chapter 1- introduction to business management Flashcards
adding value
practice of producing a good or service that is worth more than the cost of the resources used in the production process.
businesses
organizations involved in the production of goods or services and or the provision of good or services
consumers
people or organizations that actually use a product
customers
people who buy the product but might not use it
entrepreneur
an individual who plans, organizes and manages a businesses and takes on financial risks in doing so
entrepreneurship
people who manage organize and plan the other three factors of production. they make all the major decisions for the company
goods
physical products produced and sold to consumers and customers
needs
basic necessities that a person must have to survive including food etc.
primary sector
refers to the business involved in the cultivation or extraction of natural resources such as farming, mining etc.
production
process of creating goods and or services adding value in the process
quaternary sector
sub-category of the tertiary sector where businesses are involved in the intellectual and knowledge based activities that generate and share knowledge such as research organizations.
secondary sector
business concerned with the construction and manufacturing of products
services
intangible products sold to the customers such as airline or restaurant services
tertiary sector
refers to the businesses involved with the provision of services to customers.
wants
someone desires that is things they don’t need for survival but would like to have.
what are the different functional units of a business.
functional units are also called departments:
1. HR
2. finance
3. marketing
4. operations
what are some of the challenges faced by a business as it is starting out.
- lack of finance
- unestablished customer base
- cash flow problems
- marketing problems
- people management skills
- legalities
- high production costs
- poor location
- lack of knowledge
opportunities of starting a business
GET CASH
1. growth
2. earnings
3. transfer and inheritance
4. challenge
5. autonomy (independence in organization)
6. security
7. hobbies
cooperatives
for-profit social enterprises set up, owned up and run by their members who might be employees and or customers.
company
refers to a limited liability business that is owned by shareholders. a certificate of incorporation gives the company a separate legal identity from its owners.
deed of partnership
legal contract signed by the owners of a partnership to specify the name and responsibilities of the business
incorporation
legal difference between the owners of the company and the business itself. ensures that the owners are protected by limited liability
initial public offering
IPO occurs when a business sells all or part of its business to shareholders on a public stock exchange for the first time which makes the company a public held company
limited liability
restriction on the amount of money that the owners of the company lose if the business goes bankrupt so that shareholders cannot lose more money than they invested in the company
NGO
private sector not-for-profit social enterprises that operate for the benefit of others rather than focusing on making profit
partnerships
type of private sector business entity owned by 2-20 people. they all share equal burdens of running and owning a business.
privately held companies
business owned by shareholders with limited liability but whose shares cannot be bought by or sold to the general public on a stock exchange. that is shares are sold to close family or trusted partners and not the public.
private sector
part of the economy run by private individuals rather than by the government such as sole traders, partnerships etc.
publicly held company
incorporated limited liability businesses that allow shareholders to buy and sell shares in the company via a public stock exchange. that is the general public is allowed to buy and trade shares.
public sector
part of the economy controlled by the government such as state healthcare and education services.
sole trader
self employed person who runs a business on his/her own meaning this person has exclusive responsibility of its success.
social enterprises
revenue generating businesses with social objectives at the core. they can be profits or non-profit companies but all profits or surplus must be reinvested in the business for a social purpose rather than being distributed to shareholders.
stock exchange
is a marketplace for trading stocks and shares of publicly held companies that is companies that sell their shares to the general public
unlimited liability
feature of a sole trader business or an ordinary partnership who are legally liable or responsible for all moneys owned to their creditors even if it means they have to go bankrupt themselves to do so
what are organizations partially or wholly owned by the government called
public sector companies
why are public sector business required
- to ensure everyone has access to basic services
- to avoid wasteful competition as the government is able to achieve huge economies of scale.
- to protect citizens and businesses through the police of government owned hospitals.
- to create employment opportunities.
what are the advantages of being a sole trader
- fewer legal formalities
- profit goes to only one person
- being your own boss
- personalized service due to lesser customers and more attention to detail.
- privacy of business matters
- quicker decision making since there is no one else to consult
what are some of the disadvantages of being a sole trader
- unlimited liability
- limited source of finance
- higher risks
- higher workload and stress
5.limited economies of scale - unincorporated business structure
what are the maximum amount of owners in a regular partnership
2-20
what are silent investors or sleeping partners
investors that are not responsible for the running of the business but have a financial stake in it and are eligible for a portion of any profits earned by the partnership
what are the advantages of partnerships.
- financial strength
- specialization and division of labor.
