Unit 1 – Introduction to Business Management

1.1 What is Business?

Why do businesses exist?
 Therefore, businesses exist to produce goods and services to satisfy the needs and wants of their
customers (individuals, other businesses and/or governments), usually in return for a profit. There may be
additional or alternative objectives, such as:
o Survival
o Increasing their market share
o Being the market leader
o Being a socially responsible business.

Factors of production
 Land: natural resources needed to produce goods and services (water, sand, minerals, plants and animals)
 Labor: this refers to human effort used to produce goods and services
 Capital: this refers to non-natural (or man-made) resources used in the production process (tools,
machinery, motor vehicle)
 Entrepreneurship: risk taking ability

Business activity Business function

Recruitment of staff Human Resources

Setting prices for the firm's products Sales and Marketing

Deciding where a product should be sold Distribution

Stock (inventory) control and management Operation management

Establishing quality management processes Quality management

Researching the needs, wants and preferences of Marketing

customers

Allocating resources to purchase capital equipment Sourcing

Hiring a new production manager Human Resources

Financial and non-financial methods of motivation Marketing

of staff
 
Primary sector: all those activities the end purpose of which consists in exploiting natural resources. 
Secondary sector: overs the manufacturing of goods in the economy, including the processing of materials
produced by the primary sector.
Tertiary sector: consists of the provision of services instead of end products.
Quaternary sector: based upon the economic activity that is associated with either the intellectual or knowledge-
based economy.

Challenges for starting up a business:

 Lack of finance: many new businesses lack the necessary finance to have sufficient liquidity to run the
business on a daily basis. The lack of sufficient working capital can lead to bankruptcies.
  Lack of market research: the key to a successful business is having a commercially viable idea. However,
what entrepreneurs think may be a good idea may not materialize due to the lack of effective market
research.
 Poor marketing strategy: another related challenge is that new businesses have limited marketing
budgets available for promoting and advertising their products. No matter how good an idea might be or
how competitively priced it is, customers will not buy it if they are not informed that it exists. For many
products, the challenge is a lack of differentiation or not having a unique selling point, so they fail to gain
any recognition in the market.
 Limited human resources: newly established businesses often find it difficult to attract suitable skilled and
experienced staff. Without a well-established business model or corporate image, new firms can struggle
to recruit the necessary human resources for its operations.
 Long hours: similarly, a common challenge for many new businesses is that the owners often think they
can do everything themselves, partly to keep costs low. However, this is not likely to lead to long-term
success for the business. For example, the entrepreneur may spend many hours after the close of
business to work on the firm's financial accounts. It is common for self-employed people to work
significantly longer hours than if they were employed by someone else.
 Lack of knowledge, skills, and experiences: too often, new entrepreneurs do not have sufficient
knowledge, skills or experience in the industry they are entering. For example, they may lack knowledge
of their target market, competitors, and market trends. They may also lack knowledge of the best
suppliers, which can cause higher costs and distribution problems. Finally, inexperienced entrepreneurs
may lack the experience to make effective strategic decisions.
 
Opportunities for starting up a business:
 Money: perhaps the key driving force for a person to start their own business is the ambition or
motivation to earn profit for themselves. A firm earns profits by selling its products at a price that is
higher than its production costs. The owner(s) get to keep the profit as a reward for risk-taking and their
entrepreneurship talents.
 Autonomy: many people set up their own business to be their own boss, rather than working for
someone else. Some people do not like to work for other people and prefer the autonomy that comes
with being an entrepreneur. There is a great sense of satisfaction in being the “boss”. The autonomy of
being your own boss also speeds up decision-making.
 Challenges: some people are driven by personal challenges. They enjoy the satisfaction of achieving what
they perceive to be greatness and striving for self-actualization.
 Passions: some entrepreneurs want to pursue their personal passion/interest and turn this into a business
opportunity. For such entrepreneurs, the aim of starting their own business is not always to earn a profit.
 Family ties: for some entrepreneurs, running their own business is part of a family tradition.
 Unfilled market opportunities: some entrepreneurs spot an unfilled gap in the market for a certain type
of good or service, so start their own businesses.
 Making a difference: finally, some people start their own enterprises in order to be able to make a
difference to others. Examples include providing a service to the local community such as a medical clinic,
a day-care center, or nursing home for the elderly.

1.2 Types of business entities

Sole trader:
 A business organization owned and controlled by one person. Sole traders can employ other workers, but
only he/she invests and owns the business.
 Advantages:
o Easy to set up.
o Have full control, quick decisions making.
o Sole traders receive all profits.
 o Personal, increase customers' loyalty.
 Disadvantages:
o Unlimited liabilities: if the business has bills/debts left unpaid, legal actions will be taken against the
investors, where their even personal property can be seized, if their investments don’t meet the
unpaid amount.
o Full responsibility: workloads and risks are fully concentrated on him/her.
o Lack of capital: as only one owner/investor is there, the amount of capital invested in the business
will be very low. This can restrict growth and expansion of the business. Their only sources of finance
will be personal savings or borrowing or bank loans.
o Lack of continuity: if the owner dies or retires, the business dies with him/her.

Partnerships:
 A legal agreement between two or more (usually, up to twenty) people to own, finance and run a
business jointly and to share all profits.
 Advantages:
o Easy to establish and start-up costs are low.
o Partners can provide new skills and ideas that can be used to improve business profits.
o More capital investment: partners can invest more capital than a sole trader could.
o Have greater borrowing capacity.
 Disadvantages:
o Arguments may occur between partners while making decisions. This will delay decision-making.
o Similar to sole traders, partners too have unlimited liability- their personal items are at risk if
business goes bankrupt.
o If partners join or leave, you will probably have to value all the partnership assets, and this can be
costly.
o Each partner is an agent of the partnership and is liable for actions by other partners.

