Chapter 10: Management and Leadership (AS LEVEL BUSINESS STUDIES)

Definitions to Remember:

• Manager: responsible for setting objectives, organising resources and motivating staff so tat the organisation's aims are met
• Leadership: the art of motivating a group of people towards achieving a common objective
• Autocratic Leadership: a style of leadership that keeps all decision-making at the centre of the organisation
• Democratic Leadership: a leadership style that promotes the active participation of workers in taking decisions
• Paternalistic Leadership: a leadership style based on the approach that the manager is in a better position than the workers to know what is best for an organisation
• Laissez-faire Leadership: a leadership style that leaves much of the business decision-making to the workforce - a 'hands-off' approach and the reverse of the autocratic style
• Informal Leader: a person who has no formal authority but has the respect of colleagues and some power over them
• Emotional Intelligence: the ability of managers to understand their own emotions, and those of the people they work with, to achieve better business performance

Notes:

Responsibilities of Managers

1. Setting Objectives and Planning

Senior managers will establish overall strategic objectives and these will be translated into tactical objectives for the less-senior managerial staff. 

2. Organising Resources to Meet the Objectives

People throughout the business need to be recruited carefully and encouraged to take some authority and to accept some accountability via delegation.

3. Directing and Motivating Staff

This means guiding, leading and overseeing of employees to ensure that organisational goals are being met.

4. Coordinating Activities

The goals of each branch, division, region and even all staff must be welded together to achieve a common sense of purpose.

5. Controlling and Measuring Performance Against Targets

It is the management's responsibility to appraise performance against targets and to take action if underperformance occurs

Managerial Roles According to Henry Mintzberg

1. Interpersonal Roles: dealing with and motivating staff at all levels of the organisation
• Figurehead: symbolic leader of the organisation undertaking duties of a social or legal nature
• Leader: motivating subordinates; selecting and training other managers/staff
• Liaison: linking with managers and leaders of other divisions of the business and other organisations
2. Informational Roles: acting as a source, receiver and transmitter of information
• Monitor (Receiver): collecting data relevant to the business's operations
• Disseminator: sending information collected from external and internal sources to the relevant people within the organisation
• Spokesperson: communicating information about the organisation to external groups and people
3. Decisional Roles: taking decisions and allocating resources to meet the organisation's objectives
• Entrepreneur: looking for new opportunities to develop the business
• Disturbance handler: responding to changing situations that may put the business at risk; assuming responsibility when threatening factors develop
• Resource Allocator: deciding on the spending of the organisation's financial resources and the allocation of its physical and human resources
• Negotiator: representing the organisation in all important negotiations

Autocratic Style of Leadership

Main Features

• Leader takes all decisions
• Gives little information to staff
• Supervises workers closely
• Only one-way communication
• Workers only given limited information about the business

Drawbacks

• Demotivates staff who want to contribute and accept responsibility
• Decisions do not benefit from staff input

Possible Applications

• Defence forces and police where quick decisions are needed and the scope for discussion must be limited
• Times of crisis when decisive action might be needed to limit damage to the business or danger to others

Democratic Style of Leadership

Main Features

• Participation encouraged
• Two-way communication used, which allows feedback from staff
• Workers give information about the business to allow full staff involvement

Drawbacks

• Consultation with staff can be time-consuming
• On occasions, quick decision-making will be required
• Level of involvement - some issues might be too sensitive (e.g. job losses) or too secret (e.g. development of new products)

Possible Applications

• Most likely to be useful in businesses that expect workers to contribute fully to the production and decision making processes, thereby satisfying heir higher-order needs
• An experienced and flexible workforce will be likely to benefit most from this style
• Situations that demand a new way of thinking or a new solution, then staff input can be very valuable

Paternalistic Style of Leadership

Main Features

• Managers do what they think is best for the workers
• Some consultation might take place, but the final decisions are taken by the managers - there is no true participation in decision-making
• Managers want workers to be happy in their jobs

Drawbacks

• Some workers will be dissatisfied with the apparent attempts to consult, while not having any real power or influence

Possible Applications

• Used by managers who have a genuine concern for workers' interests, but feel that 'managers know best' in the end - when workers are young or inexperienced this might be an appropriate style to employ

Laissez-Faire Style of Leadership

Main Features

• Managers delegate virtually all authority and decision-making powers
• Very broad criteria or limits might be established for the staff to work within

Drawbacks

• Workers may not appreciate the lack of structure and direction in their work - this could lead to a loss of security
• The lack of feedback - as managers will not be closely monitoring progress - may be demotivating

Possible Applications

• When managers are too busy to intervene
• May be appropriate in research institutions where experts are more likely to arrive at solutions when not constrained by narrow rules or management control

McGregor's Theory X and Theory Y

• Theory X managers view their workers as lazy, disliking work and unprepared to accept responsibility, needing to be controlled and made to work. Clearly, managers with this view will be likely to adopt an autocratic style of leadership
• Managers who held Theory Y views believed that workers did enjoy work and that they would be prepared to accept responsibility, were creative and they would take an active part in contributing ideas and solutions to work-related problems

The general view is that workers will behave in a particular way as a result of the attitude that management have towards them. 