- financial privacy
- cost-effectiveness due to specialization
what are the disadvantages of partnerships
- unlimited liability
- a lack of continuity
- prolonged decision making due to partner conflict
- lack of harmony
what is a privately held company
a limited liability company that cannot raise money by selling shares to the general public.
what are joint stock companies
joint stock companies or corporations are companies in which the shares are jointly held by many different entities
what are some advantages of limited liability companies
- raising finance is easier due to stocks
- limited liability
- economies of scale
- productivity due to hiring of specialist and more employees
- tax benefits since corporation tax is less expensive than income tax
what are some disadvantages of limited liability companies
- communication problems due to longer chain of command
- added complexities
- compliance costs that is the cost of following rules and regulations
- disclosure of information
- loss of control
what is flotation
terms used to describe when a publicly held company first sells all or part of its business to external investors
what are the two main objectives of all social enterprises
- to achieve social objectives
- to earn revenues in excess of their costs
what is a memorandum of association
a relatively brief document outlining the fundamental details of the company such as its trading name, main purpose etc.
what is the article of association or incorporation
document stating the internal regulations and procedures of the company such as rights of BOD or procedures to be covered at an AGM etc
what are public sector companies
for-profit social enterprises are state owned enterprises run in a commercial way. formed by the government.
what are the three different types of cooperatives
- consumer
- worker
- producer
what are consumer cooperatives
owned by the customers who buy the goods or services from the cooperatives
what are worker cooperatives
set up, owned and organized by their employee members
what are producer cooperatives
cooperatives that join and support each other to process or market their products
what are some advantages of cooperatives
- incentive to work
- decision making power due to employees having a say in how things work
- social benefits that can be enjoyed by everyone
- public support since it is a social enterprise
what are some disadvantages of cooperatives
- disincentive effects such as ineffective employees
- limited sources of finance
- slower decision making
- limited promotional opportunities
what are NGOs
private organizations that pursue activities to relieve suffering promote the interest of the poor protect the environment and provide basic social services
what are the two kinds of NGO’s
1.operational
2. advocacy
what are some factors that make a business an NGO
- independent of the government
- not for profit
corporate social responsibility
conscientious consideration of ethical and environmental practice related to business activity. a business that acts morally to all of its stakeholders.
ethical code of practice
documented beliefs and philosophies of an organization so that people know what is considered ethical or not.
ethical objectives
businesses goals based on moral guidelines determined by the business and/or society which direct and determine decision-making
mission statement
declaration of an organizations overall purpose. it forms the foundation for setting the objectives of a business.
objectives
specify what an organization strives to achieve such as growth, profit etc.
strategic objectives
long term goals of a business such as increased market share or better reputation.
tactical objectives
short term goals that affect a unit of the organization specific goals that guide the daily functioning of certain departments.
vision statement
organizations long term aspirations that is where the business ultimately wants to be.
why are business objectives important
- to measure and control the performance of a business
- to motivate employees to do better
- to direct all parts of the business
4.
what are some common business objectives
PEGS
1. profit (mainly for private companies)
2. ethical objectives
3. growth
4. shareholder return and value
what are some advantages of having ethical objectives and practices
- better reputation for the company
- increased customer loyalty
- cost cutting example reduced packaging costs
- improved staff morale and motivation.
what are some disadvantages of having ethical objectives and practices
- compliance costs which is the cost of being ethical since ethically sourced products are more costly
- lower profits
- stakeholder conflict
- subjective nature of ethics.
what are some of the main tactical objectives
- survival
- sales revenue maximization.
what are some common strategical objectives
- market standing
- image and responsibility
employees
staff of an organization, they have a stake in the organization that they work for
external stakeholders
individuals and organizations not part of the business that still have a direct interest in its activities and performance
financiers
financial institutions and individual investors who provide sources of finance for an organization, they are interested in the companies ability to make profit
government
ruling authority within a state or country, major external stakeholder group
internal stakeholders
members of the organization such as employees, managers directors etc
managers
internal group of stakeholders responsible for overseeing daily operations of the business
pressure groups
consists of individuals with a common concern who seek to place demands on organizations to act in a particular way or to influence a change in their behaviour when it is unethical.
stakeholder mapping
is a model that assess the relative interest of stakeholders and their relative influence on an organization
shareholders
owners of a limited liability company.
suppliers
are an external stakeholder group that provide a business with stocks of raw material etc. they can also provide commercial services such as maintenance and technical support.
