Understanding Business Flashcards
What is a need?
A need is something necessary for survival. E.g, food, water, shelter, and clothing.
What is a want?
A want is something you would like to have, but is not necessary for survival. E.g, a TV, a car, a games console, and an iPad.
What is a good?
A good is a tangible, physical object you can touch.
What is a service?
A service is something that can be done for you, but is intangible - it cannot be touched.
What is meant by “durable goods”?
Goods which last for more than a year.
What is meant by “non-durable goods”?
Goods which last for less than a year.
What is meant by “capital goods”?
Goods which are used to make a product.
What is meant by “consumer goods”?
Goods that are bought day to day by consumers.
(Sectors of Industry)
What is the Primary Sector?
Industries that extract natural resources from the ground. E.g, farming, mining, and fishing.
(Sectors of Industry)
What is the Secondary Sector?
Industries that use primary resources to produce their product. E.g, manufacturers.
(Sectors of Industry)
What is the Tertiary Sector?
Industries that provide a service. E.g, hairdressers, plumbers, and mechanics.
(Sectors of Industry)
What is the Quaternary Sector?
Industries that provide information. E.g, call centres, consultancy.
(Factors of Production)
What is meant by “capital”?
Machinery used to produce or the money used to start up a business.
(Factors of Production)
What is meant by “enterprise”?
The person who combines all the factors of production together (entrepreneur).
(Factors of Production)
What is meant by “land”?
Natural resources.
(Factors of Production)
What is meant by “labour”?
Human resources.
(Sectors of the Economy)
What is the Private Sector?
Individuals who run businesses to make a profit.
(Sectors of the Economy)
What is the Public Sector?
Organisations owned by the government which aim to break even. Funded through taxation. E.g, NHS, Firefighters, and Police.
(Sectors of the Economy)
What is the Third Sector?
Organisations that aim to help people in need. E.g, Oxfam, Dog’s Trust, and British Heart Foundation.
Who makes the decisions in a Public Limited Company?
Board of Directors.
Who owns a Public Limited Company?
Shareholders.
How is a Public Limited Company funded?
By selling shares on the stock market.
What requirements does a Public Limited Company need to meet?
Plcs need at least two shareholders and £50,000 in the bank.
Advantages of a Public Limited Company
- Shareholders have limited liability
- Raise huge amounts of money by selling shares on the stock market
- Plcs dominate the market
- Can raise vast sums
- Due to size they benefit from Economies of Scale
Disadvantages of a Public Limited Company
- No control over who buys shares, therefore a risk of takeover
- Prospectors have to be produced
- Must abide by the Companies’ Act
- Have to publish their accounts
- Separation of ownership and control
Who owns a Private Limited Company?
Shareholders (normally family and friends).
How are Private Limited Companies funded?
By selling shares to chosen shareholders.
Who makes the decisions in a Private Limited Company?
A Board of Directors.
Advantages of Private Limited Companies
- Shareholders have limited liability
- Easy to raise finance
- No limit to number of shareholders
- Control of the company is not lost
- Large amount of experience can be gained from shareholders and directors
Disadvantages of Private Limited Companies
- Set up costs are expensive and time consuming
- Accounts have to be published
- Profits are shared out among a larger group of people (lower dividends)
- Shares cannot be sold to the public which makes it difficult to raise finance
- Have to meet the requirements of the Companies’ Act
What is a Franchise?
An agreement where a business sells the rights to another business allowing them to sell the products or use the company name. E.g, McDonalds, The Body Shop, Subway.
What is a Franchisee?
The person buying the rights for the company.
What is a Franchiser?
The company selling the rights.
Advantages of being a Franchiser
- Allows market shares to increase without much effort
- Has the power to withdraw the franchise if rules and conditions are not being met
- Finance for business is provided by the Franchisee
- Risks are shared between franchisee and franchiser
- % of profits are achieved
Disadvantages of being a Franchiser
Image and reputation depends on the Franchisee’s.
Advantages of being a Franchisee
- Franchiser will advertise nationally
- Franchiser carries out administration and training
- Begin trading with an established name
- Customers are familiar with the products
Disadvantages of being a Franchisee
- Franchisee’s reputation and profitability depend on Franchiser and the performance of other Franchisees
- Strict rules may be set by the Franchiser and they may pose restrictions
- A % of profits have to be paid to Franchiser
- The franchiser has the power to withdraw the contract
What is a Multinational Company?