The style of leadership used will depend on some factors:

• The training and experience of the workforce and the degree of responsibility that they are prepared to take on
• The amount of time available for consultation and participation
• The attitude of managers, or management culture; influenced by the personality and business background of the managers
• The importance of the issues under consideration - different styles may be used in the same business in different situations

Informal Leadership

• Have the ability to lead without formal power, because of their experiences, personality or special knowledge
• May have more influence over workers than formal leaders, especially if the latter are just seen as supervisors of work rather than true leaders and motivators
• Appointing informal leaders to formal leaders, the person concerned could quickly lose support if they were seen to be joining the 'other side'
• An ideal business situation involves ensuring the aims of the informal leaders are common with the aims of the business

Emotional Intelligence involves:

• Understanding yourself, your goals, your behaviour and your responses to people
• Understanding others and their feelings

Daniel Goleman has suggested that there are four main EI competencies that managers should try to develop and improve on:

1. Self Awareness: Having a realistic view of our own abilities and having self-confidence in our abilities
2. Self Management: being able to recover quickly from stress, being trustworthy and conscientious, showing initiative and self control
3. Social Awareness: sensing what others are feeling, being able to take their views into account and being able to get on with a wide range of people
4. Social Skills: handling emotions in relationships well and accurately understanding different social situations; using social skills to persuade, negotiate and lead

Chapter 5: Stakeholders in a Business (AS LEVEL BUSINESS STUDIES)

Definitions to Remember:

• Stakeholders: people or groups of people who can be affected by - and therefore have an interest in - any action by an organisation
• Stakeholder concept: the view that businesses and their managers have responsibilities to a wide range of groups, not just shareholders
• Corporate Social Responsibility: the concept that accepts that businesses should consider the interest of society in their activities and decisions, beyond the legal obligations that they have

Notes:

Responsibilities to Stakeholders - and Impact on Business Decisions

Customers:

• It is essential to satisfy customers' demands in order to stay in business in the long term
• Decisions about quality, design, durability and customer service should consider the customers' objectives for attractive goods that perform as intended, all at a reasonable price.
• Businesses also have responsibilities to customers not to break the law concerning consumer protection and accurate advertising
• Avoiding taking advantage of vulnerable customers and not using high-pressure selling tactics are other policies of responsible businesses

Benefits of accepting these responsibilities:

• Consumer Loyalty; Repeat Purchases
• Good publicity when customers give word of mouth recommendations to others
• Good customer feedback, which helps to improve further goods and services

Suppliers:

• Good reliable suppliers must be found and given clear guidance on what is required
• In return, the purchasing business should pay promptly, place regular orders and offer long-term contracts

Benefits of accepting these responsibilities

• Supplier loyalty - prepared to meet deadlines and requests for special orders
• Reasonable credit terms more likely to be offered

Employees:

• Providing training opportunities, job security, paying more than minimum wages when these are very low, offering good working conditions, involving staff in some decision-making

Benefits of accepting these responsibilities

• Employee loyalty and low labour turnover
• Easier to recruit good staff
• Employee suggestions for improving efficiency and customer service
• Improved motivation and more effective communication

Local Community

• Offer secure employment so that there is less local fear of job losses
• Spend as much as possible on local supplies to generate more income
• Reduce the transport impact of business activity as much as possible
• Keep the adverse environmental effects to a minimum

Benefits of accepting these responsibilities

• Local councils will be more likely to give planning permission to expand the business
• Local communities are more likely to accept some of the negative effects caused by business operations if they provide financial support for community groups and projects such as children's playgrounds
• Local councils often only give contracts to businesses with a record of community involvement

Government

• All businesses should meet their legal responsibilities as defined by government legislation
• Business should pay taxes on time
• Complete government statistical and other forms accurately
• Seek export markets
• the foreign currency earned by exports allows a country to pay for important imports of food, materials, new technology and so on

Benefits of accepting these responsibilities

• Good relations with government might lead to success with expansion projects receiving planning permission
• Businesses are more likely to receive valuable government contracts
• Requests for subsidies to expand businesses are more likely to be approved by the government
• Licences to set up new operations are more likely to be awarded to businesses that meet their responsibilities to the government and the wider society

An Evaluation of Corporate Social Responsibility

• There could be opportunities for businesses adopting such policies to become more profitable because they are socially responsible
• By spending money on CSR projects, it is suggested that businesses have less to invest for expansion and less to pay out to owners, who took the risk to originally invest in them
• CSR is just a form of 'window dressing' to make businesses appear society friendly when they are really damaging the interests of society by some of their activities
• It is stated that CSR is an attempt to get governments to get governments to impose fewer controls and restrictions on powerful multinational firms
• Meeting social responsibilities can be expensive and might reduce profits in the short run (for example: giving employees better working conditions than other firms)
• However, over a longer period of time, the marketing, public relations and employee motivation benefits of CSR policies might pay for themselves and even generate higher profits.

