Business Unit 1 Notes

Unit 1.2: Types of Organizations

Limited liability is a type of legal structure for an organization where a corporate loss will not
exceed the amount invested in a partnership or limited liability company. In other words,
investors' and owners' private assets are not at risk if the company fails.

For profit (commercial) Organizations:

Sole Trader:
A sole trader (also known as a sole proprietor) is a commercial for-profit business owned by a
single person. Although this person can employ as many people as needed, the sole trader is
the only owner of the business.

Advantages:
- It is the quickest and easiest type of business to set up. Sole traders can avoid
complicated and costly set-up procedures.
- The owner receives all of the profits if the business succeeds.
- Sole traders are likely to be highly motivated as the owners have a sense of
achievement from running their own business and can keep all of the profits made.

Disadvantages:
- The sole trader accepts all the risks of owning and running their own business, including
any losses made or even the collapse of the organization.
- The workload for a sole trader can be extremely high. There is no one else to share
ideas or to ask questions, so all pressures, burdens and responsibilities fall on the
owner. This means the sole trader often has to work very long hours
- There is a lack of continuity in the operations of the business if the owner is unwell,
wishes to take a holiday or wants to retire. The latter is a main reason why many sole
trader businesses struggle to continue.As sole traders tend to operate on a small scale,
there are limited opportunities to exploit economies of scale.

Partnership:
A partnership is a commercial business that strives to earn a profit for its owners. It is owned by
two or more people.
Advantages:
- Having partners enables the firm to benefit from having more ideas and different skills
and expertise.
- Unlike a sole trader, partners can share the burden of their workload and responsibilities.
- Hence, unlike a sole trader, partnerships benefit from continuity as the partnership can
remain in operation if a partner is unwell or wants to go on a family vacation.

Disadvantages:
- As the business has more than one owner, this can easily lead to disagreements and
conflict between the owners, which can seriously damage the running of the partnership.
- Decision making is slower than with sole traders because there are more owners
involved. This can also lead to disagreements and conflicts between the owners
- Unlike with a sole trade, the profits made by a partnership must be shared between all
the owners.

Companies/Corporations:
Companies (also known as corporations) are commercial for-profit businesses owned by
shareholders. Hence, the profits of a company are shared among owners. As incorporated
businesses, the owners have limited liability. Limited liability protects shareholders who cannot
lose more than the amount they invested in the business. This is because shareholders are not
personally liable for the debts of the company should it go into debt or bankruptcy.
Features of private limited companies:
- The shares cannot be advertised for sale nor sold via a stock exchange, Shares are not
available on an open stock exchange.
- Most private limited companies are small businesses, with shares typically owned by
family, relatives and friends.
- The company and its owners are separate legal entities, i.e. there is a legal divorce
(separation) of ownership and control, with the owners (shareholders) appointing a
board of directors to run the company on their behalf.

Examples of such private limited companies include: Mars, Lego, IKEA

Advantages:
- There is better control of a private rather than public limited company, as shares in a
private limited company cannot be bought or sold without the agreement of existing
shareholders.
- A lot more finance can be raised compared with a sole trader (one owner) or a
partnership (up to 20 owners).
- Shareholders have limited liability, so cannot lose more than what they invest in the
company. Owners are protected against any misconduct or misjudgments of those who
run the company.

Disadvantages:
- Private limited companies can only sell their shares to family, friends and employees,
with the approval of the majority of existing shareholders. This can make it difficult to buy
and sell shares in the company.
- They are more expensive to operate than a sole trader or partnership. For example,
there are higher legal fees and auditing fees (for checking and approving of the financial
accounts).
- A company can become a target for a takeover by a larger company which purchases a
majority stake, although other owners have to agree to the sale of the company.

Features of Public limited Companies:

 - A public limited company is owned by shareholders. The shares in a PLC can be bought
and sold by the general public, without prior approval of existing owners.
- Shares in a PLC can be bought and sold via a stock exchange (or stock market), such
as the New York Stock Exchange (NYSE), London Stock Exchange, Tokyo Stock
Exchange and Shanghai Stock Exchange.
- In order to protect shareholders, PLCs are strictly regulated and are required to publish
their final accounts each year.

