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Business Studies – 7115

O Levels
Section 1 Notes

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1. Understanding Business Activity

1.1 – Business Activity

1.2 – Classification of Businesses
1.3 – Enterprise, Business Growth and Size
1.4 – Types of Business Organizations
1.5 – Business Objectives and Stakeholder
Objectives

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1.1 – Business Activity

Mind map

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The word ‘business’ is very familiar to us. We are surrounded by

businesses and we could not imagine our life without the products
we buy from them. So what is a business, or what are business
studies? Here’s the very posh definition for it: “the study of
economics and management”
Not clear? Don’t worry, by the end of this chapter, you should be
getting a clear picture of what a business is.

The Economic Problem

Need: a good or service essential for living. Examples include
water and food and shelter.
Want: a good or service that people would like to have, but is not
required for living. Examples include cars and watching movies.
Scarcity is the basic economic problem. It is a situation that
exists when there are unlimited wants and limited
resources to produce the goods and services to satisfy those
wants. For example, we have a limited amount of money but there
are a lot of things we would like to buy, using the money.

Opportunity cost
Opportunity cost is the next best alternative forgone by choosing
another item. Due to scarcity, people are often forced to make
choices. When choices are made it leads to an opportunity cost
SCARCITY → CHOICE → OPPORTUNITY COST

Example: the government has a limited amount of money

(scarcity) and must decide on whether to use it to build a road, or
construct a hospital (choice). The government chooses to
construct the hospital instead of the road. The opportunity cost
here are the benefits from the road that they have sacrificed
(opportunity cost).

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Factors of Production
Factors of Production are resources required to produce goods or
services. They are classified into four categories.

• Land: the natural resources that can be obtained from nature.

This includes minerals, forests, oil and gas. The reward for land is
rent.
• Labor: the physical and mental efforts put in by the workers in the
production process. The reward for labour is wage/salary
• Capital: the finance, machinery and equipment needed for the
production of goods and services. The reward for capital is
interest received on the capital
• Enterprise: the risk taking ability of the person who brings the
other factors of production together to produce a good or service.
The reward for enterprise is profit from the business.

Specialization
Specialization occurs when a person or organization
concentrates on a task at which they are best at. Instead of
everyone doing every job, the tasks are divided among people
who are skilled and efficient at them.
Advantages:

• Workers are trained to do a particular task and specialize in this,

thus increasing efficiency
• Saves time and energy: production is faster by specializing
• Quicker to train labourers: workers only concentrate on a task,
they do not have to be trained in all aspects of the production
process
• Skill development: workers can develop their skills as they do
the same tasks repeatedly, mastering it.

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Disadvantages:

• It can get monotonous/boring for workers, doing the same tasks

repeatedly
• Higher labour turnover as the workers may demand for higher
salaries and company is unable to keep up with their demands
• Over-dependency: if worker(s) responsible for a particular task is
absent, the entire production process may halt since nobody else
may be able to do the task.

Purpose of Business Activity

So we’ve gone through factors of production, the problem of
scarcity and specialization, but what is business?

Business is any organization that uses all the factors of

production (resources) to create goods and services to
satisfy human wants and needs.
Businesses attempt to solve the problem of scarcity, using scarce
resources, to produce and sell those goods and services that
consumers need and want.

Added Value
Added value is the difference between the cost of materials
bought in and the selling price of the product.
Which is, the amount of value the business has added to the raw
materials by turning it into finished products? Every business
wants to add value to their products so they may charge a higher
price for their products and gain more profits.
For example, logs of wood may not appeal to us as consumers
and so we won’t buy it or would pay a low price for it. But when a
carpenter can use these logs to transform it into a chair we can
use, we will buy it at a higher cost because the carpenter has
added value to those logs of wood.

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How to increase added value?

• Reducing the cost of production. Added value of a product is

its price less the cost of production. Reducing cost of production
will increase the added value.
• Raising prices. By increasing prices they can raise added value,
in the same way as described above.
But there will be problems that rise from both these measures. To
lower cost of production, cheap labour, raw materials etc. may
have to be employed, which will create poor quality products and
only lowers the value of the product. People may not buy it. And
when prices are raised, the high price may result in customer
loss, as they will turn to cheaper products.

In a practical sense, you can add value by:

• Branding
• Adding special features
• Provide premium services etc.
In a practical example, how would you add value to a jewellery
store?

• Design an attractive package to put the jewellery items in.

• An attractive shop-window-display.
• Well-dressed and knowledgeable shop assistants.
All of this will help the jewellery store to raise prices above the
additional costs involved.

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1.2-Classification of Businesses
Mind map

Primary, Secondary and Tertiary Sector

Businesses can be classified into three sectors:

Primary sector: this involves the use/extraction of natural

resources. Examples include agricultural activities, mining,
fishing, wood-cutting, oil drilling etc.
Secondary sector: this involves the manufacture of
goods using the resources from the primary sector. Examples
include auto-mobile manufacturing, steel industries, cloth
production etc.