Impacts on Stakeholders of Changing Business Objectives

Different stakeholder groups will be affected in different ways by these changes in objectives - employees' jobs will be lost and customers will have less choice, for example. However, owners' returns might be safeguarded in the future by the decisions taken above - and lenders might be reassured that action is being taken to stem losses that should mean they are repaid the loans the have given.

Chapter 4: Business Objectives (AS LEVEL BUSINESS STUDIES)

Definitions to Remember:

• Mission Statement:  a statement of the business's core aims, phrased in a way to motivate employees and to stimulate interest by outside groups
• Corporate Social Responsibility: this concept applies to those businesses that consider the interests of society by taking responsibility for the impact of their decisions and activities on customers, employees, communities and the environment
• Management by Objectives: a method of coordinating and motivating all staff in an organisation by diving its overall aim into specific targets for each department, manager and employee
• Ethical Code (Code of Conduct): a document detailing a company's rules and guidelines on staff behaviour that must be followed by all employees.

Notes:

The most effective business objectives usually meet the following 'SMART' criteria:

• S - Specific: Objectives should focus on what the business does and should apply directly to that business.
• M - Measurable: Objectives that have a quantitative value are likely to prove to be more effective targets for directors and staff to work towards
• A - Achievable: Objectives should be possible in the time frame given in order for it to not become pointless
• R - Realistic and Relevant: Objectives should be realistic when compared with the resources of the company and should be expressed in terms relevant to the people who have to carry them out
• T - Time-Specific: A time limit should be set when an objective is established. Without a time limit, it will be impossible to assess whether the objective has actually been meant.

Corporate aims is expressed as the core central purpose of a business's activity, considerably the very long term goals that a business hopes to achieve. 

Benefits from establishing corporate aims:

• they become the starting point for the entire set of objectives on which effective management is based
• corporate aims can help develop a sense of purpose and direction for the whole organisation if they are clearly and unambiguously communicated to the workforce
• they allow an assessment to be made, at a later date, of how successful the business has been in attaining its goals
• aims provide the framework within which the strategies or plans of the business can be drawn up to.

Advantages of Mission Statements

• quickly inform groups outside the business what the central aim and vision are
• can prove motivating to employees, especially where an organisation is looked upon, as a result of its mission statement, as a caring and environmentally friendly body
• often include moral statements or values to be worked towards, and these can help to guide and direct individual employee behaviour at work
• are not meant to be detailed working objectives, but they help to establish in the eyes of other groups 'what the business is about'

Disadvantages of Mission Statements

• too vague and general, so that they end up saying little that is specific about the business or its future plans
• based on a public relations exercise to make stakeholder groups feel good about the organisation
• virtually impossible to really analyse or disagree with
• often rather woolly and general, so it is common for two completely different businesses to have very similar mission statements

Communication of Mission Statements

• They often feature in the published accounts and in other communications to shareholders
• They will appear in the corporate plans of the business - the detailed report on the company's aims and strategies for the future
• Internal company newsletters and magazines may draw their title from part of the mission statement
• Advertising slogans or posters are frequently based around the themes of the mission statement

Mission statements are insufficient for operational guidelines: they do not tell managers what decision to take or how to manage the business. 

Common Corporate Objectives

1. Profit Maximisation

Profit Maximisation is when a business is producing at a level of output where the greatest positive difference between total revenue and total costs is achieved.

Limitations of Profit Maximisation:

• The focus on high short-term profits may encourage competitors to enter the market and jeopardise the long term survival of the business
• Many businesses seek to maximise sales in order to secure the greatest possible market share, rather than to maximise profits.
• The issues of independence and retaining control may assume greater significance than making higher profits
• Most business analysts assess the performance of a business through return on capital employed rather than through total profit figures
• Profit maximisation may well be the preferred objective of the owners and shareholders, but other stakeholders will give priority to other issues. The growing concern over job security for the workforce or the environmental concerns of local residents may force profitable business decisions to be modified, yielding lower profit levels.
• In practice, it is very difficult to assess whether the point of profit maximisation has been reached, and constant changes to prices or outputs to attempt to achieve it may well lead to negative customer reactions.

2. Profit Satisfying

Profit Satisfying is aiming to achieve enough profit to keep the owners happy but not aiming to work flat out to earn as much profit as possible. 

• Objective is suggested to be common among owners of small businesses who wish to live comfortably but do not want to work longer to earn even more profit.
• Once a satisfactory level of profit has been achieved, the owners consider that other aims take priority - such as more leisure time.