Privately held companies:

 A company which does not offer or trade its company stock (shares) to the general public on the stock
market exchanges, but rather the company's stock is offered, owned, traded, exchanged privately, or
over-the-counter.
 Advantages:
o Confidentiality: since a privately held company doesn’t have to adhere to disclosure requirements,
its financial and operational information remains confidential
o Limited liabilities: because the company and the shareholders have separate legal identities.
o More access to capital through selling shares to family, friends or employees
o Saving on cost: a privately held company doesn’t have a filing or disclosure requirement. Due to
these, the company doesn’t have to do the required paperwork, thereby saving a whole lot of
administration costs and workforce.
 Disadvantages:
o Cannot sell shares to the public which will make less profits than public limited company.
o Responsibilities/ lack of personal advice: owners and stakeholders have to take up a higher level of
responsibility. This is because they are in charge of the company’s growth and wellbeing. Moreover,
there is a lack of accountability that comes with being the sole owner. There are no public
shareholders, the board of directors, or financial analysts in the picture. This makes the need for
taking responsibility proactively even higher.
o Limited access to credit: because the functioning of this company is dependent on the life and
wealth of its stakeholders. This may lead to higher interest rates and limited lending.
o Limited capital: if in need of capital, a public company can issue a block of their authorized capital in
the market and raise the necessary capital. However, raising equity capital doesn’t come so easy for
a privately held company.
 
Public held companies:
 Public sector corporations are businesses owned by the government and run by directors appointed by
the government. They usually provide essentials services like water, electricity, health services etc. The
government provides the capital to run these corporations in the form of subsidies (grants).
 Advantages:
o Raising capital through public shares: the ability to raise share capital, particularly where the
company is listed on a recognized exchange. Since it can sell its shares to the public and anyone is
able to invest their money, the capital that can be raised is typically much larger than a private
limited company. It’s also possible that having stock listed on an exchange could attract investment
from hedge funds, mutual funds, and other institutional traders.
o Rescue important businesses when they are failing through nationalization.
o Prestigious profile and confidence: more people are likely to be aware of the company if it is public,
particularly if it’s listed on a stock exchange. In that case, it’s more likely to receive attention from
the media and investment professionals. This is effectively free publicity, meaning more people will
recognize the company and its products or services. Better brand recognition can lead to more sales.
It may also make you more visible to valuable potential business partners.
o Other finance opportunities: banks and other financial institutions may be more willing to extend
finance to a public limited company.
 Disadvantages:
o Motivation might not be as high because profit is not an objective.
o There is normally no competition to public corporations, so there is no incentive to improve.
o Subsidies lead to inefficiency. It is also considered unfair for private businesses.
o Increased government and regulatory scrutiny: public companies are vulnerable to increased scrutiny
from the government, regulatory agencies, and the public. The company must meet various
mandatory reporting standards that are set by government entities such as the SEC and the IRS

Social Enterprises
 They exist to create a better world due to the role they play to improve society overall. As they are not
always revenue-generating, SPOs often need financial funding and suitable human resources. Other SPOs
include charities, cooperatives, and non-governmental organizations (NGOs). Although there is no
universally accepted definition of a social enterprise (and the legal definition differs between countries), it
is essentially an organization that focuses on meeting social objectives (such as improving social and
environmental well-being) and not only commercial business objectives such as profit maximization or
maximizing shareholder returns.
 Differences between charitable organizations, social enterprise and traditional commercial (for-profit
business entities):
Charities Social enterprises Traditional businesses
Mission driven (charitable mission) Purpose driven (social purpose) Vision driven (commercial vision)
Funded by donations Funded by internal and external Funded by owners, investors, and
sources internal and external sources
Surplus reinvested Profits reinvested Profits distributed to owners
and/or redistributed
Purely charitable Focus on social benefits Corporate social responsibilities
Focus on societal gains Focus on social impact and Focus on financial returns
financial gains

For-profit Social Enterprise

For-profit social enterprises
 Whilst traditional businesses may allocate some funds to CSR, it is not their main or most important focus.
Instead, the main drivers for such businesses is profit, growth, and protecting shareholder value. A
 growing number of traditional businesses are reporting on the triple bottom line to as part of their CSR
and sustainability goals.
 Traditional businesses focus on their missions whereas social enterprises focus on their purpose. In
reality, it is up to each business to determine its preferred approach to its mission or purpose.
Nevertheless, social enterprises generate revenue like any business organization, but hold community
objectives for the wellbeing of others in society, rather than primarily aiming to earn profit for their
owners.
Mission Purpose
What we do Why we do it
Operating a business Sharing a dream
Strategic Cultural
Creates buy-in Instils ownership
Provides focus Fuels passion
Builds a company Builds a community

Private Sector Social Enterprises

 For-profit business organizations that operate in the private sector. They differ from those that operate in
the public sector in terms of ownership, and control, the purpose of their existence, how they raise
finance, how they are managed, and how any profits (financial surplus) are distributed or how losses dealt
with.
 A for-profit social enterprise operating as a private sector company is a revenue-generating, profit-seeking
organization but the purpose of its existence is mainly concerned with social goals which are at the center
of its operations. This differs from commercial or traditional for-profit companies that aim to maximize
earnings for their shareholders (owners).
 Therefore, for-profit social enterprises in the private sector earn their revenues and profit in socially
responsible ways and uses the surplus to directly benefit the society or environment rather than
distributing the profit to owners in the form of dividend payments.
 For-profit social enterprises have social objectives and use ethical practices to achieve these goals.
Therefore, for-profit social enterprises in the private sector earn their revenues and profit in socially
responsible ways and uses the surplus to directly benefit the society or environment rather than
distributing the profit to owners in the form of dividend payments.

