BA1 Fundamentals of Business Economics - The goals and decisions of organisations Flashcards
What are the two main sectors of organisations?
Public sector and Private sector
These sectors define who owns the organisations.
What are the two main categories of objectives of organisations?
Non profit and For profit
These categories represent the goals that organisations aim to achieve.
True or False: Non profit and for profit enterprises can be found in both public and private sectors.
True
This indicates that the sectors and categories may overlap.
What does the public sector refer to?
Organisations involved in the provision of goods or services by and for the government at various levels
Includes national, regional, or local levels.
Name three common areas where public sector services operate.
- Hospitals
- Schools
- Defence
- Police
These areas have traditionally been serviced by public sector organisations.
What are publicly owned corporations sometimes referred to as?
State Owned Enterprises
These are entities owned by the government.
True or False: The public sector only includes services at the national level.
False
The public sector operates at national, regional, and local levels.
Fill in the blank: Public sector organisations provide goods or services by and for the _______.
government
This highlights the role of government in the public sector.
What is the principal goal of a public organisation?
To provide services deemed important by society
Unlike most social organisations, which are generally profit-driven.
How are public organisations funded?
Through taxation revenues
This funding model necessitates accountability in resource allocation.
What are the key responsibilities of public organisations in terms of resource usage?
Demonstrate efficiency in allocation and use of resources
This includes maximizing quality and quantity of services.
What must public organisations balance to ensure financial stability?
The financial budget
Balancing the budget is crucial for sustainability.
True or False: State Owned Enterprises can have a profit motive.
True
They may have more commercial freedom than typical public organisations.
What may influence the decision-making of a State Owned Enterprise?
Certain goals set by the Government
Despite having a profit motive, government goals can guide decisions.
Fill in the blank: The efficiency of public organisations is measured by maximizing the _______ and _______ of services.
quality; quantity
These are critical factors in assessing public service performance.
What are public-private partnerships?
Collaborations between the Government and the private sector
These partnerships are often formed to manage public services or infrastructure projects.
What is the rationale behind involving the private sector in public services?
To run more efficiently with better allocation of resources
This rationale emphasizes the belief that private expertise can improve public sector performance.
True or False: Public-private partnerships are solely focused on profit generation.
False
While profit is a factor, these partnerships also aim to enhance public service delivery.
What are the two examples of organizations that exist to bring benefits to society without being owned by the government?
Mutuals and cooperatives
These organizations are typically formed for non-profit making objectives.
What is the primary purpose of a mutual?
To raise funds from its members to provide common services
Members are collectively called its members.
Who owns a mutual?
Its members
It is run for the benefit of its members and has no external shareholders.
Give an example of a well-known mutual.
Nationwide Building Society
This is a notable example of a mutual organization.
How do cooperatives operate?
Member-owned, democratically controlled, and on a non-profit basis
They return any margins or profits to members based on usage.
What is the main distinction between mutuals and cooperatives?
Operating principles: ‘to each according to use’ for co-ops and ‘to each according to need’ for mutuals
This reflects their different goals and member interactions.
What is the goal of a mutual?
To create a fund for members in times of need
Members purchase insurance policies and pay premiums, hoping never to need them.
What do members of a cooperative aim to do?
Use the services offered as often as possible
This maximizes the benefit of being a co-op member.
What is a mutual organization’s approach to surplus?
Mutuals aim to make a surplus, but it is used to benefit members, such as offering better interest rates on borrowings and deposits.
What is the main goal of charities?
Charities aim to provide a service to society as a whole or to a specific target group within society.
What are QUANGOs?
QUANGOs (Quasi Autonomous Non-Governmental Organisations) are non-departmental public bodies that perform tasks on behalf of the Government.
What is the general goal of non-profit organizations?
To provide value for money, ensuring resources are used effectively and efficiently.
What are the 3 Es used to measure value for money in non-profits?
Economy – Acquiring resources cheaply
Efficiency – Minimizing resource wastage
Effectiveness – Aligning operations with objectives
What are the advantages and disadvantages of sole traders and partnerships?