3. Growth

Advantages:

• Larger firms will be less likely to be taken over
• Should be able to benefit from economies of scale
• Managers will be motivated by the desire to see the business achieve its full potential (gaining higher salaries and fringe benefits)
• A business that does not attempt to grow will cease to be competitive and, eventually, lose their appeal to new investors

Disadvantages:

• Expansion that is too rapid can lead to cash-flow problems
• Sales of a business may grow, but it may have low profit margins
• Larger businesses can experience diseconomies of scale
• Using profits to finance growth - retained earnings - can lead to lower short-term returns to shareholders
• Growth into new business areas and activities - away from the firm's core activities - can result in a loss of focus and direction for the whole organisation

4. Increasing Market Share

Increasing market share indicates that the marketing mix of the business is proving to be more successful than that of its competitors. Benefits of being brand leader include:

• retailers will be keen to stock and promote the best-selling brand
• profit margins offered to retailers may be lower than competing brands as the shops are so keen to stock it - this leaves more profit for the producer
• effective promotional campaigns are often based on 'buy our product with confidence - it is the brand leader'

5. Survival

• Likely to be the key objective of most new business start-ups
• Once the business has become firmly established, then other longer-term objectives can be established

6. Corporate Social Responsibility (CSR)

Firms must adopt a wider perspective when setting their objectives and not just be aiming for profits or expansion.

There are reasons for these trends in business objectives:

• Consumer and other stakeholders are reacting positively to businesses that act in 'green' or socially responsible ways
• There is a much greater harmful publicity given to business activity that is considered damaging to stakeholder groups and the wider world
• Legal changes (locally, nationally and in an EU Level) have forced businesses to refrain from certain practices
• Influential pressure groups are forcing businesses to reconsider their approach to decision making

Firms that are being ethical or environmentally conscious because they have an objective called 'public responsibility', because they want to behave in these ways.

7. Maximising Short-Term Sales Revenue

• Can benefit managers and staff when salaries and bonuses are dependant on sales revenue levels.
• If increased sales are achieved by reducing prices, the actual profits of the business might fall

8. Maximising Shareholder Value

• Applies to public limited companies and directs management action towards taking decisions that would increase the company share price and dividends paid to shareholders
• Targets can be achieved by pursuing the goal of profit maximisation
• Shareholder-value objective puts interest of shareholders above those of other stakeholders

Stages of Decision Making Framework

1. Set objectives
2. Assess the problem or situation
3. Gather data about the problem and possible solutions
4. Consider all decision options
5. Make the strategic decision
6. Plan and implement the decision
7. Review its success against the original objectives

Without setting relevant objectives at the start of this process, effective decision-making for the future of the business becomes impossible

Factors That Determine The Corporate Objectives of a Business

Corporate Culture

• Defined as: the code of behaviour and attitudes that influence the decision-making style of the managers and other employees of the business
• Culture is about people, how they perform and deal with others, how aggressive they are in the pursuit of objectives and how adaptable they are in the face of change

The Size and Legal Form of the Business

• Owners of small businesses may be concerned only with a satisfactory level of output
• Larger businesses, such as most public limited companies, might be more concerned with rapid business growth in order to increase the status and power of the managers
• This is often a result of a development known as the 'divorce between ownership and control', which nearly always exists in large companies with professional directors who do not own it. 

Public-sector or Private-sector Businesses

• State-owned organisations tend not to have profit as a major objective

The Number of Years the Business has been Operating

• Newly formed businesses are likely to be driven by the desire to survive at all costs
• Later, once well established, the business may pursue other objectives, such as growth and profit

Divisional, Departmental and Individual Objectives

• Once corporate objectives have been established they need to be broken down into specific targets for separate divisions, departments and individuals.
• These divisional objectives must be set by senior managers to ensure:
• Coordination between all divisions
• Consistency with corporate objectives
• Adequate resources are provided to allow for the successful achievement of the objectives
• Once the divisional objectives have been established, then these can be further divided into departmental objectives and budgets and targets for individual workers. This process is called Management by Objectives (MBO)

Communicating Objectives to Employees

Communication of corporate objectives and translating these into individual targets is essential for the effective setting of aims and objectives.  If employees are communicated with - and involved in the setting of individual targets - then these benefits should result in :

• Employees and managers achieving more - through greater understanding of both individual and company-wide goals
• Employees seeing the overall plan - and understanding how their individual goals fit into the company's business objectives
• Creating shared employee responsibility - by interlinking their goals with others in the company
• Managers more easily staying in touch with employees' progress - regular monitoring of employees' work allows immediate reinforcement or training to keep performance and deadlines on track

Ethical Decisions

Adopting and keeping to a strict ethical code in decision-making can be expensive in the short term:

• Using ethical and Fairtrade suppliers can add to business's costs
• Not taking bribes to secure business contracts can mean failing to secure significant sales
• Limiting the advertising of toys and other child-related products to just adults to reduce 'pester power' may result in lost sales
• Accepting that it is wrong to fix prices with competitors might lead to lower prices and profits
• Paying fair wages raises wages costs and may reduce a firm's competitiveness against businesses that exploit workers

However in the long term there could be substantial benefits from acting ethically:

• Avoiding potential expensive court cases can reduce costs of fines
• Ethical policies can lead to good publicity and increased sales
• Ethical businesses attract ethical customers and as world pressure groups grows for corporate social responsibility, this group of consumers is increasing
• Ethical businesses are more likely to be awarded government contracts
• Well-qualified staff may be attracted to work for the companies with the most ehtical and socially responsible policies

Chapter 3: Size of Business (AS LEVEL BUSINESS STUDIES)

Definitions to Remember:

• Revenue - total value of sales made by a business in a given time period
• Capital Employed - the total value of all long-term finance invested in the business
• Market Capitalisation - the total value of a company's issued shares
• Market Share - sales of the business as a proportion of total market sales
• Internal Growth - expansion of a business by means of opening new branches, shops, or factories (also known as organic growth).

Notes:

Different Measures of Size

There are several different ways of measuring and comparing business size and they often give different comparative results. A firm might appear large by one measure but quite small by another.

• Number of employees
• Advantage: easy to understand, obvious to everyone
• Disadvantage: some businesses may use machines and employ a small number of staff members
• Revenue
• Advantage: easy to use as a measure of size, especially when comparing firms in the same industry
• Disadvantage: less effective when comparing firms in different industries (some businesses might be engaged in 'high-value' production while others in 'low-value' production)
• Capital Employed
• Advantage: easy to identify (the larger the enterprise, the greater the value of capital needed for long-term investments)
• Disadvantage: two firms employing the same number of staff may have very different capital equipment needs.
• Market Capitalisation 
• Advantage: can be easily calculated ( market capitalisation = current share price x total number of shares issued ).
• Disadvantage: can be used only for businesses that have shares quoted on the stock exchange (public limited companies)
• Market Share
• Advantage: easy to calculate (total sales of business / total sales of industry x 100).
• Disadvantage: when the size of the market is small, a high market share will not indicate a large firm.

Why is the development of small businesses encouraged?

Many jobs are created by small firms

Collectively, the small-business sector employs a significant proportion of the working population in most countries.

Small businesses are often run by dynamic entrepreneurs

These innovative entrepreneurs tend to give out new ideas for consumer goods and services which creates a variety in the market. This helps benefit the consumers since they will now have a wide choice of product to choose from.

Small firms can create competition for larger businesses

If there was no competition between the small businesses and the large businesses, then this may lead to the large firms exploiting the consumers with high prices and poor service.

Small firms often supply specialist goods and services to important industries in a country

Large businesses depend on small specialist suppliers. By being able to adapt quickly to the changing needs of large firms, small businesses actually increase the competitiveness of the larger organisations.

The economy will benefit from large-scale organisations

The large firms of the future are the small firms of today. So, with more small businesses encouraged to become established and expand, the economy of the country will benefit from the business in the future.

Lower average costs can be passed on

The average costs could be lower since the wages rate being paid off to the staff could be less than the salaries paid in large organisations.

Government Assistance Towards Small Businesses

Reduced rate of profits tax (or corporation tax)
With the government reducing the rate of the tax, the small business has the chance to retain more profits in the business for expansion

Loan guarantee scheme
A government-funded scheme that guarantees the repayment of a certain percentage of a bank loan when the business fail.

Information, advice and support provided
The government may fund professional advice to entrepreneurs on marketing, business management and business planning.

Raising both short and long term finance
Small businesses has little security to offer to banks for loans so this will make obtaining finance much more difficult

Advantages of Small Businesses:

• can be managed and controlled by the owner(s)
• often able to adapt quickly to meet changing customer needs
• offer personal service to customers
• finds it easier to know each worker
• if family owned, the business culture is often informal, employees well-motivated and family members perform multiple roles

Disadvantages of Small Businesses:

• may have limited access to source of finance
• the owner has to carry a large burden pf responsibility (if unable to afford to employ specialist managers).
• few opportunities for economies of scale

Advantages of Large Businesses:

• can afford to employ specialist professional managers
• benefit from the cost reductions associated with large scale production (buying raw materials in bulk from suppliers may give out discounts compared to buying in retail).
• may be able to set low prices that other firms have to follow
• have access to several different sources of finance
• may be diversified in several markets and products so that risks are spread
• are more likely to be able to afford reasearch and development into new products and processes

Disadvantages of Large Businesses:

• may be difficult to manage, especially if geographically spread
• may have potential cost increases associated with large-scale production
• may suffer from slow decision-making and poor communication due to the structure of the large organisation
• may often suffer from a divorce between ownership and control that can lead to conflicting objectives

Reasons why business grow:

Increased Profits

Expanding the business and achieving higher sales is one way of becoming more profitable

Increased Market Share

This will give a business a higher market profile and greater bargaining power with both suppliers (suppliers giving discounts when buying in bulk) and retailers.