Microfinance providers
 For-profit social enterprises that operate as private sector companies. They 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:
o Microfinance can help many people to get out of poverty by making them become financially
independent.
o 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.
o They help to empower entrepreneurs of small businesses, especially women and the underprivileged
working and living in low-income countries.
o Microfinance can create benefits for the wider community, such as improved healthcare, education
and employment opportunities.
 o Microfinance providers act in a socially responsible way by helping the poorest and most vulnerable
adults in society.
o Microfinance can help to build and foster a culture of entrepreneurial ship and economic
independence.
 Disadvantages:
o Some people regard the practice of microfinance providers as being unethical as they earn profits
from low-income individuals and households.
o Microfinance only provides finance on a small scale, so is unlikely to be sufficient to make a real
difference to society as a whole.
o Microfinance loans incur interest charges, so can be rather expensive for small business owners who
find it difficult to earn enough revenue to keep up with their loan repayments.
o Microfinance increases the debts of entrepreneurs who may subsequently struggle in their business
venture.
o Due to relatively low profitability, microfinance providers may struggle to attract and/or retain
employees and managers, given that their remuneration packages are unlikely to be matched by
larger for-profit financial companies such as commercial banks and insurance companies.

Public Sector Social Enterprises

 The part of the economy composed of government-owned and/or government-controlled enterprises. It
does not include any private sector enterprises (sole traders, partners, limited liability companies, and
private sector social enterprises). Public sector companies operate in a commercial-like way (selling goods
and/or services in order to generate a financial surplus) but are owned and/or controlled by government
authorities. They can be owned wholly or partially by the government. They are set up as legal business
entities to partake in the commercial business activities, enabling successful public sector companies to
earn a financial surplus for the government to be used for the benefit of society as a whole.
 Quite often, the public sector is unable to provide the necessary resources and finances to operate an
enterprise, so some of the funding required comes from the private sector.
 In such a case, a public-private partnerships (PPP) is established. A PPP is a jointly established enterprise
by a government and one or more private sector businesses.
 According to the World Bank, a PPP is defined as 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).
 The exact arrangements will differ from case to case and from country to country, but often involve the
public sector having a majority share in the joint venture. In any case, the public sector company exists to
create employment and to reinvest profits (financial surplus) back into the business and the local
community.
 Advantages:
o Providing a viable solution for the government to finance projects that it simply does not have
enough money for unless it is able to charge for the services provided.
o As the product is provided by the government, there are fewer risks involved.
o By being able to charge for their services, public sector companies help to reduce the debt burden of
the economy and taxpayers in particular.
o Public sector companies create secure employment opportunities and have a positive impact on
local communities and the country’s overall economic growth and development.
 Disadvantages:
o By funding a particular public sector enterprise, the government gives up the option of financing
other items of government expenditure, such as road maintenance, flood defense systems, and
developing communications networks.
o In addition, most public sector enterprises are expensive to operate (involving high set-up costs and
running costs). This means they can be high-risk businesses with unpredictable 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).
 o Hence, it can be difficult to persuade private sector partners or investors to help fund public sector
companies. Investors could be unsure and unwilling to form a PPP, for example, due to the
uncertainty of such businesses being able to generate any long-term profit.
o Public sector companies are often associated with bureaucratic policies and procedures, which can
cause inefficiencies and delays to decision making.

Cooperatives
 Cooperatives are for-profit social enterprises owned and run by their members, such as employees or
customers, with the common goal of creating value for their members by operating in a socially
responsible way. All employees (member of the cooperative) have a vote, thus contribute to decision-
making. Cooperatives share any profits earned between their members.
 Advantages:
o Incentives to work
o Decision making power
o Social benefits
o Public support
 Disadvantages:
o Low salaries and bonus
o Sources of finances
o Decision making
o Promotional opportunities

Triple Bottom Line

 For-profit social enterprises have 3 main objectives, commonly referred to as “the triple bottom
line”. It is a business management model comprises of the following:
o Economic objective (profit): to earn a profit to fund its activities and growth in a
sustainable way.
o Social or cultural objective (people): to provide social gains for members of local
communities, such as providing job opportunities and support for less-privileged members
of society.
o Environmental objective (planet): to manage and operate the business in such a way as to
protect the ecological (natural) environment.

Not for Profit Social Enterprise

Features of non-profit social enterprises

 Not all social enterprises are for-profit organizations. Some social enterprises are not run for profit, such
as non-governmental organizations (NGOs) and charities. However, even these non-profit organizations
must earn a surplus from their business in order to continue operating. The difference is that the surplus
is reinvested back in the social enterprise and/or the community.
 Recall that social enterprises generate revenue like any business organization but hold community
objectives for the wellbeing of others in society, rather than primarily aiming to earn profit for their
owners. Non-profit social enterprises operate in a commercial-like way, but they do not distribute any
profits or financial surplus to their owners or shareholders. Instead, the surplus they may earn its
completely reinvested in the organization in order to pursue their vision and/or mission.
 Advantages:
o Benefit of local communities and societies
o Exempt from paying corporate and profits taxes.
o Government assistance
o Positive impact on employees
  Disadvantages:
o Strict guidelines and restrictions
o Depend on the goodwill of the general public, managers at NPOs are not expected to earn a profit
for their owners or shareholders.
o Wages are remuneration of workers are often lower.