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Tertiary sector: this consist of all the services provided in an

economy. This includes hotels, travel agencies, hair salons,
banks etc.
Up until the mid 18th century, the primary sector was the largest
sector in the world, as agriculture was the main profession. After
the industrial revolution, more countries began to become more
industrialized and urban, leading to a rapid increase in the
manufacturing sector (industrialization).
Nowadays, as countries are becoming more developed, the
importance of tertiary sector is increasing, while the primary
sector is diminishing. The secondary sector is also slightly
reducing in size (de-industrialization) compared to the growth of
the tertiary sector . This is due to the growing incomes of
consumers which raises their demand for more services like
travel, hotels etc.

Private and Public Sector

Private sector: where private individuals own and run
business ventures. Their aim is to make a profit, and all costs
and risks of the business is undertaken by the individual.
Examples, Nike, McDonald’s, Virgin Airlines etc.
Public sector: where the government owns and runs business
ventures. Their aim is to provide essential public goods and
services (schools, hospitals, police etc.) in order to increase the
welfare of their citizens, they don’t work to earn a profit. It is
funded by the taxpaying citizens’ money, so they work in the
interest of these citizens to provide them with services.
Example: the Indian Railways is a public sector
organization owned by the govt. of India.

In a mixed economy, both the public and private sector

exists

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1.3 – Enterprise, Business Growth

and Size
Mind map

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Entrepreneurship
An entrepreneur is a person who organizes, operates and
takes risks for a new business venture. The entrepreneur
brings together the various factors of production to produce goods
or services. Check below to see whether you have what it takes to
be a successful entrepreneur!
• Risk taker
• Creative
• Optimistic
• Self-confident
• Innovative
• Independent
• Effective communicator
• Hard working

Business plan
A business plan is a document containing the business
objectives and important details about the operations,
finance and owners of the new business.
It provides a complete description of a business and its plans for
the first few years; explains what the business does, who will buy
the product or service and why; provides financial forecasts
demonstrating overall viability; indicates the finance available and
explains the financial requirements to start and operate the
business.

Some of the content of a regular business plan are:

• Executive summary: brief summary of the key features of the
business and the business plan
• The owner: educational background and what any previous
experience in doing previously
• The business: name and address of the business and detailed
description of the product or service being produced and sold;

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how and where it will be produced, who is likely to buy it, and in
what quantities
• The market: describe the market research that has been carried
out, what it has revealed and details of prospective customers
and competitors
• Advertising and promotion: how the business will be advertised to
potential customers and details of estimated costs of marketing
• Premises and equipment: details of planning regulations, costs of
premises and the need for equipment and buildings
• Business organisation: whether the enterprise will take the form of
sole trader, partnership, company or cooperative
• Costs: indication of the cost of producing the product or service,
the prices it proposes to charge for the products
• Finance: how much of the capital will come from savings and how
much will come from borrowings
• Cash flow: forecast income (revenue) and outgoings
(expenditures) over the first year
• Expansion: brief explanation of future plans
Making a business plan before actually starting the business can
be very helpful. By documenting the various details about the
business, the owners will find it much easier to run it. There is
a lesser chance of losing sight of the mission and vision of the
business as the objectives have been written down. Moreover,
having the objectives of the business set down clearly will help
motivate the employees. A new entrepreneur will find it easier
to get a loan or overdraft from the bank if they have a business
plan.

Government support for business startups

According to startup.com, “a startup is a company typically in the
early stages of its development. These entrepreneurial ventures
are typically started by 1-3 founders who focus on capitalizing
upon a perceived market demand by developing a viable product,
service, or platform”.

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Why do governments want to help new start-ups?

• They provide employment to a lot of people
• They contribute to the growth of the economy
• They can also, if they grow to be successful, contribute to the
exports of the country
• Start-ups often introduce fresh ideas and technologies into
business and industry
How do governments support businesses?
• Organise advice: provide business advice to potential
entrepreneurs, giving them information useful in staring a venture,
including legal and bureaucratic ones
• Provide low cost premises: provide land at low cost or low rent
for new firms
• Provide loans at low interest rates
• Give grants for capital: provide financial aid to new firms for
investment
• Give grants for training: provide financial aid for workforce
training
• Give tax breaks/ holidays: high taxes are a disincentive for new
firms to set up. Governments can thus withdraw or lower taxation
for new firms for a certain period of time

Measuring business size

Businesses come in many sizes. They can be owned by a single

individual or have up to 50 shareholders. They can employ
thousands of workers or have a mere handful. But how can we
classify a business as big or small?

Business size can be measured in the following ways:

• Number of employees: larger firms have larger workforce

employed

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• Value of output: larger firms are likely to produce more than

smaller ones
• Value of capital employed: larger businesses are likely to
employ much more capital than smaller ones
However, these methods have their limitations and are not always
accurate. Example: When using the ‘number of employees’
method to compare business size is not accurate as a capital
intensive firm ( one that employs a large amount of capital
equipment) can produce large output by employing very little
labour (workers). Similarly, value of capital employed is not a
reliable measure when comparing a capital-intensive firm with a
labour-intensive firm. Output value is also unreliable because
some different types of products are valued differently, and the
size of the firm doesn’t depend on this.

