Unit 1 - Understanding Business Flashcards
define a business
an organisation that makes, buys or sells goods or provides a service. All businesses aim to satisfy consumer needs and wants.
what is the difference between a need and a want?
needs are the basic requirements that are essential for survival such as food, water, clothing, shelter and warmth. whereas wants are things we would like to have but don’t need to survive. These include luxuries such as mobile phones or holidays.
define a good
products that you can see and touch (tangible) such as laptops, clothes or food.
define a service
products that you cannot hold or touch (intangible) such as public transport, a haircut or a visit to the cinema.
name the four factors of production
land, labour, capital, enterprise
in terms of the factors of production what is land?
natural resources available for production. Examples: fishing, farming and coal
in terms of the factors of production what is labour?
the human input into the production process. Examples: workers
in terms of the factors of production what is capital?
any man made resource that is used to create other goods and services. Examples: machinery, tools
in terms of the factors of production what is enterprise?
the idea the owner had to create the business. how the land, labour and capital is used to make a good or provide a service
what are the four sectors of industry?
primary, secondary, tertiary and quaternary
what is the primary sector?
concerned with the extraction of raw materials or natural resources from the land. Examples - farming, mining, fishing or oil production
what is the secondary sector?
concerned with manufacturing. This would involve taking the raw materials from the primary sector and converting them into new products. Examples - car manufacturers, food production or building companies.
what is the tertiary sector of industry?
concerned with providing a service. Examples - hairdressers, banks or cinemas
what is the quaternary sector of industry?
consists of those industries providing information services, such as computing, ICT (information and communication technologies), consultancy (offering advice to businesses)
what are the sectors of economy?
private, public and third
what are the type of organisations that would be in the private sector?
- sole trader
- partnership
- private limited company/public limited company
- Franchises
- multinationals
what is a sole trader?
a business owned by one person. Sole traders rely on their own savings, bank loans or loans from friends and family to fund their business.
advantages of sole traders?
- easy to set up
- sole traders retain all their profits for themselves
- make all the decisions
disadvantages of sole traders?
- can be difficult to raise finance
- unlimited liability
- heavy workload
what is a partnership?
can have a minimum of two and a maximum of 20 partners.
define a sleeping partner
A partner who invests but is not involved in the day-to-day running of a partnership
advantages of partnerships?
- more equity available to finance the business compared to a sole trader
- different partners bring different skills
- workload is shared
disadvantages of partnerships?
- unlimited liability
- profit is shared between the partners
- partners may not always agree on decisions for the business
what is a private limited company?
must have a minimum of two shareholders and is usually managed by a board of directors. The capital of a private limited company is divided into shares, with each member or shareholder owning a number of shares each.
can a private limited company sell shares on the stock market to the general public?
A Ltd is not allowed to sell shares to the general public on the stock market
what are the advantages of operating as a private limited company?
- shareholders have limited liability
- more finances can be raised from shareholders
- shareholders/directors bring expertise to the business
- control of the company cannot be lost to outsiders
what are the disadvantages of operating as a private limited company?
- profits are shared among shareholders
- more difficult to raise large amounts of finance as shares cannot be sold on the stock market
- the company must follow the rules and regulations of the companies act
what is a public limited company?
There must be at least two shareholders who will own the company, and a Board of Directors control and manages it.
can public limited companies sell shares on the stock market to the general public?
yes, they can be sold on the stock market
advantages of operating as a public limited company?
- It’s possible to raise large amounts of capital by selling shares.
- Large organisation considered play risky by lenders
- shareholders have limited liability
- specialists are usually appointed to ensure the company is run effectively
- shares can be given to employees to motivate them
- some public limited companies are able to dominate the market
disadvantages of operating as a public limited company?
- the firm can be taking over if arrival firm is able to acquire enough shares
- must follow rules and guidelines provided by the Companies Act
- no control over who purchases shares
- must publish annual accounts
- have to share profits - dividends are expected by shareholders
- set up costs are high
what is a franchise?
a method of setting up a business which involves two parties:
• a franchiser
• a franchisee
define a franchiser?
The franchiser is the ‘parent’ company, and owns a brand, product or service. The franchisor gets a franchisee a license permitting them to sell goods or services under the franchisor’s brand name, usually in return for the franchisee’s annual profits or an agreed annual royalty payment. An example of this is McDonald’s.
define a franchisee?
the person buying the licencing permit to sell goods and services under the franchiser’s name in return for a royalty payment.
Advantages for the franchiser?
- it allows growth for their brand without making significant financial investment in property and without the need to recruit and train a large workforce of their own
- it reduces competition
- the risk of failure is shared with the franchisee
- they retain control over the image and product they have created
- there is guaranteed income from royalties paid by the franchisees
Disadvantages for the franchiser are?
