make the business feasible ~ Suppliers, potential customers, and government services? 2. Refining the business idea through market research. Once the entrepreneur has determined that, in broad outline, the business concept is feasible, he o she should do market research todetermine how the business wil distinguish itself from others in the marker. Rarely a gap in the market obvious. Were thatthe ‘cote, starting a successful business would be easy. However, new businesses have very high failure rates. Whale precise rats of failure are dificult to determine, as many business are so smell and so ‘hort-lived that they elude detection in surveys, failure rates in the United States, for example, ae between 50 and 80 per cent in the first four years of operation; 25 per cent fallin the fist year alone.” In Furope, another developed economy, failure rates are also high ‘Thus, once the basi Business dea is determined, the business must then do market resarch to determine the precise market segment it ‘wil target, and the entrepreneur must answer some basic questions How wil he or she conduct market research? Who will be the target market? Cor the new business test its concept? What will + paps stacsicoanconarptalve-by nba! nCRSA EO = e 1.1 AN INTRODUCTION TO BUSINESS MANAGEMENT be its “unique selling proposition (USP)"? How will the business ‘wil vely that they are accurate? Then, the business must attract, communicate with the marker? Sart-up monies. Some or all may come from the entrepreneur, of bother investors may be required. When someone provides equity Tee aeee asics Tedesco ane ot ei es ‘capital it means that person ' a partial owner of the business. the grocery business. The ies is very aitraive. Afterall fod sone Bea thinker ‘Most entreprenears who startup a business do not want to lose ‘ofthe bask meceaties of human exinence. However, matketretcaxch — ¢hogsr one of the ‘control of the business, so some of the capital will be in the form of may be very reveling. A market may have too many competitors. of stewing busines investment ~ selling shares ~ but some of the capital maybe loans atsegment ofthe grocery marke high volume. low cost for example) to the Business, Who willbe the lenders? What ki of terms will Imay be saturate. Market esearch might reveal that asnallniche #6! deletes and they want? market (uch s for organic products o spedaized meats Is where enté a there isa gap inthe market, Thus. researching the market has refined manulgctuer ofa Table 1.1.4. Possible prelems frastartup te base busines idea (a grocery store) and narrowed and refined new energy drink itt a signlay more pres ea: peciity grocery sorethat_ A | rrtiens anew businessmayfce oles either organic products and/or specialized meats, renee Chgarization + Theloatan ofthe busines inappropriate 3. Planning the business, Once the concept es been narrowed, the aed + Thename does notregste ‘entrepreneur should write a business plan, which i document that * 2ftschool ports [Fe Thestueur des not work, sudresses al the fsues that need tobe planned before operations sino Supplies rune, begin. The elements ofthe business plan ae detailed below. The Work ingroup to rete | eee ~ business plan will serve muliple stakeholders. especially potential a tustes pla for your Warkererenrch + Theresearchwas poor ‘owners ofthe business and financial institutions (banks, lending ew Business, ivi the © Thetagetmacet wast appropri. ‘companies) that may provide capital. The composition ofthe Steps between you and 2 metectwa to optimists busines plan requtes the entepreneur or people starting the wonte down a Leas five 2 channee ofcommuricaton were wea). busines to think through mos ofthe specic elements of how the bullet pins for each step = busines will operate, For investors and finances, the busines lan ‘Bushes plan | + Thebusness plan inatconince ‘an provide some confidence, a3 it indicates that the business has Goals wer to vague orcontatoy foreseen potentat sues an is tying to address them. on acer SsenTacierd A. Establishing legal requirements. ll businesses operate in requirments |. Regsvationwastoo dificult counties that have laws that can influence the legal organization eee ofthe busines, is labour paces, and its operational practices, a8 t+ wel a determine tax obligations. In most countries, ll busineses Finance © The accounts were nate’ propery cash wn rust be registered, even ifa sole rader (which is nota legally partial was protien spate ely fom the operator athe snes) Oe Sips of Raising startup capital was to dif usiness~ corporations, for example ~ are legl entities that must Be ec ener be established in accordance with the laws of the host country. In pe ee eee eee ‘many countries businesses must have specific licences and/or pass Themeiket = Telauneh ied certain inspections before they ean operate. These legal requirements © Thepiotwas inconclusive can be extensive and cost. Pally, the business must investigate {success was lined - the podut fale tnepe. the tax requirements ofthe country. These taxes would include not — ony income taxes, but also various sort of payroll axes that must, ‘be paid, such as for employees’ pensions from the government, Testing the market, The fina stage is the launch of the business unemployment and sickness Denes, oF even medial insurance. ow wl hat occur? Wil the busines begin ona small scale (a Ne ere ahah eee aces 4. Nalin the Beane Once tebe es has een Serna tania aerate Preteen heehee or eetre errata pee Cotes era peeps pmmedoeperror he eae eee SS tea sedan osppehe bose cea ere eae ane Pinan eee are ee eer errr ote tomeboanessctesiteene nape eer cae et reac otunmtte mateo Sonim pierre nu eck arenas ance escinrernarce Seems sit coatie aan ae ete eo ‘Prepare accounts in the business and who, external to the business, easelematenl ‘ bernie44 Problems a new business may face "Even when all these steps are followed, start-ups stil have a high probability of failure. Businesses that fall often do so because of what they did hefore the hesinece ever pened: she business had problems in basic organization, Iisproducts or Services Were based upon insufficient ‘or poor-quality market research, planning was poor or unconvincing to investors of lenden, legal requirements were not properly satisied, accounts were poorly kept andr the business had insutficient funds te operate, oF the lunch was unsuccessful and sales did not materialize. A ofthese problems car cause a busines 10 fall Even if star-up has a good business idea and develops a strong. ‘busines plan, the business may sl fal. Sometimes falure results frm lack of name recognion inthe marketplace, Other times failure stems from the inability to wecrut labour with the right skills. In other cases it is because businesses cannot always accurately anticipate the reactions of competitors and certainly a start-up cannot conta! the actions of ts ‘competitors, New businesses generally have less capita 0 rely upon if the ecoflmy weakens, anda strained business olten brings out problems between managers or executives which would not be present ifthe business were operating successfully. Therefore many things outside a business control can cause tt fail, The elements of a business plan -Abusiness plan ses ou: how the organization will meets business bjectves Te involves sepping back rom day-to-day operations and fssking where the busines is heading and what is protes shouldbe. The plan applies to a specific period. poten vests, and Iba detaliedatement ofthe shor-ferm and long-term objectives of the business with an aualyis ofthe resources needed to achieve these objectives It should be regulary reviewed and, i necessary, spdated Responsibly fr delivering ll the elements ofthe business pla will te alloted okey individuals in the organtation, such 8 department heads Succes wil De measured past leanly stated performance targets et ou inthe len, ‘A business plan is usually combined with detailed budgets to nance the requized activities. ‘The purpose of a business plan “A busines plans drawn pt: “+ support the lunch ofa new organization or business idea “+ attract new funds from banks, grant providers, or ventute capitalists “+ suppor states planning “+ identity resource needs provide a fcus for development “+ wor asa rceasure of business success INIRODUCTION TO BUSINESS MANAGEMENT Entrepreneurs may have plenty of exginal ideas, Dut they often lack business experienc. If banks ae to lend funds to new businesses, they ‘want tobe confident they will be paid back with interes. Since the risk ‘of new busines falure is very high ~ upto 80 per cent over the first wo {years in some sectors ~ banks will only want to