Business growth

Businesses want to grow because growth helps reduce their

average costs in the long-run, help develop increased market
share, and helps them produce and sell to them to new markets.

There are two ways in which a business can grow- internally and
externally.

Internal growth
This occurs when a business expands its existing operations.
For example, when a fast food chain opens a new branch in
another country. This is a slow means of growth but easier to
manage than external growth.

External growth
This is when a business takes over or merges with another
business. It is sometimes called integration as one firm is
‘integrated’ into the other.

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A merger is when the owner of two businesses agree to join their

firms together to make one business.
A takeover occurs when one business buys out the owners of
another business , which then becomes a part of the ‘predator’
business.
External growth can largely be classified into three types:

• Horizontal merger/integration: This is when one firm merges

with or takes over another one in the same industry at the
same stage of production. For example, when a firm that
manufactures furniture merges with another firm that also
manufacturers furniture.
Benefits:
• Reduces number of competitors in the market, since two
firms become one.
• Opportunities of economies of scale.
• Merging will allow the businesses to have a bigger share of
the total market.

• Vertical merger/integration: This is when one firm merges

with or takes over
another firm in the same industry but at a different stage of
production. Therefore, vertical integration can be of two types:
• Backward vertical integration: When one firm merges
with or takes over another firm in the same industry but at a
stage of production that is behind the ‘predator’ firm.
For example, when a firm that manufactures furniture
merges with a firm that supplies wood for manufacturing
furniture.
Benefits:
• Merger gives assured supply of essential components.
• The profit margin of the supplying firm is now absorbed by
the expanded firm.

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•The supplying firm can be prevented from supplying to

competitors.
• Forward vertical integration: When one firm merges with
or takes over another firm in the same industry but at a
stage of production that is ahead of the ‘predator’ firm.
For example, when a firm that manufactures furniture
merges with a furniture retail store.
Benefits:
• Merger gives assured outlet for their product.
• The profit margin of the retailer is now absorbed by the
expanded firm.
• The retailer can be prevented from selling the goods of
competitors.
• Conglomerate merger/integration: This is when one firm
merges with or takes over a firm in a completely different
industry. This is also known as ‘diversification’. For example,
when a firm that manufactures furniture merges with a firm that
produces clothing.
Benefits:
• Conglomerate integration allows businesses to have activities
in more than one country. This allows the firms to spread its
risks.
• There could be a transfer of ideas between the two businesses
even though they are in different industries. This transfer o
ideas could help improve the quality and demand for the two
products.

Drawbacks of growth
• Difficult to control staff: as a business grows, the business
organisation in terms of departments and divisions will grow,
along with the number of employees, making it harder to control,
co-ordinate and communicate with everyone
• Lack of funds: growth requires a lot of capital.

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• Lack of expertise: growth is a long and difficult process that will

require people with expertise in the field to manage and
coordinate activities
• Diseconomies of scale: this is the term used to describe how
average costs of a firm tends to increase as it grows beyond a
point, reducing profitability. This is explored more deeply in a later
section.

Why businesses stay small

Not all businesses grow. Some stay small, employ a handful of

workers and have little output. Here are the reasons why.

• Type of industry: some firms remain small due to the industry

they operate in. Examples of these are hairdressers, car repairs,
catering, etc, which give personal services and therefore cannot
grow.
• Market size: if the firm operates in areas where the total number
of customers is small, such as in rural areas, there is no need for
the firm to grow and thus stays small.
• Owners’ objectives: not all owners want to increase the size of
their firms and profits. Some of them prefer keeping their
businesses small and having a personal contact with all of their
employees and customers, having flexibility in controlling and
running the business, having more control over decision-
making, and to keep it less stressful.
• Why businesses fail
Not all businesses are successful. The main reasons why they fail
are:

• Poor management: this is a common cause of business failure

for new firms. The main reason is lack of experience and
planning which could lead to bad decision making. New
entrepreneurs could make mistakes when choosing the location

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of the firm, the raw materials to be used for production, etc, all
resulting in failure
• Over-expansion: this could lead to diseconomies of scale and
greatly increase costs, if a firms expands too quickly or over their
optimum level
• Failure to plan for change: the demands of customers keep
changing with change in tastes and fashion. Due to this, firms
must always be ready to change their products to meet
the demand of their customers. Failure to do so could result in
losing customers and loss. They also won’t be ready to quickly
keep up with changes the competitors are making,
and changes in laws and regulations
• Poor financial management: if the owner of the firm does not
manage his finances properly, it could result in cash shortages.
This will mean that the employees cannot be paid and enough
goods cannot be produced. Poor cash flow can therefore also
cause businesses to fail

Why new businesses are at a greater risk of failure

• Less experience: a lack of experience in the market or in
business gets a lot of firms easily pushed out of the market
• New to the market: they may still not understand the nuances
and trends of the market, that existing competitors will have
mastered
• Don’t a lot of sales yet: only by increasing sales, can new firms
grow and find their foothold in the market. At a stage when they’re
not selling much, they are at a greater risk of failing
• Don’t have a lot of money to support the business
yet: financial issues can quickly get the better of new firms if they
aren’t very careful with their cash flows. It is only after they make
considerable sales and start making a profit, can they reinvest in
the business and support it.
•
•
•