A company that owns production/service facilities outside the country in which it is based. Normally Plcs and have budgets larger than some countries.
Advantages of being a MNC
- An organisation may be given grants from governments to locate in that country and won’t be required to pay it back
- Organisations will become larger which makes them safer from takeovers
- Can allow organisations to increase their sales/profits
- Take advantage of economies of scale and reduce unit costs of products
- Employ cheaper staff - greater profitability
- May help to avoid legal restrictions in the organisation’s own country which could allow them to sell/produce their products abroad
- Could allow for tax advantages which will increase profitability
- Avoidance of tariffs/quotas imposed by governments
Disadvantages of being a MNC
- Legislation may be different in other countries which may require the organisation to alter its product/service
- Legislation may exist on how a product/service is marketed and may result in some marketing techniques having to be charged
- Cultural differences mean that organisations have to be sensitive to different countries’ cultures
- Different languages will exist and this may mean that organisations have to employ specialist linguists to work with the organisation (new menus, packaging)
Advantages of being a Host Country
- Creation of employment
- Reduction in balance of payments
- Introduction of technology
- Improved standards of living
Disadvantages of being a Host Country
- Exploitation of workers/resources
- Profits go back to MNC of origin
- MNCs become too powerful and exert a strong influence on governments
- Social responsibility - damage to the environment - use up non-renewable energy
- Low prices of MNC can force local businesses out of business
- Increased competition for local companies
Who owns a National Government Organisation?
Owned by Central Governments/Tax payers
Who runs a National Government Organisation?
Controlled by elected politicians/MPs/civil servants
How are National Government Organisations financed?
Funded through National Insurance, VAT and Income Tax
What are National Government Organisations?
- Health/Hospitals
- Education
- Defence
- Royal Mint
- HM Revenues & Customs
Public Sector
(Scottish Governments have delegated responsibility from UK Governments for education, health and transport).
What are Local Government Organisations?
Public Sector
- Refuse collection
- Local education
- Housing
- Recreation
Who owns Local Government Organisations?
Owned by Central Government or general public
Who runs Local Government Organisations?
Controlled by elected councillors/civil servants
How are Local Government Organisations funded?
Financed by:
- Council tax/business rates
- Money from Central Government
- EU grants
- Charges for services
Who owns a Public Corporation?
Owned by the government
Who runs a Public Corporation?
Controlled by chairperson/board of directors
How are Public Corporations financed?
Funded by government grants, selling merchandise, TV license
An example of Public Corporations
The BBC
An example of Voluntary and Charitable Organisations
- RSPCA
- Oxfam
- Girl Guides
Who owns a Voluntary/Charitable Organisation?
Owned by members/sponsors/founder
Who runs a Voluntary and Charitable organisation?
Controlled by volunteers or an elected volunteer
How are Voluntary and Charitable organisations funded?
Financed by:
- Donations/appeals
- Lottery grants
- Sports councils
- Selling items
- Local authority grants
Who owns a Social Enterprise?
Owned by Founder
Who runs a Social Enterprise?
Controlled by Manager
How are Social Enterprises funded?
Financed mainly by selling goods and services - however can also receive donations and grants
What’s a Social Enterprise’s main aim?
Main aim is social or environmental issues. Their main aim isn’t to make a profit, although they do.
What is needed for a Social Enterprise to be qualified?
At least half of their profits must go to their main aim
Advantages of being a Social Enterprise
- Help to solve issues whilst making a profit
- Media attention for the social issue provides publicity for your business
- Attracts customers who support the issue
- Can sell shares to raise finance if they are a limited company
- Grants are available specifically to Social Enterprise businesses
What are the objectives of a business in the Private Sector?
- Survival (not plc)
- Growth
- Provide a service
- Maximise profits (sales increase and keep costs down)
- Dominate the market (plc)
- Maximise sales
- Satisfying (not plc), running own business to make a living
- Become more environmentally friendly/ethical/socially responsible
- Improve its image/reputation
- Managerial objectives (plc):
- Company car
- Expensive account
- Mobile phone
- Private health care
What are the objectives of a business in the Public Sector?