name the 4 main internal stakeholders
- employees
- managers
- directors
- shareholders
name the 6 main external stakeholder groups
- customers
- suppliers
- financiers
- pressure groups
- government
- competitors
what is the main reason of stakeholder conflict
the business not being able to satisfy everyone’s needs
acquisition
method of external growth that involves one company buying a controlling interest in another company with the agreement and approval of the target companies BOD
average cost
refers to the cost per unit of output
backward vertical integration
occurs when a business amalgamates with a firm operating in an earlier stage of production
conglomerates
a business that provide diversified range of products and operate in a range of different industries
demerger
when a company sells off a part of its business thereby separating itself into two or more businesses due to conflicts etc
diseconomies of scale
cost disadvantages of growth since companies will have higher average costs
economies of scale
lower average costs of production as a firm operates on a larger scale due to gains in production efficiency
external diseconomies of scale
occurs due to factors beyond the businesses control which causes average price to increase as industry grows.
external economies of scale
when an organisations average cost falls as industry grows
external growth
when a business grows and evolves by collaborating with or merging with other organisations
financial economies of scale
cost savings made by large firms as banks and other lenders charge lower interest due to size of the company
forward vertical integration
growth strategy that occurs with the combining of a firm operating at a later stage of production with one operating at an earlier stage of production.
franchising
agreement between a franchisor and a franchise where a franchisor is selling its rights to a franchisee to allow them to sell their products under its corporate name in return for a fee and regular loyalty payments
horizontal integration
external growth strategy that occurs when a business combines with a firm operating in the same stage of production
internal diseconomies of scale
occurs due to internal problems of mismanagement causing average cost of firm to increase as business increases or expands
what can cause internal economies of the scale
expansion of the firm
internal economies of scale
occur within a particular organisation as it grows and not in an entire industry
what is the difference between internal and external economies of scale
internal would only reduce average costs of a firm whereas external economies helps reduce average costs of all firms in an industry
what are agglomeration economies of scale
business of the same industries are in clusters and with the help of skilled workers they can attract an increasing capital they provide the human capital to the expanding business.
internal growth
occurs when a business grows using its own capabilities and resources to increase the scale of operations and sales revenue
joint venture
growth strategy that combines the contributions and responsibilities of two or more different organisations in a shared project by sharing a separate legal enterprise
lateral integration
refers to the external growth of firms that have similar operations but do not directly compete with each other
marketing economies of scale
occurs when larger businesses can afford to hire specialist managers thereby improving the organisations overall efficiency and productivity. they can also spread their fixed costs of marketing by promoting and advertising a greater range of brands and products
merger
form of external growth whereby two firms agree to form a new organisation thereby losing their original identities
purchaser
acquiring company in an acquisition or the buyer of another company in a takeover i.e. person who is buying the company or the products
purchasing economies of scale
occurs when larger organisations can gain huge cost savings per unit by purchasing large quantities of stocks
risk bearing economies of scale
when large firms can bear greater risks than smaller ones due to having a greater product portfolio
specialisation economies of scale
when larger firms can afford to hire and train specialist workers thus boosting the level of output, productivity and efficiency.
strategic alliances
formed when two or more organisations join together to benefit from external growth without having to set up a new separate legal entity
takeover
occurs when a company buys a controlling interest in another firm without the prior agreement or approval of the target company’s BOD
what is the difference between takeover and acquisition
acquisition of a business is agreed upon by both business, in takeover it is hostile.
technical economies of scale
cost savings by greater use of large scale mechanical processes and machinery such as mass production to cut average costs of production
vertical integration
takes place between businesses that are at different stages of production
what are the components of average cost
- average fixed costs
- average variable costs
what are the seven internal economies of scale
- technical
- financial
- managerial
- specialisation
- marketing
- purchasing
- risk bearing
what are some internal diseconomies of scale
- lack of control and coordination as business increases in size
- poorer working relationships due to long chain of command
- lower productive efficiency due to larger span of control and therefore increase in average production costs
- bureaucracy such as paperwork makes decision making harder and reduced possible profit.