lend to those businesses ‘with alow risk of aire. To persuade a bank to lend it money, @ ‘business needs to prove that it has done its homework, knows where it Js going. and how is going to get there n other words, it needs a plan. ‘good business plan may be of significant use 1 stakeholders. For potential investors, it will provide a basis for assessment of risk by {etailing how the business will use a bank loan or investment. For employees, it wil dently specific objectives and goals and provide a Lacbhirecmunesal focus for action and a source of motivation. For suppliers, analysis of Using the business you disaused the busines plan may identify whether there are ikey tobe long-term "the workpolntom page 12 advantages from a commercial relationship with the business rete sbusines ten end pent For the local community and pressure groups, aces othe business plan Ae will provide the bass for asessing the organizations ole in the community. Businesses that have become successful will have usualy stated off with ‘a dear plan This is often in the style ofa document called the “Business plan* which can be presented to potential investors or other intrested {groups such as the government or the bank manager. ‘The elements of a business plan “There are six elements ofa business plan the busines dz, aims and objectives + business organzation + mR + finance + marketing operations. Fach element has 2 specific focus and should address key questions, a5 setoutin Table 1.15.“able 1.5 The ay question fora busines plan 16 cen rs setingoutthe business the business dean idee ‘tev context Business howthebusiness ‘orgenzation —_wilbe ognized GANIZATION AND E To eens ere ‘hati the cre ides and what are the objectives ofthe business? How wlthe produt work? Ooesithavea unique seling pont (USP)? Haw wiltheprocuct be developed? Why should it succee ‘Winere with business be located? What svuctar wil thave? What type ofbusiness witb? Who wil make wrat decisions? Haw lth owner or owners stare tthe Petia? he how anglepequlementanecseey tome teres? howthe business \Wnowiahave whatespensbliis and what renards should they expect? What wil wilbestafed Bethe HRpln? Whattypeofconractwa beused? how the business | Whereandhowilhe eneeprersusoue th start-up capital andatwhat cost? This wile financee untshouldineusepjecte budgets, income statements, an cashew forecasts, Warketing | howbestio What maretesearchhas bean done? Vasa als frecast heen made? isthe rmanetthe produto targeted ata parts sepment of the markatorwiltbe mass pratt rsvased? Whatwalthe prmtional mix? How wi the productbe dstbuted? ‘Operations howthe product How wil production be organized? How mang unt wil the busines produce? supply cain ikely tobe? Revision checklist Y- Businesses combine human, physical and financial resources to produce goods and services, ‘1 Human resources are the people needed to carry out the aims of the organization. Physical resources include buildings, machinery ‘and raw materials. Financial resources include the money needed to make the product or service, There are far main sectors of business activity: the primary sector generally involves the acquistion of raw materi 1 the secondary sector involves processing raw materials, usually tocreate a product, 7 the teary sectors where most service businesses sit 1 the quaternary sector provides services that focus on knowledge An entrepreneur is an individual who demonstrates enterprise and Inative in oder to make a profit, An intreprencur isan individual employed by a large organization ‘who demonstrates entrepreneurial thinking inthe development of ew producs or services 7 Businesses are started for many reasons. Steps involved in starting up «a busines include: researching the marke, planning the new business ‘establishing egal requlrements,rasing finance and testing the market. 1 A.new busiress might face challenges at each stage. These can be both things within is control and extemal factors beyond its contol. 1 The elements ofa business plan are the idea, busines organization, hbuman resources, finance, marketing and operations wile mide How ng wil production ake? Is there hel tobe a lead time? Wats the 2.3 AN INTRODUCTION TO BUSINESS MANAGEMENI Practice question starbucks! and Tata Coffee Starbuck sa mainational colle hop chain based in the United Stats {U3} Starudssin cussions with Ta Caffe, an nda company. {hott opening starbud® cfc shos in the as prowing Indian marke. ‘The Indian government limits the entry of foreign-owned rete chains int nai. “Tua Ce grows and sells sown colle. I owned by Tats Grp the Inrges Indlan business conglomerate" Starkuas and Ta Coe are Considering forming a state allance or joint venture. Forthe past Seven yeas the two companies have done busines wth each othe. Serbs" has purchased cote from vartous supple n tnd (oF ts foffe shops in Europe and the US) including trom Tata Ce Forming a arategic alliance o a jint venture with Tate Coffe will ‘allow starbucks enter the Indian market. Additional advantages for ‘Starbucks include 1 Startucts? could open coffee shops inside hotels ofthe Tata Group's nationvvide hotel cain 4+ Tata Group would consider allowing Stabucks* to pen coffee sopsin the numerous retail chains that it owns Coffee has long been popula in southern India but notin the north, ‘Over the past decade, however, consumption of coflee in the nosth has increased significantly, as new coffee shop chains with more choice. appeal to young Indians with disposable income. Enda (with population of aver 1 billion) is developing fast with a grow rate of 58% of ts GOP this Yea). Starbucks has carried out research and found ‘thatthe global brand name “Starbucks” already well-known in India, although there are no Starbucks” colle shops there yt. ‘The competition in india is intense, afé coe Dey", an Indian compen, ominates the market. An Kellan company oWns the other big coffee shop chain, Barista™, [soure.adapes rom Starbucks ta broaden dealings nina Intemational Neral Trbune,14 January 2013] 4) Define the term multinational company Lemarksy by Explain the importance of branding or the deasion of, ‘Sarbucke* to enter the Indian market. (omartey 9) Explain one PEST factor that may influence the decision ‘of Starbuck to enter the Indian market. [2 mek 1B, Nov. 2012 + cengunuet ocnpany as nade pte arcnpesan BETS ats ‘pen neste sn ft asc Ite ena awPrat) oe uC Uy By the end of this chapter, you should be able to: Distinguish between he private and the pubic sectors > Dutine te main features fhe allowing types of for pot (commercial organaations + soleaders © parmerships 4 companiestexpoatons dutine the main features othe folling ypesofforproftsocial enterprises: + cooperatives + microtinance provides public private partnerships (PPP) > Outine the main features othe folowing types ofan profit steal enterprises 4 nom governmental erganizations (NGOS) = chattes Main features of profit-based (commercial) organizations Proficmaking busneses come in many types of eel organittion and fxtence, bu tne ost common are te folowing” + sole traders |= partnerships |= companies or corporations “+ for-profit social enterprises + cooperatives icro-financers public pasatelpartnerships (PPP). ‘The common feature of al ofthese types of business is that one of thet aims is to generate profit. Th profits a business receives can beshown, by the following formula: ‘otal revenues, often calle “sales, ae all the income received by the Dusines in a specified period of time, Total costs are all the cost incurred. 