- Provide an improved service
- Breakeven, when profit and loss is equal
- Make best use of taxes
- Keep within a budget
- Be socially responsible (ethical) - i.e become more environmentally friendly
What are the objectives of a business in the Third Sector?
- Increase awareness
- Increase volunteers
- Open more shops
- Maximise donations
- Help people/animals
What are the three types of decision?
- Strategic
- Tactical
- Operational
What are Strategic Decisions?
- Long term
- Made by senior managers
- Outline objectives of the organisations
E.g, improve profits, to expand into US, to merge with another company or to change the business structure
What are Tactical Decisions?
- Medium term
- Made by middle managers
- Help achieve strategic decisions
- Involves the movement of resources
E.g, to reduce staffing levels, to replace machinery, to find a cheaper supplier, or create a new advertisement campaign
What are Operational Decisions?
- Short term (day to day)
- Made by staff or department managers
E.g, to organise cover for absent staff, to arrange a repair or decide upon order of who is going when for lunch
What are the stages of the Structured Decision Making Model?
- Identify the problem
- Identify what you want to do
- Gather information from primary sources or secondary sources, internal and external
- Analyse the information - compare, adjectives and disadvantages
- Devise alternative solutions
- Select the best solutions
- Communicate the solution to staff and customers
- Implement the decision
- Evaluate the decision - is it working?
- If no, start the process again
What is the DMM?
The Structured Decision Making Model provides decision makers with a framework/guideline to assist them making quality decisions
Internal Constraints on DM
- Lack of finance
- Policies and procedures used in the business
- Information available (quantity and quality)
- Lack of technology
- Management:
- Ability
- Use of DM tools
- Employees:
- Ability
- Amount
- Training required
- Resistance to change
Advantages of Using DMM
- Time is taken to gather and analyse the info
- No snap judgements can be made
- Time is taken to identify possible alternative solutions which enhances innovation
- The decision is shared with all stakeholders which ensures every employee is kept fully informed
- Forces the decision maker to consider every stage which means decisions are likely to be of higher quality
- Decisions made are evaluated, therefore the problem will eventually be solved
Disadvantages of using DMM
- The time scale required
- The ability to collect all information - time consuming and expensive
- The problem of generating alternative solutions
- Lack of creativity/no gut reactions
- Results of solution are not seen until the process is finished
How are decisions evaluated?
- Employee absence/attendance
- Level of employee motivation
- Ethos
- Customer opinion (questionnaire)
- Quantitative information (numbers):
- Production levels
- Sales/profit figures
What is SWOT analysis?
- Strengths - internal/current/positive
- Weaknesses - internal/current/negative
- Opportunities - external/future/positive/internal
- Threats - external/future/negative/internal
Examples of Strengths/Weaknesses
- Corporate culture
- HRM
- Finance
- Marketing
- Sales
- Structure
- Product/product range
- Management
- ICT
Examples of Opportunities/Threats
- Political
- Economic
- Social
- Technology
- Environment
- Competition
- Suppliers
Purpose of SWOT analysis
- Proactive rather than reactive
- Builds on strengths
- Fixes weaknesses
- Grasps opportunities
- Avoid/limit the impact of threats
What is a Stakeholder?
An individual or group of individuals who have an interest or an influence in the success or failure of an organisation
Competitors are NOT stakeholders!
Examples of Stakeholders
- Customers
- Employees
- Owners
- Managers
- Local community
- Trade Unions
- Tax payers
- Shareholders
- Government
- Media
- Suppliers
- Inland Revenue
- Banks/lenders
What is a conflict?
The interest of any one stakeholder can conflict within another
What is interdependence?
A reason why one stakeholder needs another
Internal/Organic Methods of Growth
- New employees
- Purchase new machinery
- Open new stores/retail outlets
- Expand product range
Advantages of Internal Growth
- Less risky than being bought over by other businesses
- Financed from own funds
- Building upon existing strengths
Disadvantages of Internal Growth
- Slow method of growth
- Dependant on increased demand
(External Growth)
What is a merger?
When two or more businesses join together on equal terms
(External Growth)
What is a takeover?
When a business buys over another business
- can be friendly or unfriendly
- a business loses its identity
(External Growth)
What is Horizontal Integration?
