Introducing the business environment Flashcards
What are the five sectors of business activity and what do they mean?
Primary: sourcing raw materials, eg fishing
Secondary: manufacture, eg building a house
Tertiary: providing finished goods and services, a bank
Quaternary: aka the knowledge economy, linked to intellectual services, eg scientific research
Quinary: the highest level decision makers in an economy, eg top government officials
What are the four categories of organisational size and how many employees are generally in each?
Micro: 0-9 employees
Small: 10-49 employees
Medium: 50-249 employees
Large: 250+ employees
Why do we categorise organisations according to size?
It helps inform government policy, such as tax rates and eligibility criteria for subsidies
It helps when analysing the impact of different types of businesses on the economy
What does SME stand for?
Small and medium sized enterprises
What percentage of all businesses in the EU and UK are SMEs?
99%, an important part of the economy
What is the problem with defining organisations according to size?
Criteria varies so widely, within the UK and across different countries
Size doesn’t always indicate turnover
What are the three main sectors of the economy?
Public
Private
Voluntary
Give six examples of a private sector organisation.
Sole trader (aka sole proprietor) Partnership Limited company Parent and subsidiary Unincorporated association Cooperative
How many people own a sole trader?
One
How is a sole trader often financed?
Usually the owner’s personal funds and sometimes topped up with borrowed funds
What are the advantages of a sole trader?
All profits go to the owner
The owner will often reinvest a significant proportion back into the business which can help ease loans or pay back debts
Easy to be legally established
Have fewer document filing requirements
Accounts are not publicly available, so the owner has some privacy
What are the disadvantages of a sole trader?
The business does not have a separate legal entity so the owner has UNLIMITED personal liability
The owner is personally responsible for any losses and their own assets can be seized to pay off debts
How many people own a partnership?
Two or more
How is a partnership financed and who gets the profits?
Two or more people combine their money and skills
They share the profits and losses of the business
What are the advantages of a partnership?
Easy to establish
Combines skills and resources
Owners receive a share of the profit
Non-public disclosure of accounts, giving privacy to the owners
What are the disadvantages of a partnership?
Owners have unlimited personal liability jointly for any losses and liabilities incurred by the business
Their assets can be seized to pay debts
What kind of agreement can be put in place for a partnership?
A written, legal agreement can be put in place to agree to share liabilities and losses or one or more partners having limited liability
Which types of businesses is a limited liability partnership popular with?
Trade
Accountancy
Law
Architecture
What are the benefits of a limited liability partnership?
If one partner is sued for misconduct or negligence, the assets of the other partners are not put at risk
What are the general arrangements of a limited liability partnership?
Combines practice of general partnership and limited liability partnership
At least one general partner has unlimited personal liability for the debts
One or more partner is only liable for what they have invested but cannot be involved in day to day management of the business aka silent partner
How is the company viewed in a limited company?
It is a company set up as a legal person in its own right
Company property and assets belong to the company and not its members (the shareholders)
Who is liable for what in a limited company?
The company is liable for debt if it goes into insolvency
The members are only liable for the their initial investments
Who has the responsibility for the day to day running of a limited company?
Shareholders delegate the responsibility to the board of directors
What is incorporation?
The process by which a new or existing business registers as a limited company
They are limited by shares or guarantees
What rights do shareholders have in a company limited by shares?
A right to share in the profits a business makes through dividends, the amount depends on how much they have invested
A right to vote
How is a company limited by guarantee financed?
There are no shares and the company is owned by members (aka guarantors) instead of shareholders
Guarantors are normally appointed as directors and must guarantee to contribute a fixed some of money if the company winds up
What types of companies are usually companies limited by guarantee?
Non-profit businesses
Charitable organisations
Explain what a parent and subsidiary is.
50% of subsidiary is owned or controlled by the parent (aka holding) company
Parent remains legally separate
Companies might form subsidiaries to spread the risk of liability when expanding business
Explain what an unincorporated association is.
An organisation set up through an agreement between a group of people with no aim to make profit, ie sports club
Doesn’t need to be registered with Companies House
Members are personally responsible for their debts or contractual obligations
Explain what a cooperative is.
Owned and run by members
Not run for benefit of shareholders
Operate in the interest of members who have an equal say in how the business is run
Name the three types of public sector organisations
Central and local government
Public corporations
Municipal enterprises
How are public sector organisations financed?
Taxes people pay to the government
What is the difference and what are some examples of central and local government?
Central is nationwide, eg police, defence, healthcare
Local is for the local community, eg social services, refuse and recycling, parks
Explain what a public corporation is.
Owned by central government
Chairperson and board of directors appointed by a government minister to run the company on behalf of the government
Financed through grants and charges to the general public eg, BBC charging for TV licenses
Explain what a municipal enterprise is.