18 4.2 PEE OF by that business in the same period of time. The wey that revenue and expenses are measured is actually more complex than this simple formula suggests, but for now the simple form is enough. ‘The diference between them can be expressed as shown in Figure 1.2.1 \ & = cone ome ae es Figure 1.24, Revenve, expenses, and profitsin diferent types of organization Sole trader -Most people starting their own business typically begin with a limited ‘budget and a simple organization, Facing these constraints, they often choose to operate asa sole trader (sometimes called a sole proprietor), ‘which i the simples form of business to organize. Being a sole trader {ulfls many of the reasons people start a business: being their own boss, seeing a gap in the market and wanting to respond quickly, creating their own product, serving the community, or jos ving their dream, ‘The main atures ofa sole trader business include the following The sole trader owns and runs the business Sole traders may ‘employ other people, including those empowered to make some of, the decisions, but the sole traders themselves make management {ecisions and have ulimate responsibility forthe business Monique owns and run her own ‘No legal distinction exists between the business and the sole cafe busness-ahe ne sle aver trader, The sole trader i the business an, thus, i abe forall, the debts ofthe business or other daims (such asthe outcome of a lavesut). In other words, sole traders have “unlimited liability” © The finance is usually limited. Here finance refers tothe money thatthe Business has available for use. It can come from the personal savings ofthe sole trader or from other sources, such asa loan {rom family and friends a fom a bank. Regardles, sole traders ‘ypleally have limited finance, ether because their personal savings are limited or because family friends, banks, and other financial Institutions may be reluctant to Tend the sole trader money because (ofthe high faite rate of start-up businesses, | + The business is close to the customer. A sole traders usually small Business that allows the sole trader to interact with each customer. Sole traders get to know their customers on an individualBS oe basis, which allows them to provide a more personelized service than. larger businesses. «The sole trader has privacy and limited accountability. Most of the time, sole traders do not have to declare their fisances to anyone ‘eneept the tax authortes, Which want to know how much prott the Dsiness has made for tax purposes. Sometimes, as wel, sole traders borrow money or enter into a financial contract (such asa Tease) and lenders or lessors may need to see financial statemenss. In general, however sole waders have a high degre of privacy, “ Reglstering the business is generally relatively easy and inexpensive ~ and quick. Although laws vary fron country © ‘cuntry in general starting and operating as a sole wader is simpler than for other types of legal organizations. Sole tracers usually have less legal paperwork to il out and file, Sole traders make all decisions themselves and therefore do not have to devote time to dicussion and o building consensus for decisions. One ofshe greatest advantages of being a sole trader shat all profit ‘rom the business belop tothe sole trader, a5 no legal sistincion separaies the owner from the business, Other advantages of operating as asoletrader include: = «+ cemplete control over all the important decisions “+ Alexbilty in terms of working hours, products and services, and changes to operations ‘= privacy, assole traders generally do not need to divslge information “+ minimal legal formalities 1+ hase es to customers, which can give a competitive advantage, ‘The sucess of businesses operating assole waders depends on the drive, centhisiasm, and health ofthe sole traders themselves. Any of these can {alter Sole traders also have other disadvantages, which include the following: «+ Competing against established businesses all by yourselFcan be @ daunting challenge ‘There may be stress and potential inetfectiveness because the sole tmider makes all the decisions, often with imited time to make them and limited opportunity to seek advice from other. ‘There wil be lack of continulty inthe event of a sedous acident or te owner's death ~ the business itself may not continue. ‘There may be limited scope for expansion as the owner spends al his orher dime running the busines. + Generally, there willbe liited capital, which may also crete 2 burden on the business. The focus wil be more on having sulficlent «zsh for day-to-day operations than on looking tothe future. 1 There is unlimited lability ofthe owner for any faults, debts. oF mistakes made. 4.2 TYPES OF BUSINESS oncaNizATION ‘The majority of scle aders remain small businesses and typically the business comes to an end when the sole trader retires cr des. Someuimes, sole caders want wo stay smal, whieh allows the wo make ‘a decent living and not have to manage (and worry about) the many ‘complexities of oferating on a larger scale. Sole traders often have a riche in the market and see no need to expand. When sol: traders want toexpand, often the challenges are too great. Their profits are not large fenough o suppor grovt, oF the rsks of growth ate too great Just, surviving may be the chiet goal ofa sole trader: many sole traders give ‘op oF fall within tne fest few yeas of existence. Partnerships An altemative type of busines is that ofa partnership. This type of busines i formed by two or more people. Oten they are friends associates or people with similar or relate skill, Partnerships are ‘popular with profesional people with related quaifieations, such as ‘doctors lawyers, accountants, of even business consultancy firms. “The main features ofa partnership business inchude the following: © Decisions are made jointly by the partners, who own and run the business together. Partners may employ other people but they ‘make all the management decisions. Partners also own the business, each partner with a percentage ownership. © The business isowned and managed by more than one person. Although the number of partners s technically unlimited, Betting agreemert is more difficult asthe numberof partners Increases. Most parinerships have 2-20 partners. «No legal distinction exists between the business and the partners, who are able for al ofthe partnership’ debts and omer ‘obligations Partners have unlimited liability and legally can be called ‘vpon to pay for 100 per cent of the partnerships debts even ila partner owns only a small percentage ofthe business. + Finance is usually more available than for a sole trader business. ll partners contribute some capital to startup the business or 1o “buy into” the business, whieh usually means more capital than if provided by only one person. Also, banks and other Sinanclal institutions are usualy more wiling to provide finance 10 a partnership thanto a sole trader, asa partnership is considered more Stable than a sole trader + Some partners may be “sleeping partners”, which means that they provide some finance (their investment in the partnership) and expecta share ofthe profit. Otherwise, however, a sleeping parmer performs no other role in the business. + The business operated asa partnership can often offer a ‘more varied service than a sole trader. Often different partners bring diferent expertise, and the product or service offerings of the Business can vary. This situation is especialy tue in the case of parmnerships of professionals such as lawyers or doctors. For ‘example, a law firm could have lawyers specializing in criminal law, ‘commercial law, international law, or evil aw. a2 «Partnerships typlcally have a greater degree of accountability ‘than a sole erader, Although in most countries parmerships ere not Tegally required to draw up a deed of partnership, partnerships often do. Having a deed of partnership makes good business sense because itisa legally binding document that sets out the rights and duties of the partner. It ieludes information about + responsibilities + inancing Avision of profs = abilities procedures for changing circumstances. ‘With a deed of parmership, partners know their rights and responsiblies within the partnership, andthe Hkelthood of some nao disagreement between the partners decreases, «Partnerships are ¢ypically more stable than sole traders and hhavea higher likelihood of continuity. Drawing up a deed of partnership wil slow down registering the business but will hep the ‘organization in the long term. “+ Partners do not necessarily share all the profits equally, Usually, profits are allocated and paid out according to each partners percentage ownership of the business. I one partner has provided 2 substantial amount of finance, then that person may expecta {greater proportion of profits than the other partners are alloceted. tn fddiion, in partnerships with sleeping pariners", the active partners, may get agreed-upon salaries or drawings that ae considered expenses for the purpose of determining the partnership's profit, ‘Then ater the profit is determined, the profits are allocated to partners according to thelr percentage ownership. Partnerships have certain advantages compared to sole traders: ‘+ Asparinets often bring diferent skills and qualities, partnerships 'n have mote effident production through the specialization and the division of labour. “In general, partners bring more expertise to a business than one pesson ca. «Aspartnerships are perceived to have greater stabilty and lower risk, they generally have access to more finance, ‘+ Partners can help in emergencies or when others are ill or on holiday. ‘© Parmerships have moze chance of continuity asthe business will not necessarily end If one partner