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• 1.4-Typesof Business Organizations

Mind map

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Sole Trader/Sole Proprietorship

A business organization owned and controlled by one person.
Sole traders can employ other workers, but only he/she invests
and owns the business.
Advantages:
• Easy to set up: there are very few legal formalities involved in
starting and running a sole proprietorship. A less amount of
capital is enough by sole traders to start the business. There is no
need to publish annual financial accounts.
• Full control: the sole trader has full control over the business.
Decision-making is quick and easy, since there are no other
owners to discuss matters with.
• Sole trader receives all profit: Since there is only one owner,
he/she will receive all of the profits the company generates.
• Personal: since it is a small form of business, the owner can
easily create and maintain contact with customers, which will
increase customer loyalty to the business and also let the owner
know about consumer wants and preferences.
Disadvantages:
• Unlimited liability: if the business has bills/debts left unpaid,
legal actions will be taken against the investors, where their even
personal property can be seized, if their investments don’t meet
the unpaid amount. This is because the business and the
investors are the legally not separate (unincorporated).
• Full responsibility: Since there is only one owner, the sole
owner has to undertake all running activities. He/she doesn’t have
anyone to share his responsibilities with. This workload and risks
are fully concentrated on him/her.
• Lack of capital: As only one owner/investor is there, the amount
of capital invested in the business will be very low. This can
restrict growth and expansion of the business. Their only sources
of finance will be personal savings or borrowing or bank loans

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(though banks will be reluctant to lend to sole traders since it is

risky).
• Lack of continuity: If the owner dies or retires, the business dies
with him/her.

PartnershipsA partnership is a legal agreement between two or

more (usually, up to twenty)people to own, finance and run a
business jointly and to share all profits.

Advantages:
• Easy to set up: Similar to sole traders, very few legal formalities
are required to start a partnership business. A partnership
agreement/ partnership deed is a legal document that all
partners have to sign, which forms the partnership. There is no
need to publish annual financial accounts.
• Partners can provide new skills and ideas: The partners may
have some skills and ideas that can be used by the business to
improve business profits.
• More capital investments: Partners can invest more capital than
what a sole trade only by himself could.
Disadvantages:
• Conflicts: arguments may occur between partners while making
decisions. This will delay decision-making.
• Unlimited liability: similar to sole traders, partners too have
unlimited liability- their personal items are at risk if business goes
bankrupt
• Lack of capital: smaller capital investments as compared to large
companies.
• No continuity: if an owner retires or dies, the business also dies
with them.

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Joint-stock companies

These companies can sell shares, unlike partnerships and sole

traders, to raise capital. Other people can buy these shares
(stocks) and become a shareholder (owner) of the company.
Therefore they are jointly owned by the people who have bough
it’s stocks. These shareholders then receive dividends (part of
the profit; a return on investment).
The shareholders in companies have limited liabilities. That is,
only their individual investments are at risk if the business fails or
leaves debts. If the company owes money, it can be sued and
taken to court, but it’s shareholders cannot. The companies
have a separate legal identity from their owners, which is why
the owners have a limited liability. These companies
are incorporated.
(When they’re unincorporated, shareholders have limited liability
and don’t have a separate legal identity from their business).
Companies also enjoys continuity, unlike partnerships and sole
traders. That is, the business will continue even if one of it’s
owners retire or die.
Shareholders will elect a board of directors to manage and run
the company in it’s day-to-day activities. In small companies, the
shareholders with the highest percentage of shares invested are
directors, but directors don’t have to be shareholders. The more
shares a shareholder has, the more their voting power.
These are two types of companies:

Private Limited Companies: One or more owners who can sell

its’ shares to only the people known by the existing shareholders
(family and friends). Example: Ikea.

Public Limited Companies: Two or more owners who can sell

its’ shares to any individual/organization in the general public

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through stock exchanges (see Economics: topic 3.1 – Money and

Banking). Example: Verizon Communications.

Advantages:
• Limited Liability: this is because, the company and the
shareholders have separate legal identities.
• Raise huge amounts of capital: selling shares to other people
(especially in Public Ltd. Co.s), raises a huge amount of capital,
which is why companies are large.
• Public Ltd. Companies can advertise their shares, in the form of
a prospectus, which tells interested individuals about the
business, it’s activities, profits, board of directors, shares on sale,
share prices etc. This will attract investors.
Disadvantages:
• Required to disclose financial information: Sometimes, private
limited companies are required by law to publish their financial
statements annually, while for public limited companies, it is
legally compulsory to publish all accounts and reports. All the
writing, printing and publishing of such details can prove to be
very expensive, and other competing companies could use it to
learn the company secrets.
• Private Limited Companies cannot sell shares to the public.
Their shares can only be sold to people they know with the
agreement of other shareholders. Transfer of shares is restricted
here. This will raise lesser capital than Public Ltd. Companies.
• Public Ltd. Companies require a lot of legal documents and
investigations before it can be listed on the stock exchange.
• Public and Private Limited Companies must also hold an Annual
General Meeting (AGM), where all shareholders are informed
about the performance of the company and company decisions,
vote on strategic decisions and elect board of directors. This is
very expensive to set up, especially if there are thousands of
shareholders.
• Public Ltd. Companies may have managerial problems: since
they are very large, they become very difficult to manage.