- reputation depends on how good the franchisees are
- bad publicity for one branch affects all
- franchiser only receives a share of the profits or sales revenue profits depend on the ability of the franchisees.
The advantages for the franchisee?
- training and support are available throughout the franchise agreement
- national marketing campaigns will be conducted by the franchiser on their behalf
- launching a new business is less of a risk due to using an established brand and product
- all decisions regarding product range and store layout are made by the franchiser on their behalf
The disadvantages for the franchisee?
- although the franchisee is legally responsible for a business, virtually all of the major decisions will be made by the franchiser
- royalties need to be paid to the franchiser
- operating a franchise limits scope for showing initiative
- bad publicity or poor performance by a fellow franchisee can have negative impact on whole brand
what are multinationals?
normally very large businesses which have outlets or production facilities in a number of different countries.
why would businesses want to expand overseas?
- to reduce production costs - manufacture goods in countries that have lower wage costs, other components of their final product in countries where they can be produced at the lowest cost.
- to reduce transport costs - it may be cheaper to manufacture products in a foreign country rather than trying to transport the finished goods from the country of origin.
- to penetrate markets protected by import controls - if a country has a tariff for example in may be cheaper to just manufacture in that country.
- to escape government regulations at home - if a government imposes restrictions such as minimum wage
- to earn higher after-tax profits - many companies move production to countries with low profit taxes to earn higher after-tax profits
advantages of multinationals?
- lower wage rates may make the cost of production much lower
- higher skilled workers may be available for the same or lower cost
- the rate of corporation tax may be lower which means they can keep more of their profits
- the business can then operate competitively in the local market
- it allows the organisation to grow out with saturated or highly competitive markets
disadvantages of multinationals?
- legislation in the local country may be too restrictive to operate profitably
- the local currency may be too weak to allow profits to be converted back at a good rate
- there may be a lack of technical expertise or equipment, including poor infrastructure
- Taking advantage of local laws (eg minimum wage, working ages/conditions) can have a negative impact with customers in the UK, Can lead to bad publicity which can damage a brand.
what is the public sector made up of?
- central government
- local government
- public corporations
what does the central government do?
responsible for providing citizens with essential services such as health, defence and transport. Finance is allocated to each government department form money raised through income tax, VAT and corporation tax.
what does the local government do?
for example City of Edinburgh Council aims to meet local needs and will take responsibility for providing services such as schools, environmental health and leisure facilities like pools and football pitches. Finance for local governments comes from the central government, business rates and council tax.
what are public corporations?
organisations that are regulated by the central government. A chairperson and a board of directors are appointed to manage the organisation on behalf of the government. The BBC is an example of a public corporation
define nationalisation
the process of a government taking control of a company or industry.
define privatisation
the transfer of ownership, property or businesses from the government to a privately owned entity, moving from Public to Private sector.
what are the positive impacts of privatisation?
- huge sums of money go into the government - improves government’s budgetary position and allow tax cuts.
- no government responsibility for large areas of UK business and employment - no political need to interfere/spend money on sorting out other people’s problems
- businesses become more efficient - prices fall, quality of service to customers rise.
- shared ownership widened - people used privatisation to buy shares for the first time in their lives
- businesses became free to borrow, to invest, innovate and enter new markets
- free to expand, to merge, to take over and be taken over - the face of the relevant markets has changed quite substantially
what are the negative impacts of privatisation?
- expensive and generates a lot of income in fees for specialists’ advisers e.g. banks
- too little competition
- the nationalised industries were sold off too quickly and too cheaply
- unprofitable parts of the business sold off or closed down - (as businesses normally do) so services have gotten worse e.g. transport in rural areas
- wider share ownership didn’t happen
what does a charity do?
help specific causes, they are overseen by the government but run by a board of trustees. they are funded through government allowances, lottery grants, donations and fundraising activities. Charities have a mix of paid and voluntary workers. Examples include Oxfam and Cancer Research
what are voluntary organisations?
non-profit organisations that aim to provide a service for members/local community. They are managed and run by volunteers who give up their time for free and controlled by a committee, who volunteer to undertake specific duties. Voluntary organisations are financed mainly through membership fees (known as subs) but many also ask for donations, apply for government funding or apply for a lottery grant.
what are social enterprises?
run the same way as a Private sector business but have social or environmental aims. Profits are reinvested to benefit a group/cause or invested in the community. Income is generated through the trading of goods and services rather than through donations. Examples include: The Big Issue or the Eden Project
what are cooperatives?
aims to provide a quality service to benefit customers and members and also to generate a profit (not profit maximisation). The profits and decision making is shared among its members, customers and employees are invited to share ownership also. Cooperatives share a set of values and principles, which define the ethical approach the business must take.
advantages of third sector?