dies. Partnerships also have cerain disadvantages: ‘+ Hach partner has unlimited lability, which means that each Fariner is legally responsible forall of the businesses debts or actions of any ‘other partner. The one exception to this lability is when, in the deed ‘ofpartnership, a partner or certain partners are declared “limited : 4.2 TWPEE OF susiNess oneanization partners‘, Although the laws vary according to county, in general, limited partners have limited Habity but algo limited contol (bot specified inthe deed of partnership), © Compared to businesses that operate as companies (ceporations), partnerships usually have les access to loans trom banks and other financial institutions, Limited Bnance can often prevent a business from expanding or maximizing opportunites for making profits, + Am individual partner does not have complete control over the business and has to rely on the work and goodwill of ohers ‘Profits have tobe shared among the pariners. ‘Partners may disagree, which in the worst case could break up the | parinership. ‘In summary, partnerships are safer than sole traders but also more complex: ‘organizations. As multiple partners can typically rae more finance than sole traders and because ofthe greater inherent abit, partnerships have :mote ofa chance of surviving changing market conditions and have mate ‘ofa chance of expanding ifthe conditions ae right. Companies or corporations eshaps the mos important ype of busines isthe company (comoration in North Ameri) and you can recguiae a company at say have the fllowing abbreviations afters loo: INC ~ Incorporated (USA/Canada) LLC ~ Limited Liabilty Company (United States) PLC ~Private or Public Limited Company (UK) PTE ~ Private Limited Company (UK) LID ~ Limited Company (various) Td SA ~ Sociedad Anénlma (Latin America except Brail and Mexico); SA ~Sociedades Andnimas (Brazil, Portugal) Thisbusness nthe USAhas registered ‘SpA ~Soceta per Azion! (tay) itsefas corporation AB Aktiebolag (Finland, Sweden) Bhd Berhad (Malaysia, Brunel) (GIE~ Groupement d'intér€x Economique (France) GmbH ~ Gesellschaft mit beschraenkter HTaftung (Austria, Germany, Switzerland) Other countries have other designations and abbreviations. Whichever 's used, this type of designation means the same thing: thatthe business {sa join stock o limited company. This type of business is the only one ‘thai can be called a company (corporation) to distinguish it from the other types of busines. ‘A business can become a company by a simple but very powerful process =the busines and the owners ofthe business ae legally separated {and the liability ofthe company is stint from the lability of those who oeBE eos ‘owt, Another feature ofa company is that. typically, thas mulple fwners, each owing a fraction ofthe company in the form of shares (Ghares of stock ov equity shares) inthe company. ‘The business ~ the company —has legal existence in its owa right. The company employs executives to manage the business and workers who hhandle the day-te-day operations. Just like sole traders and partnerships, 2 company has certain responsibilities inthe community: |: must obey the Inwe ofthe land and pay te¥ee nike enle fader andl parsnerehie companies Keep tae profs from helt business activities ~ snless the owners (also called shareholders) decide to pay all or @ porion of profits (pastor present to the shareholders in the form of svidends. Shareholders recrive a proportion ofthe profits as dividends atthe tiscteton ofthe company, and thei proportion of the dividends i determined by ther proportion ofthe shares of stock. For example, if company makes profit of €1,000,000 and decides to pay total dividends ‘of €600,000, the otal payout (€600,000) will be divided by the number of shares of stockissued and outstanding. If that gure were 100,000, + the owner of each share of stock would receive a dividend of €6.00 for each share the peson gwned. If one person owned 20,000 ofthe issued and outstanding shares, that person would receive €120,000. Often, individual shareholders own only @ par of the business. When that isthe ease, dividual shareholders in theory do not control the business unless they own a majority of the shares. In practice, sometimes 4 shareholder who owns a lower percentage can stil have a deciding ‘weight in the decsions ofthe company and can, therefore, contro it In the case of very lrge companies, itis very raze for one person to own all ‘ora majority ofthe shares of a company With smaller companies, its ‘not uncommon far one person to own 100 percent of the shares of for small group of family members or frends to own 100 percent of the shares. Regardles, shareholders are rewarded for investing ina campany in three ways 1. The price ofthe share(s) they hold may increase in value ifthe company i peforming well In theory (though not always teue in practice, the value of a company is based upon is profits. As profits increase, s0 t00 should the total valu of its shares. Therefore, individual shares of stock in the company should increase in value at the same rate 2. ‘The company issues portion ofthe company profits as dividends, ‘The amount of money each shareholder receives deperds on ‘the numberof shates each shareholder owns. With small or new companies, divdehds are often not paid or are relatively small With large, established companies, dividends are often paid regularly ~ fonce every three months or quarter - and individuals invest in the ‘company in part because they want the regular dividerd income that, ‘comes with share ownership in that particular company. 3. The shareholder has limited lability, which is one ofthe single ‘most important features and benefits of owning stock in a company. Unlike sole proprietors or partners in a partnership, shereholders Ina company are not responsible in any way forthe company’s 2 17 TYPES nF BUSINESS ORGANIZATION debts, If the busines falls, chen all the shareholders can lose is thelr. Snvestment in the company, Dut no more, For example, a company gees into receivership (bankruptcy) owing millions of euros or Sellars to individuals, banks, and other companies, he shareholders ‘de not have to pay any of those debss. The shareholder’ Hablity is limited to their investment (however, inthe event of liquidation of 1 tompany, the shareholders are the last party to recelve any monies {om the sale ofthe assets of a business all debts wil be pai fis) ‘The est to the shareholders of investing in a company i as follows: 1. The price ofthe shave(s) they hold may decrease in value ifthe ‘company isnot performing well. As noted in point | above, in theory the value ofa company is based upon its profits. I profit declines, so too (typically) wil the value of individual shares 2. The company may choose not to issues dividends fit does not have to, Businesses need funds for many reasons. Companles that are doing poorly may not have sufficient cash om hand tobe abe to pay dividends, Businesses that are rapidly growing also need money to Support the growth (to pay for more investment in equipment and ‘working captal). Asa result, many companies rarely or never pay dividends. The entire measurement ofthe value ofthe investment Is besed upon the rise or fallin the stock value. 3. As “owners often own only a fraction ofthe shares of the ‘empany, owning shares in a firm may not mean that an individual stareholder has any meaningful say n decsions about the business. ‘the end of 2012, General Electric Corporation (GE) in the United States had 10,405, 625,000 issued and outstanding shares of sock. An individual investor owning 100 shares would, practically sveaking have no say at ll a glant company such as GE. To ‘own even | percent of the company (and thus have a1 per cent say in who the executives are) would require an investment of| approximately $2.5 bilion dollars. ‘Typically, businesses choose initially to become a company because the owners ofthe business want the busines to have aseparat legal existence from them personally thus giving the owners as shareholders ‘athe: than as a sole trader or partners, limited lability. There are also ‘other reasons for becoming a company: = The enhanced status of being a company is generally recognition that the business has been succesful ‘© Seling shares a good source of finance for a business, especially ‘one with growing Working capital requirements. 