BUSINESS, ORGANIZATION &

ENVIRONMENT
WHAT IS THE ROLE OF A BUSINESS?

A business aims to meet the needs and wants of individuals or organizations through any of
the following activities:

- Producing crops or extracting raw materials

- Creating a product
- Providing a service

INPUT  PROCESS  OUTPUT

STORAGE

Feedback

WHAT IS A BUSINESS?

It is a decision-making organization involved in the process of using INPUTS to produce goods

or services (usually in exchange for money).

INPUTS  These are the human, physical and financial resources needed by a business to
produce goods or services (factors of production).

4 main inputs:

 Human GOODS
 Physical
 Financial PRODUCTION
 Enterprise
SERVICES
Factors of production (another name):

 LAND  rent
 LABOR  wages
 CAPITAL  interest INCOME
 ENTERPRISE  profit

OUTPUTS  There are 3 types:

 Consumer goods: tangible products  sold to the public

 Consumer services: non-tangible products  sold to the public

1
  Capital goods: physical goods that are used by Industry to aid in the
production of other goods and services  sold to other companies

PROCESSES  Production processes can take many forms:

 Capital-intensive: use a large proportion of land or machinery relative to

other inputs, such as labor.
(Lot of money needed)

 Labour-intensive: use a large proportion of labor relative to other inputs.

(Lot of labor needed)

THE CIRCULAR FLOW OF MONEY

Expenditures Revenues
PRODUCT MARKET
Goods & services Outputs

HOUSEHOLDS FIRMS

Land, labor & capital Factors of production

RESOURCE MARKET
Wages, rent, Costs of production
interests & profit

 Businesses exist to satisfy the NEEDS and WANTS of people, organizations, and
governments.

INVOLVEMENT  how important is to make a decision when purchasing something.

o High involvement
o Low involvement

MARKET PLACE  place or process where buyers and sellers meet to trade. In marketplaces
we can find MARKET and CUSTUMERS.

CUSTOMER vs CONSUMER:

Example: HAPPY MEAL

o Customer  the kids’ parents

o Consumer  the kids

2
16/09/2021

*To be successful you need to ADD VALUE.

HOW TO ADD VALUE?

We can add valued in:

 Inputs
 Process
 Outputs

Value added is the difference between the value of the inputs and the value of the outputs.

Value added allows a business to sell its products for more than the production cost  MORE
REVENUE

BUSINESS FUNCTIONS

 4 DEPARTMENTS:
- Production
- Marketing
- Accounting
- Human resources
 Division of labor: each person/group performs one specific activity  MORE
EFFICIENCY
 Interrelationship: good communication, cooperation and close interrelationships
between functions are essential before major decisions are taken.

17/09/2021

OPPORTUNITY COST

Things you can’t do because you’ve chosen something else.

- Businesses have to make decisions that affect their daily operations and long-term
processes.

BUSINESS SECTORS

 Primary  business involved with the extraction, harvesting and conversion of land as
a factor of production.
o Ex: fishing, mining, forestry…

 Secondary  business involved in using raw materials and other resources for the
manufacturing or construction of finished and usable products.
o Ex: aircraft manufacturer – use steel, rubber…

 Tertiary  business involved in providing services to customers or other businesses.

3
 o Ex: transport, tourism, distribution…

 Quaternary  refers to businesses engaged in the creation or sharing of knowledge or

information. Services involving complex processing and handling of information,
education & research, engineering, IT specialist, R&D…
o Ex: research and investigations

These sectors are typically linked in what is referred to as the production chain or chain of
production. A chain of production is the steps through the different sectors that must be made
to turn raw materials into a consumer good that is marketed.

WHY DO WE START A BUSINESS?

 Autonomy
 Security
 Interest/hobby
 Self-realization
 Fear of losing a job
 Make more money
 Independence
 Challenge
 Finding a gap in the market

ENTREPRENEURSHIP & INTRAPRENEURSHIP

Both are vital to business activity as they provide the impetus for innovate products and new
businesses opportunities.

- Entrepreneurs: an individual who demonstrates enterprise and initiative in order to

make a profit.
- Intrapreneurs: an individual employed by a large organization who demonstrates
entrepreneurial thinking in the development of new products or services.

Entrepreneurs are typically self-employed, while intrapreneurs are employed by large

organizations and develop new products or services for the benefit of their employers. They
are both type of people who want to create a start-up, either for a new product or for a whole
new business.

Innovation is fundamental to what entrepreneurs & intrapreneurs do. This typically comes in
one of three forms:

 Market reading  observing customers and competitors and then making

small changes to existing products.
 Need seeking  communicating with current and potential customers to
determine their needs.
 Technology driving  investing in R&D and following opportunities
offered by technological capabilities.

4
BUSINESS PLAN

 Elements of a business plan: (6)

o Business idea, aims and objectives
o Business organization
o Human resources
o Finance
o Marketing
o Operations

 Purposes of a business plan: (6)

o Support the launch of a new business idea
o Attract new fund from banks, investors…
o Support strategic planning
o Identify resource needs
o Provide a focus for development
o Work as a measure of business success

TYPES OF OWNERSHIPS

- Sole traders
Public Limited
Commercial organizations For-profit - Partnerships
Companies

- Companies/Corporations
Private Limited
Companies
- Cooperatives
For-profit - Microfinances
- Public-private partnerships (PPPs)
Social organizations

- NGOs
Non-profit - Charities 5
TYPES OF COMMERCIAL (FOR-PROFIT) ORGANIZATIONS
SOLE TRADERS

 What is it?  sole traders are people who run their own business as an individual. They
are usually people who have seen a gap in the market, people who wanted to create their
own product, or just living their own dream.