- social enterprises provide an opportunity for local people to gain employment
- social enterprises bring about a positive change to people and communities as they are not just driven by profit
- charities raise awareness and funds to support a particular cause
- private organisations are keen to donate to and support third sector organisations as it is good PR
disadvantages of third sector?
- social enterprises have to compete in the commercial market and so face the same challenges and risks common to all businesses
- charities and voluntary organisations usually depend heavily on unpaid volunteers or workers
- those with a paid role in the third sector usually earn less than they would if they worked in the private or public sector
- charities and voluntary organisations depend heavily on the generosity of the community for finance - for example donations and fundraising
what are the objectives of a private sector business?
growth, maximising profits, maximising sales, survive, provide a quality service, increase market share and corporate and social responsibility
what are the objectives of a public sector business?
provide a service, work within a budget, operate ethically and serve the local community
what are the objectives of a third sector business?
support a cause, provide a service, raise awareness, maximise donations, operate ethically, survival and increase number of volunteers
what is profit maximisation?
where an organisation strives to make the highest level of profit possible
what is sales maximisation?
where an organisation tries to achieve the highest volume of sales possible
what is survival in terms of business objectives?
literally the aim of continuing to trade as an organisation.
what is provision of a service in terms of business objectives?
Most businesses provide some type of product or service, however there are some types of organisations for which the provision of a service is their main concern.
what is an increase in market share in terms of business objectives?
this is an increase in the portion/percentage of a market controlled by a particular company or product. How strong is the product within the market?
what is growth in terms of business objectives?
this is when a business expands and develops (more in methods of growth)
what is satisficing in terms of business objectives?
when a business aims for satisfactory result rather than the best possible outcome
define corporate social responsibility
Corporate social responsibility (CSR) is when a company aims to act ethically and responsibly to ensure the public perceive them in a positive light.
what are some examples and benefits of CSR?
- Reducing carbon footprint can improve a company’s reputation as they are seen to be eco-friendly. It may also attract new customers.
- Creating new safety measures can lead to a business gaining quality and safety awards which can then be used as an effective marketing tool and give the company a competitive advantage.
- Improving working conditions of employees will motivate existing staff and attract new staff to the organisation.
- Recycling, reducing waste and minimising packaging can reduce costs for an organisation and improve their reputations.
Why do businesses want to grow?
· To eliminate competition · To become market leader · To increase sales/profits · To avoid being a takeover target · Reduce risk of failure · Economies of scale
Economies of scale?
a business has lower unit costs because of its large size. They can buy raw materials cheaply in bulk and also spread the high cost of marketing campaigns and overheads across larger sales.
Internal (organic) growth?
When a business grows internally, using its own resources to increase the scale of its operations and sales revenue.
advantages of internal growth?
· No loss of control as outsiders are not involved
· Hiring more staff will bring new ideas
· Investing in new equipment will increase production capacity
· Opening new branches means the company can reach new markets
· Less risky than a takeover
Disadvantages of internal growth?
· Can be a slow method of growth
· May be limited by the size of the market
· Restricted by the amount of finance available
horizontal integration?
occurs when two companies that operate at the same stage of production and within the same market merge to become one entity. For example, two banks merging.
Advantages of horizontal integration?
- Removes a competitor from the market
- Opportunity for greater economies of scale
- Business gains a greater market
disadvantages of horizontal integration?
- Hostility and job losses may occur
- Changes within the business could impact negatively on customer loyalty
- Can be expensive to purchase another company
What is vertical integration?
occurs when firms at different stages of the production process merge together
what are the two types of vertical integration?
forward and backward integration
Forward vertical integration?
when a business takes over a company at a later stage in the production process for example a customer such as a retail outlet for selling goods. This guarantees an outlet to sell products and means there is more control over pricing and product display.
backward vertical integration?
when the business takes over a company at an earlier stage in the production process for example its supplier/source of goods and materials. This guarantees the quality of inputs and the supply of stock and limits supplies to competitors.
diversification?
when firms move into new markets that are different from their core business.
what are the two types of diversification?
conglomerate and lateral integration
Conglomerate integration?
when a business moves into an entirely different market for example a grocery store merging with a bank, or a company like Ford (car manufacturing) merging with Nokia (technology and communications
Lateral integration?
when a business moves into a different market but within a related industry for example a hairdresser merging with a beauty salon.
advantages of diversification?
- Spreads risk across different markets
- Targets new markets increasing customer base
- Business gains customers and assets from the acquired business
- Experience/knowledge can be gained from the acquired business
disadvantages of diversification?