1 Being a company Increases the stability of the busiress asa ‘company has a legal existence apart from is owner Ifa shareholder ‘orshareholders de, the business continues. Inthe ease of small Dasinesses, the death ofa major shareholder, if that person is also an active executive in the firm, can cause some disruption. Nevertheless, te business does continue, ‘© Companies typically have improved chances of gaining further finance, especially loans, from financial institutions and governments,6B oo Ey ‘Achieving company status soften a curing point in the evolution of a business. Up unl the point that a business becomes a company, some ‘questions exst about the survival ofthe business and its continuity and growth, ‘As with any Tegel organization ofa business, the choice to become a ‘company has advantages and disadvantages. To take fll advantage of ‘becoming a company, a business will have multiple investors and thus 1 major infusion of capital. However, when ths occurs, the original business owner loses some control over the business and could even lose personal involvement in the company. When a business becomes 4 company, its new owners (the shareholders) may hire executives to ‘make all major decisions. The orginal business owner (as sole trader oF partner) may new be merely an investor. ‘When a business reorganizes as a company, It can choose to become ‘ether ofthese pes of organization: private limited company = pubic limited company. ‘The only real diferenc® berween the two forms of company is thatthe privat limited company can oaly sel shares inthe company privately: to people known to the owmers suchas frends, family, and associates ‘Although the numberof shareholders permitted in a private Lmited ‘company varies from country to county, generally tls alow, around 20 ‘Asa result becoming a private limited company limits the amount of finance available but allows more control to be maintained, 1 the business decides to become a public limited company (and the phrase typically used is “te company Is going public) then it has to ‘offer its shares ina public place ~ a stock exchange ~ based in one of the ‘majo financial centres such as London, New York, Frankl, Tokyo, Shanghai or Singapore, or online: for example, the FTSE, Wall Street, the NASDAQ, the NIKKEL Going public opens up the possibilty of Securing large sums of capital n 2012, for example, Facebook acquired S16 bilion fom ts “inital public offering” (IPO), or frst sale of shares to the public. When a company goes public it does lose some privacy. Public limited companies have to allow potential investors o see their accounts, which become open to everyone. Further, the busines itsell, hhas no control over who buys thelr shares. For example, Microsoft bought USS150 milion worth of shares in Apple in 1997. ‘The main features of a company i2dude the following: «The shareholders own but do not run the business. Their purchase of shares provides fiance, but otherwise the shareholders have litle input into the day-to-day running ofthe busines. Instead, professional managers are normally employed to make all the ‘management decisions. +The business and the owners are divisible. The shareholders are not lable for any ofthe debts ofthe busines. The shareholders’ lability i inited to their investment in the company because the ‘company and shareholders are separate legal entities. As the business and the owrers (shareholders) are divisible, the owners can change 1.2 TYPES OF BUSINESS ORGANIZATION ‘A person owning shares in the company can decide to sll these ‘hares for any reason whatsoever. ‘The legal existence and many of the details are legally recorded and matters of public record. To form a company {and thus achieve ths separation from the owmers) owmers of the business must have two documents drawn up and registered with the appiopiiate government agency (which verles in name fom ‘country 10 country as do the names of the documents}: | Memorandum of association — this document records the key characterises and the external activities of the company being created. For example, the memorandum will provide basic lnformation onthe objecives ofthe business and record the share capital intially required «Articles of association ~ this document speciies how the company willbe regulated internally. I wil for example, explain the initial organization ofthe executives of the company with their tes and areas of responsbilties (chief executive otiet, chief financial officer, et) and the rights and responsibilities of cach shareholder Greater finance is generally avallable. The intial offering of shares tepresents a one-time injection of capital to the business (Once the busines sels its shares It receives the price paid atthe PO. Thereafter, the intial shares and any future gains (or losses) ln price ae to the benefit (or cost) ofthe shareholders only. unless the ‘company issues and sels addtional shares to raise more capital ‘A company is held to a high degree of accountability. The fowmers and the company are separate entities, so from time 10 time the company must provide information to the shareholders so that they can understand the condition of thelr investment and so thatthe company and its management are being held accountable, Information on a company is generally provided by = published, audited company reports annvally and, in some ‘countries, unaudited quarterly reports an annual general meeting (AGM) open to all shareholders + an extraordinary general meeting (EGM) if called by the shareholders, Compared to other forms of business organizations, ‘companies have greater stability and a higher chance of ‘continuity. Wien a shareholder des or sells shares, the company ‘continues to operate, The death ofa shareholder or the sale of shares has no direct impact on the company. All that happens is that one parsal owner ofthe busines is replaced by another paral owner. ‘8 company can theoretically last for ever because its independent ‘of the shareholders. The oldest company in the worlds a Japanese ‘onstruction company, Kongo Gumi, which was founded in 578 CCE and began operations by building a Buddhist temple. Another example of an exceptionally old company is Stella Artois, which has been operating in Belgium since 1366. Sole trader a personho owns andans thelrowm business and who has complete contol over dections Parterehip busines osned and contlledby oor ‘more peope who share ‘esponsibility and decision making Company _abusiness organization ‘eaablshed fora specfe Purpose andregitered ‘ecaringtolocal maton legavon az‘Advantages of operating @ business as a company include the following: + Access to finance is easier than for sole traders and partnerships. Companies are perceived to have greater stability {nd lower tsk than sole traders and partnerships. Individuals {and instutions ate more likely to invest and benks and financial Insitutions are more likely © make loans to companies, + Theinvestor has limited lability. Investors cam lose only the value ofthe shares and nothing else. By owning small numbers of shares in many diferent companies, investors cen build up safe investment portfolios. Each individual investrrent is limited, and thus their risks are spread out among many campanies. The ‘companies also benefit. Many companies have a huge number of “small” investors lindividuals or insitations that own avery small, ‘numberof shares). However, the sum of the investment ofall those small investors can add up to large sums of finance. + Thereis continuity. The business will nt necessarily endif shareholder dies or sells his or her shares or indeec if any ofthe Airecors leave. Companies can go bankrupt and be liquidated (with all of th assets solf of to pay all the liabilities) thas terminating their operations. However, companies have a greater chance of ‘ontinuty than a sole trader or partnership. “There are possibilities for expansion. Companies have more ‘opportunity to expand because generally they lst jonger and have more aces to finance. Fora busines o grow, it ten needs to Invest money in equipment, marketing effors or new activites, ‘With fewer opportunites fr finance, many small business, Inching Soe traders and partnerships, cannot tak advantage of busines opportunities to expand, More often, companies ca. An established organtzatfonal structure exists. Managers and Workers do not have to change every time a shareholder sells shares. ‘This stability car help the business develop long-term relationships with customers and suppliers alike. I can also allow the business. 