Advantages:
- It is also easier for large PLCs to borrow money from bank loans and mortgages, due to
their lower level of risk for financial lenders.
- As with private limited companies, the shareholders of public limited companies enjoy
limited liability.
- Large PLCs get to enjoy the benefits of operating on a large scale, such as opportunities
to exploit economies of scale, market share, and market power.

Disadvantages:
- There is a lack of privacy because the general public have access to the financial
accounts of public limited companies.
- As the general public can buy and sell shares freely, there is always a potential threat
that a rival company will make a takeover bid.
- Large companies can suffer from diseconomies of scale (see Unit 1.6). Being too large
can cause inefficiencies in the company, and hence higher average costs of production.

For Profit Social Enterprises: Uses commercial business practices in order to achieve
social goals, such as improving the environment, building better communities and developing
social wellbeing. Such organizations do not focus on generating profits for their shareholders.

Cooperatives:
Cooperatives are for-profit social enterprises that are owned and managed by their members.
Examples are employee cooperatives, producer cooperatives, managerial cooperatives and
consumer cooperatives. Cooperatives exist throughout the world, but are predominant in the
agricultural and retail sectors of the economy in many parts of Europe.

Advantages:
- Cooperatives are not difficult or expensive to set up.
- Cooperatives are tax exempt because the focus of the business is on serving the
collective interests of its member-owners and the community (such as home care
associations for the elderly).
- As all member shareholders are expected to help run the cooperative, it is more likely to
succeed.
 - As cooperatives strive to benefit their members and society, they often qualify for
government financial support.

Disadvantages:
- As cooperatives are not profit-driven, it can be difficult to attract investors, financiers and
member-shareholders.
- Similarly, employees and managers of cooperatives may lack the financial motivation to
excel, due to the absence of a profit motive.
- Most cooperatives have very limited sources of finance as their capital depends on the
amount contributed by their members.

Microfinance Providers:
Microfinance providers are for-profit social enterprises that offer a financial service to those
without a job or on very low incomes. These members of society would not ordinarily be able to
secure bank loans. The aim of providing microfinance is to help entrepreneurs, especially
women, struggling to finance their business start-ups to gain access to loans of a small amount.
Microfinance can give these people the opportunity to become self-sufficient and empower them
to run their businesses. As with the majority of loans, interest is charged on the amount
borrowed, although these are typically lower than what commercial banks would charge.

Advantages:
- can help many people to get out of poverty by making them become financially
independent.
- Around half of the world’s people live on less than $2 a day, (with the vast majority of
these living in low-income countries or highly indebted poor countries) so microfinance
can help to provide poverty relief.
- Microfinance can create benefits for the wider community, such as improved healthcare,
education and employment opportunities.

Disadvantages:
- Some people regard the practice of microfinance providers as being unethical as they
earn profits from low-income individuals and households.
- Microfinance only provides finance on a small scale, so is unlikely to be sufficient to
make a real difference to society as a whole.

Public Private Partnerships:

Jointly established by a government and one or more private sector businesses. a long-term
contract between a private company and a government agency for providing a public asset or
service, in which the private party bears significant risk and management responsibility (not
necessarily the majority stake though). Examples of PPP projects include bridge construction
projects in Australia and railroad services in Japan. PPPs are a suitable type of organization
when the finance for public projects (such as prisons or parks) lacks sufficient funding.
Advantages:
- PPPs can create job opportunities and have a positive impact on the country’s economic
growth.
- PPPs can provide a viable solution for the government to finance projects that it simply
does not have enough money for.
- As there is a formal partnership between the public sector and private sector provider(s),
both contribute resources for the project, thereby limiting the risks involved.

Disadvantages:
- By funding a particular PPP, the government gives up the option of financing other items
of government expenditure, e.g. education and healthcare.
- In addition, most PPPs are very expensive projects (involving high set-up costs and
running costs). This means PPPs can be high-risk projects with unknown rates of return
on the investments. For example, Hong Kong Disneyland opened in 2005 but took seven
years to declare a profit (the annual profit in 2012 was only US$13.97 million).
- Hence, it can be difficult to persuade a private sector partner to join a PPP. Investors
could be unsure and unwilling to form a PPP due to the uncertainty in generating a log-
term profit.