- Entering into new markets may affect core activities as resources and expertise need to be shared
- May not have the knowledge required to successfully run the new business
takeover?
when a larger business buys another smaller business, taking control and ownership. this is usually hostile.
advantages of a takeover?
a reduction in the risk of business failure as existing staff and processes can continue to be utilised.
a larger and more financially secure business
expand a company’s portfolio
disadvantages of a takeover?
it requires allocation of significant financial and human resources to ensure the process properly carried out.
There is a risk of harming the main company business or damaging the customer base of the acquired business when it loses its identify
merger?
where two companies integrate on equal terms - a ‘friendly’ combining of companies, where elements of both brands/names will be retained.
advantages of a merger?
· Market share and resources are shared, which spreads the risk of failure and increases sales.
· Economies of scale can be achieved
· Unlike with a takeover, jobs are more likely to be spared in both businesses.
Can overcome barriers to entering a market, such as strong competition
disadvantages of a merger?
· Customers may dislike the changes a merger may bring e.g. new logo, new names etc.
· Marketing campaigns to inform customers of changes can be expensive.
· Can be bad for competition, resulting in higher prices for customers.
demerger?
where an organisation splits into two separate businesses. This allows each business to focus on their core activity and therefore improve efficiency and performance.
divestment?
where a business chooses to sell off (usually less profitable or loss making) elements of operations or some assets. This raises finance that can be invested into improving remaining areas of the business.
asset stripping?
when a firm buys another firm and then sells off the profitable sections bit by bit while closing down less profitable areas. By selling off bit by bit the firm could make money than what they paid for. This will allow the firm to earn funds for future expansion
management buy out?
when top managers purchase the company they work for. This may be done in order to keep their jobs and to make the firm more efficient.
management buy in?
when a group of managers that do not work for the firm takes over the business.
de-integration?
when a firm cut back or sells off minor areas and concentrates on core areas. Like divestment it can provide funds for future expansion.
define an external factor
things outside a business that will have an impact on its success. A business cannot control external factors. All it can do is react to them and make decisions to help it remain successful. Each of the external factors can affect a business positively or negatively
what are the different types of external factors?
- P - political
- E - economic
- S - social
- T - technological
- E - environmental
- C - competitive.
what are the political external factors that businesses must deal with?
- Tax - Governments can raise or lower corporation tax. They can also affect businesses by increasing value-added tax on products or business rates.
- Laws - new laws like the National Minimum Wage. This will lead to impacts on profits as the wage costs of the business will rise. Another option is the Governments can introduce new health and safety legislation, 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.
- political stability - Brexit
what are the economic external factors that businesses must deal with?
Economic growth unemployment rate interest rates Inflation exchange rates
how can economic growth impact a business?
If economic growth increases more jobs will be created, meaning there will be a higher level of employment. This will lead to consumers having more disposable income to spend on goods and services produced by businesses. This is known as a boom in the economy. However, if economic growth is decreasing there will be higher levels of unemployment meaning people will have less money to spend of goods and services. This is known as a recession.
how can unemployment rate impact a business?
If the rate of unemployment is high firms have more potential workers to choose from and there is more competition for jobs means that it is easier for a business to keep wages down. However, If the rate of unemployment is low: businesses will have to offer higher competitive wages to secure new employees.
how can interest rates impact a business?
high interest rates are good for savers, bad for borrowers. Therefore, businesses will invest less rather save profits in the bank as they receive more interest on money saved. However, consumers will also save more money and spend less on goods and services provided by the business.
how can inflation impact a business?
When inflation is high prices rise and customers may stop buying luxury goods and focus on essentials
how can a strong pound impact a UK business?
effect on exports - make exports unattractive to foreigners, as UK goods will cost more than their own home goods.
effect on imports - become cheaper, decrease costs of sourcing materials from abroad. increase profits or allow a lower price to be charged to attract customers
how can a weak pound impact a UK business?
effect on exports - make exports attractive to foreigners, as UK goods will be less expensive
effect on imports - become more expensive, increased cost for UK businesses and may lead to increased prices
what are the external social factors do businesses have to deal with?
demographics
lifestyles
tastes and trends
how can demographics impact a business?
a change in demographics is most commonly changes in population such as birth rate, life expectancy and levels of immigration. For example, statistical evidence shows that the UK population is ageing. This demographic information is useful for firms who provide products and services for older people therefore businesses will need to adjust their focus to ensure they are tailoring their products to the elderly or the specific demographic changes that are happening at that time.
how can lifestyles impact a business?
