UNIT 1

BUSINESS AND ITS ENVIRONMENT

Chapter 1
Learning Outcomes

1. The nature of business activity

 Purpose of business activity

 The concept of creating value
 The nature of economic activity, the problem of choice and opportunity cost
 Business environment is dynamic
 What a business needs to succeed
 Why many businesses fail early on

2. The role of the entrepreneur

 Qualities an entrepreneur is likely to need for success

 The role of business enterprise in the development of a business and a country

3. Social enterprise

 The range and aims of social enterprises

 Triple bottom line – economic (financial), social and environmental targets
Factors of production are resources needed by business to produce goods or services. They
include:

 Land – this general term includes not only land itself but all of the renewable and non-
renewable resources of nature, such as coal, crude oil and timber.

 Labor – manual and skilled labor make up the workforce of the business.

 Capital – this is not just the finance needed to set up a business and pay for its continuing
operations, but also all of the man-made resources used in production which include
capital goods, such as computers, machines, factories and vehicles.

 Enterprise – this is the driving force, provided by risk-taking individuals, that combines
the other factors of production into a unit capable of producing goods and services. It
provides a managing, decision-making and coordinating role
Opportunity cost – scarcity of resources and the need to choose leads to the next important
principle of our subject – opportunity cost. In deciding to purchase or obtain one item, we must
give up other goods as the benefit of the next most desired option which is given up

The concept of creating or adding value

All businesses aim to create value by selling goods and services for a higher price than the cost
of bought-in materials, this is called ‘creating value’. If a customer is prepared to pay a price that
is greater than the cost of materials used in making or providing a good or service, then the
business has been successful in creating value. It can also be referred to as ‘adding value’.
Consumer goods are goods sold to consumers for their own use or enjoyment and not as means
for further economic production activity. Consumer goods can be grouped into different
categories based on consumer behavior, how consumers shop for them, and how frequently
consumers shop for them.

Capital goods are physical goods used by industry to aid in the production of other goods and services,
such as machines and commercial vehicles

Consumer services are services that are sold to individuals. Consumer services derive much of
their value from the intangible elements that can’t be touched such as experience, outcome or
process.

Entrepreneur – someone who takes the financial risk of starting and managing a new venture
Why do new business often fail?

Some of the problems that a new start-up business face is:

 Lack of record keeping

 Lack of working capital
 Poor management skills
 Changes in the business environment
 Poorly produced business plan
 Competition from the established businesses
 Building a loyal customer base

Social enterprise or social business is defined as a business that has specific social objectives
that serve its primary purpose. Social enterprises seek to maximize profits while maximizing
benefits to society and the environment. Their profits are principally used to fund social
programs.

Social enterprises often have three main aims. These are:

1 economic – make a profit to reinvest back into the business and provide some return to
owners

2 social – provide jobs or support for local, often disadvantaged, communities

3 environmental – to protect the environment and to manage the business in an

environmentally sustainable way.

These aims are often referred to as the triple bottom line. This means that profit is not the sole
objective of these enterprises.

Triple bottom line: the three objectives of social enterprises: economic, social and
environmental
 Glossary
1. Consumer Goods: The physical and tangible goods sold to the general public - they include
durable consumer goods and non - durable consumer goods.

Example: Consumer durable good: cars and washing machines | non-consumer durable goods:
food, drinks and sweets that can only be used one

2. Consumer Services: The non - tangible products sold to the public.

Example: Insurance services and hotel accommodation

3. Factors of Production: These are the resources needed by business to product goods or
services.

Example: Land, labour, capital, and enterprise

4. Land: This term includes not only land itself but all the renewable and non - renewable
resources of nature.

Example: Coal, crude oil and timber

5. Labour: manual and skilled labour make up the workforce of the business.

6. Capital: This is not just the financed need to set up a business and pay for its continuous
operations, but also physical goods used by industry to aid in the product of other goods and
services.

Example: Machines and commercial vehicles

7. Enterprise: this is the driving force and provided by risk- taking individuals, that combine the
other factors of production into a unit capable of producing goods and services. It provides a
managing, decision - making and coordinating role.
8. Creating Value: Increasing the difference between the cost of purchasing bought - in -
materials and the price the finished goods are sold for.

9. Added Value: The difference between the cost of purchasing bought - in - materials and the
price the finished goods are sold for.

Example: Jewellers: well -designed shop - window display, attractive shop fittings, well - dressed
and knowledgeable shop assistants and beautiful boxes offered to customers to put new
jewellery in.

10. Opportunity Cost: The benefit of the next most desired option which is given up.

Example: If consumers choose to buy the smartphone over a pair of trainers, then the trainers
become the opportunity cost OR if the government chooses to build a fighter plane, then the
hospital becomes the opportunity cost

11. Entrepreneur: Someone who takes the financial risk of starting and managing a new venture.

Example: Bill Gates and Steve Jobs

12. Social Enterprise: A business with mainly social objectives that reinvests most its profits into
benefiting society rather than maximising returns to owners.