Owned and operated by local government for the purpose of generating income, eg hospital car park or local community theatre
What are the advantages of a municipal enterprise?
Creates jobs
Provides service for local community
Reduces the reliance on tax generated funds
Lower rates than their private sector equivalents
Why are municipal enterprises criticised?
Critics argue that money generated from taxes should not be used to provide capital to start the businesses
Critics doubt that local governments have the skills to effectively run the businesses
What does NGO stand for?
Non-governmental organisation, eg voluntary organisations
Who owns a voluntary organisation?
They are not owned by individuals but someone (eg individual or Board) is responsible for ensuring they break even
What does CIO stand for?
Charitable incorporated organisation, a legal form of voluntary organisation
What does CIC stand for?
Community interest companies, a legal form of a voluntary organisation
Give example organisational objectives for:
A: new sole trader
B: large established private sector company
C: voluntary sector organisation
A: breaking even and establishing its place in the market
B: generating large profits for shareholders or pursuing growth
C: generate revenue to fund projects that meet charitable purposes
What three things might influence an organisational objective?
The sector, ie private sector more focused on profits
The legal structure, ie a coop can’t legally go after maximising profits
Influence of stakeholder goals, ie shareholders want more profit to maximise returns whereas directors want to show progress to enhance their career
Simply define mission, vision and values.
Mission is why the organisation is doing what its doing
Vision is where it’s trying to go
Values is how it’s going to go about doing it
What are some potential uses of vision and mission statements (four for inside the organisation and three for outside)?
Inside:
Assist senior management in developing strategic plans
Developing KPIs
Motivating and focusing employees by creating common goals
Assisting the development of an ethical framework
Outside:
Encouraging support and endorsements from third parties
Creating closer links and better communication with customers, suppliers and other stakeholders
Serving as an effective PR tool
What is a core values statement?
It declares how the organisation will behave during the process of realising its mission and vision. It articulates the principles and values that leaders will follow when carrying out the activities of the organisation.
What should an organisational structure do? How does it help?
It should set out hierarchy, define job roles and how they fit into the organisation, how roles are delegated, controlled and coordinated.
It helps management make more effective decisions on how to adapt or change the organisation to reach objectives or business goals.
What is the key thing to look at when creating an organisational structure?
Layers of management, where authority for key decisions is concentrated.
What are the advantages and disadvantages of a tall hierarchy?
Advantages: tasks are easily designated, employees and depts have well defined responsibilities
Disadvantages: if leadership at the top is weak, poor decision making will ripple down the organisation, leaving staff demotivated and inefficient
What are the advantages and disadvantages of a flat hierarchy?
Advantages: higher level managers have more control over their area of operations, are given more authority over decisions, are more empowered, higher employee morale, fewer levels of management to go through for decisions, cost less to run, more transparency
Disadvantages: fewer promotion opportunities, roles can be less well defined, difficult to delegate tasks, difficult to maintain if organisation grows
Who has the authority for key decisions in centralised and decentralised structures?
Centralised: senior management in the centre makes decisions and delegates to lower level management
Decentralised: authority is delegated across a larger group, including individual business units or managers
What are the advantages and disadvantages of a centralised structure?
Advantages: control is retained at the centre, consistency is maintained, customer experience and quality as standard policies are decided at the top and implemented through the organisation, easier to show strong leadership, decision making can happen quickly, communication and reporting are easier as information is stored in one place
Disadvantages: more bureaucratic, less flexible in responding to customer needs, demotivating for managers lower down the chain
What are the advantages and disadvantages of a decentralised structure?
Advantages: individual trading units have their own authority, decisions can be made with the local market in mind, good tailored customer service, more empowering for local managers, more opportunities for staff progression, decisions are directly relevant rather than coming from ‘faceless’ centre, reduces bureaucracy
Disadvantages: costs can be increased, some functions are duplicated throughout different locations, decisions are less strategic, service is less consistent
What are the three ways organisations can choose to structure themselves?
By function, division or matrix (combination of the two)
What are functional, divisional and matrix structures?
Functional: divided into smaller groups based on specialised functions they perform
Divisional: divided into discrete operating units with own complete sets of functions
Matrix: each product line has its own function
What are the advantages and disadvantages of a functional structure?
Advantages: promotes efficiency and cost effectiveness because employees with similar specialised knowledge are grouped together
Disadvantages: more bureaucratic with complicated communication and decision making processes, less efficiencies across functional areas, results in silo working, leads to poor transparency and tendency towards groupthink
What are the advantages and disadvantages of a divisional structure?
Advantages: easy to respond to local business needs, more flexible, staff can concentrate on their product line or service
Disadvantages: can be costly, resources (like HR, marketing etc) are duplicated, office politics can become the basis for decisions, divisions can undermine each other
What are the advantages and disadvantages of a matrix structure?