Increased Economies of Scale

Some of the examples of economies of scale are: easier source of finance, bulk buying discounts, advertising advantages

Increased Power and Status of the Owners and Directors

With the raise of power and status, there are higher opportunities of gaining publicity and influencing government policies.

Reduced Risk of Being a Takeover Target

A larger business may become too large to become a target for a potential takeover.

Chapter 2: Business Structure (AS LEVEL BUSINESS STUDIES)

Definitions to remember:

• Primary Sector Business Activity - firms engaged in farming, fishing, oil extraction and all other industries that extract natural resources so that they can be used and processed by other firms.
• Secondary Sector Business Activity - firms that manufacture and process products from natural resources, including computers, brewing, baking, clothes-making and construction.
• Tertiary Sector Business Activity - firms that provide services to consumers and other businesses, such as retailing, transport, insurance, baking, hotels, tourism and telecommunications.
• Public Sector - comprises of all of the organisations accountable to and controlled by the central or local government.
• Private Sector - comprises of all the businesses owned and controlled by individuals or groups of individuals.
• Mixed Economy - economic resources are owned and controlled by both private and public sectors.
• Free-market Economy - economic resources are owned largely by the private sector with very little state intervention
• Command Economy - economic resources are owned, planned and controlled by the state. 
• Sole Trader - a business in which one person provides the permanent finance and, in return, has full control of the business and is able to keep all of the profits.
• Partnership - a business formed by two or more people to carry on a business together, with shared capital investment and, usually, shared responsibilities.
• Limited Liability - the only liability - or potential loss - a shareholder has if the company fails is the amount invested in the company, not the total wealth of the shareholder
• Private Limited Company - a small to medium sized business that is owned by shareholders who are often members of the same family; this company cannot sell shares to the general public.
• Share - a certificate confirming part ownership of a company and entitling the shareholder owner to dividends and certain shareholder rights.
• Shareholder - a person or institution owning shares in a limited company
• Public Limited Company - a limited company, often a large business, with the legal right to sell shares to the general public - share prices are quoted on the national stock exchange.
• Memorandum of Association - this states the name of the company, the address of the head office through which it can be contacted, the maximum share capital for which the company seeks authorisation and the declared aims of the business. 
• Articles of Association - this document covers the internal workings and controls of the business (for example: the name of the directors and the procedures to be followed at meetings will be detailed).
• Franchise - a business that uses the name, logo and trading systems of an existing successful business
• Joint Venture - two or more businesses agree to work closely together on a particular project and create a separate business division to do so
• Holding Company - a business organisation that owns and controls a number of separate businesses, but does not unite them into one unified company.
• Public Corporations - a business enterprise owned and controlled by the state - also known as nationalised industry.

Notes:

Sole Trader

Advantages:

• easy to set up - no legal formalities needed
• owner has complete control - not answerable to anybody else
• owner keeps all profits
• the owner is able to choose times and patterns of working
• because it is a small business, the entrepreneur is able to establish close personal relationships with staff and customers
• the business can be based on the interests or skills of the owner since the entrepreneur is not as an employee for a larger firm

Disadvantages:

• the owner has unlimited liability so all of the owner's assets are potentially at risk
• since it is a small business, it faces competition from larger firms that have operated for a longer time in the market
• the owner is at risk since they are responsible for all aspects of management of the business
• since he is on his own, it is difficult to raise additional capital 
• involves of long hours of work in order to make the business pay
• lack of continuity - the business does not have separate legal status so when the owner dies, the business ends too.

Partnership

Advantages:

• partners may specialise in different areas of the business so the task is divided amongst the partners
• there is shared decision-making giving less weight on each partner
• additional capital is injected into the business by each partner
• the losses of the business is shared between the partners
• there is much greater privacy and very few legal formalities compared to corporate organisations

Disadvantages:

• unlimited liability is given to all partners
• the profits are being shared amongst the partners
• just like the sole trader, there is no continuity and the partnership will have to be reformed in the event of the death of one of the partners
• it is not possible for the partners to raise capital from selling their shares
• with the existence of partners, there will be a loss of independence when making decisions.