 Features:
- Full control
- Not a separate legal entity
- Unlimited liability
- Continuity depends on the funder
- Taxed as an individual
- Minimal admin and filing requirements
- Privacy

 Advantages & Disadvantages:

 Flexibility in working hours

 Control over decisions taken
 Easy and quick legal paperwork
 All profits belong to the sole trader
 Easy, quick, and inexpensive to register the business
 Familiarity with the customers

× Limited capital
× Lack of continuity
× Unlimited liability
× Limited scope for expansion
× Competition with other businesses
× Making decisions may be stressful

PRIVATE LIMITED COMPANY

 What is it?  A Private Limited Company is a type of privately held small business entity.
This type of business entity limits owner liability to their shares, limits the number of
shareholders to 50, and restricts shareholders from publicly trading shares.

 Main features:
- Size  usually smaller than Public Limited Companies.
- Shares will originally be owned by the original owner, who will sell them to close
friends and family (the transfer is private, and all the shareholders must agree on
it).
- Limited liability  Different legal entities between company and share owners
- Initial owner usually keeps the largest percentage of shares, therefore having
control over the company’s decisions, including the share buying and selling.

6
 - Shares of a private limited company cannot be sold into the market – PLCs are
owned by a small number of shareholders.
- Nº of members  1 min./200 max. (non-employee shareholders  max. 50).
- Greater nº of shares  Greater difficulty when making a decision.
- Minimum set-up capital (Spain): 3000 euros.
- Perpetual Succession  Life of company keeps existing forever in the eyes of the
law, even in case of death or bankruptcy.

 Advantages & Disadvantages:

 Control of the company cannot be lost.

 It can raise more finance than a sole trader.
 These tend to have more privacy than public Limited Companies.
 Limited liability.
 Guaranteed continuity.

× Limited number of members.

× Restricted transfer of shares (it restricts finance compared with a PLC).
× Difficulties in the expansion.
× Lack of privacy  financial accounts must be made available upon request.
× Misrepresentation of the income.
× Small capital.
× It is more expensive to set up compared to a sole trader or partnership.

PUBLIC LIMITED COMPANY

 What is it?  A PLC is a company that offers shares to the public and is managed by
directors and owned by shareholders.

It must comply with additional administration on tax matters and make their financial reports
public so that potential shareholders have all the information they need before investing.

 Main features:
- Paid-up capital  minimum 60.000 euros (Spain).
- Easy transferability  easy for the shareholders to transfer their shares.
- Limited liability  the SHs are not liable personally in case of losses or debts
suffered by the company.
- Perpetual succession  members may come and go, but the company will never
become non-existent.
- Separate legal entity  it has a different identity from its SHs, and it can own
property on its own name.
- Number of members  minimum 7 / NO maximum.
- Number of directors  minimum 3 / NO maximum.
- Voluntary association  easy to buy shares and easy to exit the company too.

7
 - IPO (initial public offer)  first time that shares in a PLC are sold via stock
exchange.
- They have to publish their financial accounts on a yearly basis.

 Advantages & Disadvantages:

 EASIER to raise finance by selling additional SHARE CAPITAL.

 EASIER to secure finance from banks and investors.
 The shareholders have LIMITED LIABILITY.
 Benefits of being large: ECONOMIES OF SCALE, MARKET POWER & MARKET
DOMINANCE.
 There is CONTINUITY even if the principal shareholder dies.

× It is ADMINISTRATIVELY DIFFICULT and EXPENSIVE to set up the company.

× There are more COMPLEX accounting and reporting REQUIREMENTS (they must
`publish their financial accounts).
× There is a greater risk of a hostile takeover by a rival company as THE COMPANY
CANNOT CONTROL WHO BUYS ITS SHARES.
× Shareholders will expect to receive DIVIDENDS (% of the profit).
× It can become too large to manage efficiently  DISECONOMIES OF SCALE.

PARTNERSHIPS

 What is it?  a partnership is a commercial business organization owns by 2 or more

people (from 2 to 20 owners generally). These owners are called partners.
- DEED OF A PARTNERSHIP: legal contract between the partners to prevent
potential conflicts. In this contract are stated their responsibilities, voting
rights, and how profits are to be shared between the owners.

 Advantages & Disadvantages:

 With up to 20 owners  easy to raise more finance than sole traders.

 The partners can benefit from having more ideas and expertise and they have less
responsibilities.
 They can also benefit from specialization and the division of labor.
 Business affairs are kept confidential (only tax authorities need to know your
financial position).

8
  Improved continuity as the partnership can remain in business if a partner is ill or
on holiday.
 SLEEPING PARTNERS can provide additional capital without having an active role in
the business.

× There might be disagreements and conflicts.