Society is more health-conscious so healthy foods and habits are becoming more important to customers. Businesses will need to adjust their product portfolios and marketing strategies to ensure they are considering the lifestyle trends and fashions or they will start to lose customers.
how can tastes and trends impact a business?
taking advantage of new opportunities to suit new changes in demand will increase sales. This can be made more effective using market research to get an accurate idea of the market.
what are the external technological factors do businesses have to deal with?
ICT
automation
ecommerce
how can ICT impact a business?
this can make processes and communication within a business quicker and more efficient. Firms also need to keep their software and hardware up to date. If they don’t, they risk being seen as old fashioned by customers.
how can automation impact a business?
Automation refers to the introduction of machines to do work that was previously done by people. For example, the introduction of self-scan checkouts in supermarkets means that fewer employees are needed on the tills.
how can ecommerce impact a business?
buying and selling through websites and more and more firms are online. E-commerce widens the number of customers, lowers the costs of production, and allows fast communication.
what are the external environmental factors do businesses have to deal with?
changes in weather
pressure to recycle
ethical pressures
how can changes in weather impact a business?
demand of a product changes depending on the attractiveness in hot or cold weather. Bad weather can cause problems with distribution, resulting in unhappy customers.
how can pressure to recycle impact a business?
a business can market the fact they are socially responsible e.g. bio-degradable products, minimising packaging. The cost of recycling will reduce profits but customers may choose to switch to their product from competitors and this will lead to an increase in sales.
how can ethical impact a business?
There is increased pressure on businesses to operate ethically by reducing waste, paying fair wages, and providing goods and services that are ethically produced and marketed. It may cost businesses more to operate ethically but it will improve the image of the organisation which may result in greater sales.
what are the external competitive factors do businesses have to deal with?
imitators
price wars
new competitors entering the market
competitors introducing new products
define an internal factor
factors within a business that can be controlled by the organisation.
what are the main internal factors?
- corporate culture
- staffing
- finance
- current technology
define corporate culture
the way in which the attitudes, beliefs, values and norms of the firm are visible and evident and shared by all employees in the organisation.
what are the benefits of corporate culture to staff?
Staff will feel as if they belong to the firm, and this will increase their loyalty. As a result, fewer staff will leave. Staff are more likely to feel valued and want to work for a firm if it promotes excellence or quality in their culture. This can boost staff motivation as they will want to be seen as part of a successful or innovative company. Company values and perks can attract high quality staff, resulting in a higher quality service.
what are the benefits of corporate culture to customers?
A corporate identity will be seen by customers and will be associated with the company’s brand. Customers may become aware of the standards and culture the company stands for, which may increase profits. For example, the Animation Studio Pixar have a strong corporate culture of creativity, excellence, continuous improvement, and innovation. Pixar only allow their employees to pitch ideas for their next blockbuster.
What are the costs of developing a corporate culture?
- It can take a long time to develop or change the corporate culture of a business.
- The most successful corporate cultures are often created when a business is founded. It can be difficult to change a company’s corporate culture once it is imbedded.
- Not all staff will feel comfortable with a business’s corporate culture. This could lead to less creativity within the business.
what are human resources?
relates to the people who work in a business organisation. The performance of a business is affected by the quality and impact of the people who work for it. Human resources covers managers and employees.
what are the two types of hierarchical structures?
tall or flat
what types of organisations use hierarchical structures?
large organisations
what are the differences between tall and flat hierarchical structures?
Tall structures contain many layers of managers whereas managers in flat structures are responsible for more employees. Managers on the same level will often be responsible for the same number of delegates. This is often linked to the pay grade they receive. The higher up the pyramid a manager is, the more responsibility and pay they will receive. The number of employees in an organisation will often determine number of levels of management.
what are the advantages of tall structures?
- more opportunities for promotion which can lead to greater staff motivation
- staff gain more support from their line manager
- there is a higher degree of supervision as each line manager has a limited number of people they are responsible for
what are the disadvantages of tall structures?
- many levels of hierarchy
- span of control is narrow, and the chain of command is long, making communication slower as instructions take longer to travel through the levels of the organisation
- longer lines of communication can make the firm less responsive to change
- can be expensive to run due to high wage costs
what are the advantages of flat structures?
- few levels of hierarchy
- lines of communication are short, making the firm responsive to change and decision-making quicker
- staff working in a flat management structure can be empowered to work independently and take on more responsibility
what are the disadvantages of flat structures?
- wide span of control means that tasks must be delegated, which can lead to employees feeling stressed and managers feeling overstretched
- less promotion opportunities within a flat structure, which may lead to the company losing staff to other organisations
what is a matrix structure?
contains teams of people created from various departments from across the business. These teams will be created for the purposes of a specific project and will be led by a project manager. Often the team will only exist for the duration of the project and matrix structures are usually deployed to develop new products and services.
what are the advantages of a matrix structure?
