Understanding Business 2 Flashcards
What are external factors?
External factors are influences OUTWITH the control of the business.
Although the business cannot control these factors a successful business will anticipate the impact and plan how to manage them effectively
Name the external factors
Political (Legal) Factors
Economic Factors
Social Factors
Technological Factors
Environmental Factors
Competitive Factors
Describe political factors
Political factors come from the actions of the government at local and national level, each having different powers.
Name the political factors
Legislation (laws)
Government revenues (taxes) and spending
Government policy
Describe legislation (laws)
These are implemented by the central government and include:
Minimum Wage Act
Health & Safety at Work Act
Equality Act
Environmental and pollution laws
Ban on cigarette advertising
Describe the national minimum wage act
Government changes the National Minimum Wage every year by increasing it.
This impacts on profits as the expenses increase due to an increase in wage costs.
Describe health and safely at work act
Governments can introduce new health and safety legislation or add onto current/existing ones.
This means that a business may have to change the way it works, for example by training its staff or upgrading its machinery or safety equipment
Describe government revenues (taxes) and spending
Both local and national government have to raise revenue to fund the services they provide. There are a number of ways to do this including:
VAT increase from 17.5% to 20%
Changes to Income Tax (personal)
Changes to Corporation Tax (business)
Council Tax
Charges for services e.g. leisure centres
Describe VAT
VAT (value added tax) is a charge on the sales of goods and services based on the value of the item sold. It is collected by businesses which is then passed onto the government. This means that products will have be more expensive with the VAT included which may put customers off of purchasing them.
Describe corporation tax
Corporation tax is tax paid on the profit made by a company to the Government. This means that the business make less profit overall as a certain percentage of profits will go to the government in the form of tax
Describe government policy
Example of government policy include:
Immigration
Recycling targets
Competition policy
Describe competition policy
Competition policy can have a significant effect on a business and in some
cases can prevent a takeover or merger e.g. Sainsburys and Asda.
The Competition and Markets Authority (CMA) is responsible for implementing government policy. The main areas it is involved in are:
Consumer protection
Mergers
Describe economic factors
Economic factors refer to anything that encourages people to spend or not to spend money. There are 6 factors shown here.
What are the economic factors
Inflation
Unemployment
Exchange Rates
Boom/Recession
International Trades
Interest Rates
Describe unemployment
Unemployment can effect the success of a business. This means that when
unemployment is high people have less to spend on goods and services
This will reduce demand for some goods/services which will reduce a businesses sales revenue and profit
Describe exchange rates
Exchange rates can also effect the
success of a business as businesses
trading internationally will be affected by
changes in exchange rates. This means
that when the pound is weak, it becomes
more expensive to buy supplies from
abroad which can increase expenses.
Describe boom/recession
During a boom demand for products is high, unemployment is low and prices rise quicker.
During a recession demand for products is low, unemployment is high and prices are lower.
Describe social factors
Social factors are the ways in which society changes and the need for businesses to adapt to these changes e.g. demographics, lifestyles, tastes and trends and ethical. These changes will impact on what consumers buy and when they buy it.
Describe lifestyle
Lifestyles can have a effect on the success of a business. This means that businesses will need to adjust their product portfolios and marketing strategies to ensure they are taking into account the lifestyle trends and fashions or they will start to lose customers.
Describe ethicality
How ethical a business is will impact their success as there is increased pressure on businesses to operate ethically. This means that it may cost businesses more to operate ethically but it will improve the image of the organisation which may result in greater sales.
Describe technological factors
Technology changes at a very fast pace now and can also bring pressure for the business to change and adapt to this. The use of technology can be split into 4 broad categories:
What are the technological factors
Communication
E-Commerce
Manufacturing
Research and Development
Describe communication
Communication is enhanced and more efficient using technology. Most people now own a smartphone which makes
this very convenient. A business can communicate with customers,
suppliers and employees using e-mail, Intranet, OneDrive, Internet and social media. Using technology means that communication is now much faster.