Example: The KASHF Foundation in Pakistan provides micro-finance (very small loans) and social-
support services to women entrepreneurs who traditionally find it very difficult to receive help

13. Triple Bottom Line: The three objectives of social enterprise: economic, social and
environmental.

Economic: Make a profit to reinvest back into the business and provide some return to owners.

Social: Provide jobs or support for local, often disadvantaged communities.

Environmental: To protect the environment and to manage the business in an environmentally

sustainable way.
 Sample Answers

1. 2018/NOV/P12/Q.4a

Q. Define the term ‘added value’. [2]

Added value is the difference between the selling price of a product and the cost of producing
that product

2. 2018/NOV/P.12/A/Q.4b

Q. Briefly explain two ways a restaurant could increase its value added. [3]
A restaurant could increase its added value by either increasing the selling price of the food
they are selling; this would drag the customers away as higher prices would allow them to go
for another restaurants. Or reduce the cost of making the food by buying raw materials at a
cheaper cost, from a supplier closer to the restaurant to reduce the transportation cost or by
using low quality ingredients but this would affect the food quality and hence customers
satisfaction as well, so customers would be lost.

3. 2017/NOV/P.12/A/2a

Q. Define the term ‘social enterprise’.[2]

A social enterprise is a business whose main objective is not to maximize the profits for thesake
of the business and its returns to owners, but their main objective is to utilize the profit to
benefit the society and environment

4. 2017/NOV/P.12/A/Q.3b

Q. Briefly explain two aims of a social enterprise. [3]

The two aims of a social enterprise would be to first make profits on their investment and to use
that profit ethically back into the business or to use that for the society. Its main focus is not to
expand and maximize the profits and market share but to achieve three bottom line objectives
of a social enterprise.
5. Explain what is meant by the term ‘triple bottom line’. [3]
The term triple bottom line explains the three main objectives of a social enterprise that are;
economical social and environmental. Economical objective allows the social enterprise to
produce the products in demand, make profits and then ethically reinvest into the business or
returns to owners. Social objective is to provide external benefits to the society by helping out
people or providing jobs to disadvantaged communities. Environmental objective is to make sure
they are not harming the environment and usingsustainable methods of production

6. List three factors of production that a new hairdressing business will require [3]
A new hairdressing business would require the following factors of production: Labors, capital
and enterprise

7. 2018/March/P.12/A/Q.2a

Q. Define the term ‘entrepreneur’. [2}

An entrepreneur is a person who has enterprise. He takes the risk, makes decision for the
business, hire labors and manage the business and its employees. He has the qualities of being
innovative, innovative, and optimistic with communicating skills.

8. 2016/June/P.12/A/1b/Q.3b
Q. Briefly explain two reasons why new businesses often fail. [3]
New business often fails due to first lack of experience in starting a business, managing the
production, making sure the coordination between the employees and much more and second
due to lack of finance and capital in a new business, which makes it difficult for the business to
survive unless it keeps making profits and is optimistic enough to not give up.
 CHAPTER 1
1. Define the term ‘social enterprise’.
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................

2. Briefly explain two aims of a social enterprise.

..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................

3. Define the term ‘entrepreneur.’

. ..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................

4. Briefly explain two reasons why new businesses often fail

..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................

5. Define the term ‘opportunity cost’.

..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................

6. Briefly explain how business decisions involve opportunity cost, using an appropriate example
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................

7. Define the term ‘value added

..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
8. Briefly explain two ways a restaurant could increase its value added.
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................

9. Analyze the qualities of a successful entrepreneur. {8}

..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................

10. Analyze the potential advantages to a community of a business with triple bottom line targets.{12}
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
Chapter 2
Learning outcomes

1. Economic sectors

 Primary, secondary and tertiary sector businesses

 The public and private sectors

2. Legal structures

 Main features of different types of legal structure, including ability to raise finance

 Appropriateness of legal structure: sole trader, partnership, private limited companies,

public limited companies, franchises, co-operatives, joint ventures

 Concept of limited liability and its importance

 Problems resulting from changing from one legal structure to another

Levels of business activity: There are three main types of industry in which firms operate.
These sectors form a chain of production which provides customers with finished goods or
services.

1. Primary
2. Secondary
3. Tertiary

Changes in business activity

Industrialization in DEVELOPING countries: the development of industries in a country
(or region on a wide scale) where the focus is on the manufacturing sector.