Non-governmental organization (NGO)

 A NGO 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 is operated a voluntary group to
promote 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 causes.
 They are usually funded by a combination of sources:
o Government grants or nations
o International organizations
o Charitable organizations
o Commercial businesses, as a part of their corporate social responsibilities (CSR)
o Private donors and philanthropists

Differences between NGO and a charity

 Non-governmental organizations are completely independent of government control. Charities
can operate in the public sector, they are run and operated by the government or public sector
agencies.
 NGOs can operate at the community, national or international level for a range of social or
political reasons, including humanitarian causes, protection of the environment, and the
conservation of wildlife. Charities tend operate on a smaller scale with a specific focus, such as
developing the arts, helping people with illnesses, relieving homelessness, or other publicly
beneficial actions.
 Furthermore, NGOs generally lobby governments for desired change or a community goal, such
as environmental protection, whereas charities do not tend to get involved in politics or
lobbying of governments.

1.3 Business Objectives

Vision Statement and Mission Statement
 Vision Statement: inspiring or aspirational declaration of what an organization ultimately strives to be, or
wants to achieve, in the distant future. This usually includes, or at least indicates, the organization’s core
values. The vision statement is intended to act as a clear guide for key stakeholders when planning and
implementing current and future corporate strategies.
 Mission Statement: a succinct and motivating declaration of an organization’s core purpose (why it
exists), identity (who they are) and focus (what they do). It is, therefore, a written declaration that
normally remains unchanged over time.
 Whilst a vision statement tends to be a broad and abstract statement, a mission statement tends to be
narrow and more specific.
 Vision and mission statements give stakeholders of an organization a sense of purpose and direction.
 Positive and inspirational mission and vision statements can help to motivate employees, especially if the
values of the organization are aligned with those of the workers.
 A firm’s mission and vision statements serve to guide the organization’s strategies and strategic object.
 Vision statement: some day
 Missions statement: every day
  A vision sets out the ultimate dream of an organization; where is strives to be some day/one day in the
distant future (if it ever gets there)
 A mission statement declares the purpose of the organization, and what it stands for. These do not
change on a day-to-day basis, so the mission statement is what the business is in existence for, every day
 
Criticism of Vision Statements
 Too vague, so therefore are rather meaningless and/or difficult to measure.
 Based on public relations (i.e., to make the organization "look good") - what the business aspires to and
what it actually does on a regular basis may not align.
 Vision statements (and many mission statements) are very long term, so may not ever materialize.
 Virtually impossible to really analyze or disagree with, so may be ignored or not taken seriously by
stakeholders such as employees.
 
Business objectives

What are business objectives?

 Business objectives are the clearly defined and measurable targets of an organization, used to achieve its
overall goals.
 Business objectives are essential for all businesses so that people know where they are striving to go or
what they are trying to accomplish. They give people a sense of common purpose, thus promote a greater
sense of belonging and team spirit (cohesiveness). They also enable managers and entrepreneurs to
measure progress towards to their stated vision or mission statement.
 Objectives can be long-term (strategic objectives) or short-term (tactical objectives)
o Tactical objectives are easier to change or reverse than strategic objectives. They are specific targets
with definitive timelines.
o Strategic objectives are targets that the whole organization is striving to achieve. It requires a
greater investment in human and financial resources than tactical and operational objectives. It is
often related to what the owners of the business want to focus on, such as business survival, growth,
or profit maximization.
 Like vision and mission statements, business objectives can give employees and managers a genuine
sense of direction (and purpose). Hence, they can help to motivate employees and raise labor
productivity.

Common business objectives

 Growth
o Usually measured by an increase in its sales revenues or by its market share
o Essential for the survival of a business in an ever-changing and competitive world
o The failure to grow my result in declining competitiveness and threaten the firm's sustainability
 Profit
o The main business objective of most private sector organizations is to maximize profits
o Without a profit motive, owners and investors find it difficult to justify the existence of the business
 Protecting shareholder value
o Generating long term value for shareholders of the business
o About earning a profitable return for shareholders in a sustainable way
 Ethical objectives
o The moral principles and values underpinning human behaviour
Advantages and Disadvantages of having ethical objectives
 Advantages:
o Improve corporate image: acting ethically and in a socially responsible way can help to enhance the
corporate image and reputation of a business. Conversely, the media will report unethical business
behavior which could seriously damage the firm’s corporative image.
 o Increased customer loyalty: customers are more likely to be loyal to a business that does not act
immorally.
o Cost cutting: ethical behavior can help to cut certain costs, e.g. being environmentally friendly can
reduce the amount of (excess) packaging. Ethical objectives and strategies can help the firm to avoid
litigation costs (expenses associated with legal action taken against a business) that might otherwise
arise from unethical and irresponsible activities.
o Improved staff morale and motivation: ethical behavior can help a business to attract and retain
highly motivated staff. People are more likely to be proud of the firm they work for if it acts ethically
and within the law. This also helps to improve productivity and employee loyalty.
 Disadvantages:
o Compliance costs: the costs of being socially responsible are potentially very high
o Lower profits: if compliance costs cannot be passed onto consumers in the form of higher prices, the
firm’s profitability is likely to fall. An ethical dilemma for the business exists when ethical decision-
making involves adopting a less profitable course of action.
o Stakeholder conflict: not all stakeholders are keen on the firm adopting ethical objectives, especially
if this conflicts with other business objectives such as profit maximization. Speculative shareholders
and investors may be more interested in short-term profits than the firm’s long-term ethical stance.
So, managers may be pressurized into pursuing other goals.
o The subjective nature of business ethics: views about what is considered right or wrong depend on
the beliefs and principles held by individuals and societies. Legislation can help to provide guidelines
about what is socially acceptable, but even these are somewhat subjective in nature.