1 hire individuals with expertise for individual positions and thus ‘enhance the performance of the business. Disadvantages of operating asa company include the following: © Setting up a company can take time and cost a great deal of ‘money to fulfil the necessary legal requirements. Whether reorganizing into a company or starting a business as a company, the ‘owners must retin lawyers, have legally required paperwork filled ‘out and file papers with the appropriate government agencies © Selling shares, ekpecially if the company “goes public”, does ‘not guarantee that the desired or intended amount of finance will be raised. Sometimes 1POs are unsuccessful, and a busines has sold Itself for felatvely ite cash Thus, eonganizing a business as 2 ‘company oF staring up a company involves risk, Owners risk partial or entire loss of control of the business. Ia business deedes to become a company, especially fora public limited company; the owners must give up some control of their business. ven if, during incorporation, former owners stil retain 51 per cent ofthe shares, they must sll answer tothe new owrers {other shareholder). In the ease of public companies, loss of control ‘an be significant Original owners can have a very small percemage ‘ofthe shates ater the frm has gone publi. © There is loss of privacy. A public limited company is required to {ulfla numberof legal obligations, including publishing its accounts publily. Many business people unaccustomed to sharing information ‘with others dsike publishing their accounts. Further, the company’s performance has ben weak ~ sales are down or profit are negaive — the future performance can be further Jeopardlaed. Some customers ‘may not want 9 purchase from or do business with a weak company, a situation that canbe especially damaging to those business that offer product warranties or after-sales service on products. ‘+ A company has no control over the stock market, Share prices ‘may fll, which can datnage the image ofthe company. Such a ss ‘of share value ean sometimes occur not because the business has done anything wrong but simply because ofan external facto: in lection, negative news about another business in the same industry, 4 downturn in the economy, ora natural disaster. ‘= Acompany has limited control over who buys Its shares, For ‘example, a competitor may want to ake over the business. Ifthe shareholders are willing to sll their shares, the company cannot prevent being taken over. Companies are especially walnerable to being taken over if their share prices fl, which, as noted above, sometimes occurs through no fault ofthe business isl For-profit social enterprises ‘Although the erm “social enterprise” has a slightly eitferent meaning or legal standing in diferent cute, in generat eer oa form of business that has a social purpose. Socal purpose generally means thatthe organization ams improve human, socal, or envitonmental well-being although socal enterprises should and typically do operate toa profesional standard (regarding legal existence, proper accounts, management srucure, and reporting procedures, ec), he socal alm nevertiles takes priory over any othe aim sch es growth raximizig sales or making prot, which are typical objectives of for prot orgatizations.Forproft socal enterprises sim io make «prof However, they do not want to maximize profs doing so compromises ‘thelr sol purpose. The for pref socal enterprise can take the form of any ofthe three models wehave sen aleady (ole Wade, partnership, or company) Socal entepises often have one of several other models of busines organization, including the folowing Cooperatives Cooperatives are a form of partnership whereby she business is owned and ran al the "members" Du, Uke partnerships (wBich in most ‘counties Gan have no more than 20 partners), cooperatives may have lethe abel soa emenprise appropiate? Can businesces be sgparsted froma poftmotve? Can any business be separate rom a socal purpose?BE oo more than 20 members. Bach member participates atively in the aning of ie business ‘Theze are many types of cooperative: © A flnanelal cooperative is financal institution the ethical and socal aims of which take precedence over profits. Sometimes, for ‘example in the case of credit unions, the socal alms might mean lending money at lower rates of interest or providing non-lensing services at lower cost than banks or other Hinancial institutions. At other umes, ainancial cooperative wil provide Snance (loan) tos ‘members who otherwise might not beable to borrow money. + Ahousing cooperative is run to provide housing for its members 8s opposed to providing rent for private landlords. A common acivity of housing cooperative is owning an apartment building ‘and having each “member” entitled to one housing unt im the building. The members, through the cooperative, own the building, and surpluses ae reinvested in the building and is operation, 9,costs to individual members are lower. In addition, housing ‘cooperatives typically have control aver who ean become a mtmber, thereby ensuring that all members agree to rules and conditions and ‘thus increase the likelihood of social harmony in the building. + workers’ cooperative is business that is owned and operated by the workers themeives, which does not pay significantly higher ‘wages or salary to managers, and has providing employment 10 ‘workers asa priority. Often, a workers’ cooperative emerges when busines is about to fal, Workers, fearful of losing their jobs, take lover the busines, sack the managers (or drastically reduce thelr ay), and reinvest all profits inthe business (rather than pay them ut as dividends, +A producer cooperative is where groups of producers collaborate in certain stages of production. Producer cooperatives are paricularly ‘common in agriculture, such a grape farmers having a cooperative ‘wine-producion facility or olive producers having a cooperatively owned press. With producer cooperatives, often the aim Is 10 ‘maximize the utlization of an expensive piece of equipment that ‘ndividval members, by themselves, could not afford. At other ies, costefficiencis can only be achieved when a stage ofthe procuction rocess is carried out ona large seal. Thus, many producers pool their resources to obtain the cost efficiencies, + A-consumer cooperative provides a service to its consumer: who fare also part ovmers ofthe Busines, In Europe and the Unitec States, a common type of consumer cooperative involved certain srocery stores. thdividual consumers would become a “member”, ‘hich entiles them to purchase groceries atthe cooperative, often at Tower prices than for-profit grocery stores. In each case, the cooperative’ provty isnot to make profit. Rather, the cooperative sells or offers is products or services typically a close to cost price as posible, thereby lowering the costs 19 members, However ifs prices are to low, the cooperative runs the risk of falure Dy not reinvestng in the business (and thus not updating its procucts cor services) or not having sgnifcant financial cuslor to weather ‘ificalt period or an unexpected expense. Thus, cooperatives generally aim to make some profit, but maximizing profit is not thei most important aim, Micro-financiers Since the work ofthe Nobel Prize winner Muhammad Yunis, founder of the Grameen Bank in Bangladesh in the 1980s, a whole industry has developed, particulary in low-income economies. The idea is very simple: to provide small amounts of finance to those who traditionally ‘would not have access tit, for example low-income individuals, ‘families in rural communities, and women, Te money is ent with specified conditions of use and scheduled repayments, The micro- fancier expects to receive repayment of principal and to make a profit on the loans (Interest). The loan amounts are small andthe interest rates are low, and micro-inanciers do not use the aggressive tactic of other forms of moneylenders, While the model has proved 10 be very, profitable forall partes, the main aim has always been to help those ‘who would previously never have had access to nance to take the Brst ‘eps towards economic independence. In many low-income economies, individuals with good ideas and a strong work ethichave been able to ‘open their own business through the help of micro-finance. Public-private partnerships (PPP) [APP Is a business created between private sector busines andthe ube sector Typealy a PP involves the construction of aity with 2 Socal aim (or exemple in healthcare or education). could alo befor 2 Specie projec suchas the development ofa ste fo emativ enezpy fore nature reserve The busines expected to make aterm on the Imaney invested ina but the pony snot profits The plc sctor tually provides the finance and the private business the expertise Otten the government ofr ax incentives tothe pate sector to ake pa tac patsy A PEP nay tbe aed to onal paresis Such as rug rebabitaion sevice bat can involve large Dusineses doing big projects. The multinational Swedish company Skanska was involved ina FP to help constuct the Eurotonnel the channel nel terween Hance andthe UK ‘The main common features of a PPP (for-profit social enterprise) include the following + Profit is important but not the priority ~ social aims take precedence. These alms may vary and for-profit socal enterprises feed to generate profits to ensure the survival and growth ofthe ‘busines. Th aim, however, Is not to maximize profits but 1 earn profits sufficient sustain the business. «There is collaboration between the business and the local ‘community. For-profit socal enterprises usually signify a desire for cooperation between the business community and government ‘because both recognize 8 need being met by ordinary business activity or by government. 