Benefits Problems
 Increased national output (GDP)  Mass movement of population to
towns (housing and social problems)
 Increased standard of living
 Increased exports  Import of raw material needed for
production (foreign currency outflow)
 Lower imports
 Increased influence / control of
 Job creation multinational companies
 Tax revenue for government

Deindustrialization in DEVELOPED countries: Reduction of industrial activity or capacity

in an economy (or region on a wide scale) marked by a change in focus from Secondary sector
to Tertiary sector.
 Benefits
 Rising incomes mean people spend
more on services rather than goods
 Growth in tourism hotels and
restaurant services financial services
Problems
 Spending on physical goods rises slowly
 Manufacturing business in developed
countries face more competitors firm
developing countries
 Rising imports of good Is taking away
firm the domestic secondary sectors
firms

 Public sector public sector: comprises organization’s accountable to and controlled by

central or local government (the state)

 Private sector Private sector: comprises businesses owned and controlled by individuals
or groups of individuals
The Concept of Limited Liability
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 (LLC). In other words,
investors' and owners' private assets are not at risk if the company fails

Sole Proprietor / Trader (One owner)

Sole trader is an individual who owns and runs a business, taking all responsibility of final
decisions. The owner of a sole treader has unlimited liability and few administrative or legal
requirements. The business is not a separate legal entity.
Advantages of being a sole trader

 Cheap, quick, and easy to set up.

 Owner controls the business and has confidentiality.
 Flexible.

Disadvantages of being a sole trader

 Unlimited liability
 Difficult to raise finance from loans.
 Demands that the owner be skilled at all aspects of business operation.
 Difficult for the owner to be absent from the business — no sick leave.

Partnership (More than one owner)

A Partnership is when two or more people own and run a business. Partnerships generally have
unlimited liability and are not legal entities, so individual partners have legal responsibility.

Advantages of a partnership
 Easy and cheap to set up.
 More capital-raising ability with extra partners.
 Possibility of ‘sleeping partners’ to raise finance.
 Shared responsibility, workload, and stress.
 Wider range of skills.

Disadvantages of a partnership
 Unlimited liability restricts ability to raise capital and partners may be forced to use
personal assets to pay business debts.
 Slower decision making and less control for individuals.
 Possible arguments about work arrangements and share of profits.
 Partnership finishes if one partner leaves, so no continuity.

Limited Company
Private or public limited companies share the following features:
 Incorporation: the company is a separate legal
entity from the owners and can sue and be sued.
 Ownership through share issue and can be sold.
 Limited liability of owners.
 Management is by a board of directors elected by
the shareholders.
 Setting up requires formal registration, regular
filing of accounts and reports open to the public.
 Limited liability and share issue enable large amounts of capital to be raised.

This means that limited companies are more expensive to set up but have access to greater
sources of capital, are seen as more secure and continue until wound up or taken over.

Private limited company:

 Relatively cheaper to set up than a public limited company
 Shares can only be traded privately, not advertised for sale on the stock exchange
 Not all accounts and reports are open to the public
 Cannot be taken over without agreement of shareholders

Public limited company:

 Usually, large businesses
 Shares issued for sale publicly to anyone via a stock exchange
 Expensive to set up
 Account, reports and AGM open to anyone
 Easier to take over as shares available in open market
 Huge amounts of capital can be raised via share issue
 Complex to run, directors separate from shareholders so directors might seek different
objectives from shareholders
Legal formalities in setting up a limited company
Articles of Association: this document covers the internal workings and control of the
business for example, the names of directors and the procedures to be followed at meetings will
be detailed

Memorandum of Association: this states the name of the company, the address of the head
office through which it can be contacted, the maximum share capital for which the company
seeks authorization and the declared aims of the business
Other forms of business organization

Franchises
A franchise is a smaller business that uses the advantages of
a large well-known brand in return for payment. The
franchisor often supplies a name, logo and generic
marketing, and lays down conditions for the product. The
franchisee supplies the premises, equipment and staff.

The franchisee gets:

 Access to a successful marketing model and product,

but this may be restrictive
 Low-cost starting up but weak negotiating position for further supplies
 Cheap resources due to access to economies of scale but could have franchise
withdrawn if conditions are not met the

The franchise gets:

 Guaranteed regular income, assuming the success of franchises

 Access to local knowledge, but brand name could be damaged if a franchise is poorly
run

 control over final product, but high cost of monitoring and coordination
Cooperative
A cooperative is an autonomous association of people united voluntarily to meet their common
economic, social and cultural needs and aspirations through a jointly owned and democratically
controlled business.

Advantages
 All members contribute to the running of the business
 All members have one vote
 Profits shared equally among members

Disadvantages
 Member may not be skilled enough
 Capital cannot be raised by issuing shares to general public
 Slow decision-making process


Joint ventures
When two or more businesses work together on a particular project, such as building a bridge.
They may do this by sharing staff, capital and experiences but keep their own identity. Or they
may set up a new jointly owned and controlled business for the purpose of carrying out the
project. Joint ventures often last only for the duration of the project

Advantages of Joint Ventures

 Access to new markets and distribution networks.
 Increased capacity.
 Sharing of risks and costs (i.e. liability) with a partner.
 Access to new knowledge and expertise, including specialised staff.
 Access to greater resources, for example technology and finance. 
Disadvantages of joint venture
 Objectives of the venture are unclear.
 Communication between partners is not great.
 Partners expect different things from the joint venture.
 Level of expertise and investment isn't equally matched.
 Work and resources aren't distributed equally.