Strategic and Tactical Objectives

 Strategic objectives refer to the long-term goals that the whole organization continually strives to
achieve. They are used to achieve the overall strategic goal or vision or mission of the business as an
organization. They require a greater level of investment in human and financial resources than tactical
objectives. Strategic objectives are often related to what the owners of the business want to focus on,
such as growth, profit maximization, protecting shareholder value, or ethical objectives.
 Tactical objectives refer to the short-term and specific goals of a business with definitive timelines for
specific functional areas of an organization. Therefore, they are easier to change or reverse than strategic
objectives. In general, tactical objectives have a pre-determined time frame of less than a year. Tactical
objectives are usually delegated (entrusted) to the others lower down in the organizational hierarchy.

1.4 Stakeholders
Stakeholders are individuals, organizations, or groups with a vested interest in the actions and outcomes of a
specific organization. All stakeholder groups are directly affected by the performance of the business. Different
stakeholder groups have different degrees of influence on the organization.

Internal stakeholders
Employees
 Employees are workers within an organization. They have a vested interest in the business organization
that they work for. They can have a major impact on the organization and are directly affected by the
financial health of the organization. Their level of motivation and productivity have a direct impact on the
performance and prosperity of the business.
 The interrelated interests of employees include:
o Improved terms and conditions of employment
o Better pay and bonuses
o Equal opportunities
o Improved job satisfaction
o Improved job security
 o Wider opportunities for career progression

Managers
 Managers are people hired to be responsible for overseeing certain functions, operations, or departments
within an organization. Many businesses, especially large firms, tend to have 3 broad levels of
management:
o Senior management: refers to the team of higher-ranking managers or directors that plan and
oversee the long-term aims and strategies of the organization. They are responsible for the middle
managers.
o Middle management: refers to the group of managers in charge of running individual departments.
They set department objectives (which are in line with the firm’s overall aims) and are responsible
for implementing strategies to achieve these goals. Middle managers are accountable to the senior
management team and are responsible for their departmental staff.
o Junior management (or supervisory management): refers to lower-ranking managers who are in
charge of monitoring and controlling day-to-day and routine tasks. They are accountable to the
middle managers and are responsible for their team and workers.
 The interests of managers, irrespective of their rank or seniority in the organization, include:
o Striving to improve operational efficiency, labor productivity and profits as these are all measure of
management performance.
o Aiming to improve customer relations in order to maintain or improve the organization’s
competitiveness
o Aiming to improve their own salaries, bonuses, and other fringe benefits – just like all employees of
the organization.

Directors
 Directors (or executive) are the group of senior managers who are legally responsible for the overall
running of a company on behalf of their shareholders (the legal co-owners of the company). In a large
company, there is likely to be directors responsible for each key functional area of an organization:
marketing, human resource management, finance and accounts, plus operations management.
 There are 2 main types of directors:
o Executive directors work full-time at the organization and make key strategic decisions.
o Non-executive directors do not work at the organization but are consultants used for their particular
expertise. They advise the Board of Directors on corporate strategy.
 Directors must also keep company records and report any changed to the authorities. Other
responsibilities of directors include:
o Advising and supporting the CEO
o Filling company annual accounts
o Target setting and devising long-term strategic plans.
o Establishing organizational policies and codes of conduct/practice, which in turn means shaping the
corporate culture.
o Monitoring and controlling the organization’s overall activities and financial results.
o Identifying and recording people with significant control (PSC) in the company. Most PSCs are likely
to be people who hold:
 More than 25% of shares in the company
 More than 25% of voting rights in the company
 The right to appoint or remove the majority of the Board of Directors
o Directors also need to be aware that the information of all PSCs are available to the general public,
apart from their home address and date of birth.
 The interests of directors include:
o They have similar interests to managers, but are also likely to strive to improve their share ownership
rights and performance related bonuses.
 o They are concerned with the organization’s return on investment for their shareholders.
o They strive to improve the competitiveness of the organization as measured by market share and
market growth.

Shareholders (stockholders)
 Shareholders (or stockholders) are people or other organizations that buy shares in the company. They
own a part of the business.
 The interests of shareholders of a limited liability company include:
o They have rights to a share of any profits that the company earns (dividend payments); shareholders
expect regular payment of dividends.
o They also have voting rights (based on the number of shares they own) on how the company should
be run.
o As co-owners of the limited liability company, shareholders expect the business to earn a certain
(financial) return on their investment.

External Stakeholders
Customers
 Customers are the firm’s clients who pay for the goods and/or services of the business.
 The interests of customers include:
o Customers strive for cheaper and more competitive prices for the goods and services they purchase.
o They demand products that are of an acceptable quality for the price they pay.
o They want products that are safe and fit for their purpose.
o Customer service is paramount, such as the provision of after-sales support.
o Overall, customers want value for money.

Competitors
 Competitors are the organization’s rival businesses competing in the same industry.
 The interests of competitors (or rivals) include:
o Competitors are interested in the organization’s operations, such as its product range and pricing
strategies.
o Competitors are also interested in the finances of the business in question, such as its final accounts
and how competitive its remuneration package is (such as salaries and fringe benefits offered to its
employees)
o Competitors also have a vested interest in the behavior and operations of the business in question as
this can affect the reputation and sales of the industry as a whole.
o It is not uncommon for rival companies to hold shares in the business in question.
o Rivals are also interested in benchmark data to measure their own performance, such as sales
turnover, market share, and financial ratio analysis.