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Communication problems may occur which will slow down

decision-making.
• In Public Ltd. Companies, there may be a divorce of
ownership and control: The shareholders can lose control of the
company when other large shareholders outvote them or when
board of directors control company decisions.
A summary of everything learned until now, in this section, in
case you’re getting confused:

FranchisesThe owner of a business (the franchisor) grants a

licence to another person or business (the franchisee) to use
their business idea – often in a specific geographical area. Fast
food companies such as McDonald’s and Subway operate around
the globe through lots of franchises in different countries.

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Joint Ventures

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Joint venture is an agreement between two or more

businesses to work together on a project. The foreign
business will work with a domestic business in the same industry.
Eg: Google Earth is a joint venture/project between Google and
NASA.
Advantages

• Reduces risks and cuts costs

• Each business brings different expertise to the joint venture
• The market potential for all the businesses in the joint venture is
increased
• Market and product knowledge can be shared to the benefit of the
businesses
Disadvantages

• Any mistakes made will reflect on all parties in the joint venture,
which may damage their reputations
• The decision-making process may be ineffective due to different
business culture or different styles of leadership

Public Sector Corporations

Public sector corporations are businesses owned by the

government and run by directors appointed by the government.
They usually provide essentials services like water, electricity,
health services etc. The government provides the capital to run
these corporations in the form of subsidies (grants). The UK’s
National Health Service (NHS) is an example. Public corporations
aim to:
• to keep prices low so everybody can afford the service.
• to keep people employed.

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• to offer a service to the public everywhere.

Advantages:

• Some businesses are considered too important to be owned by

an individual. (electricity, water, airline)
• Other businesses, considered natural monopolies, are
controlled by the government. (electricity, water)
• Reduces waste in an industry. (e.g. two railway lines in one city)
• Rescue important businesses when they are failing through
nationalisation
• Provide essential services to the people
Drawbacks:

• Motivation might not be as high because profit is not an objective

• Subsidies lead to inefficiency. It is also considered unfair for
private businesses
• There is normally no competition to public corporations, so there
is no incentive to improve
• Businesses could be run for government popularity

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1.5 – Business Objectives and

Stakeholder Objectives
Mind map

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Business objectives

Business objectives are the aims and targets that a business

works towards to help it run successfully. Although the setting of
these objectives does not always guarantee the business
success, it has its benefits.

• Setting objectives increases motivation as employees and

managers now have clear targets to work towards.
• Decision making will be easier and less time consuming as there
are set targets to base decisions on. i.e., decisions will be taken in
order to achieve business objectives.
• Setting objectives reduces conflicts and helps unite the
business towards reaching the same goal.
• Managers can compare the business’ performance to its
objectives and make any changes in its activities if required.
Objectives vary with different businesses due to size, sector and
many other factors. However, many business in the private sector
aim to achieve the following objectives.

• Survival: new or small firms usually have survival as a primary

objective. Firms in a highly competitive market will also be more
concerned with survival rather than any other objective. To
achieve this, firms could decide to lower prices, which would
mean forsaking other objectives such as profit maximization.
• Profit: this is the income of a business from its activities after
deducting total costs. Private sector firms usually have profit
making as a primary objective. This is because profits are
required for further investment into the business as well as for
the payment of return to the shareholders/owners of the
business.
• Growth: once a business has passed its survival stage it will aim
for growth and expansion. This is usually measured by value of

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sales or output. Aiming for business growth can be very

beneficial. A larger business can ensure greater
job security and salaries for employees. The business can also
benefit from higher market share and economies of scale.
• Market share: this can be defined as the proportion of total
market sales achieved by one business. Increased market share
can bring about many benefits to the business such as increased
customer loyalty, setting up of brand image, etc.
• Service to the society: some operations in the private sectors
such as social enterprises do not aim for profits and prefer to set
more economical objectives. They aim to better the society by
providing social, environmental and financial aid. They help
those in need, the underprivileged, the unemployed, the economy
and the government.
A business’ objectives do not remain the same forever. As market
situations change and as the business itself develops, its
objectives will change to reflect its current market and economic
position. For example, a firm facing serious economic recession
could change its objective from profit maximization to short term
survival.

Stakeholders

A stakeholder is any person or group that is interested in or

directly affected by the performance or activities of a
business. These stakeholder groups can be external – groups
that are outside the business or they can be internal – those
groups that work for or own the business.
Internal stakeholders:

• Shareholder/ Owners: these are the risk takers of the

business. They invest capital into the business to set up and

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expand it. These shareholders are liable to a share of the profits

made by the business.

• Objectives:
• Shareholders are entitled to a rate of return on the capital
they have invested into the business and will therefore have
profit maximization as an objective.
• Business growth will also be an important objective as this will
ensure that the value of the shares will increase.