Private Limited Companies

Advantages:

• the shareholders have limited liability
• there is a separate legal personality between the shareholders and the business
• the company is able to continue in the event of the death of a shareholder
• the original owner of the company is often able to retain control of the business
• raising capital can be done by the sale of shares to family, friends and employees
• a private limited company has a greater status compared to an unincorporated business

Disadvantages:

• there are legal formalities that are involved when establishing the business
• capital cannot be raised by the sale of shares to the general public
• it is quite difficult for shareholders to sell shares
• there is less secrecy about the financial affairs that the company has compared to a sole trader and a partnership

Public Limited Companies

Advantages:

• the shareholders have limited liability
• there is a separate legal identity between the shareholders and the business
• continuity (the company is able to continue in the death of a sole trader
• ease of buying and selling shares for the shareholders
• they have access to substantial capital sources since they have the ability to offer shares for sale to the general public

Disadvantages:

• there are legal formalities needed when setting up this business
• expensive - this is because there is a need to hire business consultants and financial advisers when creating such a company
• share prices are subject to fluctuate due to reasons beyond the control of the owners (for example: the state of the economy) 
• legal requirements concerning disclosure of information to shareholders and the public
• there is a risk of takeover due to the availability of the shares on the stock exchange
• directors influenced by short term objectives of major investors

Franchise
Advantages:

• fewer chances of the new business failing since the name of an established brand and product are being used
• advice and training is offered by the franchiser
• national advertising is being paid for by the franchiser
• the supplies used in the franchise are obtained from quality checked suppliers
• franchiser agrees not to open another branch in the local area

Disadvantages:

• share of profits or revenue have to be paid to the franchiser each year
• the initial franchise fee can be expensive to pay
• local promotion still have to be paid for by the franchisee
• no choice of supplies or suppliers to be used
• there are strict rules over pricing and layout of the outlet reduces the franchisee's control over their own business

Joint Ventures

Advantages:

• the costs and risks of a new business venture are shared - this is a major consideration when the cost of developing new products is rising rapidly
• different companies might have different strengths and experiences and they therefore fit well together
• they might have their major markets in different countries and they could exploit these with the new product more effectively than if they both decided to 'go it alone.'

Disadvantages

• styles of management and culture might be so different that the two teams do not blend well together
• errors and mistakes might lead to one blaming the other for mistakes
• the business failure of one of the partners would put the whole project at risk

Holding Companies

Advantages:

• the holding company eliminates any competition due to centralised control over the subsidiary companies so it earns maximum profits
• the subsidiary company does not lose its identity under this system therefore it is still a separate business
• when the goodwill of the holding company is established in the market, it also establishes the goodwill of the subsidiary company before the public

Disadvantages:

• A holding company tries to create a monopoly over the market which may be against the public's interest. This may ruin the image of the company.
• it is expensive to maintain the control of large numbers of subsidiary companies
• the holding company may try to exploit the subsidiary company (for example: the subsidiary company is forced to buy goods at a high price from the holding company and sell their produce at low prices).

Public Corporations

Advantages:

• managed with social objectives rather than solely with profit objectives
• loss-making services might still be kept operating if the social benefit is great enough
• finance raised is mainly from the government

Disadvantages:

• tendency towards inefficiency due to the lack of strict profit targets
• subsidies from government can also encourage inefficiencies
• the government may interfere in business decisions for political reasons, for example by opening a new branch in a certain area to gain popularity.

Chapter 1: Enterprise (AS LEVEL BUSINESS STUDIES)

Definitions to remember:

• Consumer Goods - the physical and tangible goods sold to the general public - they include durable consumer goods (such as cars), and non-durable consumer goods (such as food).
• Consumer Service - the non-tangible products sold to the general public (such as hotel accommodation, insurance services or train journeys).
• Capital Goods - the physical goods used by industry to aid in the production of other goods and services (such as machines). 
• Creating Value - increasing the difference between the cost of purchasing bought-in materials and the price the finished goods are sold for
• Added Value - the difference between the cost of purchasing bought-in materials and the price the finished goods are sold for.
• Opportunity Costs - the benefit of the next most desired option which is given up.
• Entrepreneur - someone who takes the financial risk of starting and managing a new venture.
• Social Enterprise - a business with mainly social objectives that reinvests most of its profits into benefiting society rather than maximising returns to owners.
• Triple Bottom Line - the three objectives of social enterprises: economic, social and environmental.
• Economic: make a profit to reinvest back into the business
• Social: provide jobs
• Environmental: protect the environment

Notes:

The purpose of business activity is to use resources to meet the needs of customers by providing a product or a service that they demand. 

Businesses identify the needs of consumers or other firms. Then they purchase resources - or factors of production - in order to produce goods and services that satisfy these needs, usually with the aim of making a profit.

Factors of Production:

• Land: the general term that includes not only land itself but all renewable and non-renewable resources of nature (such as coal, crude oil and timber)
• Labour: manual and skilled labour that make up the workforce of the business
• Capital: this defines all of the finance needed to set up the business and pay for its continuing operations and all of the man-made resources used in production (capital goods)
• Enterprise: this is the driving force, provided by entrepreneurs that combines the factors of production into a unit capable of producing goods and services.