Financiers
 Financiers (or financial lenders) are commercial banks, investors, insurance companies, and other financial
backers that provide finance for a business.
 The interests of financiers include:
o They are interested in the financial health of an organization in order to judge the ability of the
business to repay its debts and to generate profits.
o They expect regular and prompt repayment of the money lent to the business.
o They also demand a positive yield (competitive financial return) on their investment funds.
The interests of internal stakeholders
Stakeholders Dividend return and a say in the running of the
business.

Executive directors Income, respect, experience, status and power.

They seek to maximize profits for the owners of the
business.

Non-executive directors Income, respect, experience, status and limited

power.

Senior managers Income, status and job satisfaction. They seek

success in implementing their strategic objectives.

Middle managers Income, status and job satisfaction. They seek

success in implementing tactical objectives.

Workers Income, job satisfaction and good working

conditions.

The interests of external stakeholders

Government Tax returns and the success of businesses in
improving economic success and economic growth.

Customers/consumers The availability of goods and services to meet their

needs and wants.

Suppliers The maintenance of a long-term and mutually

beneficial relationship with the firm.

Local community Protecting the local environment and seeking

employment opportunities.

Lenders Maximizing investment returns.

Pressure groups Persuading the firm to adapt its practices to

support its cause.

Labor unions (trade unions)

 A labor union is an organization that aims to protect the interests of its worker members. In particular it
focuses on the terms and conditions of employment, such as workers’ pay and benefits. A worker become
a member of a trade union by paying a subscription fee, usually on a yearly basis. The membership fees
help to pay for the administrative and legal expenses of operating the trade union.

Pressure groups
 Pressure groups are organizations consisting of like-minded individuals who come together for a common
cause of concern.
 Pressure groups strive to influence government and public opinion in order to create the desired social
change, such as protection of the environment, fairer terms of international trade or the upholding of
human rights.
  They put pressure on organizations to operate in a socially responsible and ethical way, such as the fair
treatment of workers. Action from pressure groups help to hold businesses accountable for the impact of
their operations and activities on local communities and the natural environment

Suppliers
 Are the organizations that provide the goods and support services for other organizations.
 The interests of suppliers include:
o Suppliers are interested in securing contracts for regular orders from their business customers.
o They demand prompt payment from their business clients for the orders placed and the deliveries
made.
o Whilst they may offer larger business customers price discounts, suppliers strive to achieve
reasonable prices for the goods and services they supply.
o Having a good professional relationship with suppliers means the business is more likely to receive
timely deliveries and better credit terms.
Government
 The government is an external stakeholder of all organizations operating within the country. the
government is keen to see that businesses operate in a legal and socially responsible way.
 This is enforced by government policies, such as:
o Consumer protection legislation
o Employment laws
o Environmental protection guidelines
o Equal opportunities legislation
o Health and safety standards and regulations
o Taxation policies and laws

The local community

 The local community refers to the general public and local businesses (not necessarily competitors
though) that have a direct interest in the activities of the business in question.
 The interests of the local community include:
o Members of the local community try to encourage the business in question to act in a socially
responsible way, such as sustainable activities that protect the environment.
o They expect the business to create jobs in the local area.
o The local community may also want financial support (such as sponsorships and donations) for local
events.
 
Mutual benefit and conflict between stakeholder interests 
Mutual benefit
 Stakeholders share many common interests. For example, making a profit allows for:
o Dividend payments to shareholders
o Business expansion, creating more orders for suppliers and jobs for the local community.
o The payment of taxes to the government
o Increases in wages for employees.
o Competitive wages and good terms and conditions result in a highly motivated and productive
workforce with low turnover. This in turn leads to higher output and market share, economies of
scale and lower costs, higher sales and profits. This benefits all stakeholders in the medium and long
term.
 
Potential stakeholder conflicts
 Shareholders expect profits in return for their investment risk and may not want the firm to be more
ethical than its competitors.
 Directors have a legal obligation to the shareholders to act in their best interests.
  The local community wants local firms to be environmentally sensitive in their operations and pressure
groups may take action against those that are not.
 Employees may be split in their opinions. They may want improved terms and conditions, but not to be
associated with a socially irresponsible organization.
 Stakeholder conflicts can be extremely damaging. Poorly motivated staff, for example, will lead to lower
productivity and profits. Conflict between management and the workforce may result in strikes. The
outcome of negotiations is influenced by the relative strengths of the stakeholder groups.
 
Minimizing stakeholder conflicts
 Rewarding employees by linking their performance to business success using share options and
performance-related pay
 Involving more stakeholders in the decision-making process
 Improving channels of communication between stakeholder groups
 Using public relations (PR) channels to inform stakeholders of the positive aspects of the business
operations.

1.5 Growth and Evolution

Economies and diseconomies of scale

Economies of scale enable a business to benefit from lower average costs (the cost per unit) by increasing the size
of its operations. Hence, these are often described as the cost-saving benefits enjoyed by a firm as it grows.
However, diseconomies of scale will occur if the firm growths beyond its ability to operate efficiently. This causes
the firm’s average costs of production to rise due to problems such as miscommunication, misunderstandings, and
poor management of resources.
 
Economies of scale
 Economies of scale arise when unit costs fall as output increases.
 Average cost per unit: total production costs in period / total output in period
 Fixed costs do not change in relation to output.
 