Describe e-commerce
E-commerce has meant that even small businesses can increase their number of customers by using e-commerce and s-commerce (social media). Many businesses only operate online which reduces their costs meaning they can charge lower prices. Online retailer, is
able to carry a much larger stock in warehouses than even the largest stores. Customers use e-commerce to shop and pay for products without leaving the amazon comfort erener-own nome. Produces can be deivered the same day or next day, improving customer satisfaction.
Describe environmental factors
Environmental factors arise from the way the natural environment impacts the organisation and the expectation that they will act in an ethical or environmentally friendly manner.
What are the environmental factors
Weather
Natural Resources
Natural Disasters
Pollution
Recycling Targets
Carbon Footprint
Describe weather
Changing weather patterns can also affect a business. Flooding and storms can lead to delays in the delivery of stock and goods which affects production, as well as delivery of orders to customers. Business premises can also be badly damaged resulting in temporary or permanent closure.
Describe recycling targets
Being environmentally friendly can
increase the effectiveness of a business.
This means that businesses who work to
minimize their carbon footprint or to cut
down on pollution to rivers and the
environment can also be more attractive to customers who are interested in the
environment. This could also result in an
increase in market share due to customer loyalty.
Describe competitive factors
Most businesses face competition from other businesses which provide the same product/service. A business must try to reduce the impact of competitors and will use marketing strategies to do this.
Describe competitors prices
Competitor’s prices may effect a business as their prices may be more attractive to customers. This means that they are more likely to go and buy from them which could will gain competitors loyal customer.
Describe the amount of competition
The amount of competition could also
effect a business as there may be many
businesses selling similar goods and
services, giving consumers a lot of choice
when choosing where to buy their goods
and services. This could decrease the
chances of them buying from you.
What are stakeholders
A stakeholder is a person or group of
people who have an interest and influence on an organisation and the way in which it is managed or run.
Describe stakeholder interests
This is what they want from the business
e.g. employees want a salary.
Describe stakeholder influences
This is how they impact the business e.g.
employees can go on strike.
List the internal stakeholders
Owners
Shareholders
Employees
Managers
List the external stakeholders
Banks
Customers
Suppliers
Local Community
Pressure Groups
Local Government
National Government
What are owner interests
Good return on the money they have invested into the business
Increase in value of the business
Stability to ensure future returns on investment
What are owner influences
Make decisions which will affect the business
Invest more capital in the business
Sell their investment in the business
What are shareholder interests
Good return on the money they have invested into the business (dividend)
Increase in value of their shares
Stability to ensure future returns on investment
What are shareholder influences
Invest more capital in the business
Sell their investment in the business
Contribute to decision making by voting at the Annual General Meeting
What are manager interests
Fair salary and bonuses
Opportunities for promotion
Status and responsibility
Job satisfaction and security
What are manager influences
Poor decisions which can affect the success of the business.
Recruitment and management of staff
Motivating staff
What are employee interests
Good rate of pay/pay rise
Job satisfaction and security
Good working conditions
To be treated fairly
What are employee influences
Standard or work/customer service
Lack of motivation
Industrial action
What are customer interests
Value for money on product or service
Good quality product or service
Good customer service
Choice of products
What are customer influences
Can choose to shop elsewhere
Complain about product or customer service
Damage reputation of business
What are bank interest
Business to open an account with them
Business to repay on time and in full
Stable cash flow
What are bank influences
Refuse to provide overdraft or loan
Charge higher interest rates
Change repayment terms
What are supplier interests
Business to place repeat orders
To be paid for goods or services supplied on time and in full
What are supplier influences
Increase/decrease their prices
Withdraw offers of discount
Refuse trade credit
Deliver late
Deliver goods which are not fit for purpose
What are government interests
Correct amount of tax is paid
Legislation is adhered to
Provision of employment
Behaving in a socially
responsible way
What are government influences
Change the rate of tax
Change the rate of minimum pay
Change legislation
Offer grants
Refuse to grant planning permission
What are local community interests
Social responsibility in local area
Provision of employment
What are local community influences
Protest against the business through MP’s and local press
Describe conflicts of interests
All stakeholders want the business to succeed however, a business cannot satisfy the interests of all stakeholders all of the time (remember satisficing from business objectives), this is
known as a conflict of interest.