The personal qualities and skills needed to make a success of a new business venture include:

• Innovative: the entrepreneur should be able to attract customers in innovative ways by carving out a new niche in the market and be able to present their business as being different from other businesses. This requires original ideas and the ability to do things differently.
• Committed and Self Motivated: there should be a willingness to work hard and have a keen ambition to succeed with energy and focus in order to set up and run your own business.
• Multi - skilled: different tasks in an entrepreneur's job involves to be able to have different qualities vital in running a business (such as create the product, promote it, sell it and keep all of the accounts). 
• Leadership Skills: the entrepreneur will have to lead by example and must have a personality that encourages people in the business to follow them and be motivated by them.
• Self - confidence and the ability to bounce back: Many business start-ups fail, but this would not discourage a true entrepreneur who would have such belief in themselves and their business idea that they would be able to bounce back from any setbacks.
• Risk Taking: entrepreneurs should be willing to take the risks involved in starting up a business in order to see the results (example of risk: investing their own savings into the business).

Major Challenges Faced By Entrepreneurs:

Identifying Successful Business Opportunities

Entrepreneurs should be able to identify a market need that will offer sufficient demand for their product to allow the business to be profitable.

Sourcing Capital (Finance)

After being able to find on a business idea or opportunity, there is the problem of not being able to find sufficient funds. Obtaining finance is a major problem for entrepreneurs due to a few main reasons:

• lack of sufficient own finance (due to very limited personal savings)
• lack of awareness of the financial support and grants available
• lack of any trading record to present to banks as evidence of past business success (a trading record would tend to give a bank confidence when deciding to lend money or not for a new venture).
• A poorly produced business plan that fails to convince potential investors of the chances of a business's success

Determining a Location

When finance is limited, it is very difficult to determine a good location. Finding a cheap and easy location to set up on may not be close to the area with the biggest market potential. 

Competition

A newly created business will often experience competition from older, more established businesses with more resources and more market knowledge.

Building a Customer Base

To survive, a new firm must establish itself in the market and build up customer numbers as quickly as possible. The long term strength of the business will depend on encouraging customers to return to purchase products again and again.

Reasons Why New Businesses Often Fail:

Lack of Record Keeping

Many entrepreneurs fail to pay sufficient attention to this need as either they believe that it is less important than meeting their customers' needs, or they think they can remember everything. 

Lack of Cash and Working Capital

Capital is needed for day-to-day cash, for the holding of inventories and to allow the giving of trade credit to customers, who then become trade receivables. Without sufficient working capital, the business may be unable to buy more supplies.

Poor Management Skills

Most entrepreneurs have had some form of work experience, but not necessarily at a management level (for example: an entrepreneur opening a restaurant may be an excellent chef, but may lack management skills). 

Changes in the Business Environment

Setting up a new business is risky because the business environment is dynamic, or constantly changing. The risk of change can make the original business idea much less successful. (Example of changes in the business environment: new competitors, economic changes leaving customers with less money to spend, technological changes making methods used by new business become old fashioned and expensive).

Impact of Enterprise on a Country's Economy

Employment Creation

In setting up a new business, an entrepreneur is employing not only themselves, but also, very often, employing other people. In creating such employment, the national level of unemployment will fall.

Economic Growth

Any increase in output of goods or services from a start-up business will increase the gross domestic product of the country. If enough small businesses are created, it will lead to increased living standards for the population. In addition, increased output and consumption will also lead to increased tax revenues for the government.

Firms' Survival and Growth

Although a high proportion of new firms fail, some survive and a few expand to become really important businesses. These will employ large numbers of workers and considerably add to the economic growth of the country.

Innovation and Technological Change

New businesses tend to be innovative and this creativity adds dynamism to an economy. This creativity can rub off on to other businesses and help to make the nation's business sector more competitive.

Exports

Most business start-ups tend to offer goods and services that meet the needs of local or regional markets. Some will expand their operations to the export market and this will increase the value of a nation's exports and improve its international competitiveness.

Personal Development

Starting and managing a successful business can set an example for others to follow which can lead to further successful new enterprises that will boost the economy still further

Increased Social Cohesion

Unemployment often leads to serious social problems (for example: crime) and these can be much reduced if there is a successful and expanding small business sector because it will create jobs and career opportunities and achieve social cohesion in the country. 

Social Enterprise

A social enterprise is a proper business that makes its money in socially responsible ways and uses most of any surplus made to benefit society. 

Features:

• directly produce goods or provide services
• have social aims and use ethical ways of achieving them
• need to make a surplus or profit to survive as they cannot rely on donations 

Objectives:

• economic - make a profit to reinvest back into the business and provide some return to owners
• social - provide jobs or support for local, often disadvantaged communities
• environmental - to protect the environment and to manage the business in an environmentally sustainable way.