- a good way of having different viewpoints and skills involved in a project
- provide staff with an opportunity to learn new skills from other members of the team which may lead to greater motivation and productivity
what are the disadvantages of a matrix structure?
- it is very expensive
- team members may have priority issues when having to report to two bosses (their regular line manager and their project leader)
what is an entrepreneurial structure?
when the major decisions are made by one or two key personnel. Usually in small businesses this will be the owner or the entrepreneur.
what are the advantages of a entrepreneurial structure?
- Decisions are often made quickly by the entrepreneur who is experienced within the business.
- Clear direction of the business
what are the disadvantages of a entrepreneurial structure?
- There is a workload issue for the decision makers as responsibility for many tasks will fall to them.
- Demotivating for employees
- Limited numbers of ideas
what are centralised organisations?
where most decisions are taken by senior managers and then passed down the organisational hierarchy. This structure relies on having strong and competent managers.
what are the advantages of a centralised structure?
- Centralised management structures can lead to greater uniformity within the organisation as each branch of the business will be using standardised procedures.
- Clear and consistent direction of the organisation
- Skilled staff in charge of decision making
what are the disadvantages of a centralised structure?
- Centralised organisational structures are often less responsive to localised external pressures.
- It can also lead to demotivated staff who are not being given the opportunity to be involved in the decision-making process.
- Communication issues
what are decentralised organisations?
spread responsibility for specific decisions across various departments and lower level managers, including branches or units located away from head office. Decentralised organisations delegate authority down the chain of command, thus reducing the speed of decision-making. Each department within the organisation has the authority to make their own decisions.
what are the advantages of a decentralised structure?
- The business will be more responsive to changes in individual/local markets as staff in each department have a greater local knowledge.
- Employees will be more motivated as they are given the opportunity to make decisions and be creative.
- Prepares junior managers for promotion
- Decisions can be made quickly
what are the disadvantages of a decentralised structure?
- Overall control of the organisation is delegated to departmental managers. This may lead to poor decisions as branch managers may not be as experienced as the managers in the head office.
- Individual branches may begin to compete with each other
- corporate culture may be harder to develop.
- Not as consistent method as centralised organisation
define downsizing
removing some of the activities carried out e.g. closing a branch
define delayering
removing layers of management e.g. changing from tall to flat
define outsourcing
allowing an outside agency to provide a service e.g. cleaning
what is a functional grouping?
the traditional method of organising a firm into departments based on their core activities such as marketing or finance. This means that staff with similar expertise work together.
what are the advantages of functional grouping?
- Brings together employees with similar skills allowing expertise to develop.
- Less duplication of resources
what are the disadvantages of functional grouping?
- Can lead to slow decision making and poor communication
* Can become unresponsive to external changes in the market
what is product/service grouping?
when the business is grouped around the product or services provided. A business will be led with a management team and then split into the various sections. Each division operates as a self-contained unit, with the board ensuring that the work of all divisions contributes to the overall business strategy and objectives. Each division caters for different market segments and allows staff to increase knowledge and skills to match that particular product.
what are the advantages of product/service grouping?
- It encourages customer loyalty
- Easier to identify products that are poorly performing
- Departments can respond more quickly to change in their specialist area
what are the disadvantages of product/service grouping?
- There can be duplication of effort and resources
- Departments based on products may end up competing with each other
- Difficult to share expertise and resources across departments
what is customer grouping?
when a business decides to group by the needs of their different customers. Each team within the business has responsibility for dealing with customers. Customers can be transferred from one team to another as their needs change. This is grouped by customer types e.g. market segments.
what are the advantages of customer grouping?
- It encourages customer loyalty as customer needs are the main focus of the department
- Individual departments are more responsive to changes in customer needs
what are the disadvantages of customer grouping?
- There can be duplication of effort and resources
- Competition between departments may occur
- Difficult to share expertise and resources across departments
what is geographical grouping?
used by Multinational businesses and is when it is grouped by geography. This is because operating across the world can create problems with time zones, payment rates, customer expectations, delivery times and corporate culture. Grouping by place also allows for a closer working relationship with local suppliers.
what are the advantages of geographical grouping?
- Each department can meet the needs of local markets and can react quickly to external factors
- Communication is better, for example with different languages or cultures
- Failing departments can be easily identified
what are the disadvantages of geographical grouping?
- High cost due to duplication of effort and resources
- Departments may begin to compete with each other
- New departments need to be created when the business wants to trade in a new area.
what is line/staff grouping?
a method where the organisation is divided up into line departments. Each department has a line manager responsible for the work of their department and instructions from the managing director are passed through these lines of communication and chain of command. With this method of grouping, an organisation can organise its departments into core and support departments.
what is the difference between core and support departments?