× Any profits made must be shared between the partners.
× The death or departure of a partner can cause the organization to cease until a
new partnership agreement is legally created.
× Unlimited liability (sleeping partners are exempt)
× Limited ability to raise capital compared with limited liability companies

TYPES OF SOCIAL (FOR-PROFIT) ORGANIZATIONS

MICROFINANCE

 What is it?  a type of financial service aimed for people and small enterprises who
don't have access to traditional banking and related services.

 Funder  Muhammed Yunis (Nobel prize winner)

 Main features:

- Provide small amounts of finance to those who traditionally wouldn’t have

access to it.
- Microfinance is a great business model for someone who wants to work for
the well-being of the underprivileged section of the society.
- However, there are many hidden challenges that one must face while
conducting such business activities. This business model probably won’t give
you higher ROI, but it can ensure optimum growth due to stable demand for
credit.

 Advantages & Disadvantages:

 Provide an extensive portfolio of loans.

 Promote self-sufficiency and entrepreneurship.
 Warranty-free loans  quick fundraising.
 Disburse quick loan under urgency  to satisfy the financial needs of people in
whatever situation.

9
  Help people to satisfy their financial needs  microfinances offer loans to low-
income groups.

× Harsh repayment criteria  strict criteria to repay the loans

× Small loan amount
× High-interest rate  they borrow money from banks, so they have to ask for
high-interest rates to make profit

COOPERATIVES

 What is it?  these are for-profit social enterprises owned and run by their members,
such as employees, managers, and customers. Cooperatives strive to provide a service and
to create value for their member, rather than a financial return for their owners.
- Like a limited liability company, a cooperative is a separate legal entity.
- All members have equal voting rights.
- They promote a democratic style of managing the organization, with a culture
of promoting the concepts of sharing resources and delegation to increase
competitiveness.

 Advantages & Disadvantages:

 It is usually straight forward & inexpensive to set up a cooperative.

 All members must be active stakeholders, making it more likely to succeed.
 Shareholders have equal voting rights (democratic and harmonious organization).
 Limited liability.
 Members own and control the business rather than being governed by external
investors.
 Any surplus if spent on the welfare of the members and a portion is kept for
reserves.
 Governments often provide special financial assistance to help cooperatives.

× It can be difficult to attract members/shareholders as cooperatives are not formed

to generate financial return on investment.
× Limited resources as the financial strength of cooperatives depends on the capital
contributed by its members.
× Employees and managers may not be motivated due to the absence of financial
rewards and benefits.
× Employees may not have any managerial skills so inefficiencies can hinder the
success of the business.
× Although some members have more responsibilities, they all have the same voting
rights (unfair).

10
PUBLIC-PRIVATE PARTNERSHIPS (PPPs)

 What is it?  these are organizations jointly stablished by the government and at least
one private sector organization.
- PPPs have been used for a wide range of projects that benefit local
communities and society.
- They are suitable when the capital to finance a public project from public
funding is insufficient or not available.
- Once the project is built, it is usually maintained by the private sector
contractor (up to 30 years), after which time there is the option to renew the
partnership, or the asset returns to the public sector contractor.
 Example: The Hong Kong government owns 51% of the stake in Hong Kong Disneyland
whilst the Walt Disney Company owns the other 49%.

 Advantages & Disadvantages:

 Both sectors contribute financial resources and share some of the risk.
 They are run more efficiently than traditional public sector organizations.
 They provide a solution to the funding shortfall of many governments.
 Government funding can help private firms to reduce the amount of money they
need for investment projects.
 Private sector management skills and financial support help to create better value
for money (calidad-precio) for taxpayers.
 PPPs have positive impact on employment and economic growth.

× There is always an opportunity cost of public sector finances and resources; by

engaging in a PPP, the government forgoes (renuncia) other projects or areas of
expenditure.
× High risk investments  these tend to be large projects and involve large amounts
of money and high operational cost for a long period of time.
× There is the danger of conflict between stakeholders:
o Ex: Private sector managers need to act in the interest of their
shareholders whilst the government has alternative priorities.
× Private investors might be put off (pueden desanimarse) due to the difficulty in
estimating financial outcomes of the PPP over such long time periods.

TYPES OF SOCIAL (NON-PROFIT) ORGANIZATIONS

 Social enterprises are organizations that generate revenue but act with community
objectives at the core of their operations.

11
 -
A non-profit organization acts in a business-like way but does not
distribute profits to its owners or shareholders.
- They use the surplus to pursue its mission or vision.
 Advantages & Disadvantages:
 They are exempt from paying income taxes or corporate taxes.
 They qualify for government grants and subsidies.
 They exist for the benefit of local communities & societies  fundraising &
donations.
 To encourage donors, non-profit social enterprises qualify for tax
reductions on their donations.

× In order to protect the general public, there are strict restrictions and
guidelines that must be followed.
× Earnings of workers are lower than workers in for-profit firms.
× They are often reliant on donations and external support in order to
survive.
× Cost and financial control may not be stringent as there is no expectation to
earn a profit.
NON-GOVERNMENTAL ORGANIZATIONS (NGOs)

 What is it?  An NGO is a type of non-profit social enterprises that is neither part of a
government nor a traditional for-profit business but run by voluntary groups.
- They may be funded by governments, charities, private individuals…
- NGOs can operate at a local, national, or international level.
- Most of them are run to promote a social cause.
- They exert (ejercen) pressure and influence on government policies to support
their cause.
 Examples: Oxfam, Doctors Without Borders.