Advantages: minimises silo working, more dynamic, fewer communication barriers, employees have opportunities to increase their specialised knowledge
Disadvantages: employees need to report to both project managers and heads of functions, chain of command is complex, blurred lines of authority can result in slow decision making, costly,
Name the five roles which make up a Board.
Chairperson Chief Executive Officer Executive Director Non Executive Director Senior Independent Director
What are the responsibilities of the Chair of a board?
Ensures effectiveness as a decision making group
Sets agendas
Acts as liaison between shareholders and the board
What are the responsibilities of a CEO?
Day to day running of an organisation
Development and execution of long term strategies and long term and short term plans
Liaison between board and management team
Communicates to stakeholders on behalf of the company
Why is it good practice to have separate Chairs and CEOs?
Reduces risk of one person dominating the board
Allows constructive challenge during discussion, leading to effective decision making
What is the role of an Executive Director?
FTE
Usually works for the organisation
Often responsible for functional areas of the business
Often highest earners in an organisation
Usually have NED roles with other organisations
What is the role of a NED?
Independent advisor to the board Not employed but may receive flat fee Provide balanced influence Minimise conflicts of interest Acts as mentor to Chair or CEO Make decisions on directors’ pay and benefits Usually make up 1/3 to 1/2 of the board
What is the role of the Senior Independent Director?
Provides support for the Chair
Intermediary for other Directors
Alternative point of contact for investors who feel their needs are not addressed by the Chair
Meet with other NEDs to annual appraise the Chair
Meets with shareholders to understand their issues and concerns
Acts as mediator between CEO and Chair
What is the difference between a unitary and a two-tier board structure?
Unitary (or one tier) has one board with executive and non-executive members and day to day business is run by the CEO and senior management team Two tier (or dual board) separates those responsible for operations (executive board) and those responsible for supervision (supervisory board, usually consisting of NEDs representing the shareholders)
Name two types of internal stakeholders.
Shareholders (invested money and are directly affected by profit)
Workers / employees (invested labour in the business and are directly affected by decisions that impact salaries and job security)
Name eight external stakeholders.
Customers - interested in price and quality
Suppliers - interested in financial success to understand if their services will be paid for and continually wanted
Creditors - interested in financial success to understand if their loans will be repaid
Debtors - they owe money to the business so can affect their financial success
Government - changes in policy and processes affect businesses by increasing costs and limiting investment opportunities
Local and national communities - rely on goods and services and job opportunities
Trade unions - want to protected and enhance interests of the workers
Pressure groups - can influence government policy through activities
What is the difference between a primary and secondary stakeholder?
Primary - functional or financial interest in the business
Secondary - influence the business without being directly involved in day to day activities
Give examples of conflicting stakeholder interests.
Owners wanting high profits, employees wanting high wages
Directors wanting higher sales, owners wanting higher profits
Customers wanting better service, owners wanting higher profits
What does stakeholder theory suggest?
That organisations should make decisions that consider and create value for all of its key stakeholders, not just their owners or shareholders
This supports the argument in favour of corporate social responsibility
What does CRS stand for?
Corporate social responsibility (where organisations should be accountable to their wider stakeholders for their actions)
Why should organisations analyse the business environment?
To be able to develop relevant strategies to achieve business purposes and objectives
Effective situational analysis is crucial in helping organisations realise their vision by identifying factors that may impact their current mission activities
Helps organisations identify potential issues and anticipate changes
Organisations should constantly analyse their environment because it is always changing
What are the consequences of not understanding the external business environment?
Can result in managers developing or implementing unrealistic strategies or being slow to respond to issues or not developing a appropriate responses to issues, which can cause a decline in profits, loss of market share, reputations damage, decreased level of sales or total failure
What does a PEST/PESTEL/LoNGPESTEL help with?
This helps with situational analysis of an organisation’s external environment
It gathers information about their product and the market they sell it in
It informs decision making, resource direction and implementation strategies
What does LoNGPESTEL stand for?
Political - government regulations and legal issues
Economic - anything that influences the economy
Sociocultural - consumer behaviour, potential customers, buying trends
Technological - levels and advancements of technology
Environmental - ecological factors such as climate change, weather patterns
Legal - relevant laws covering consumer protection, health and safety, data protection
Local
O
National
Global
What are the benefits of a SWOT analysis?
Helps understand organisation’s current and future situation to help plan strategies
Helps capitalise on strengths and reduce weakness
What does SWOT stand for?
Strengths - positive attributes, internal and within control
Weaknesses - aspects that detract from value, within control
Opportunities - external attractive factors
Threats - external factors that can place risk, out of control