Internal Economies of scale
 Internal economies of scale occur for a particular organization (rather than the industry in which it
operates) as it grows. These cost savings are generated within the business by operating on a larger scale.
All in all, when a firm grows and expands, the firm is able to lower its production costs and overheads.
With lower average costs, the firm can reduce its prices to gain competitive advantages and attract more
customers.
 Arise from the increased output of the business.
 Buying economies: buying in greater quantities usually result in a lower price (bulk-buying)
 Technical: use of specialist equipment or process to boost productivity
 Marketing: spreading a fixed marketing spend over a larger range of products, markets and customers
 Network: adding extra customers or users to a network that is already established
 Financial: larger firms benefit from access to more and cheaper finance
 
External Economies of scale
 Occur within an industry.
 Arise from the industry as a whole.
 Often associated with particular geographic areas
 
Type Explanation
Financial economies Banks and other lenders charge lower interest to larger
 businesses for overdrafts, loans and mortgages because
they represent lower risk. Large firms enjoy favorable
terms and conditions when it comes to raising finance,
they tend to be able to borrow very large amounts of
money from banks or other lending institutions and at
lower interest rates. Consequently, lower interest
payments mean larger forms enjoy higher profit
margins due to the lower average costs of finance.
Lenders show preference for lending to larger
businesses with a proven track record and a diversified
range of products.
Marketing economies Larger businesses can spread their fixed costs of
marketing by promoting and advertising a greater range
of brands and products.
While total marketing costs tend to increase as a
business grows, they do not rise proportionately to
sales revenue. If a business doubles its sales, it does not
have to double its marketing expenses. This means that
the average cost of marketing falls as a firm’s sales
increase.
Managerial economies Larger businesses can afford to hire specialist functional
managers, thus improving the organization’s efficiency
and productivity. Large firms can attract the best
managers who can create a more productive working
environment and encourage higher efficiency and
goodwill from workers.
As a firm expands, it can afford to hire specialized
managers for different functional areas of the business
such as Marketing, Finance, Production (Operation
management), and Human Resources. These specialist
managers will be operating more efficiently than a sole
trader who would need to perform a range of different
managerial roles that s/he may not be specialized in.
The skills of specialist managers which allow them to do
the job faster and without costly mistakes (because of
their knowledge, skills, and experience) is a potential
economy for larger organizations.
Technical economies Cost savings by greater use of large-scale mechanical
processes and specialist machinery (such as mass
production techniques). Modern technology enables
businesses to produce very high levels of output at
much lower unit costs than smaller firms can do. Large
firms can afford to use sophisticated and specialized
machinery to mass produce their output using flow
production techniques.
Purchasing economies Larger firms can gain huge cost savings by buying vast
quantities of stocks (raw materials, components, semi-
finished goods and finished goods). The more items
purchased at one time, the larger the savings
(discounts) that their suppliers are likely to offer,
 thereby leading to a lower average cost of production.
This is because it is cheaper for suppliers to process and
deliver a large single order for 1 customer.
Risk bearing economies Large businesses can bear greater risks than smaller
ones due to a greater product portfolio. Hence,
inefficiencies will harm smaller firms to a greater extent.
Specialization economies Larger firms can afford to hire and train specialist
workers, thus helping to boost output, productivity and
efficiency (thereby cutting average costs of production).

Diseconomies of Scale
 Diseconomies of scale will occur if the firm grows beyond its ability to operate efficiently. This causes the
firm’s average costs of production to rise due to problems such as miscommunication, misunderstandings,
and poor (inefficient) management of resources.

Small organizations
 Characteristics of a small organization:
o Low sales turnover
o Low gross profit figure
o Few employees
o Minimal market share
o Very few retails store, if not only 1
o Low market value
 The optimum size for a business is the point at which average costs are at their lowest. However, it is
likely that other factors are more influential, such as:
o The aims, objectives and goals of the owners
o The potential size of the market
o Access to funding and investment
o Competition in the market.
 There are many reasons why small organizations survive and prosper. A small organization can:
o Be started at a very low cost, carried out with minimum investment, and potentially run on a part-
time basis
o Be run from the home with low overheads, making it price competitive despite its lack of scale
o Be entrepreneurial with a highly motivated owner
o Manage its cash transactions relatively easily
o Be close to its customers
o Be suited to e-commerce operations because it serves specialised niches
o Be more flexible to change.
 Small businesses face a variety of problems:
o Working on a low budget
o Poor liquidity and cash flow caused by larger firms delaying bill payments
o Higher costs than large firms, e.g., higher interest rates
o Excessive government regulation
o Customers prefer better-known brands.
o Lack of management skills.

Merits of small organizations

 Privacy: the owners of small businesses can enjoy greater privacy as their financial accounts do not have
to be made public. By contrast, the rivals of a large company have access to their balance sheet and profit
and loss account.
  Ownership and control: many small business owners may not want to expand so that they can retain
ownership and control of their own business. Becoming a much larger organization often involves selling
shares on a stock exchange, and whilst this can raise a significant amount of finance, it dilutes ownership
and control of the company. There might even be a threat of a hostile takeover bid if the company is
publicly listed on the stock exchange.
 Autonomy: the owners of small organizations enjoy autonomy (independence in decision making). They
have complete control and ownership of the business, so can make their own, independent decisions.
Unlike large companies, the owners of small organization do not face pressures from a board of directors
and shareholders.
 Individually: small businesses tend to be able to provide a more personalized service for their customers.
Hence, they generally have a closer relationship with their clients, which can provide smaller firms with
competitive advantages over their larger rivals.
 Maintenance: small organizations are easier and cheaper to set up and maintain. They also tend to have
lower running costs. Further, the business owner may not want the risk, responsibilities, and burdens that
come with managing a larger organization. This also includes wanting to avoid the increased workload
associated with business growth.
 Specialization: smaller firms can specialize in providing goods and services that larger organization find
unprofitable to supply. Small firms that specialize in niche markets, such as sporting equipment for paddle
board or fencing, can be highly profitable and earn extremely high profit margins. Operating in niche
markets also means the firm benefits from very limited competition.
 