For Non-Profit Social Enterprises:

Advantages:
- Non-profit social enterprises exist for the benefit of local communities and societies.
Examples include fundraising events and donations to meet social aims of a community.
- Non-profit organizations, including non-profit social enterprises, are exempt from paying
corporate and profits taxes.
- Many NPOs also qualify for government assistance in the form of grants and/or
subsidies, thereby reducing their costs of production.

Disadvantages:
- There are strict guidelines and restrictions that non-profit social enterprises must follow;
not all trading activities are permitted. This is to ensure the general public is protected
against fraudulent activities by dishonest charities or non-governmental organizations.
- NPOs depend on the goodwill of the general public and donors to fund their operations.
As a result, business survival is often difficult for many smaller, less-known non-profit
social enterprises.
 - There is a lack of financial and cost control because, unlike in a for-profit organization,
managers at NPOs are not expected to earn a profit for their owners or shareholders.

Non governmental organizations (NGOs):

Is a type of non-profit social enterprise that operates in the private sector of the economy.
Therefore, it is not part of a government organization. Instead, it operated a voluntary group to
promote a social cause, such as the protection of human and animal rights, protection of the
environment, and development aid. They operate at a local, national or international level and
put pressure on governments to adopt policies in support of their social cause.

They are usually funded by a combination of sources:

- Government grants or donations
- International organizations
- Charitable organizations Commercial businesses, as part of their corporate social
responsibilities (CSR)
- Private donors and philanthropists

Examples of non-governmental organizations include:

- Oxfam
- the Wikimedia Foundation
- Amnesty International
- Doctors Without Borders
- World Vision International.

Charities:
Charities are another type of not-for-profit social enterprise. They operate to serve a
humanitarian purpose, rather than to pursue a financial return for their owners. Charities exist to
help a large range of causes, such as the pursuit of poverty eradication, human rights, child
protection, and safeguarding the welfare of animals. Unlike commercial businesses, charities do
not necessarily sell any goods, but promote a socially desired cause. Like other types of social
enterprises, charities generally operate in the private sector.

Examples of charities:
- UNICEF
- Ronald McDonald House Charities
- Greenpeace
- Bill & Melinda Gates Foundation

Unit 1.3: Organizational Objectives

○ Vision statement
A vision statement is a written expression of an organisation’s lon,lg-term ambitions that it hopes
to realise in the future. It is often an optimistic view of what the organisation hopes to
accomplish.

○ Mission statement

A mission statement is a written expression of an organisation’s purpose and reason for being.
The mission may be seen as a means of accomplishing the organisation’s vision.

○ Aims

Aims are goals an organisation would like to accomplish. They may be somewhat broad,
optimistic and imprecise.

○ Objectives

Objectives are concrete targets an organisation sets for itself. They may be formulated in order
to accomplish wider aims, and can be developed using the acronym SMART.

SWOT Analysis:
Is a strategic analysis tool to allow
managers to assess the current situation
facing an organization. It considers both
internal factors (strengths and
weaknesses) and the external business
environment (opportunities and threats).

- Strengths: The things that the

organization does well or better in
comparison to its competitors, e.g.
brand recognition, market share
and customer loyalty.
- Weaknesses: The things that the
organization does not do so well in
relation to its competitors, e.g. low
productivity, high staff turnover or a
poor corporate image.
- Opportunities: External factors that
provide openings (prospects) for an
organization to succeed, e.g. new
technologies, favourable
demographic trends and new
overseas markets.
- Threats: External factors that hold
back the business, preventing it
achieving its organizational goals,
 e.g. detrimental weather conditions, increased competition in the industry and economic
recession.

Advantages:
- It is a useful visual management tool with a very broad range of applications in dealing
with real-world problems, issues and decisions.
- It enables the organization to reflect on its strengths (to be protected) and weaknesses
(to be developed).
- It encourages decision makers to examine the strategic opportunities for the
organization and the possible threats of certain decisions, such as growth (expansion),
diversification or relocation.

Disadvantages:
- It only provides a snapshot of the current situation for an organization. Changes in
internal and external factors could make the SWOT analysis outdated quite quickly.
- It requires the organization to be honest, although it is not always easy to acknowledge
or disclose to our weaknesses.
- Like any business management tool, a SWOT analysis is only as good as the person(s)
who compiled it, i.e. there may be errors, bias and/or omissions.