1.2 TVPES OF BUSINESS ORGANIZATION a32 There is greater democracy in the business than in other ‘organtrafione. In for-profit evil enterprices, deison makirg tend ‘bemore consultative and transparent. This style of governance parally stems from the sprit of social enterprises, which ae to do goo! and not typically to devise aggressive business strategies (suchas to take market share from competitors orto maximize profi). This style of governance parcally stems from the nature of social enterprises, which often rly fn Suppor or aid from athers (workers willing to work for lower wages, lanilords willing to lease properties at discounted rate, et. Consultan and transparency convey the socal spirit and generate greater wilingnes onthe part of stakeholders tobe supporive. «The business operates the same functions as any other business. For profit social enterprises are businesses, and must attend 1o production, marketing, HR, and finance decisions just as In any otter busines. in some respects, areas ofthe business have tobe run with greater care than other businesses, which often have sreater profits and proftabily Advantages of for-profit social enterprises compared to traditional sole ‘traders, partnerships, and companies indude these + A favourable legal status is achieved. Anyone can engage in activities tat are good for humans, socety, ofthe environment ‘The legal structure ofa for-profit socal enterprise allows individuals to engagein those activities without being personally lable cr accountale to shareholders with traditional (maximizing profits) brsines interests, «There is strong communal identity. For-proft socal enterprises often have highly motivated employees and other stakeholéers working together with a common sense of purpose. Employees often report a high degree of satisfaction, knowing that they are doing something posiive for society + There are benefits to the stakeholder community. Forjrofitsociah enterprise: help many stakeholders, incuding the direct ene'aries oftheir pducts and service. They may help the goverment more, ‘because fr profit social enterprises typically ameliorate human, socal ‘or environmental problems that a government isnot addressing, and so help reduce problems in the community. Disadvantages of for-profit socal enterprises compared to traditional sole traders, partnerships, and companies include these “© Decision making is complex and time consuming. In bing consultative and transparent, for profit socal enterprises ofen take ‘long time 1o make decisions. f many parties are involved with the ecision, which is often the case, this extended decision-making time ‘an limit the effectiveness ofthe business. ‘© There may be insufficient capital for growth. The busiress model {ora for-profit socal enterprise may not suficent in the long term. ‘Most busines ely on healthy profit margins and profits, much of ‘which are retained, fr investment in property, plant, and equipment, and to provide working captal as working capital requirements Sncrease with the sz ofthe business. Without lage profits, for-profit socal enterprises may struggle to survive and expand ‘There may be insufficient capital for financial strength. For. profit social enterprises tend to have lower profit margins and profs ‘than traditional for profit businesses because they often try to make their products and services as inexpensive as possible, Asa result, for profit social enterprises tend not to have deep financial strength ‘that can permit them to survive a recession or times when nance is, Jey available Non-profit social enterprises ‘The main features o non-profit based (commercial) organizations {P00 areas follow: «Some businesses operating in the private sector do not aim to make profits at al. These businesses are als socal enterprises ~that I Where the main aim is fr a socal purpose but they are different from for-profit social enterprises in that they do not aim to make any profits whatsoever. © Though these social enterprises are run as businesses, they generate (oraim to generate) surpluses rather than profits, A surplus (sometimes referred to as surplus revenue) is, conceptually, very similar toa preft. However, rather than be distributed tothe owners ofthe business. the surplus is used to advance the socal purpose for whieh the business was set up. {A surplus is any esta revenue generated after subtracting a NPO'S oss. A surps is calculated a follows: Surplus ‘otal revenues ~ total costs ‘Many non-profit socal enterprises are very large: the United Way. Red Cross and Red Crescent, the Mohammed bin Rashid Al Maktoum Foundation, and the Calouste Gulbenkian Foundation are just a few examples. These o-anizations, and many other large NPOs, ar bigger than many traditenal businesses. Social enterprises can take many possible forms, and the diferences between chem canbe subtle (and confusing). Nevertheless, two broad categories of non-profit social enterprises exists NGOs and charts Non-governmental organizations (NGOs) NGO was aterm fr used by the United Nations nd it has since Become a common way to describe a variety of social enterprises. The sm ofthese various social enterprises sto support cause that Considered sally desiabe. Some ofthese NGOs are concerned wth tinge sue, such Save the Whales or witha broader spearum suchas Greenpeace. Oters may be apolta, such s the Aga Kahn Development Netvork, while others have plial ais, such 4 Amnesty International andthe National Rifle Assocation. Regacdles a commen element of these i thet they are not organized or run by any government. ‘Be aresearcher Look atthe websites for wo NGOs~one local and one in.emational. Make notes about when they were established, the work they do and any recent news articles about them, Can you find any information about their funding and organization? What are the matn similarities and differences between the 1wo GOs? 33u SEP Charities CChartes area specific form of NGO wihose alm isto provide as much relief as possble for those in need. Charities difer from other NGOs in that their focus ison philanthropy and a desire to help those who cannot hep themselves. ‘Some charities are single-eventcharites that provide for example, cemengency aid for specific natural dissters or war. Other charities focus ‘ona single issue: Save the Children or Oxfam. As with regular NGOS, charities may be apolitical such asthe Red Cross and Red Crescent and Half the Sky. Others can be partisan and or have particular preferences, such asthe Catholic Charities USA. Nevertheless, the idea is that the business is not ran by any governmert and that It operates in the private sector of the economy. In addition to the common features of social enterprises mentioned shove. common features af non-proft social enterprise include the following: ‘The surplus generated toma chantys business actites such + Profits are not generated —inscad, these Dusineses generate See sevndshand te shop, surpluses and surpass are used t advance the socal purpose of the ve usedto advance the socal business. Sometimes non-profit social enterprises retin surpluses. i= purpose ofthe organization ‘fashion similar to retaining profi, forthe captal requirements of the organization. Typcaly the supluses are used ditecly to provide the goods and services for which te chasity was created. + Donations are important ~ these businesses cannot rely on government funding or other forms of income, soa lage par of thee "revenues comes from voluntary donations from individuals. In some ‘cases (the Calouste Gulbenkian Foundation fr example), the charity has an endowment and the proceds from the endowment provide rellable ongoing revenues. Nevertheless, vrualy all chartes want to {do more ~ provide more goods and services for those in need - and elcome large and small donations from individuals and organizations. ‘There s unclear ownership and control. Who owns a charity? Who should decide who sis on the board of directors? Who selects new Doard members? Should indvidvals who conubute large amounts of ‘money to charty have a larger sa) inthe operation ofthe charity than ‘others? How are managers selected? Whats appropriate compensation? ‘The issue of compensation is especly thorny wien the charity is Inuge, such asthe United Way, and is management requires the skis ‘of executive officers of major for profit companies. should the heed ‘ofa multinational charity be pald the same amount as the CEO ofa ‘multinational company? To attract exectives ofthe necesary calibre and sls, are f-profit corporate salaries necessary? These kinds of ‘questions routinely plague charities and canbe the source of discontent among stakeholders if not handled ellecively. ‘Finally Ls also worth noting that there is one clear distinction between [NGOs and charities: charities, because of their charitable status and philanthropy, are exempt from paying taxes. Other NGOs, a with all other businesses, are not exempt. 