CHARITIES

 What is it?  a charity is a non-profit organization that operate in an altruistic way with
the objectives of promoting a worthwhile cause (e.g. Child protection).
- They generally operate in private sector.
- These are run for the benefit of others in society.
- Charities get their finance from a limited range of sources (donations, fund-
raising events…).
 Examples: Boys & Girls Clubs of America, Red Cross.

27/09/2021

 Reasons to belong to the public sector:

o Ensure everyone has access to basic services

12
 o To avoid wasteful competition since the government can achieve huge economies
of scale in the provision of certain services

TYPES OF ECONOMY

- Mixed economy  owned by the state & the private sector

- Free-market economy  owned largely by the private sector
- Command economy  owned by the state

28/09/2021

OVER TO YOU – 1.1 ACTIVITY

1) Define the term “tertiary sector”

a. The tertiary sector includes businesses involved in providing services. Some
examples are transport, tourism, distribution…
2) Outline the factors of production needed to set up the business providing CVs to
school leavers
a. Raw materials  paper
b. Labor  design workers
c. Capital  computers
d. Entrepreneurship  Jessica Lyons
3) Explain two reasons why new businesses might start up in the tertiary sector.
a. The tertiary sector doesn’t require large amounts of start-up finance to
purchase capital equipment
b. It relies more on their own skills and interests
4) Discuss the advantages and disadvantages of setting up a business in a recession.
a. The advantages are that there is a higher demand of jobs so you can employ
people easily and it is easier to find a gap in the market so you can achieve
success slightly easier.
On the other hand, some disadvantages are that there is a lot of people willing
to set up their small businesses so there is more competition, and they are
more probable to success.

 advantages:

- Low cost of initial investment

- Low labor cost
- Low interest cost
- Low cost of raw materials
- Potentially growing market

disadvantages:

- Low consumer demand

- Banks and creditors may be unwilling to lend
- Pressure to set low prices

13
EXQUISITE FLOWERS – ACTIVITY

1) Analyze the costs and the benefits to Natalie in operating as a sole trader.
a. Some benefits are that all the profit that she makes belong to her, she has
flexible working hours, and it is easy to set up the business and make the legal
paperwork.
On the other hand, there are some disadvantages. As she works alone and
probably doesn’t have machinery, if she receives a large order, she will have to
work a lot of hours to complete the order. Another con is that, as a sole trader,
she has unlimited liability, which means that in case of losses or debts suffered
by the business, she will be liable personally to it and she will have to take over
it.
2) Examine (compare pros & cons) whether sole traders, like florists, benefit from a
high degree of specialization (specific product).
a. Benefits:
i. Being able to provide a specialized, focused, and personalized service
to their customers means that sole trader can thrive (prosperar).
ii. Sole traders become experts at their jobs, and this enhances their
productivity.
iii. There are lower costs involved compared to providing a wide range of
different goods and services.
(Sole traders tend to need a variety of management skills since they
cannot afford to hire a specialist)
b. Cons:
i. There is a higher risk in providing only a limited range of goods or
services, i.e., sole traders are not able to enjoy risk bearing economies
of scale.
ii. Specialization and repetitive tasks can become boring and demotivate
the worker.
iii. The is a limited customer base  reduces the profitability

14
4/10/2021

VISION & MISSION

They are sometimes confused.

The VISION (what do we want?) statement is more forward looking and speaks to the long-
term aims and highest aspirations of a business.

The MISSION (why are we doing what we are doing?) communicates what needs to be done to
achieve the vision.

VISION MISSION

Concept What do we want? Why are we doing what we are doing?

Purpose A vision statement points to the
future. It is what the business would
like to see itself as. (Visualize
themselves)
Audience INTERNAL STAKEHOLDERS 
inspires and motivates employees.
EXTERNAL STAKEHOLDERS  binds
them to the business by giving sense
of shared beliefs.
Change As an expression of the business care
values, the vision should never
change.
A mission statement, based upon now,
communicates what needs to be done
to achieve the vision.
INTERNAL STAKEHOLDERS  provides
means for accountability by defining
key performance indicators.
EXTERNAL STAKEHOLDERS  it
measures how successful the business
is at achieving its vision.
A mission may change: a mission
statement may need to be modified to
adapt to new circumstances.

THE HIERARCHY OF OBJECTIVES

AIMS

CORPORATE
OBJECTIVES

DIVISIONAL OBJECTIVES

DEPARTMENTAL OBJECTIVES
15
INDIVIDUAL OBJECTIVES
Corporate aims  the core of a business’s activity is expressed in its corporate aims and
plans.

DIFFERENCES BETWEEN AIMS & OBJECTIVES

 Aims:
- What the business wants to achieve
- Not necessarily time-bound
- Vague and abstract goal
- What a business wants to happen
- Set by senior leaders
- Long term goals of an organization
- Unquantifiable statements
- Serve to give a purpose to the general direction of an organization
- Often expressed in a mission statement

*(ex: increase in sales)

 Objectives:
- What the business must do to achieve the aims
- Time-bound
- Specific and measurable target
- What a business needs to happen
- Set by managers or their subordinates
- Short term goals of an organization
- Quantifiable/measurable statements

*(ex: increase 10% in sales)

ORGANIZATION OBJECTIVES

16
  To control objectives can help control a business plan, they set boundaries for
business activity.
 To motivate objectives can help to inspire managers and employees.
 To direct  objectives provide an agreed and clear focus of all individuals and
departments of an organization.