When a company takes over or merges with another organisation at the same stage of production
E.g, Wal-Mart and Asda, Halifax and Bank of Scotland, Lloyds and TSB
What are the advantages of Horizontal Integration?
- More profit/sales/market share
- Economies of scale
- Reduce competition
- Acquire the firm’s assets
- To become stronger and reduce the chance of takeover
What is Backward Vertical Integration?
When a company merges with or takes over another business at the previous stage of production.
E.g, Tesco and Heinz, and Ford and Michelin.
What is Forward Vertical Integration?
When a company takes over with another business which is at the next stage of production.
E.g, Tate & Lyall and Cadbury
What are the advantages of Forward/Backward Vertical Integration?
- Less expensive raw materials
- No middle man so increased profits
- More control over supplier
- Guaranteed stock
- Processes can be linked easier
- More control over distribution
What is a Conglomerate (diversification)?
When a business merges with or takes over an organisation which operates in a different market.
E.g, Pepsi & Walkers, Pepsi & Quaker, Kiwi & Sara Lee
What are the advantages of a Conglomerate?
- Reduces the chance of failure?
- Spread the risk
- Firm becomes larger and more secure
- If it fears loss of market share
- If it fears heavy competition
- Gains the assets of the firm
- Ability to overcome seasonal fluctuations
What is a De-merger?
Splitting 1 firm into 2 separate firms
Advantage of a de-merger?
Can concentrate on the business’ core activity
What is a de-integration?
Selling non-profitable/minor areas
An advantage of de-integration?
Can concentrate on the business’ core activity
What is a Divestment?
When a business sells some of its assets (or subsidiaries businesses) to another company
An advantage of a Divestment
Can raise finance which is re-invested into the business
What is asset stripping?
Buying a business and selling it off bit by bit
An advantage of asset stripping
The parts which are making a loss are closed down
What is a Management Buyout?
When current managers buy the business from its current owners
What is a Management Buy in?
When managers from outside the business buy it from its current owners
What is Outsourcing?
Hiring another company to perform your non-core activities rather than doing them yourself.
E.g, Catering, cleaning and accountancy
Advantages of Outsourcing
- You can concentrate on your core activities
- Less equipment and labour needed
- Outsourced staff should have greater expertise
- Only use them when required
- More efficient therefore cheaper than doing the activity yourself
Disadvantages of Outsourcing?
- Difficult to keep confidential information confidential
- Less control over the work
- Employees often unsure of loyalty
(External Factors)
What is PESTEC?
- Political
- Economic
- Social
- Technological
- Environmental
- Competition
What are some Political Factors?
- Change in the law/legislation
- Change in taxation levels
- Government spending - eg new road network
- Local government planning permission
- Reduced/increased trade restrictions
What are some Economic Factors?
- Unemployment
- Rate of inflation
- Recession
- Change of interest rates
- Change in exchange rates
What are some Social Demographics Factors?
- Ageing population
- Family size (smaller)
What are some Socio-cultural Factors?
- Changes in trends and fashions
- Animal and environment welfare
- Health conscious
- Increased car and home ownership
- More women work
- Late motherhood
- More leisure time
- Change in attitude about marital status
What are some Technological Factors?
- Advancements in technology:
- Internet/e-commerce
- S-commerce
- Software
- Transportation
- Production
What are some Environmental Factors?
More care taken to protect the environment
- More recycled goods - recycling bins/raw materials
- No animal testing
- Less car parking available
- Electric cars
-Storms and floods
What are some Competition Factors?
New competition enters the market which forces change
- New improved products are produced
- Lower price
- Increased promotions
- Improved quality
What are some Internal Factors?
- Finance (or lack thereof)
- Staff ability
- Information available
- Changes in costs (wage rises/stock theft)
- Availability of ICT
- Management ability
- Corporate Culture
- Resistance to change
What are the Organisational Structures?
- Hierarchical (tall)
- Flat
- Entrepreneurial
- Matrix
- Decentralised
- Centralised
What is a Hierarchical/Tall Structure?
An organisation which has many levels of management
What are the key features of a Hierarchical Structure?
- Long chain of command
- Narrow span of control
- Easy to put procedures in place
What are the advantages of a Hierarchical Structure?