• Workers: these are the people that are employed by the

business and are directly involved in its activities.

• Objectives:
• Contract of employment that states all the right and
responsibilities to and of the employees.
• Regular payment for the work done by the employees.
• Workers will want to benefit from job satisfaction as well as
motivation.
• The employees will want job security– the ability to be able to
work without the fear of being dismissed or made redundant.

• Managers: they are also employees but managers control the

work of others. Managers are in charge of making key business
decisions.

• Objectives:
• Like regular employees, managers too will aim towards
a secure job.
• Higher salaries due to their jobs requiring more skill and effort.
• Managers will also wish for business growth as a bigger
business means that managers can control a bigger and well
known business.

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External Stakeholders:
•
• Customers: they are a very important part of every business.
They purchase and consume the goods and services that the
business produces/ provides. Successful businesses use market
research to find out customer preferences before producing their
goods.

• Objectives:
• Price that reflects the quality of the good.
• The products must be reliable and safe. i.e., there must not
be any false advertisement of the products.
• The products must be well designed and of a perceived
quality.
•
• Government: the role of the government is to protect the
workers and customers from the business’ activities and
safeguard their interests.

• Objectives:
• The government will want the business to grow and survive
as they will bring a lot of benefits to the economy. A
successful business will help increase the total output of
the country, will improve employment as well as increase
government revenue through payment of taxes.
• They will expect the firms to stay within the rules and
regulations set by the government.
•
• Banks: these banks provide financial help for the business’
operations’

• Objectives:
• The banks will expect the business to be able to repay the
amount that has been lent along with the interest on it. The
bank will thus have business liquidity as its objective.
•

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• Community: this consists of all the stakeholder groups,

especially the third parties that are affected by the business’
activities.

• Objectives:
• The business must offer jobs and employ local employees.
• The production process of the business must in no way harm
the environment.
• Products must be socially responsible and must not pose
any harmful effects from consumption.

Public- sector businesses

Government owned and controlled businesses do not have the

same objectives as those in the private sector.

Objectives:
• Financial: although these businesses do not aim to maximize
profits, they will have to meet the profit target set by the
government. This is so that it can be reinvested into the business
for meeting the needs of the society
• Service: the main aim of this organization is to provide a service
to the community that must meet the quality target set by the
government
• Social: most of these social enterprises are set up in order to aid
the community. This can be by providing employment to citizens,
providing good quality goods and services at an affordable rate,
etc.
• They help the economy by contributing to GDP, decreasing
unemployment rate and raising living standards.
This is in total contrast to private sector aims like profit, growth,
survival, market share etc.

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Conflicts of stakeholders’ objectives

As all stakeholders have their own aims they would like to

achieve, it is natural that conflicts of stakeholders’ interests could
occur. Therefore, if a business tries to satisfy the objectives of
one stakeholder, it might mean that another stakeholders’
objectives could go unfulfilled.

For example, workers will aim towards earning higher salaries.

Shareholders might not want this to happen as paying higher
salaries could mean that less profit will be left over for payment of
return to the shareholders.
Similarly, the business might want to grow by expanding
operations to build new factories. But this might conflict with the
community’s want for clean and pollution-free localities.

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2-1 Motivating Workers.

Mind map

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People work for several reasons:

• Have a better standard of living: by earning incomes they can

satisfy their needs and wants
• Be secure: having a job means they can always maintain or grow
that standard of living
• Gain experience and status: work allows people to get better at
the job they do and earn a reputable status in society
• Have job satisfaction: people also work for the satisfaction of
having a job
Motivation is the reason why employees want to work hard
and work effectively for the business. Money is the main
motivator, as explained above. Other factors that may motivate a
person to choose to do a particular job may include social
needs (need to communicate and work with others), esteem
needs (to feel important, worthwhile), job satisfaction (to enjoy
good work), security (knowing that your job and pay are secure-
that you will not lose your job).
Why motivate workers? Why do firms go to the pain of making
sure their workers are motivated? When workers are well-
motivated, they become highly productive and effective in
their work, become absent less often, and less likely to leave
the job, thus increasing the firm’s efficiency and output,
leading to higher profits. For example, in the service sector, if
the employee is unhappy at his work, he may act lazy and rude to
customers, leading to low customer satisfaction, more complaints
and ultimately a bad reputation and low profits.

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Motivation Theories

• F. W. Taylor: Taylor based his ideas on the assumption

that workers were motivated by personal gains, mainly money
and that increasing pay would increase productivity (amount of
output produced). Therefore he proposed the piece-rate system,
whereby workers get paid for the number of output they produce.
So in order, to gain more money, workers would produce more.
He also suggested a scientific management in
production organisation, to break down labour (essentially
division of labour) to maximise output
However, this theory is not entirely true. There are various other
motivators in the modern workplace, some even more important
than money. The piece rate system is not very practical in
situations where output cannot be measured (service industries)
and also will lead to (high) output that doesn’t guarantee high
quality.
Maslow’s Hierarchy: Abraham Maslow’s hierarchy of needs
shows that employees are motivated by each level of the
hierarchy going from bottom to top. Mangers can identify which
level their workers are on and then take the necessary action to
advance them onto the next level.