Merits of large organizations
  Economies of scale
 Sources of finance
 Recruitment and retention of employees
 Brand awareness and brand loyalty
 Spreading risks

Internal Growth (organic growth)

 Takes place when an organization expands without the help of an external partner firm. Instead, it uses its
own resources to do so, such as using retained profits to invest in production facilities in new locations.
 How can a business grow internally:
o Changing price
o Promotion
o Better products
o Greater distribution network
o Preferential credit
o Increased capital expenditure
o Training and Development
o Value for money
 Advantages:
o Better control and coordination: it is often easier to grow internally than to rely on external sources,
internal growth also enables the organization to maintain control, whereas external growth can lead
to a loss of control and ownership of the business
o Relatively inexpensive: the main source of internal growth is retained profits, there might also be a
need to secure interest – bearing loan capital to fund the growth, but there is less risk involved with
internal growth as the amount of capital tends to be lower. The higher cost of external growth
means that for many firms, internal growth is the only suitable option.
o Maintains the corporative culture: a major problem for mergers and acquisitions is that when two or
more firms with very different cultures work together to create a new company. By contrast, internal
growth means there are no problems related with culture clashes or conflicting management styles.
 o Less risky: due to the above reasons, internal growth is the easiest and least risky method of growth
and evolution for most businesses. Furthermore, internal growth builds on the strengths of the
organization, such as its brand value and customer loyalty.
 Disadvantages:
o Diseconomies of scale: higher average costs of production can arise from internal growth.
Hierarchical structures tend to be a feature of internal growth, causing communication problems and
slower decision-making as a business grows.
o A need to restructure: although a sole trader can control and coordinate the business quite easily, if
it grows into a multinational company then the organizational structure has to be changed.
Restructuring takes time, effort and money, such as training needs. Specialist managers also have to
be hired as the firm and its workforce frows.
o Dilution of control and ownership: if a firm grows by changing its legal status, the owners (partners)
will have to share decision-making power with the new owners (shareholders). With more owners,
decision-making is prolonged and conflicts between the different stakeholders are more likely.
o Soler growth: internal growth is slower than external growth. Despite the risks, shareholders may
prefer more rapid methods of growth (such as mergers, acquisitions, takeovers or franchising) in
order to increase their return on investment.

External Growth (inorganic growth)

 Takes place when an organization needs the support of a partner organization for growth.
 Business organizations pursue external growth for several reasons, including:
o To grow at a faster pace
o To diversity their product portfolio
o To gain market share
o To gain customers in new and existing markets
o To reduce competition in the industry
 External growth is usually faster than internal growth, but also more expensive to execute (especially in
the cases of mergers and acquisitions). Inorganic growth typically requires external sources of finance,
and also involves a lot of bureaucracy. Gaining trust from partner companies can be another hurdle for
achieving inorganic growth.

1.6 MNCs
What is a Multinational Company
 Any business organization that has operations overseas, irrespective of whether it produces/sells goods
and/or provides services, i.e., MNCs operate in two or more countries.
 
Positive impacts of MNCs on their host countries
 Employment opportunities – MNCs can account for a significant number of jobs in the host country. This
has huge economic benefits, such as higher incomes, consumption, savings and tax revenues. Overall, this
can raise the quality life for citizens in the host country.
 Support for the workforce – In addition to job creation, MNCs create other opportunities for domestic
workers. For example, the wages offered by MNCs are often better than those offered by local firms (even
if the wages paid by MNCs are low by international standards). Local workers may also benefit from
training and development opportunities.
 Support for local businesses – MNCs can provide a range of benefits to local businesses, directly or
indirectly. For example, they are likely to purchase stocks from domestic suppliers of raw materials, semi-
finished goods and finished goods. This provides revenue for local firms and supports domestic industries.
In addition, MNCs are also likely to use the services of local firms, such as insurance and distribution.
 Choice and quality – MNCs offer consumers in host countries more choice and often better-quality
products. Domestic customers no longer have to rely only on local suppliers and must compete with the
prices and quality of the products offered by MNCs.
  Efficiency gains – Similarly, MNCs create increased competition for local suppliers, forcing the domestic
businesses to improve their operational efficiency. This covers aspects of the prices, quality and customer
care of local firms.
 Tax revenues – The host country’s government benefit from profitable multinational companies as they
pay corporate taxes. The additional finance can be spent to further improve the economy, such as better
infrastructure to further entice foreign direct investment.

Negative impact of MNCs on their host countries

 Negative impacts on local businesses – Many local firms, especially smaller ones, may lose customers to
the larger foreign multinational companies. A fall in their market share and profit can eventually lead to
bankruptcies and some job losses in the economy.
 The repatriation of profits – Any profits declared at interest and tax payments are accounted for may be
repatriated (sent back) to the home country, rather than the funds being used to invest further in the host
country.
 Exploitative business practices – MNCs have been known to be socially irresponsible, especially when
operating in less economically developed countries where rules and regulations are less stringent. This has
often resulted in workers being exploited (poor pay and working conditions) and business operations that
cause damage to the environment (such as air pollution and destruction of natural habitats). For example,
Coca-Cola’s bottlers have been accused of causing water shortages in certain parts of India and South
America.
 Loss of cultural identity – The growing presence of multinational companies, and the convergence of
habits and tastes brought about by globalization, can cause a depletion of local cultures. MNCs and
globalization have been blamed for causing a cultural shift in how people live, especially for the younger
generation.