• Example 1: Google parent company and the pharma company Glaxo and Smith decided to
enter into a joint venture agreement to produce bioelectric medicines the ratio of the
ownership was 45%-55%. The joint venture lasted and was committed for 7 years with a capital
of Euro 540 million

Holding companies, A business that owns and controls a number of separate businesses,
but DOES NOT unite them into on unified company
 Glossary
1. Primary Sector Business Activity: Firms engaged in the extraction of natural resources so they
can be used and processed by other firms. Example: Oil extraction, fishing and farming

2. Secondary Sector Business Activity: Firms that manufacture and process products from
natural resources. Example: Brewing, baking, clothes - making and construction

3. Tertiary Sector Business Activity: Firms that provide services to consumers and other
businesses. Example: Retailing, transport, insurance, banking, hotels and tourism

4. Public Sector: Comprises of organisations accountable to and controlled by central or local

government (the state) Example: Military and police

5. Private Sector: Comprises of business owned and controlled by individuals or groups of

individuals. Example: Sole proprietors

6. Mixed Economy: Economic resources are owned controlled by both private and public sectors.
Example: England and Canada

7. Free - Market Economy: Economic resources are owned largely by the private sector with very
little state intervention. Example: Hong Kong, with its extremely low tax rates, minimal
regulations on businesses, and highly capitalist system of economics, ranks as 89.8%
economically free, which is the highest rating in the world.

8. Command Economy: Economic resources are owned, planned and controlled by the state.
Example: North Korea

9. Sole Trader: A business in which one person provides the permanent finance and in return,
has full control of the business and is able to keep all of the profits. Example: Small retailers,
plumbers, builders
10. Partnership: a business formed by two or more people to carry on a business together with
shared capital investment and, usually, shared responsibilities. Example: McDonalds: Richard and
Maurice McDonald Apple Inc: Steve Jobs and Paul Allen

11. Limited Liability: The only liability - or potential loss - a shareholder has if a company fails is
the amount invested in the company, not the total wealth of the shareholder.

12. Private Limited Company: A small to medium - sized business that is owned by shareholders
who often members of the same family; this company cannot sell shares to the general public.
Example: Ernst & Young

13. Share: A certificate confirming part ownership of a company and entitling the shareholder
owner to dividends and certain shareholder rights.

14. Shareholder: A person or institution owning shares in a limited company.

15. Public Limited Company: A limited company, often a large business, with legal right to sell
shares to the general public - share prices are quoted on the national stock exchange: Example:
Pakistan State Oil Company Ltd (PSO)

16. Memorandum of Association: This states the name the company, the address of the head
office through which it can be contracted, the maximum share capital for which the company
seeks authorisation and the declared aims of the business.

17. Articles of Association: This document covers the internal workings and control of the
business such as the name of the directors and the procedures to be followed at meetings will
be detailed.

18. Cooperatives: A cooperative is an autonomous association of people united voluntarily to

meet their common economic, social and cultural needs and aspirations through a jointly owned
and democratically controlled business.
19. Franchise: A business that uses the name, logo and trading systems of an existing
successfulbusiness. Example: Ben and Jerrys, Mc Donald’s and Subway

20. Joint Venture: Two or more businesses agree to work closely together on a particular
projectand create a separate business division to do so. Example: Sony-Ericsson - Sony-Ericsson
is a jointventure between Sony and the Swedish company Ericsson.

21. Holding Company: A business organisation that owns and controls a number of separate
businesses, but dos does not unite them into one unified company. Example: HSBC Holdings
PLCand Goldman Sachs

22. Public Corporations: A business enterprise owned and controlled by the state also known
asnationalised industry. Example: Publicly owned TV channels
 CHAPTER 2
1. Define the term ‘co-operatives’[2]
.........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
2. Explain two advantages to a business of being part of a joint venture [3].
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
3. Define the term ‘private sector’[2]
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
4. Explain two advantages that a business in the public sector may have that a business in the private
sector may not.[3]
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
5. Explain the benefits of a co-operative to its members[2]
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
6. Distinguish between the ‘private sector’ and the ‘public sector[3]
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
7. Briefly explain two advantages of public sector businesses[5]
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
8. Discuss why the shareholders of a public limited company might not support corporate social
responsibility (CSR) as a business objective[8]
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
9. Analyze the advantages to an entrepreneur of purchasing a franchise to start a business[8]
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
10. The purchase of an internationally recognized fast food franchise guarantees business success.’
Discuss this view.[12]
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
11. Analyze the advantages of a partnership as a legal structure for the owners of a small business[8]
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................

12. Discuss the most important factors that could influence the success of a small business
manufacturing highly priced ‘designer’ handbags
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................

13. Analyze problems a business could experience in its first year of trading.
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
Size of Business
Learning outcomes

1. Measurements of business size

 Different methods of measuring the size of a business (profit is not an acceptable measure
of business size)

2. Significance of small businesses

 Advantages and disadvantages of being a small business

 Strengths and weaknesses of family businesses
 The importance of small businesses and their role in the economy
 The role of small businesses as part of the industry structure in some industries

3. Internal growth

 Why and how a business might grow internally

Who wants to measure business size and why?