'Non-profit social enterprises have many advantages compared to any of the businesses discussed above. These sre some of the advantages: 4.2 TYPES OF BUSINESS ORGANIZATION ‘ther help people or causes in need. Individuals, organizations, and governments almost never have sufficient resources to solve all tf the needs of local people and/or communities. Non-profit social fenteprises cannot address all the needs either. Nevertheless, forthe Specfic groups or causes that ae supported, the work of non-profit ‘Socal enterprises is cruclly important and valuable. CULTURE any dewotaros tons bnundaies poviingasostance snasidlover tne wor Wit ctameaes mt tesa wind examples of such fmcunes «They can foster a philanthropic spirit in the community. People may feel good about helping others, which can foster socily constructive views in general. n turn, postive attitudes in 2 community can make ita better place to live and can improve the fencral business diate «They can foster informed discussions in the community about allocation of resources. As noted above, individuals, organizations, land governments almost never have suficent resources to solve al the needs of local people and/or communities. The actions of ‘non profit socal enterprises and the individuals working for and Contibuting to them can lead to better information about local fanddisant problems, sues, and causes, With better information, individuals and organizations, including various government agencies, can carry out more informed dedsion making, + ‘They can innovate, Employees or members are often “forced” 0 be cteative ~ to try new ideas and tactics to address problems and find Solutions ~because non-profit sadal enterprises are not ted to profits. \Non-prfit social enterprises have many dlsadvantages compared to any ofthe businesses discussed above. These disadvantages Include the following + The lack of control but intense lobbying can lead to socially tuncesirable goods, For example, High North Alliance in Norway Tobties for Artie coastal communities and seeks to protect the rights, of whalers. In effec, suppor consumption of whale meat. In the United States, the power of two non-profit lobbying groups, the ‘National Rifle Assocation and Gun Owners of America, effectively Toby state and national legislatures in the United States to prevent ‘mecningful restrictions on gun ownership. including the possession of hand guns and assault weapons. Both gun ownership and gun. felated deaths are far higher in the United States than in other Industial countries? + Sometimes the employees of non-profit social enterprises hhavea passion and zeal that Ill serve the organization or its cause, Greenpeace employees, for example, have at times taken iret action, acting a pirates by boarding whaling ships, which is illegal and can lead 10 Ios of suppor forthe organization or business Funding can be irregular. Non-profit sodal enterprises are trnerally very reliant on donations, which can be a problem in ‘spencer caei t/a unnciesgcancquhestv201998 Ss haemo guna gen det tn ay 3SIN Revision checklist Businesses Inthe private sectr are owned ‘and controled by Individual or groups oF individual. Businesses inthe public sector ate owned and conttolled by governmental authoraies Sole trader businesses are owned and managed by single person. The individual sable for any debts the businesses might incu. Registering a business asa sole trader is relatively quick and easy ¥ Aparinersbip is a business owned and ‘managed by more than one person. Decisions Should be made jointly and ail partners wall be equally Hable. Multiple pariners an bring diferent kinds of experi, and may aso bring. ‘extm sources of finance, Practice question Ecofoluclones Feosugnesis a non-profit research organization located n Madind, spain. One oftheir objectives {sto try toimtroduce non-polluing Sources of dectriaty in developing countries. One successal application of thei research was the Alumbre Project. This provided ekcurcity ‘reated by wind generators 10 the remote village of Alumbre, Pera, which previously had none. In Alumbe. wind generators were installed by Ecaslucione to supply. fo the Hest time, eletecty toa textile factory, one ofthe few fim in the area ‘operatingin the secondary sector. Exsoluconss also agreed to maintain and repair the generator. There was 2 complete vansformaton inthe production process. The factory was able wo buy new ‘machinery. Productivity increased dramatically New jobs were created, eosoluions also promised, in partnership with Peru Telecom and she Reruvian government. to help fund the improvements in communication between Alumbre and the rest of Peru, This also allowed regional trade to develop. The entire community ‘experienced significant improvements in their Companies and corporations have muliple ‘owners ~ usually shareholders. When a business has registered 35 2 company or corporation, the ownets themselves ate I Separate from the business. so they are no longer lable for debe, lly /- For-profit saal enterprises have a socal -micclon, but sil alm to make a pref Asocial mission is the maln aim af non-profit Social enterprises. Any money made is called surplus, Most charities fll Into this category. ‘quality of lie. The Peruvian government saw this 84 practical solution ta devel other depressed teas" of the country Unfortunately in 2008 a severe financial crisis hit Europe and the Spanish government suspended part of ts funding for esearch organization; such as Eesolucones. Asa direct test, the management fof Eeslucione et may no longer be abe to maintain Alumbre’s wind generators. [Source adap tom hps/ecowolaly com/2008/06/17/ ind power blows ino pers sna-bghtene futures, 17 une 2008} 2) Define the term secondary stor Lemarish by Prepare a PEST analysis forthe textile Factory in alumbre Lemar ©) Contrast the objectives of non-profit longonizations sch as Eoslucienes to those of proficbased organizations (5 marks} 4) Discuss ewo possible areas of conflict Between stakeholders inthe Alumbre Proje. (7 mart 1, May 2010 SPER U Ph) ahr By the end of this chapter, you should be able to: > Explain the defniions and oles of vison statement and mision Define aims, objectives strategies and tacts and explain thir telaionships Explain why oganizations change objectives and innovate in response to changes inintemal and ecermal environments Describe ethical objectives and corporate social responsibilty (SR) Outline the reasons why organizations set ethical bjecves andthe impact of implementing them Elan he oveving rae and nature of SR Prepare a SWOT analysis ofa gvenonntzavon Examine the Ansoffmatinfor ferent growth sategies ofa given nganization n and mission statements Successful businesses have a clear identity, shared values and a sense of purpose that ll stakeholders identify wih. To create or reinforce ‘this identity, communicate these values, and maintain focus on the purpose, many businesses produce mission and vision statements. Some businesses wil have one ofthese, others both. When properly done, both types of statement can help a business reach is foftes aims and stay focused day today. ‘Mission and vsion statements are sometimes confused. They have, however, diferent purposes. The vison statement is more forward looking a speaks vo the long-term alms ad ges aspvatons ‘of business. 8 mission statement is more grounded inthe alm of {accomplishing objectives to achieve the mission, an intermediate step fn the way tothe vision, The two statements should complement each ther withthe vision statement being produced fist. Less specificthan a ‘mission statement, the vision statement serves as 2 guiding prince or prinepls.