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• One limitation of this theory is that it doesn’t apply to every

worker. For some employees, for example, social needs aren’t
important but they would be motivated by recognition and
appreciation for their work from seniors.

Herzberg’s Two-Factor Theory: Frederick Herzberg’s two-factor

theory, wherein he states that people have two sets of needs:
Basic animal needs called ‘hygiene factors’:

• status
• security
• work conditions
• company policies and administration
• relationship with superiors
• relationship with subordinates
• salary
Needs that allow the human being to grow psychologically,
called the ‘motivators’:
•
• achievement
• recognition
• personal growth/development
• promotion
• work itself
According to Herzberg, the hygiene factors need to be satisfied, if
not they will act as de-motivators to the workers. However
hygiene factors don’t act as motivators as their effect quickly wear
off. Motivators will truly motivate workers to work more
effectively. Motivating Factors

Financial Motivators
• Wages: often paid weekly. They can be calculated in two ways:

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• Time-Rate: pay based on the number of hours worked.

Although output may increase, it doesn’t mean that workers
will work sincerely use the time to produce more- they may
simply waste time on very few output since their pay is based
only on how long they work. The productive and unproductive
worker will get paid the same amount, irrespective of their
output.
• Piece-Rate: pay based on the no. of output produced.
Same as time-rate, this doesn’t ensure that quality output is
produced. Thus, efficient workers may feel demotivated as
they’re getting the same pay as inefficient workers, despite
their efficiency.
• Salary: paid monthly or annually.
• Commission: paid to salesperson, based on a percentage of
sales they’ve made. The higher the sales, the more the pay.
Although this will encourage salespersons to sell more products
and increase profits, it can be very stressful for them because no
sales made means no pay at all.
• Bonus: additional amount paid to workers for good work
• Performance-related pay: paid based on performance. An
appraisal (assessing the effectiveness of an employee by senior
management through interviews, observations, comments from
colleagues etc.) is used to measure this performance and a pay is
given based on this.
• Profit-sharing: a scheme whereby a proportion of the company’s
profits is distributed to workers. Workers will be motivated to work
better so that a higher profit is made.
• Share ownership: shares in the firm are given to employees so
that they can become part owners of the company. This will
increase employees’ loyalty to the company, as they feel a sense
of belonging.
Non-Financial Motivators
• Fringe benefits are non-financial rewards given to employees
• Company vehicle/car
• Free healthcare

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• Children’s education fees paid for

• Free accommodation
• Free holidays/trips
• Discounts on the firm’s products

• Job Satisfaction: the enjoyment derived from the feeling that

you’ve done a good job. Employees have different ideas about
what motivates them- it could be pay, promotional opportunities,
team involvement, relationship with superiors, level of
responsibility, chances for training, the working hours, status of
the job etc. Responsibility, recognition and satisfaction are in
particular very important.
So, how can companies ensure that they’re workers are satisfied
with the job, other than the motivators mentioned above?

• Job Rotation: involves workers swapping around jobs and

doing each specific task for only a limited time and then changing
round again. This increases the variety in the work itself and will
also make it easier for managers to move around workers to do
other jobs if somebody is ill or absent. The tasks themselves are
not made more interesting, but the switching of tasks may avoid
boredom among workers. This is very common in factories with a
huge production line where workers will move from retrieving
products from the machine to labelling the products to packing the
products to putting the products into huge cartons.
• Job Enlargement: where extra tasks of similar level of work
are added to a worker’s job description. These extra tasks will not
add greater responsibility or work for the employee, but make
work more interesting. E.g.: a worker hired to stock shelves will
now, as a result of job enlargement, arrange stock on shelves,
label stock, fetch stock etc.
• Job Enrichment: involves adding tasks that require more skill
and responsibility to a job. This gives employees a sense of

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trust from senior management and motivate them to carry out the
extra tasks effectively. Some additional training may also be given
to the employee to do so. E.g.: a receptionist employed to
welcome customers will now, as a result of job enrichment, deal
with telephone enquiries, word-process letters etc.
• Team-working: a group of workers is given responsibility for a
particular process, product or development. They can decide as
a team how to organize and carry out the tasks. The workers
take part in decision making and take responsibility for the
process. It gives them more control over their work and thus a
sense of commitment, increasing job satisfaction. Working as a
group will also add to morale, fulfill social needs and lead to job
satisfaction.
• Opportunities for training: providing training will make workers
feel that their work is being valued. Training also provides them
opportunities for personal growth and development, thereby
attaining job satisfaction
• Opportunities of promotion: providing opportunities for
promotion will get workers to work more efficiently and fill them
with a sense of self-actualization and job satisfaction

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2.2 – Organization and Management

Mind map

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Organizational structure refers to the levels of management and

division of responsibilities within a business. They can be
represented on organizational charts (left).