Core departments are directly responsible for the products and selling of the business’ products. They carry out the activities that allow the business to generate profits. Support departments don’t contribute directly to the production of the organisation’s goods or services, but they do support the core departments and ensure the business operates efficiently.
what are the advantages of line/staff grouping?
- Staff become specialised and competent in their activities
- Each department has a designated manager who is responsible for and oversees the work of the department
- Specialists equipment and staff are not spread across different departments, so the organisation saves money
what are the disadvantages of line/staff grouping?
- As the organisation grows, communication between departments can become a problem
- Coordination of activities between departments can be lacking
- Line managers might focus on departmental aims rather than the overall aims of the organisation
define Chain of command
how instructions are passed down through an organisation and how communication flows up and down
define Delegation
giving the responsibility to someone else to carry out a task
define Narrow span of control
means less subordinates to manage, more opportunities to communicate with managers, subordinates likely to be involved in decision making, longer chain of command
define Wide span of control
more empowerment for subordinates, tasks can be delegated, large numbers of subordinates to control, fewer managers which could save money, shorter chain of command
define Line relationships
manager and subordinate e.g. marketing director > marketing assistant
define Lateral relationship
two or more people on the same level e.g. Marketing director and finance director
define Functional relationship
support for other functional areas e.g. admin department giving support to the human resource department
define Informal relationships
colleagues communicating on an informal or ‘friendly’ basis. These are said to be the most important relationship in an organisation.
define a stakeholder
those people who have a positive interest in the business. Their interest as a stakeholder will differ according to the type of business.
define an internal stakeholder
stakeholders from inside the business itself e.g. owners, shareholders, managers and employees
define an external stakeholder
stakeholders from outside the business e.g. customers, the local community, pressure groups, government, suppliers and bankers.
name five external stakeholders
- Suppliers
- Banks and lenders
- Government
- Local community
- Customers
name three internal stakeholders in a business
- Employees
- Managers
- Shareholders
what interests and influence do employees have on a business?
Interest: good salary, job satisfaction, good working conditions, job security
Influence: change the standards of their work, industrial action e.g. strikes
what interests and influence do employees have on a business?
Interest: good salary, job satisfaction, good working conditions, job security
Influence: change the standards of their work, industrial action e.g. strikes
what interests and influence do managers have on a business?
Interest: good salary, job satisfaction, responsibility and status
Influence: they make decisions e.g. hiring and firing, creating company policies and making day-to-day decisions and long term decisions
what interests and influence do owners have on a business?
Interest: want the firm to be profitable, healthy dividends, improve share value
Influence: they can influence decision making, voting for certain directors, choose to sell their shares
what interests and influence do suppliers have on a business?
Interest: will want the business to be successful to ensure repeat custom, they depend on this for survival
Influence: change price/discounts, quality of product or service, change their lead times.
what interests and influence do banks have on a business?
Interest: they want to make sure cash flow is stable so the organisation can pay their loans in full and on time.
Influence: permitting or denying loan requests, changing interest rates on loans offered and changing repayment lengths
what interests and influence do governments have on a business?
Interest: pay corporation tax, create jobs and wealth for the population and provide goods and services for the population
Influence: legislation e.g. minimum wage act, can issue ban e.g. smoking, set tax rates, offer or withhold grants and licences
what interests and influence do local community have on a business?
Interest: companies provide jobs for an area, businesses offer goods and services, the community cares about the area they live in
Influence: can make complaints to local authorities and protesting and petitioning if unhappy at an organisation’s conduct
what interests and influence do customers have on a business?
Interest: they want the best quality products, lower prices, a range of goods and services
Influence: can choose whether or not to purchase goods and services, they may recommend the business to friends and family.
define stakeholder conflicts
when disagreements occur between stakeholders
what conflicts arise between owners and employees?
owners generally seek high profits and so may be reluctant to see the business pay high wages to staff
what conflicts arise between Owners, employees and customers?
a business decision to move production overseas may reduce staff costs. It will therefore benefit owners but work against the interests of existing staff who will lose their jobs. Customers also suffer if they receive a poorer service
what conflicts arise between managers and suppliers?
managers may want to pay for goods later to improve cash flow whereas the suppliers will want their payment as soon as possible
what conflicts arise between managers and customers?
managers want the highest profit possible on sales whereas customers want low prices for high quality goods
define stakeholder interdependence
why one stakeholder needs another stakeholder
what is an example of stakeholder interdependence between owners/managers?
owners are dependent on managers to make good decisions to achieve the business objectives and managers rely on owners for job security, salary and support in their management role.
what is an example of stakeholder interdependence between employees/managers?
employees are dependent on managers to provide direction and support and managers rely on employees to achieve their targets and deadlines to help support business effectiveness.
what is an example of stakeholder interdependence between employees/customers?
employees are reliant on customers to buy goods and services to generate revenue for the business and therefore pay their wages and customers are reliant on employees to provide a good service so they can complete their transaction easily.
what are the three different types of decisions a manager must make?
strategic, tactical, or operational.
define strategic decisions
the aims and objectives of the organisation • long term • complex • made by senior managers • e.g. aiming to be market leader
define tactical decisions
which resources are needed and how they will be used to achieve the aims.