Ansoff Matrix:
The Ansoff matrix is a strategic management tool, used to devise product and market growth
strategies for an organization.

Market Penetration:
- This growth strategy focuses on developing existing markets with existing products in
order to increase sales revenue and market share.
- It is a relatively low-risk strategy as it focuses on what the organization does and knows
well.
- There is little, if any, need for investment expenditure or further market research as the
strategy focuses on marketing its existing products to its existing customers.
- It is used to gain market dominance in growing markets and to reduce competition in
mature markets.
- Examples include: charging more competitive prices, using customer loyalty schemes,
broadening channels of distribution (e.g. delivery services) and improved advertising
campaigns.

Market Development:
- This growth strategy involves selling existing products in new or unexplored markets.
- It focuses on using customer loyalty to persuade them (and prospective customers) to
buy a new product.
- It also relies on a greater distribution network, such as retailers, to get the product to
customers spread around the world.
 - This strategy carries an element of risk as the organization might not succeed in
unexplored markets. After all, consumer habits and tastes vary in different part of the
world.
- It can also be expensive for a business to invest and establish itself in new markets,
especially if these are in overseas locations.

Product Development:
- This growth strategy involves introducing new products to existing customers.
- If focuses on product differentiation in order to remain competitive or to improve its
competitiveness.
- Typically, products are developed to replace their existing ones (e.g. iPhone 7) or to
extend the product range (e.g. iTunes, iPads and Apple Watch) and marketed at current
customers.
- It is a medium-risk growth strategy because product development can incur substantial
investment costs, such as the expenditure on market research (to find out what
customers want), prototyping and test marketing.

Diversification:
- Diversification involves organizations moving into new markets with new products, e.g.
Honda lawn mowers, Lenovo smartwatches or the Golden Arch hotel of McDonald’s in
Switzerland.
- Diversification is a high risk growth strategy as the organization enters a market that it
has no experience or expertise in. Existing rivals may already have established
themselves with brand recognition and customer loyalty.
- Related diversification – the organizations operate within the same industry, e.g. Coca-
Cola entering the energy drinks market.
- Unrelated diversification – involves the organization entering new industries, e.g.
McDonald’s entering the hotel industry or offering wedding reception services.

Unit 1.4: Stakeholders

○ Stakeholders
A stakeholder is any individual or group that affects an organisation or is affected by it.
Stakeholders are often classified as internal (CEO, different level managers, employees and
shareholders/owners) or external (customers, suppliers, unions, competitors, the government
and society as a whole).
○ Internal stakeholders
Stakeholders are often classified as internal (CEO, different level managers, employees and
shareholders/owners)
○ External stakeholders
Stakeholders are often classified as external (customers, suppliers, unions, competitors, the
government and society as a whole).
● Analyse the interests of a particular stakeholder group.
In order to be successful, managers must create an environment where employees can work
together to meet these objectives. Managers are therefore interested in the success of their
enterprise, as well as the advancement of their own careers.
● Discuss the possible areas of mutual benefit between stakeholder groups.
Like managers, employees are motivated by compensation, benefits, job security, and working
conditions. perhaps less of a line drawn between management and employees than in the past;
as stakeholders their interests are often similar.
● Examine potential conflicts between stakeholders’ interests.
Customers and suppliers. Customers demand high quality and low prices, which is in conflict
with suppliers’ interest in being paid fairly. This conflict is played out between agricultural
producers and consumers, with supermarkets in the middle coming under pressure from both
stakeholders.
● Recommend possible solutions to stakeholder conflicts.
Managers and employees. Management may wish to maximise productivity, while employees
may prefer to work less or under less stressful conditions. Potential remedy: employee
participation in management and performance-related pay

● Identify each component of the STEEPLE analysis.

STEEPLE is used to evaluate the firm’s external environment – opportunities and threats.

● Sociocultural
● Technological
● Economic
● Environmental
● Political
● Legal
● Ethical

● Explain the purpose of STEEPLE analysis.

STEEPLE is a framework that is useful in examining a firm’s external environment. Building on SWOT
analysis studied in the previous section, STEEPLE is used to better recognise and understand the
opportunities and threats facing a business.

Sociocultural factors relate to the way people live and what they believe and value.

Ex: what do people eat, at what time, and with whom?

what do people eat, at what time, and with whom?