Advantages:
• All employees are aware of which communication channel is
used to reach them with messages
• Everyone knows their position in the business. They know who
they are accountable to and who they are accountable for
• It shows the links and relationship between the different
departments
• Gives everyone a sense of belonging as they appear on the
organizational chart

The span of control is the number of subordinates working

directly under a manager in the organizational structure. In the
above figure, the managing director’s span of control is four. The

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marketing director’s span of control is the number of marketing

managers working under him (it is not specified how many, in the
figure).
The chain of command is the structure of an organization that
allows instructions to be passed on from senior managers to
lower levels of management. In the above figure, there is a
short chain of command since there are only four levels of
management shown.
Now, if you look closely,there is a link between the span of control
and chain of command. The wider the span of control the
shorter the chain of command since more people will appear
horizontally aligned on the chart than vertically. A short span of
control often leads to long chain of command. (If you don’t
understand, try visualizing it on an organizational chart).
Advantages of a short chain of command (these are also the
disadvantages of a long chain of command):
• Communication is quicker and more accurate
• Top managers are less remote from lower employees, so
employees will be more motivated and top managers can always
stay in touch with the employees
• Spans of control will be wider, This means managers have more
people to control This is beneficial because it will encourage
them to delegate responsibility (give work to subordinates) and
so the subordinates will be more motivated and feel trusted.
However there is the risk that managers may lose control over the
tasks.

Line Managers have authority over people directly below them in

the organizational structure. Traditional
marketing/operations/sales managers are good examples.
Staff Managers are specialists who provide support, information
and assistance to line managers. The IT department manager in
most organisations act as staff managers.

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Management

So,, what role do manager really have in an organization? Here

are their five primary roles:

• Planning: setting aims and targets for the

organisations/department to achieve. It will give the department
and it’s employees a clear sense of purpose and direction.
Managers should also plan for resources required to achieve
these targets – the number of people required, the finance
needed etc.
• Organizing: managers should then organize the resources. This
will include allocating responsibilities to employees, possibly
delegating.
• Coordinating: managers should ensure that each department is
coordinating with one another to achieve the organization’s
aims. This will involve effective communication between
departments and managers and decision making. For example,
the sales department will need to tell the operations dept. how
much they should produce in order to reach the target sales level.
The operations dept. will in turn tell the finance dept. how much
money they need for production of those goods. They need to
come together regularly and make decisions that will help achieve
each department’s aims as well as the organization’s.
• Commanding: managers need to guide, lead and supervise
their employees in the tasks they do and make sure they are
keeping to their deadlines and achieving targets.
• Controlling: managers must try to assess and evaluate the
performance of each of their employees. If some employees fail
to achieve their target, the manager must see why it has occurred
and what he can do to correct it- maybe some training will be
required or better equipment.

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Delegation is giving a subordinate the authority to perform

some tasks.
Advantages to managers:
• managers cannot do all work by themselves
• managers can measure the efficiency and effectiveness of their
subordinates’ work
However, managers may be reluctant to delegate as they may
lose their control over the work.

Advantages to subordinates:
• the work becomes more interesting and rewarding- increased job
satisfaction
• employees feel more important and feel trusted– increasing
loyalty to firm
• can act as a method of training and opportunities for promotions,
if they do a good job.

Leadership Styles

Leaderships styles refer to the different approaches used when

dealing with people when in a position of authority. There are
mainly three styles you need to learn: the autocratic, democratic
and laissez-faire styles.
Autocratic style is where the managers expects to be in charge
of the business and have their orders followed. They do all the
decision-making, not involving employees at all.
Communication is thus, mainly one way- from top to bottom. This
is standard in police and armed forces organizations.
Democratic style is where managers involve employees in the
decision-making and communication is two-way from top to
bottom as well as bottom to top. Information about future plans is

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openly communicated and discussed with employees and a final

decision is made by the manager.
Laissez-faire (French phrase for ‘leave to do) style makes the
broad objectives of the business known to employees and leaves
them to do their own decision-making and organize tasks.
Communication is rather difficult since a clear direction is not
given. The manger has a very limited role to play.

Trade Unions

A trade union is a group of workers who have joined together

to ensure their interest are protected. They negotiate with the
employer (firm) for better conditions and treatment and can
threaten to take industrial action if their requests are denied.
Industrial action can include overtime ban (refusing to work
overtime), go slow (working at the slowest speed as is required by
the employment contract), strike (refusing to work at all and
protesting instead) etc. Trade unions can also seek to put forward
their views to the media and influence government decisions
relating to employment.
Benefits to workers of joining a trade union:
• strength in number- a sense of belonging and unity
• improved conditions of employment, for example, better pay,
holidays, hours of work etc

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• improved working conditions, foe example, health and safety

• improved benefits for workers who are not working, because
they’re sick, retired or made redundant (dismissed not because of
any fault of their own)
• financial support if a member thinks he/she has been unfairly
dismissed or treated
• benefits that have been negotiated for union member such as
discounts on firm’s products, provision of health services.
Disadvantages to workers of joining a trade unions:

• costs money to be member- a membership fee will be required

• may be asked to take industrial action even if they don’t agree
with the union- they may not get paid during a strike, for example.

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