Different stakeholders will have different reasons for keeping an eye on the activities of a
business.

 Government wants to measure business size because it may

want to give assistance to small start-up businesses or confirm
how much tax big businesses should pay.

 Investors (shareholders) in a firm want to measure business size

because they want to compare the size of the business with
close competitors to find out, if the particular business is
growing and how fast.

 Customers of the business want to measure business size because they want to
purchase goods and services from well-established stable firms rather than buy from
small companies that may cease production anytime, hence stop providing after-sale
services.

 Employees want to measure business size because they want to know whether their
salaries will increase in the near future as the business grows and to check whether
the business will offer them opportunities for promotion anytime soon.

 Local community wants to measure business size in order to find out about any job
opportunities created by the business in the future.
Ways of measuring size of business

No of outlets sales turnover market share

Ways of measuring business size

Capital employed number employed market capitalization

1. Capital employed: the total value of all long-term finance invested in the business.

2. Market capitalization: the total value of a company’s issued shares.

3. Market share: sales of the business as a proportion of total market sales

4. Sales turnover: total value of sales made by a business in a given time period

5. Number of people employed: The total number of employees who work in the business
in a given moment in time

6. Number of outlets: Extent of availability of product judged by the number of branches

How to choose the right method to measure?

Although the abovementioned methods are used universally by business, there is one particular
method that can conclusively be considered as the best method to use. The choice of method
would depend upon the industry.

 Hotel – Number of rooms

 Retailers – Total floor space
 Mobile service – Number of cell towers
For the best possible outcome, it is advised to use multiple methods before concluded which
business is the largest.

Capital Sales Selling space No of

Fashion brands Employees
employed turnover sqm outlets
Nike 300 150 250 5500 15
Adidas 800 500 1200 300000 20
Reebok 1200 700 1000 400000 35
Puma 1500 400 400 150000 40

Difficulties of using these methods

The various methods are not a definitive measure of the size of a business because:

 A business using a highly mechanized process will employ fewer workers than a business
using labor-intensive methods.

 A high value of capital employed might reflect the fact that very expensive equipment is
essential for the business to function.

 A business could have a large market share of a very small market.

 The current market value of a business might be due to a sudden surge or decline in its
share value, as in the case of some of the dot.com companies.

 Sales turnover can be high due to the sale of only a few very high-value items, such as
the highly specialized computer control mechanisms being used on the current space
exploration mission to Mars.
Advantages and disadvantages of being a Small Business

Advantages

 Small businesses are often able to respond quickly to

market changes without need of much further investment.

 It is often small businesses that provide a personal and/or

specialized service to customers.

 The owner(s) of a small business might be able to retain

more power and control over the business than if they
grew larger and involved more people in management
and/or ownership of the business.

Disadvantages

 Small businesses sometimes find it difficult to obtain bank loans because they have fewer
assets to offer as collateral. This can lead to a lack of finance for growth or development
of the business.

 A smaller number of employees might mean that the business lacks the opportunity to
employ a range of specialist workers.

 Due to not enjoying economies of scale, the cost of goods and materials might be higher
than those paid by larger businesses. This could mean that a small business must charge
a higher price and therefore could struggle to remain competitive with larger businesses.
Family-owned businesses

Businesses are those that are actively owned and managed by at least two members of the same
family. In many cases, the family that founded the business retains complete ownership of it

Strengths

 The family business is more likely to have members who will be loyal to each other and
therefore to the business.

 The family bonds should lead to a stronger working relationship.

 The family employees will all know how to approach one another when discussion is
needed.

Weaknesses

 Family feuds might affect the working relationship.

 Family members who are not performing well at work might resent any discipline from
another family member.

 Family members are likely to be in the managerial roles and this can prevent the
introduction of employees from outside the business who might have expertise that could
prove very beneficial to the business.

 The emotional involvement of family members might make some decisions difficult. For
example, if one family employee is worthy of promotion, another relative might resent
this.
 Glossary
1. Revenue: The total value of sales made by a business in a given period of time.
Formula: Selling Price x Quantity

2. Capital Employed: The total value of all long - term finance invested in the business.

3. Market Capitalisation: The total Value of a company’s issued shares. Formula: Current Share
Price x Total Number of Shares Issued

4. Market Share: Sales of the business as a proportion of total market sales

Formula: Total Sales of Business x 100

Total Sales of Industry

5. Internal Growth: Expansion of a business by means of opening new branches, shops or

factories (also known as organic growth). Example: A retailing business opening more shops in
towns and cities where it had previously had none such as Starbucks
 CHAPTER 3

1. Analyze the role of small businesses in a country’s economy {8}

..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................

2. Discuss the factors that could influence the success of a small business manufacturing fashion clothing for
children.{12}
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
Learning Outcomes

1. Business objectives in the private sector and public sector

 The nature and importance of business objectives at corporate, departmental and

individual levels
 Corporate social responsibility (CSR) as a business objective

2. Objectives and business decisions

 The different stages of business decision making and the role of objectives in the stages
of business decision making
 How objectives might change over time
 Translation of objectives into targets and budgets
 The communication of objectives and their likely impact on the workforce
 How ethics may influence business objectives and activities
Importance of Objectives
Business objectives are long-term goals or targets that a business will work towards. The
objectives will determine all activities that the various sections of the business undertake.