Ex of technological factors: Closely linked to the growth of information technology is the

increasing availability of big data that can be exploited by companies to understand and meet
the needs of their clients.

Economic factors: The demand for products and services is not the same in poor countries as it is
in wealthier ones. As economies develop, consumers have more money to spend.

Environmental factors:

Environment in this case refers to the natural environment. Factors to be considered in this
category include the following:

EX: The quantity and quality of available fresh water. The availability of fresh water is an
increasing constraint on business activity in many parts of the world. Large amounts of water are
essential for agricultural use and power production, as well as for industries like paper production
and food processing.

Political Factors: Politics is ever-present in business decision-making. From a sole trader seeking
permission from a local government to open a new outlet, to a multinational company seeking
access to oil fields, all businesses have to take political factors into account.

Legal Factors: Business must at a minimum abide by all existing laws and regulations. These are
generally made by central governments, but additional rules may be set by local authorities.
Companies must obey the law not only in their home countries, but in all the countries where
they operate.

Ethical factors: Companies are increasingly under fire for marketing products that may not be in
consumers’ best interests. Most people would agree that alcohol and tobacco marketing
campaigns should not target children.

● Prepare a STEEPLE analysis of a given organisation.

● Discuss the consequences of a change in any of the STEEPLE factors for a business’s
objectives and strategy.

Carrying out a STEEPLE analysis is not a one-time event for any organisation. It is not even
sufficient for a company to carry out a review of its external environment on a regular timetable.
Instead, companies must be constantly on the lookout for changes in the environment.
Managers that overlook or ignore changes outside the executive suite imperil their own careers
as well as the future of the company. Some changes will represent opportunities for businesses,
others will represent threats.

Unit 1.6: Growth and Evolution

○ Economies of scale

Economies of scale refers to the case where the average unit cost of production decreases as
the level of output increases, where unit cost refers to the cost of producing a single unit of
output. In business, the explanation for this reduction in unit costs is usually described as resulting
from purchasing, technical, marketing, managerial, and financial economies of scale.

○ Diseconomies of scale

Diseconomies of scale describes the case when the average unit cost of production actually
increases as the level of output increases. This increase in average unit cost is usually explained by
the difficulty of managing very large operations.

○ Internal growth
Internal growth (also known as organic growth)
involves a businesses using their own resources to
expand:
● Retained profits
● Borrowing
● Selling shares

○ External growth
External growth (also known as inorganic growth)
involves a business dealing with other organizations
to expand.

○ Mergers
A merger is a form of external growth that usually
results in two firms combining to form a third entity.
This new company then replaces the two that
existed before the merger. Eg: Coca Cola buying
costa coffee.
○ Acquisitions
An acquisition (also called a takeover) involves one
company buying a controlling interest (majority stake) in another company. This means the
buyer purchases enough shares in the target company to own more shares than any other
shareholder, leading to a change of ownership. For example, in 2017 e-commerce giant
Amazon bought Whole Foods, the American organic-food grocer for $13.7 billion.

Advantages of M&As:
- Enables the newly formed company to benefit from greater economies of scale. For
example, backward vertical integration enables the firm to gain from having direct
access to its supplier, thereby cutting average costs of production (third party suppliers
charge higher prices as they need to earn a greater profit margin).
- M&As enable the larger organization to spread its fixed costs and risks, and to share its
resources and expertise. This can improve the larger company’s chances of success
- The cost savings and synergies created by a merger or acquisition enables the
organization to earn greater profits, gain market power, and increase its market share.
Customers also benefit from the possibility of lower prices arising from the cost savings
and synergies. This helps to enhance the company's competitiveness.
Disadvantages of M&As:
- M&As are typically very expensive. For a company to buy out a rival firm is often
unaffordable. Even for businesses that can afford M&As, the amount of money involved
can be huge. For example, in 2014, Facebook bought WhatsApp for a staggering
$19.3bn
- There is potential loss of management control of the company, especially in the case of
a hostile takeover of the business. M&As often cause redundancies of senior managers.
For instance, there is no need to have two separate marketing or finance directors from
the integrated companies.
- Unlike strategic alliances and joint ventures as methods of external growth, M&As
cannot be easily reversed if the new business venture goes wrong. Hence, it is a riskier
external growth strategy than strategic alliances and joint ventures