(Taken by directors/senior (Taken by less

important
managers) managers)

THE NEED FOR CHANGING OBJECTIVES

External factors:

 state of economy
 government constraints
 the presence & power of pressure groups
 new technologies

Internal factors:

 corporate culture
 type & size of organization
 private vs public sector organizations
 age of the business
 finance
 risk profile
 crisis management

6/10/2021

Ethics  moral guidelines that determine decision-making

Ethical code  a document detailing a company’s rules and guidelines on staff behaviour that
must be followed by all employees.

*Ex: accepting bribes breaks the ethical code

Businesses may set themselves ethical objectives:

 building up customer loyalty

17
  creating a positive image
 developing a positive work environment
 reducing the risk of legal redress
 satisfying customer’s ever-higher expectations for ethical behaviour
 increasing profits

CORPORATE SOCIAL RESPONSIBILITY (CSR)

Objectives that focus on meeting social responsibilities are increasingly important for most
business organization.

- This concept (CSR) applies to those businesses that consider the interests of society by
taking responsibility for the impact of their decision and activities on customers,
employees, communities, and the environment.

Stakeholders: people or groups of peoples who can be affected by, and therefore have an
interest in, any action by an organization.

ACTIVITY 1.3.3. MCDONALD’S vs BURGER KING

1- In the context of the above case studies, describe the meaning of ethical business
behaviour.
a. The business that are that large, try to improve their public image by creating
Charities/foundations which help other people who don’t have enough
resources to eat, pay for healthcare, pay scholarships… This are all examples of
ethical business behaviour, with which they try to show the ethical values of
the company, so that customers think that they are doing something well for
the world.
2- Discuss whether acting ethically ultimately provides McDonald’s and Burger King
with commercial and competitive advantages.
a. It is obvious that acting ethically gives a good image of the company and it
attracts customers, but there are different ways to act ethically. For example,
Burger King gives priority to suppliers who provide cage-free chickens and
free-range pigs, so people who care about the quality of the product they are
consuming and how it has been treated or raised will prefer to go to BK rather
than Mc. McDonald’s also have lot of involvement in helping other, for
example with the RMHC, with which they help children. Helping children is
well-seen and it is very attractive, so people who care about children or know
someone whose children are in that Charity, will tend to go to have lunch in
McDonald’s rather than in BK. Depending on the type of charity/foundation
you’re focused in, you will attract different types of customers, but generally
acting ethically always provides some benefits.

b. *Other advantages:
i. Easier to recruit staff and improved staff retention since employees
feel that they are working for a socially responsible employer.
ii. Greater employee satisfaction, morale, and motivation.

18
 iii. It is a source of differentiating from rival firms.
iv. Improves sales and profits.

OVER TO YOU  ACTIVITY 1.2 GOOGLE

1- Define partnership
a. A partnership is business organization owned by two or more people. In an
ordinary partnership there are between 2 to 20 owners. These owners are
called partners. To avoid misunderstandings most partnerships, draw up a
legal contract between the partners stating their responsibilities, voting rights
and how profits are going to be shared.
2- Outline two possible benefits to Larry Page and Sergey Brin of starting Google as a
partnership.
a. First, they were able to raise way more capital than a sole trader and there is
no limit paid-up capital required to start a partnership, and another advantage
is that they could benefit from their specialization and the division of labour.
b. Easy to set up/ More chances of continuity/ Come up with new ideas easier/
share finance
3- Analyse two possible problems Larry Page and Sergey Brin might encounter by
starting Google as a partnership.
a. One disadvantage is that they have to share ideas and come to an agreement
before they made a decision and this could create conflicts, and another
problem is that they had to share profits.
b. Unlimited liability
c. Difficulty in raising finance
4- Discuss the advantages and disadvantages to Google of its conversion to a public
limited company in 2004.
a. The owners pass to have limited liability instead of unlimited and it is easier to
grow finance by selling additional share capital.
On the other hand, these types of companies are very difficult to administer
and even if they are well organized, there is possibility that, as the company is
so big, it can be less efficiently managed than a smaller one. As well, it is way
more expensive to be a public limited company than a partnership and there is
a risk of being overtaken by a rival company.

14/10/2021

SWOT ANALYSIS

OPPORTUNITIES
STRENGTHS

SWOT

THREATS
19
 WEAKNESSES

SWOT analysis:

A form of strategic analysis that identifies and analyses the main internal strengths and
weaknesses and external opportunities and threats that will influence the future direction and
success of a business.