 Creates a clear focus

 A business aim helps direct, control and review the success of business activity

 Objectives must have a strategy (plan of action) to be successful!

“SMART” Objective Criteria

 Specific: In what they want to achieve.

 Measurable: So that progress or ultimate achievement can be assessed.

 Achievable: So that everyone involved will feel capable of reaching the goal and,
hopefully, will be motivated to achieve it.

 Realistic & Relevant: Because setting unrealistic objectives can demotivate a

workforce. It might be that it is the timeframe that must be realistic as some goals will
take longer than others.

 Time Specific– Should have a clear time limit

Hierarchy of Objectives
 Something for the future
 Gives you a direction to work towards.
 Strategy is the actual plan on how to achieve the objective.

1. Aims are long term objectives a business hopes to achieve in the future. Aims help develop
a sense of direction for the business corporate objectives allow an assessment to be made
corporate aims provide an assessment to be made in accordance with bs progress corporate
aims provide framework for strategy

2. Mission Statement is a concise explanation of the organization's reason for existence. It

describes the organization's purpose and its overall intention. The mission statement
supports the vision and serves to communicate purpose and direction to employees,
customers, vendors, and other stakeholders.
Three core aspects of a well-written mission statement are:
 Highlights the company’s core aims
 Motivates employees
 Generates interest in stakeholder group

A mission statement is not meant to be detailed working objectives, but they help to establish in
the eyes of other groups ‘what the business is about’.

Mission statements are criticized for being:

 Too vague and general, so that they end up saying little that is specific about the business
or its future plans
 Based on a public relations exercise to make stakeholder groups feel good about the
organization
 Virtually impossible to really analyze or disagree with
 It is common for two completely different businesses to have very similar mission
statements.

3. Corporate objectives are those that relate to the business as a whole. They are usually
set by the top management of the business, and they provide the focus for setting more
detailed objectives for the main functional activities of the business.

Typical corporate objectives include:

1. Survival – a short term objective, probably for small business just starting out, or when a new
firm enters the market or at a time of crisis

2. Profit maximization – try to make the most profit possible – most like to be the aim of the
owners and shareholders.

3. Profit satisficing – try to make enough profit to keep the owners comfortable – probably the
aim of smaller businesses whose owners do not want to work longer hours.
4. Growth – where the business tries to make as many sales as possible. This may be because
the managers believe that the survival of the business depends on being large. Large
businesses can also benefit from economies of scale.

5. Increase in market share: attempt to increase own customer base and eat into competitor’s
clientele

6. Corporate social responsibility (CSR):

This concept applies to those businesses that consider the

interests of society by taking responsibility for the impact of
their decisions and activities on customers, employees,
communities, and the environment.
However, choosing to have CSR as an objective is a decision
that the business will have to take keeping in mind the
additional costs that are associated with it. A company may or
may not choose to engage in CSR, but given the demands of
the modern consumers, CSR provides an additional reason to choose a company’s products
over its competitors.
The potential benefits of CSR to companies include:

 Better brand recognition

 Positive business reputation
 Increased sales and customer loyalty
 Operational costs savings
 Greater ability to attract talent and retain staff
 Ethical growth
 Avoiding fines and government action

Conflicts between Corporate Objectives

 Growth VS Profit– profit can be sacrificed to increase sales.

 Short Term vs long term– buying new machinery or developing new products will result
in a short-term loss for a long-term gain.

 Stakeholder Conflicts – Employees of an organization will be expecting a reward (bonus)

for good performance; however, the owners want to take most of that as returns on
their investments.

Internal influences on corporate objectives

 Business Ownership
 Attitude to Profit
 Ethical Stance
Organizational Culture
Leadership
 Stakeholder influence

External influences on corporate objectives

 Economic environment
Political / legal environment
 Competitors
Social & Technological change
4. Departmental objectives

5. Individual targets
Management by objectives (MBO) is a strategic management model that aims to improve the
performance of an organization by clearly defining objectives that are agreed to by both
management and employees. According to the theory, having a say in goal setting and action
plans encourages participation and commitment among employees, as well as aligning objectives
across the organization.

Alternative Aims and Objectives

Not all businesses seek profit or growth. Some organizations have alternative objectives.
Examples of other objectives:

 Ethical and socially responsible objectives – organizations like the Co-op or the Body Shop
have objectives which are based on their beliefs on how one should treat the environment
and people who are less fortunate, e.g. social enterprise.

 Public sector corporations are run to not only generate a profit but provide a service to the
public. This service will need to meet the needs of the less well off in society or help improve
the ability of the economy to function e.g., cheap, and accessible transport service.
 Public sector organizations / government watchdogs monitor or control private sector
activities to ensure that the business are complying with the laws laid down (e.g. petrol
prices).