○ Joint ventures
A joint venture (JV) is an external growth method that involves two or more organizations
agreeing to create a new business entity, usually for a finite period of time. The newly created
business is funded by its parent companies
Advantages:
- As the JV is set up for a finite time, it can be dissolved at the end the project if needed,
without compromising the operations of the parent companies.
- The parent companies combine their expertise, technologies and financial resources, to
create the new business, thereby increasing its chances of success. For example, more
finance is raised than if the companies were to grow organically, and the financial risks
are split between the parent companies.
- Joint ventures are generally cheaper than M&As, which involve high legal and
administrative costs. It is also quicker to form a JV than to go through with a merger or
acquisition.
Disadvantages:
 - As with all forms of partnerships with other entities, there are possible conflicts and
disagreements between the parent companies. This might be due to different
organizational cultures and management styles . This can create communication and
productivity problems, thus jeopardising the joint venture.
- In the case of poor performance, a joint venture is more difficult to terminate than a
strategic alliance. This is partly due to the legally binding responsibilities committed by
the parent companies of the joint venture.
- Many joint ventures are short-lived as they do not succeed or are purchased outright by
one of the parent companies.

○ Strategic alliances
Strategic alliances are created when two or more organizations join together to benefit from
external growth without having to set up a new separate entity or to make major changes to
their own business models. Eg: Apple and MasterCard (the first credit card company to offer
Apple Pay) and Starbucks and PepsiCo (bottling, distributing and selling Frappuccino coffee)

Advantages:
- Members of a strategic alliance can benefit from the pooling of resources in a business
project. This created synergies, such as the sharing of: industry expertise, research and
development, financial resources, distribution channels, and the spreading of risks.
- Businesses in a SA retain their individual corporate identities, without the expenses of
establishing a new company with its own legal status (as in the case of joint ventures).
This also means it is usually quicker to set up a SA than a JV.
- As with a JV, a strategic alliance fosters cooperation rather than competition. In theory, if
there is less competition, profits should rise.
Disadvantages:
- Many strategic alliances are only short-term agreements. This can limit the options for
an organization’s external growth strategies.
- As there can be numerous members in a SA, the business organization in question is
exposed to the potential mistakes or misconduct of member firms in the alliance.
- As with all cases of working with and relying on third parties, there is the potential of
conflict and misunderstandings. Communication problems, divergent corporate cultures
and perspectives, and mistrust are key reasons for the failure of many strategic alliances

○ Franchising
Franchising is a growth method that involves two
parties, with the franchisor giving the legal rights to a
franchisee to buy, own and sell goods and services
using the franchisor’s brand. For this privilege, the
franchisee has to buy the right to use the brand name
and business model of the established franchisor. In
addition, the buyer must also pay royalties to the
franchisor, based as a re-determined percentage of the
franchisee’s sales revenues.
 ○ Globalisation
Globalisation refers to the increasing interconnectedness of countries across the world in terms
of communication, culture, trade, and the movement of people.

○ Multinational companies (MNCs).

Multinational companies (MNCs) are corporations that operate in at least two countries, one of
which is outside the corporation's 'home' country.

Plan for 2&4 Mark Question:

2 marks:
- Point
- Apply (elaborate on the question)

4 marks:
- Define key terms
- Point (only if its in the case study)
- Explain (always link back) x2
- Apply

Plan for 10 Mark-Question:

Introduction:
- Opening sentence/introduce business
- Definition of key concept
- Thesis statement
- What the response will examine

Body 1:
- Topic sentence
- 1st advantage (with link/evidence from stimulus and explanation)
- 2nd advantage (with link/evidence from stimulus and explanation)
- Closing statement

Body 2:
- Topic sentence
- 1st advantage (with link/evidence from stimulus and explanation)
- 2nd advantage (with link/evidence from stimulus and explanation)
- Closing statement

Conclusion:
- Clear judgment which relates back to the question and your thesis statement.
- Use of long term v short term framework to shape/develop your judgement.
- Use of different stakeholder (stakeholders, suppliers, employs, consumers) perspectives
to shape/develop your judgement.
- Use of financial v non financial framework to shape/develop your judgement
- Concluding statement (potentially refer back to the business.