Advantage: Least administration and red tape
Disadvantage: Owners have unlimited liability, meaning personal assets can be seized to pay business debts
What is a key benefit of a limited company?
The owner’s liability is limited to the nominal value of the shares they own.
What is the key difference between a private limited company (Ltd) and a public limited company (plc)?
A private limited company (Ltd) cannot offer shares to the public.
A public limited company (plc) can sell shares/securities to the public.
How does Mendelow’s stakeholder mapping help businesses?
It helps organizations prioritize stakeholders based on their power and level of interest in the business.
What are the four categories in Mendelow’s stakeholder mapping?
Minimal effort required (Low Power, Low Interest)
Keep informed (Low Power, High Interest)
Keep satisfied (High Power, Low Interest)
Key player (High Power, High Interest)
What are alternative goals for profit-making businesses?
Revenue maximization (Baumol’s theory)
Long-term survival
Satisficing – Achieving just enough to keep shareholders happy while benefiting management
What two main returns do shareholders expect when investing in a limited company?
Dividends (regular income)
Growth in share value (capital appreciation)
What is another term for “required rate of return”?
Cost of capital – the minimum acceptable return on an investment made by a business.
Why is the concept of ‘cost of capital’ important?
It helps businesses determine whether an investment is worthwhile by setting a minimum acceptable return.
What does ROCE measure?
ROCE (Return on Capital Employed) measures how efficiently capital (equity and debt) has been used to generate profit before finance costs.
What is the formula for ROCE?
ROCE = (Profit from operations) ÷ (Total assets - Current liabilities)
What is another term for “Profit from operations”?
Profit before interest and tax
What does Earnings Per Share (EPS) measure?
EPS is used to monitor the short-term performance of listed companies, with an emphasis on year-on-year growth.
What is the formula for Earnings Per Share (EPS)?
Profit available for ordinary shareholders) ÷ (Number of equity shares in issue)
How is “profit available for ordinary shareholders” calculated?
Profit after tax minus preference dividends
What does the P/E ratio indicate?
The P/E ratio (Price-to-Earnings ratio) provides insight into the market’s perception of a company’s future growth potential.
How can the P/E ratio be used to compare companies?
If two companies have the same EPS but one has a higher share price, investors believe it has better future potential or that the other company is higher risk.
What does a rising P/E ratio suggest?
A higher P/E ratio indicates greater investor confidence in the company’s ability to generate future profits.
What is P/E Ratio formula?
P/E Ratio = Share price / Earnings per share
What is corporate governance?
Corporate governance refers to how an organization is managed and controlled, ensuring directors act in shareholders’ best interests.
How can conflicts between shareholders and directors be managed?
Through reward schemes such as:
- Profit-related pay
- Share option schemes
- Corporate governance regulations (e.g., UK Corporate Governance Code)
What does Baumol’s Sales Maximization theory suggest?
Managers focus on expanding sales to increase prestige, bonuses, and job security.
What is Williamson’s Management Discretion theory?
Managers act in self-interest but ensure they achieve minimum profit acceptability to satisfy shareholders.
What does Cyert & March’s Organizational Coalition theory propose?
Stakeholders must compromise to maintain political balance within the organization.
What is an example of a market for factors of production?
The labour market, which determines the market wage for a particular group of employees.
What is the “price mechanism”?
The price mechanism determines how scarce resources are allocated based on changes in supply and demand.
How does a price change affect consumers and producers?
A price change acts as a signal, influencing how much buyers purchase and sellers produce.
What is a Free Market Economy?
An economy where market forces (supply and demand) determine what is produced, how much, and who gets it, with minimal government intervention.
What is a Mixed Economy?
An economy where both market forces and the government determine resource allocation. In Western Europe, up to half of economic activity is government-driven.
What is a Planned (Command) Economy?
An economy where the state owns and controls production, making central decisions on what to produce and how to distribute it.
What are the two main methods of business expansion?
Organic growth – Expanding internally by developing products or acquiring resources.
Mergers & Acquisitions – Combining with or taking control of another business.
What is the difference between a merger and an acquisition?
Merger: Two firms join with balanced control (rare in practice).
Acquisition: One business takes control of another.