- Each employee has one manager to whom he or she is responsible
- Easier to check everyone’s work because there is a narrow span of control
What are the disadvantages of a Hierarchical Structure?
- Slow response to market and consumer demands
- Length of communication time, both up and down
- Length of time to make decisions
- Expensive to staff
- The system is rigid and inflexible
- People’s position in management is often seen as a status symbol with clear divisions between the managers and the workers
What is a Flat Structure?
An organisation which has few levels of management (add photo)
What are the key features of a Flat Structure?
- Short chain of command
- Wider span of control
What are the advantages of a Flat Structure?
- Faster lines of communication
- Faster response to change
- Less expensive wages
- Employees have more responsibilities - more tasks
- Staff are motivated due to experience gained and prospects for promotion
What are the Disadvantages of a Flat Structure?
- Increased stress for managers and employees
- Increased workload
- Reduced promotion
- Some staff are unmotivated
What is an Entrepreneurial Structure?
- One or two key people own and run the organisation
- Used by small businesses (Sole Traders, Partnerships)
What are the advantages of an Entrepreneurial Structure?
- Decisions are made by a senior manager
- Decisions made quickly
- Staff know who they’re accountable
What are the disadvantages of an Entrepreneurial Structure?
- Little input from staff - no consultation
- Heavy workload for manager
- Key person has to be an expert in all areas of running a business
- Demotivating for employees
- Do not benefit from the initiative and creativity of the employees
What is the Matrix Structure?
- People with specialist skills are put together to form a team to complete a specific task/project
- The team is made up of staff from different functional areas
What are the advantages of a Matrix Structure?
- Increased experience- different angles
- Increased motivation as staff always have new projects to work on - no time to get bored
- Increased job satisfaction as employees get the opportunity to use their expertise
What are the disadvantages of a Matrix Structure?
- Expensive to have teams working on different projects
- Confusion over who reports to who
- Difficult to co-ordinate all the activities of the employees from the different functional departments
What is a Centralised Structure?
- Control and decision-making lies with the most senior directors/managers (HQ)
- Associated with Hierarchical Structures
- Subordinates/each branch don’t have much power at all
What are the advantages of a Centralised Structure?
- Organisation benefits from strong leadership
- Only those at the top have control of finance
- Decisions are made for the whole organisation and not just a department/branch
- Decision makers are experienced and make better quality decisions
- All orders and storage is standardised -economies of scale can be gained
- Easier to promote a corporate image as all external communications can be done in a standardised format
What are the disadvantages of a Centralised Structure?
- Unmotivational for staff as no consultation takes place
- Thoughts and ideas for those working on the shop floor are lost
- Decisions made may not represent the local market
What is a Decentralised Structure?
Decision-making and control are delegated to the managers of each branch which gives senior managers a lighter workload as they have longer to make day-to-day decisions
What are the advantages of a Decentralised Structure?
- Branch managers are better informed to make decisions
- Decision-making is quicker which allows for a quicker response to local changes in the market
- Delegation is said to be a greater motivator for branch managers
- Groomed for a senior position when it comes along
- Delegation allows for a proactive approach to be adopted, and a greater flexibility of roles
What are the disadvantages of a Decentralised Structure?
- Branch managers may lack expertise
- No economies of scale gained for bulk buying
- Decisions made may not benefit the whole organisation
What is Delayering?
Removing the middle management from a Tall Structure to make it a Flat Structure
What are the advantages of delayering?
- Improved communication
- Empowers staff
- Speeds up DM
- Fewer management salaries to pay
- Organisation can adapt quickly to market changes
- Prepares employees for promotion
What are the disadvantages of Delayering?
- Remaining stuff have to take on extra work
- Fewer promotion opportunities
- Managers have responsibility for a wider span of control - increased stress and workload
- Causes redundancies
What is Downsizing?
Removal of areas of the organisation that are NOT linked to the core activities
What are the features of Downsizing?
- Any employee can be made redundant
- Stripping out excess capacity within the organisation
- Reducing scale of operations to meet demand
- Causes unrest in the workplace
- Empowers more staff as responsibilities are being shared out amongst more people
How can Downsizing reduce costs?