Internal: (can control them)

- Positive  STRENGTH
- Negative  WEAKNESS

External: (can’t control them)

- Positive  OPPORTUNITIES
- Negative  THREATS

*Exercise: McDonald’s:

- S  they are fast and cheap / very accessible / McAuto / well-recognized all over the world

- W  it is unhealthy / it is not a serious restaurant / high staff turnover / limited menu offer

- O  it is very popular so it can dominate the market

- T  lot of competition and it is not always well-seen

OVER TO YOU  ACTIVITY 1.3 NIKE

1- Explain the reason for Nike, Inc. having a mission statement.

a. Nike, Inc has a mission statement, because they want to explain why are they
doing what they are doing. For example, one element on its mission statement
is “if you have a body, you are an athlete”. Obviously, this is no true, but they
want to say that they are making sports clothing and sneakers so that every
person could feel like an athlete while using them. Their mission is to able
everyone to have high-quality sports clothing, even if they are not high-level
athletes.

2- Analyze 2 strategic objectives that Nike, Inc. might try to achieve.

a. Strategic objectives are like long-term goals, so they might try to achieve a
complete market domination in the sports clothing sector and get more and
more popular over time till the point they dominate worldwide and have
stores in almost every country. Another objective they could try to achieve is
to improve their profits by producing cheaper, but without losing product
quality. As their demand is so big, they could benefit from the economies of
scale and be more efficient and profitable.

20
 3- Using Nike, Inc. as an example, outline the main components you might expect to
see in its environmental audit.
a. As they are such an enormous corporation, they own a lot of factories which
pollute a lot and, also, they have been accused of using child-labour. For this
reason, they have get involved in environmental matters and they have
focused in fighting the climate change. To be more eco and environmental-
friendly they have cut their greenhouse gas emissions and incorporated more
sustainable processes.

4- Evaluate the advantages and disadvantages to Nike, Inc. of aiming to be a socially

responsible organization.
a. Being socially responsible has obvious advantages such as improving the public
image of the company, advertise the company, get new customers, reduce the
pressure groups, etc.
On the other hand, this also has some disadvantages. For example, it is
expensive to be more friendly to the environment and probably it would make
the profits lower.

18/10/2021

STRENGTHS:

- Unique selling point

- Brand awareness and brand loyalty
- Experience, knowledge, and skills
- Market share / market domination
- Corporate image and reputation
- Accreditation, endorsement, or official support
- Core competencies (ex. product quality, service quality…)
- Geographical location
- Value for money (relation price-quality)

sales of the company(units∨revenue)

 MARKET SHARE(units∨revenue)=
total sales of the market (units∨revenue)

 MARKET DOMINANCE  most market share

WEAKNESSES:

- Limited sources of revenue

- Escalating costs of production
- Poor cash flow / liquidity problems
- Higher prices than competitors
- Demotivated and/or unproductive workforce
- Limited sources of finance

21
 - Lack of spare capacity
- Restricted product range
- Poor location

QUESTION 1.3.5. KIDZPLAY BOUNCY CASTLES

Say if it is a strength, weakness, opportunity, or threat.

a) Limited competition in a niche market.

a. OPPORTUNITY this is because competition is an external factor and since
and since the business operates in a niche market, there are opportunities for
expansion without the threat of intensive competition.
b) Limited traffic on its newly launched website.
a. WEAKNESS  I assume they are running a weak marketing campaign and
because of that they are having low traffic in their website. This factor
depends on them, so it is an internal factor.
c) Struggling to recruit and retain suitable staff.
a. WEAKNESSthis could be because the firm is unable to hire the right staff.
d) demand in the winter months is low.
a. THREAT
e) Highly profitable earnings could attract new competitors.
a. THREAT

21/10/2021

ANSOFF MATRIX

MARKET PENETRATION market our existing products to our existing customers.

MORE RISK
MARKET DEVELOPMENT  market our existing products in a new market.

22
PRODUCT DEVELOPMENT  market new products in our existing customers.

DIVERSIFICATION  market new products in a new market.

QUESTION 1.3.6. THE ANSOFF MATRIX

Use the Ansoff matrix to explain the growth strategies in the following cases

a) Cadbury, the chocolate manufacturer, launches new products under the names of
Crème Eggs, Flake, Crunchie and Heroes in order to compete with existing rivals.
a. Cadbury is using a strategy of Product Development, which means they are
launching new products into existing audience/customers. The advantage of
this strategy is that you won’t have to do any market research because you
already know how that market works. On the other hand, you will take the risk
of launching a new product, which you don’t know if it will be liked or not.

b) Nissan, a mass market car manufacturer, launches a new line of upmarket cars under
the Infiniti brand to cater for wealthier customers.
a. In this case Nissan is using a Diversification strategy because it is launching
new products into a new market. This strategy carries a lot of risk because you
don’t know anything about your customers and what kind of products they
like.
b. It is Product Development

c) Tesco, the world’s second largest retailer, expands to provide petrol and financial
services to its customers.
a. Tesco is using a strategy called Product Development, in which they launch
new products, but they have the same market/customers.

ACTIVITY – COLORADO BIKES

I recommend 2 strategies:

PRODUCT DEVELOPMENT  to launch new products which innovate the sector of the off-road
bikes (equipment, accessories…) and surprise your customers and make them affordable and
good quality, so that everybody wants to buy those products.

DIVERSIFICATION  also launch new products but try to expand your market. Sell different
types of bikes, not only off-road bikes, sell accessories… this way you will have a wider range of
customers and have more sells.