Describe owner and employee conflicts
Employees are likely to want higher wages than the owner is willing to pay as this will reduce profitability
Owners want to cut costs and employees want a safe working environment e.g. health and safety - protective clothing
Reorganisation of the business to become more efficient will benefit the owner, however, employees may feel they are being given extra responsibility without training or financial reward or some may be made redundant
Describe owner and manager conflicts
Owners want to maintain control of the business while managers want to have more power and influence
Managers will focus on their personal objectives e.g. high salary and bonuses which will conflict with the owner’s objective of maximising profit
Describe customer and owner conflicts
The owner’s interest is to maximise profits and charge the highest price possible while customers want value for money and want prices to be low
Customers expect a satisfactory quality of goods for the price they paid. The business may try to reduce costs by using poorer quality materials, resulting in customers wanting a refund and the
business loses this sales revenue
Describe supplier and manager conflicts
To improve cash flow, managers want to keep cash within the business for as long as possible and may delay paying suppliers for goods/services provided. However, if suppliers are not paid within a reasonable time (usually 28 days) this can cause them financial hardship and cash flow problems of their own.
Describe the interdependence of stakeholders
Despite possible conflicts of interest stakeholders also rely on each other to achieve their own objectives
Describe owner and manager interdependence
Owners rely on the skills and ability of the management team to achieve their objective, and the managers rely on the owners for job security, salary and support in their management role
Describe employee and manager interdependence
Employees rely on managers to provide leadership and direction to successfully do their job while managers rely on employees to achieve their targets and meet deadlines. Managers are accountable if their employees work inefficiently.
Describe manager and supplier interdependence
Managers need supplies to provide high quality raw materials when required and
suppliers need managers to buy supplies from them to keep them in business.
Describe owner and customer interdependence
Business owners are reliant on customers to buy their goods/services to generate sales revenue while customers are employees of businesses and rely on them to earn their salary to generate enough income to buy goods/services to satisfy their needs and wants
Customers need owners to provide them with the goods and services they require, and owners need customers to buy their products
Describe owner and employee interdependence
Owners need employees to work hard for them to help satisfy customers and increase sales and employees need owners to provide them with fair wages and good working conditions.
Describe business structures
The structure of a business is very important as it defines how it operates. It clearly indicates the role and responsibility of employees and outlines the relationships between individuals
and groups of staff. Small businesses with few employees may have an informal structure; however, large businesses need a formal structure to ensure the best use of the resources
available.
What factors should be considered when deciding on business structures
The size of the business
The marketplace
The technology used
The products and services made or supplied
The skills of staff
Finance available
Describe the size of the business
In small business one or two managers can be responsible for decision making and control. However, larger businesses will have a more formal structure as there is a greater need of structure and control.
Describe the marketplace
A small business is more likely to operate in a local market and need less formal structures. However, a business which operates nationally or internationally will need a formal structure to ensure efficient and effective use of resources.
Describe the technology used
Introducing e-commerce will result in the business altering its structure to create a new department for this activity. In addition, if new technology is introduced this may result in redundancies or deskilling of jobs. Technology is widely used to facilitate communication in any business.
Describe the products or services made or supplied
If a business is diverse and
produces many products or services there may be a higher number of
departments resulting a larger more formal business structure.
Describe the skills of staff
Highly skilled staff may be given more independence resulting in a flat, decentralised structure.