Objectives and decision-making

Effective decision-making requires clear objectives. Business managers cannot decide on future
plans of action – strategies – if they are uncertain of which direction, they want to take the
business in.

Clearly, without setting relevant objectives at the start of this process, effective decision-making
for the future of the business becomes impossible.
 Glossary
1. Ethical code (code of conduct): a document detailing a company’s rules and guidelines on
staff behavior that must be followed by all employees

2. Corporate Aims: These are very long - term goals that a business hopes to achieve. The core
central purpose of a business’s activity is expressed in its corporate aims.

Example: New car and truck designs are an important strategy to help Daimler (car
manufacturer) achieve its long-term aim

3. Mission Statement: A statement of the business’s core aims, phrased in a way to motivate
employees and to stimulate interest by outside groups.

Example: GOOGLE: ‘To organize the world’s information and make it universally accessible and
useful.’

4. Corporate Objectives: Based on the central aim and mission of the business, but they are
expressed in terms that provide much clearer guide for management action or strategy.

Example: Profit maximisation, profit satisficing, growth, increasing market share, survival and
corporate social responsibility

5. Corporate Social Responsibility (CSR): This concept applies to those businesses that consider
the interests of society by taking responsibilities for the impact of their decisions and activities
on customers, employees, communities and the environment.

Example: Google Green is a corporate effort to use resources efficiently and support renewable
power. But recycling and turning off the lights does more for Google than lower costs
6. Management by Objectives: A method of coordinating and motivating all staff in an
organisation by dividing its overall aim into specific targets for each department, manager and
employee.

7. Ethical Code: A document detailing a company’s rules and guidelines of staff behaviour that
must be followed by all employees.
 Sample Answers
2016 Nov / 13 / Sec B/ 5b.

Q. Discuss why senior managers leading public limited company might decide not
to have corporate social responsibility (SR) as a business objective. (12 marks)
CSR (Corporate Social Responsibility) is the phenomenon where the business operates to make
profit also keeping the society's welfare in mind, not to harm it in any way, the measures of which
are taken by making use of the profits of the company. If a company (it’s senior managers)
decides whether to have CSR as a business objective, they should always consider the advantages
and disadvantages of doing so.
Firstly since the company's profits to made use of to take social measures, the net profits per
year might decrease hence decreasing dividends to the shareholders. However, making CSR as
the company's objective helps promote them amongst the consumers as being environmentally
friendly and not a possible threat to the eco-system, but by doing so, large amounts of profits
might be used up for. marketing, advertisements, etc. which in turn has an adverse impact on
the company's profits. Also, legal changes at the local, national, and international level often
force the company to refrain from such practices as the stakeholders or even the shareholders
cannot be paid less or told to compromise to meet social objectives. Contradictive of it, CSR helps
acquire customer loyalty which is beneficial for the company in the long run. All such measures
require extra supervision, and attention from the senior managers hence they might be diverted
from the actual aims of the business. However, with passing time, people in the world are
becoming more and more socially and environmentally responsible hence profit can be
maximized by attracting consumers by taking green measures
Conclusively choosing CSR as a business objective is more advantages for the company than
disadvantages in terms of profit maximization and increase customer loyalty which is very
essential for bs survival

Q. Discuss how ethics may influence the activities of a business (8 marks)

Being ethical means doing business in a way that is thought to be morally correct and not
necessarily the most profitable. However, working ethically or unethically influences the
activities of a business in many ways. one example of working unethically might be to accept
bribes to secure business' contracts which is beneficial in the short term but is still unethical and
there is a potential risk of the company being sued at some time in the future. Secondly,
employing children in place of adult employees to do the same task is unethical but for the
company, they can just get away by paying the children lower wages hence saving money.

However, acting ethically has both, adverse and positive effects on the business activity although
it can be expensive to follow in the short term, for example, hot talking bribes might result in a
loss of sales Paying fair wages raise wage cost and may reduce a firm’s competitiveness against
other businesses that exploit workers. However, acting ethically. is beneficial in the long run, as
ethical business activity is more likely to attract customers as CSR is now becoming a global
phenomenon. Bad publicity is prevented hence decreasing the risk of losing consumer loyalty
and ever increased sales lastly, ethical businesses have the advantage of being awarded
government contracts as well as a well-qualified staff who are more likely attract to work In an
ethical environment

2016 June / 12 / Sec B

Q. Analyze the importance to a large business of setting corporate objectives (8

marks)

Corporate objectives are the very long term goals that a business hopes to achieve which
expresses a company's core central purpose. The objectives are the basis which direct the
company towards effective management in the long run. The objective guides the employees at
the divisional, departmental, and individual levels to set targets for Themselves and work
accordingly to achieve these goals in the time limit they have set.