what are some possible external diseconomies of scale
higher rents
traffic
high amount of competition
how can a business grow internally
changing price to be more competitive
improved promotion
better products
selling through a greater distribution pattern
increasing customer loyalty
improved training and development
providing better quality and value for money
what are the advantages of internal growth
- better control and coordination since there is no loss or change in leadership
- inexpensive since hiring procedure is cut down
- maintains working style of the business since no one new is brought in
- less risky
what are the disadvantages of internal growth
- diseconomies of scale due to higher average costs
- need to restructure due to growing size of business which requires a lot of time and training
- dilution of ownership and control
- slower growth
what are the advantages of external growth
1.quicker than internal growth
2. business can benefit from greater pool of skills
3. reduced competition
4. economies of scale
5. spreading of risks
what are the disadvantages of external growth
- more expensive than internal growth
- greater risks
- government barriers 4. potential diseconomies of scale
- organisation clash
10 points
how can the size of a business be measured
- market share
- total sales revenue
- size of workforce
- profit
- capital employed
- gross profit
- number of customers
- number of employees
- number of retail outlets
- value of business
why do companies want to expand
- to benefit from economies of scale
- lower prices
- brand recognition
- brand reputation
- value-added services since larger firms have the resources to offer special benefits etc
- greater choices for customer
- customer loyalty
why do some businesses stay small
- owners do not want to increase costs of production and take loans etc for expansion
- owners do not want to lose control by expanding
- financial risks of running a bigger business are higher
- they want to be applicable for financial aid
- they want to be able to offer personalised services in order to maintain customer loyalty
- the business has a small market size with no space for expansion
what are the main external growth methods
- mergers and acquisitions
- horizontal integration
- vertical integration
- lateral integration
- conglomerate
- takeovers
- joint ventures
- strategic alliances
- franchising
what is the difference between a merger and an acquisition
a merger is between two companies of similar size and an acquisition is one bigger company acquires a smaller company so that both can benefit
what is forward vertical integration
consolidation of businesses that head towards the final stage of production
what is backward vertical integration
merger or acquisition of businesses towards an earlier stage of production
what are the benefits of mergers and acquisitions as an expansion tool
- greater market share
- economies of scale
- synergy since both companies can benefit from each other
- survival if firm is in a weak position especially if it is an acquisition
- diversification to spread risk and improve customer base
- gain entry into new markets
what are some drawbacks of using mergers and acquisition as a growth strategy
- redundancies due to change in ownership and leadership style
- conflict
- culture clash work and personal
- diseconomies of scale
what are some advantages of joint ventures
- spreading of costs and risks
- entry to foreign markets
- relatively cheap and easier to pull out
- competitive advantages since company is bigger and competition is reduced
- exploitation of local knowledge to increase sales
- high success rate
in what way are strategic alliances different to joint ventures
when a business wants to become a joint venture business it becomes a separate legal identity instead the two business are still their own separate entities
what are the four stages of forming a strategic alliance
- feasibility study to understand common objectives etc
- partnership assessment to evaluate skills experience and gaps
- contract negotiations
- implementation
what are the benefits for the franchisor
- company experiences great growth rapidly
- allows companies to easily becomes mncs
- earns a lot of profit from the franchises
- receive royalty payments from the franchisee such as a joining fee
what are the drawbacks of being the franchisor
- huge risk on reputation
- can be difficult to maintain quality
- not as quick as others
5 points
what are some benefits of being the franchisee
- lower start up costs
- low risk
- provided with value added services such as special overseas training
- get to be their own boss without a lot of the negatives
- get tried and tested business model so it is easy money
- lower marketing expenses
what are the some of the disadvantage of being the franchisee
- cannot use any of their new ideas
- buy a franchise can be expensive and can lead to no profit if the location is not right etc.
- franchisees cannot keep most of their products
gross domestic product
value of the countries annual output or national income
host country
is any nation that allows a multinational company to set up in its country
multinational country
organisation that operates in two or more countries with its head office in the home or base country
protectionist policies
measures handled by a country to reduce the competitiveness of imports, tariffs, quotas and restrictive trade practices
what is another name for a multinational company
transnational company
what are some of the reasons businesses want to be MNCs
- it would reduce the risks faced by the business
- it would improve the businesses economies of scale
- it would increase the profit produced
- it would help the brand loyalty
- it can help the company avoid protectionist policies
- it would lead to reduced production costs
what are some positive impacts of MNCs on the host companies
- job creation
- technological or knowledge transfer
- higher national income or GDP
what are some negative impacts of MNCs on the host country
- increased competition to local businesses
- job losses since the companies will also bring their own employees and might even put other smaller businesses of the same industry out of business due to the benefits they have over the smaller businesses
- social responsibilities since the government of the host country cant do much to the MNCs due to their power on the market and their positive impact on the economy
what is a demerger and when does it happen
this happens when a company sells of a part of their company thereby separating their business into two or more business entities due to cultural conflicts, inefficiencies and incompatibilities
what is brand acquisition and when does it happen
purchasing a brand and other rights that could become the foundation for development or further growth of an existing brand or trademark.
what is sales revenue
it is the amount of money the business earns by selling of goods or services