Describe the finance available
If finance is limited the business will not have as many options to choose from when structuring their business.
What are the business structures
Tall (Hierarchical) structure
Flat structure
Centralised structure
Decentralised structure
Entrepreneurial structure
Matrix structure
Describe the tall (hierarchical) structure
This is the traditional structure for many medium and large businesses. Decisions and instructions are passed down from senior staff to the workforce and information passes back up through the levels of management.
In a Tall structure employee’s position in the structure indicates their level of responsibility - the higher up the
structure the greater the responsibility.
What are the feature of a tall (hierarchical) structure
many levels of management
the chain of command is long
the span of control is narrow
What are the advantages of a tall (hierarchical) structure
There is a high level of control as
important decisions are made by senior
staff and are then passed down through
the various levels of management.
The role and responsibility of each
employee is clearly defined, along with
the procedures to be followed
Staff become specialist in their role
(often linked to functional grouping)
Supervisors/managers have a narrow
span of control, making it easier to
oversee the work of their staff
There are clear promotion and career
development opportunities
What are the disadvantages of tall (hierarchical) structure
Slow response to market and consumer
demands because of the length of the
chain of command
Decision making is slow as many
individuals in the various levels of
management must be consulted
The system is rigid and inflexible as
roles and responsibilities are clearly
defined
The level of responsibility and authority
in the structure can be seen as a status
symbol causing divisions between
managers and staff.
Describe a flat structure
A flat structure has very few levels of management. It is traditionally used by small businesses e.g. professional partnerships of doctors, dentists or lawyers. However, large businesses are increasingly moving towards a flatter structure to overcome the problems of
a hierarchical structure.
Moving to a flat structure will involve reducing the number of levels of
Flat Structure management through a process called delayering.
What are the features of a flat structure
few levels of management
the chain of command is short
the span of control is wide
What are the advantages of a flat structure
Faster communication as there are
fewer levels of management to be
consulted
Faster response to changes in the
marketplace
Employees have more responsibility
and a wider variety of tasks to complete
which can be motivating
What are the disadvantages of a flat structure
Supervision of employees becomes
more difficult as span of control is wide
The level of support received by staff is
reduced as managers are now
responsible for more staff
Fewer promotion opportunities
available
Describe a span of control
Span of control is the number of people who report to a manager. If a manager has a wide span of control, there are a number of impacts;
Describe the chain of command
Chain of command is how decisions and information are communicated within the organisation i.e. down the levels of management.
A short chain of command (flat structure) means decision making and
communication is faster. A tall structure has a long chain of command which slows down decision making and communication.
Describe centralized structure
This structure relies heavily on a relatively small number of key decision
makers which makes it easier to maintain the corporate image
The decision makers will be senior managers, directors and sometimes the owners, depending on the type of business, who will be based at the businesses “head office”. Branches)
departments are not consulted.
What are the advantages of centralized structures
Economies of scale are gained by
purchasing materials centrally
Easier to promote corporate image as
communication will be standardised
Decisions made for the benefit of the
whole business rather than individual
departments
Managers are likely to be more
experienced and skilled in the role of
management and the decisions they
make will be of better quality
What are the disadvantages of centralized structures
Heavy reliance on key decision makers
Stifles creativity of staff
Difficult for decision makers to relate to
local conditions
Employees become demotivated
through lack of responsibility
Does not prepare staff for promotion
Describe decentralized structures
Decision making is devolved to individual branches/departments therefore employees at different levels are involved in decision making and they are more motivated and empowered.
Head office provides a supporting role rather than a controlling role. This
structure is often associated with a flat structure
What are the advantages of decentralized structures
Decision making is quicker
More responsive to changes in local
market
Decision makers have better knowledge
of local needs
Staff are empowered - more motivated
Staff are prepared for promotion
Staff are more proactive and flexible
What are the disadvantages of decentralized structures
Some overall control of the business is lost
Corporate image and consistency more
difficult to maintain
Inexperienced managers may make
poor decisions affecting the whole
business
Greater supervision may be required
Lower and middle managers may need
additional training
Higher salaries may need to be paid
Describe a matrix structure
A matrix structure involves an organisation being arranged into temporary project teams to carry out a particular task e.g. developing new product or service, or a large-scale
construction project.