• medium term
• less complex
• made by middle managers
• e.g. launching new product/opening new branches
define operational decisions
respond to minor problems that arise each day or week
• day-to-day
• simple and routine
• made by junior managers
• e.g. regular ordering of supplies/creating staff rota
define SWOT analysis
a tool that management can use to help with decision making. It is used to evaluate where the organisation is now and where it should be in the future. It helps with:
• planning
• deciding the way forward for the organisation
• looking at strategies which could be used.
in terms of SWOT analysis what are strengths?
Strengths are internal areas where the organisation performs well. They reflect the current position and can develop a competitive edge for the business. For example, goods/services that make the most profit, high quality staff and good morale.
in terms of SWOT analysis what are weaknesses?
Weaknesses are internal areas where the organisation performs poorly. They will try to minimise these and turn them into strengths. For example, lack of finance, products or branches that are making a loss and poor effectiveness of the production process.
in terms of SWOT analysis what are opportunities?
Opportunities are external areas in which the organisation could be involved in the future. For example, a competitor going bust, so their business could take on more customers; a boom period in the economy that the business could exploit; customer tastes and fashions changing to suit what that organisation does (PESTEC).
in terms of SWOT analysis what are threats?
Threats are external areas which pose a threat to the organisation and that can impact on a business achieving its aims or making positive decisions. For example, competitors, government, changes in the economy (PESTEC).
when is SWOT analysis used most often?
SWOT analysis is a tool that can be effectively used for any decision making, however, it is most often used when making strategic decisions
what are advantages of using SWOT analysis?
- Time is taken to analyse the business’s current position, so no rash decisions are made.
- Businesses can identify/build on strengths and address weaknesses
- Identifies opportunities and allows them to be exploited as well as identifying threats and turning them into opportunities.
what are the disadvantages of using SWOT analysis?
- Very time consuming, which can slow down decision making
- Very structured process can harm creativity
- No guarantee correct idea is picked. Results reflect the opinions of those who carry it out which could lead to bias.
what are Henri Fayol’s five functions of management?
the different roles and jobs a manager must do in order to be efficient and effective. these include: • Plans • Organises • Commands • Co-ordinates • Controls
what is involved in planning for a manger?
Looking ahead, seeing potential opportunities or problems, and devising solutions, setting targets, and setting aims and strategies.
what is involved in organising for a manger?
Arranging the resources of the organisation to be there when people need them and acquiring additional resources if required.
what is involved in commanding for a manger?
This involves the issuing of instructions, motivating staff and displaying leadership.
what is involved in co-ordinating for a manger?
Making sure everyone is working towards the same goals, that all the work being done fits together, and people are not duplicating work or working against each other.
what is involved in controlling for a manger?
Looks at what is being done, checks it against what was expected, and makes any necessary adjustments. This is the monitoring and evaluating role of management.
what other roles must a manager have in addition to Henri Fayol’s five functions of management?
- Delegate - Gives subordinates the authority to carry out tasks. This helps with motivation and reduces the manager’s workload. The overall responsibility will still lie with the manager who delegated the authority.
- Motivate - Rather than simply telling workers to work harder, which is not likely to be successful, you encourage them by helping to them enjoy their tasks through team-working, participation in decision making, and by giving them some powers.
what does good decision making but the manager lead to?
increased productivity, increased profits and growth of the business.
what does bad decision making but the manager lead to?
employees lose motivation, production is disrupted and increase in customer complaints.
Why do managers make decisions?
- Achieve long term aims of the organisation
- Give focus for operations
- Carry out their roles and functions within the organisation e.g. which resources to use and methods of production.
- Make comparisons between aims and objectives set and actual performance over a period of time – judging the success or failure of decisions previously made.
how do you evaluate the effectiveness of decisions?
- Looking at qualitive information – ask employees for views on how effective they think it is
- Looking at quantitative information – productivity rates and sale/profits figures to see the decisions impact
- Looking at employee absence rates
- Measuring the level of employee motivation within the workplace to see whether or not the decision has reduced/increased this
- Asking customers opinions by carrying out primary research as this will give first-hand information