ANSOFF MATRIX EXISTING PRODUCT NEW PRODUCT

(Colorado bikes)

23
 EXISTING MARKET - relaunch the bike - Develop a new range
- discount the bike of bikes
- advertise the bike - Build specialist bikes

NEW MARKET - Export the bikes - Make different types of

- Sell via internet bikes (exercise bikes,
electric bikes…)
26/10/2021

Stakeholders are any individual or groups of individuals who have a direct interest in a
business the because the actions of the business will affect them directly.

Examples:

- Shareholders  to receive a good dividend

- Workers  good working conditions/ keep their job
- Managers  interested that the company runs well
- Suppliers  to get paid by the company
- Clients  get the best quality products for the lowest price possible
- Banks  get in return their loans
- Government  interested in the compliance of the law, to get paid the taxes, generate
employment…
- Pressure groups  make the companies to act ethically
- Competitors  the rival company runs badly

 Internal Stakeholders:
o Employees
o Managers
o Shareholders
 External Stakeholders:
o Customers
o Suppliers
o Government
o Banks and other creditors
o Special interest groups:
 Pressure groups
 Community action groups
o Competitors
o The media

24
27/10/2021

STAKEHOLDER CONFLICTS  one way of reducing conflict is to compromise.

Example: A business wants to reduce costs and it wants to close one of its factories. In
this case, a way to reduce conflict would be to close the factory in stages rather than
closing it immediately to allow workers time to find other jobs but, as a result, the
business costs will fall more slowly.
*In these situations, the senior management will have to establish its priorities and
decide who the most important stakeholders are in each case.

METHODS OF CONFLICT RESOLUTION

25
QUESTION 1.4.4. SKODA
a) Identify 2 external stakeholders.
a. Customers
b. Pressure groups
c. Suppliers
d. The Czech and Chinese governments
e. Competitors
f. Banks

b) With reference to the case study, explain one source of conflict between
Skoda Auto’s various stakeholders.
a. According to what I have read, one source of conflict would be between
the workers and the managers. The workers complain about the pays
and benefits, maybe because they are too low, and that is manager’s
fault. For this reason, the workforce went on strike and the production
decreased, what caused to Skoda a loss of 2.9 million per day.
c) Discuss how the conflict outlined in your answer above could have been
minimized.
a. This conflict could have been minimized by increasing by little the
workforce’s wages and their working conditions and that way they
wouldn’t have gone in strike and, even they have lost money by
increasing wages, they wouldn’t have lost 2.9 million per day and they
would have made profit.

28/10/2021
POWER & INTEREST (STAKEHOLDERS)

26
2/11/2021

PESTLE ANALYSIS
 What is it?
It is a useful tool for understanding the industry environment and is often used
in conjunction with a SWOT analysis to assess the situation of an individual
business.

- PESTLE stands for “Political, Economic, Social, Technological, Legal &

Environmental” factors.

4/11/2021

27
ACTIVITY 1.5.5. JKL JEANS
JKL Jeans sell jeans throughout the UK. They buy an average of 10000 pairs of jeans per
month at a cost of 30$ each from an American manufacturer. JKL Jeans then sell these
at a price of 30£.
a)

exchange rate purchase cost ($) purchase cost (£) sales revenue (£) profit/loss (£)
£1=0.75$ 300000 400000 300000 -100000
£1=1$ 300000 300000 300000 0
£1=1.5$ 300000 200000 300000 100000
£1=2$ 300000 150000 300000 150000
£1=2.5$ 300000 120000 300000 180000

b) Comment on the relationship between changes in the exchange rate and the
level of profits for JKL Jeans.
- What I can appreciate is that when the dollar is more expensive than the pound,
JKL Jeans loses money, but when the dollar is cheaper, JKL Jeans makes profit.

c) Explain two other costs that JKL Jeans may incur from using a foreign supplier.
- JKL Jeans may face some expenses such as import taxes at the customs and
shipping fees (the containers are expensive).

d) Examine how a high exchange rate can be both an opportunity and a threat
to a business such as JKL Jeans.
- It can be an opportunity because if you have a high exchange rate, the raw
materials from other countries are cheaper and the shipping too.
10/11/2021
STEEPLE ACTIVITY – PEDRO FARMER

28
 1. Explain how each of the two external threats arising from the STEEPLE analysis
would have impacted on farmers’ incomes in the developing world.
- The first threat is about the T for Technological. The competition from orange producers
from developed countries may have impacted significantly on farmers’ incomes because
they are in an unfavorable position relative top its competitors, who have more resources
and technologies to produce oranges. Producers in developed countries have access to
technologies such as genetically modified seeds, crop selection and all sort of machinery
specially crated for increasing the productivity and efficiency of its crops. Also, the oranges
from the developed countries, due to chemical processes, have more durability, flavour,
good-looking, etc.
This way, farmers from developing countries will stay behind because they cannot
develop in their processes of producing and obtaining the oranges as much as the
producers from rich countries and they will have less buyers, what will cause a
decrease in their incomes.
- The second threat is about E for Environmental.

How do we measure growth of a business?

- Value of firm’s sales turnover (revenue)

- The firm’s market share (in units sold or revenue)
- The value of the firm’s capital employed
- Number of employees hired by the business

 Why do you think that a business wants/needs to grow?