Teams are made up of employees from the different functional areas e.g. marketing, finance, operations. Each member of staff will have two managers: one from the functional area and the other is the project manager.
What are the advantages of a matrix structure
Increased motivation as staff have the
opportunity to move to new projects
Increased job satisfaction as staff can
use their expertise
Staff can develop through working in
areas out with their expertise
Project benefits from different
viewpoints and skills
Effective use of resources as staff can
be moved between projects
What are the disadvantages of a matrix structure
There can be confusion and conflict
between the 2 managers
Many managers across projects means
high salary costs
Duplication of resources increase costs
e.g. equipment
Describe entrepreneurial structures
Entrepreneurial structure is common in many small businesses and decisions are made by the owner(s).
This structure is similar to a centralised structure but
for a small business.
This structure may not be suitable as the business grows. A heavy workload is placed on the owner(s) who have responsibility for decision making which can lead to inefficiency.
What are the advantages of an entrepreneurial structures
Decision making is quicker
Decisions are made for the benefit of
the business as a whole
There is no confusion around
accountability/responsibility
High quality decisions as decision
makers are experienced
What are the disadvantages of an entrepreneurial structures
Heavy workload for decision makers
No decisions can be made if decision
maker not available
Decision maker has to be expert in all
areas
Demotivating for employees
Stifles creativity and initiative
Describe decisions
A decision is the process of making a choice between different options to achieve an aim or goal.
Some decisions in business are routine and made quickly while others are more
complex and take longer to make and implement.
What are the decision making categories
Strategic
Tactical
Operational
Centralized
Decentralized
Describe strategic decisions
These are long term (5-10 years) made by directors/senior managers
Difficult and expensive to reverse - carry the highest financial risk
They focus on where the business wants to be in the long term i.e. strategic objectives
These are proactive decisions - plan for future
These decisions take a long time to implement fully and do not consider the detail of how it will be achieved
Example - to increase market share by 10% within 5 years
Describe tactical decisions
These are medium term (up to 5 years) and are made by middle managers.
They focus on the actions the business must take to achieve its strategic objectives
They can be reversed but it is time consuming and expensive
These carry less financial risk than strategic decisions
Example, to open 3 new stores within the next year
Describe operational decisions
These are short term, day to day decisions made by lower level managers.
They are implemented quickly and have a short-term impact
They are reactive decisions - based on current situation
They do not have a significant effect on the business and can be easily reversed
These carry the least financial risk
Example, to open an extra checkout to reduce the queue.
Describe centralized decisions making
In a centralised structure the decision making is kept at the senior level of the business e.g. fast food franchises do not let their franchises make any significant decisions on prices or promotions, so they retain overall consistency and identity.
What are the advantages of centralized decision making
Decisions are made by the most
experienced people
Decision making is quick and efficient
Leads to greater uniformity/ standardisation within the organization
Decisions are made for the benefit of
whole organisation
Can maintain the corporate image
What are the disadvantages of centralized decision making
Staff demotivated from lack of input in
decisions
Central team are slower to respond to
local changes in the market
Describe decentralized decision making
In a decentralised structure decision making is delegated to branches or outlets e.g. Waterstones operates in this way and branch managers order books that reflect the local area and what local customers want to read.
What are the advantages of decentralized decision making
Can improve staff motivation and morale as they are a part of the decision making process
Focus the decisions making on indivisible department and branches of the business which can increase efficiency
What are the disadvantages of decentralized decision making
Some decisions are made by less
experienced managers
Local decisions may be inconsistent
with the overall strategy of the business