- Saves cost of wages (all staff)
- Cost of premises is lower if it’s smaller
What factors influence the type a structure a business has?
- The size of the organisation
- The technology used
- Staff knowledge and skills
- Ability of the manager
- The products sold
- The finance available
What does the word “responsibility” mean in business?
When an employee is answerable for their own actions and the actions of others
What does the term “span of control” mean?
The number of employees a manager controls in an organisation
What does the term “chain of command” mean?
The communication of information up and down through the organisation’s structure
What does the word “delegation” mean?
Giving the responsibility and the authority to a subordinate to carry out a task or duty
Why do managers delegate?
- Reduces manager workload
- Employees will gain experience for a promotion
What is an Organisational Grouping?
The way in which a business can organise its staff and the activities they undertake
What are the different types of Grouping?
- Functional
- Customer
- Place/Territory
- Product/Service
- Technology
What is Functional Grouping?
Departments are grouped based on similar skills, expertise and resources used
Name 5 common Functional Departments
- Marketing
- Operations
- Finance
- Human Resource Management
- Administration
What are the advantages of Functional Grouping?
- Organisation has a clear structure
- Staff expertise is contained in one department which encourages specialism
- Staff can help each other with problems
- Easy to identify who has answers to problems and who performs particular activities
What are the disadvantages of Functional Grouping?
- Difficult structure to manage as organisation expands
- Slow at responding to change
- Department objectives become more important than organisation’s strategic objectives
- Department rivalry
- Communication between departments is poor
What is Place/Territory Grouping?
When are organisation organises its activities and resources by geographical location and sell to a broad customer base
What are the advantages of Place/Territory Grouping?
- Can meet the needs of customers in different countries exactly - in terms of language
- Can become familiar with local customs and cultures
What are the disadvantages of Place/Territory Grouping?
- Expensive to produce products in different languages - marketing
- Communication can be difficult between branches
- Expensive to staff
- Duplication of admin activities
What is Customer Grouping?
When an organisation organises its activities and resources by different types of customers. E.g, Domestic and Business, Private and Public, Home or abroad
What are the advantages of Customer Grouping?
- Customer loyalty due to highly personal service they receive
- Highly responsive to the needs of the customer
- Each type of customer receives its own service, price, and promotion suited to their needs
What are the disadvantages of Customer Grouping?
- Very expensive staffing costs
- If a new group of customers exist, a whole new group of staff have to be employed and trained
- Duplication of marketing activities and admin activities
What is Product/Service Grouping?
When the activities of the organisation are divided according to the different products and services which are produced. E.g, Virgin, Warner.
What are the advantages of Product/Service Grouping?
- Increased responsiveness to change
- Staff become experts on the product/service
- Staff can easily see the results of their efforts - increased motivation
- Allows management to identify poorly performed products/services
What are the disadvantages of Product/Service Grouping?
- Competition between products and services
- Duplication of equipment, admin and staffing
What is Technology Grouping?
Organisations group their activities according to the technological processes involved in providing the good or the service. E.g, Tesco.
What are the advantages of Technology Grouping?
- Highly suitable for large organisations with different production processes
- Specialisation within the workforce
- Training is given in only one area
- Easy to pinpoint problems in production
What are the disadvantages of Technology Grouping?
- Duplication of resources in each production process
- Departments compete against eachother
- Department aims more important than organisational aims
What is Corporate Culture?
“The values, beliefs, and norms related to the organisation that is shared by all its members”
- Set of beliefs and behaviours which managers and employees adopt to enable the business to achieve its aims
- Consists of everything to do with the organisation including its values, emotions, beliefs, and language used
- Grows organically over time and becomes the unwritten ruled and values of the business
- Culture will be reflected in every part of the business including dress codes, layout, décor, policies and procedures used, symbols, terms and conditions of employment, and employee incentives
- Management style will also influence the culture
What are the advantages of Corporate Culture?
- Employees feel they belong to the organisation and are part of it which can provide them with a sense of security and will improve motivation
- This motivation can in turn lead to improved efficiency and higher productivity
- Employee loyalty can increase which will decrease the staff turnover and staff absence rates
- Can create positive relationships within the organisation that will enable better communication and decision-making
- Image and identity of the organisation can be improved which will be visible to all stakeholders