 Economies of scale
 Gain larger market share
 Make more profit
 Survival against rivals
 Spread risks by diversifying

29
ECONOMIES OF SCALE

 What is it?  Reduction in a firm’s unit average costs of production that result from an
increase in the scale of production. It refers to the lower average cost of production as a
firm operates on a larger scale due to an improvement in productive efficiency.

- Efficiency is measured in terms of costs of production per unit.

- total costs=¿ cost+ variable cost

total cost
- average cost=
quantity produced

- Optimum production  maximum output you can achieve with the minimum input
possible.

Scale of production: the maximum output that can be achieved using the available inputs.

 It can help businesses gain a competitive cost advantage because lower average cost can
mean:
- Lower prices for customers
- Higher profit margin earned on each unit sold

TYPES OF ECONOMIES OF SCALE

 Internal economies:
o Highlight the advantages that a company obtains due to the use of modern
techniques.
 External economies:
o Highlight the advantages that a company obtains due to the external factors

 Internal economies of scale

30
 External economies of scale

DISECONOMIES OF SCALE

 What is it?  Result of higher unit cost as the firm continues to increase in size (ex:
the business becomes outsized and inefficient, so average costs begin to rise).

TYPES OF DISECONOMIES OF SCALE

 Internal economies:
o Highlight the advantages that a company obtains due to the use of modern
techniques.
 External economies:
o Highlight the advantages that a company obtains due to the external factors

(Not all businesses want to expand. Some business owners do not want the headache of
growing their business or managing a large business)

31
JEREMY’S BAKERY (production)
Nº of workers Total output
0 0
1 4
2 10
3 17
4 23
5 28
6 31
7 32
8 32
9 30
10 25
 Output-Worker graphic
Marginal product Average product
0 0
4 4
6 5
7 5.7
6 5.8
5 5.6
7 5.2
1 4.6
0 4
-2 3.3
-5 2.5
32
 Total output-Nº of workers
35
f(x) = 3.02727272727273 x + 5.95454545454545
30 f(x) = 12.4013122928457 ln(x) + 4.4685462681306
R² = 0.741831683168317
R² = 0.855252782539127
25
total output

20

15

10

0
0 2 4 6 8 10 12
Nº of workers

16/11/2021

SIZE OF A BUSINESS

BUSINESS GROWTH

INTERNAL GROWTH EXTERNAL GROWTH

(Expansion of a business by (Business expansion achieved by

means of opening new means of merging with or taking over
branches, shops, or factories) another business, from either the
same industry or a different one)
Examples:

- Changing price
- Effective advertising and promotion
- Producing improved and better
products
- Selling in more locations MERGERS TAKEOVERS
- Increasing capital expenditure

33
 ADVANTAGES OF INTERNAL GROWTH DISADVANTAGES OF INTERNAL GROWTH

Control and coordination Diseconomies of scale

Inexpensive Need to restructure
Maintains corporate culture (ethical code) Dilution of control & ownership
Less risky Slower growth

ADVANTAGES OF EXTERNAL GROWTH DISADVANTAGES OF EXTERNAL GROWTH

Much faster than organic growth Diseconomies of scale

Reduce competition Need to restructure & fire people
Greater market share & market power More expensive
Greater power of negotiation Conflicts with the other business
Survival Culture clash
Diversification Regulatory problems
Synergy (benefit from others expertise / two
people together know more than they as Redundancies
individuals)

MERGERS vs TAKEOVERS

 Merger:
o Takes places when 2 firms actually agree to form a new company (An
agreement by shareholders and managers of two businesses to bring both
firms together under a common board of directors.
 Takeover:
o Occurs when company buys a controlling interest in another company (They
buy over the 50% of the shares of another company and become the
controlling owner)

EXTERNAL EXPANSION OF A BUSINESS

 HORIZONTAL INTEGRATION:
o Most common type of M&A
o Occurs when there is a merge of firms operating in the same industry
o Horizontal M&A do not represent growth in the industry, but larger market share.

 VERTICAL INTEGRATION:
o Takes place when businesses that are at different stages of production
o Forward vertical  M/A toward the end of production
o Backward vertical  M/A toward an earlier stage of production

 LATERAL INTEGRATION:

34
 o Refers to M&A between firms that have similar operations but do not directly
compete with each other (e.g. Burger King & McDonalds / Volkswagen owns
Bugatti and Bentley)

 CONGLOMERATE:
o The M&A of businesses that are in completely distinct or diversified markets.
 To spread the risk

TYPES OF MERGERS
- Joint ventures
o Two or more businesses decide to split the costs, risks, control & rewards of a
business project.
o They set up a new legal entity
- Strategic alliances
o Agreement between firms in which each agrees to commit resources to
achieve an agreed set of objectives.
o They don’t set up a new legal entity.
- Franchises
o A form of business ownership whereby a person or business buys a license to
trade using another firm’s name, logo, brands, and trademark.
o The FRANCHISEE pays a license fee to the FRANCHISOR.

35
 GLOBALIZATION
The world is becoming increasingly interconnected due to increased trade and cultural
exchange.
 It is the process by which people, cultures, money, goods, and information are being
increasingly transferred between countries.

 What drives globalization?

1- Improved communications
2- Transports
3- Free trade agreements
4- Global banking

36