The corporate objectives once set are then transferred or communicated to the different
structures of the business so that work is divided which keeps them closely knitted working
towards a common objective. Without first selling corporate objective, strategic planning
becomes difficult hence they are the basis of any corporation. Business objective also play a vital
role in measuring how far has the business come and far it still has to go to achieve the objective
set. By setting a specific target, employees are motivated to reach a target hence work
enthusiastically without objectives, a company is more likely to cease to compete and flourish as
they have nothing specific Io work towards which is why it is very important for large businesses
to set corporate objective before venturing into a new business or growing an existing one.
`

Stakeholder Group
Learning Outcomes

1. Business stakeholders

 Individuals or groups interested in the activities of business, e.g.,

owners/shareholders, managers, employees, customers, suppliers, lenders,
government and the local community

2. The importance and influence of stakeholders on business activities

 Roles, rights and responsibilities of stakeholders

 Impact of business decisions/actions on stakeholders, and their reactions

 How and why a business needs to be accountable to its stakeholders

 How conflict might arise from stakeholders having different aims

 How changing business objectives might affect its stakeholders

Stakeholders: people or groups of people who can be affected by – and therefore have an
interest in – any action by an organization.

Stakeholder concept: the view that businesses and their managers have responsibilities to a
wide range of groups, not just shareholders.

All shareholders are stake holders but not all stakeholders are shareholders

The main stakeholders of a business are:

 Owners/ shareholders
 Customers
 Suppliers
 Employees
 Local communities
 Government and government agencies
 Special interest groups – for example, pressure groups
 Lenders / banks
Rights & Responsibilities of stakeholders
Customers justify the existence of a business; without customers there is no reason for the business to
exist. Customers can expect to receive a product that is in good condition and safe to use. In return,
customers are expected to pay on time for goods and services received and not to make any false claims
against the business.

Suppliers are the providers of goods and services required by businesses. They expect to be paid for all
goods and services provided and within an agreed time limit. Suppliers are expected to supply goods
and services of a required standard or to a standard agreed between the supplier and the purchasing
business.

Employees expect to be paid fairly and on time, and to be treated in a way that complies with
employment law. Employees have a responsibility to the business to work efficiently and not to
breach their contract with the business

Managers organize the resources of a business in order to achieve the business objectives. They
must ensure that they have the relevant resources in place to allow those objectives to be
satisfied. It is reasonable for managers to expect that they will be given access to the necessary
resources to allow them to work towards meeting business objectives. They have a
responsibility to manage the resources of the business in an efficient and effective manner.

Owners/shareholders provide permanent finance in return for a share in ownership. They

expect to receive dividends on the shares they hold if the business makes a profit. The
shareholders are expected to use their voting power to appoint the best people to the board of
directors and to ensure that the business follows ethical policies.

Lenders / Banks provide finance for the business and have a right to expect that repayments
will be made by the business in accordance with the lending agreement. The banks will be
expected to make funds available to a business once an agreement had been reached. The
banks might also be expected to allow only reasonable loan agreements to be made. If a bank
lends more than a business can afford to repay, this can result in severe financial difficulty for
the business and might result in its closure.

Suppliers are the providers of goods and services required by businesses. They expect to be
paid for all goods and services provided and within an agreed time limit. Suppliers are expected
to supply goods and services of a required standard or to a standard agreed between the
supplier and the purchasing business.
Conflicts between different stakeholders:
 Customers want good-quality products at low prices, but if the highest possible profit is to
be gained then higher prices might have to be charged. Higher profits will be desired by
shareholders because high profit can mean higher dividends being paid to them.

 Owners/shareholders want the business to have large profits, but this might conflict with
the employees, who want to be paid higher wages. Higher wages will increase costs but
reduce profit.

 The government usually aims to have lower unemployment and will therefore conflict with
a business that wants to increase its use of machinery and reduce the number of people
employed. However, a change in production methods might make the business more
profitable and therefore liable to pay more tax to the government.

 If suppliers charge higher prices for their goods, a business will have increased costs, so
reducing profits and dividends paid to shareholders will be low

Stakeholders vs. shareholders

Trying to please all stakeholders may decrease profit which can decrease shareholder value

• Compromises are made

• Pros and Cons are considered
• Who are the more important stakeholders in the situation?
Corporate social responsibility: Concept that accepts that businesses should consider the
interests of society in their activities and decisions, beyond the legal obligations that they have

Advantages of CSR:

 It builds public trust. 88% of consumers said they were more likely to spend money for a
company that supports and engages in activities to improve society
 It enhances positive relationships.
 Sustainability
 It increases profits.
 Encourage professional and personal growth
Disadvantages of CSR:

 Higher Costs
 Clashing of business objectives
 Interests of the shareholders
 Competitive disadvantage
 Impact upon the reputation of the Corporation
Ethics
Ethics are not limited to matters of legality but can be a moral guide to how a business might
conduct itself. Ethics can influence business objectives because consumers are becoming
increasingly aware of when a business is thought to have behaved in an unethical or immoral
way.
It gives the business an understanding of the impacts of the right and wrong decision on
business activity and forces the business to choose the right thing to do by the stakeholders.

Ethics might influence a business objective or activities in the following ways:

 A business seeking to increase its profits might lower its labor costs by employing child
labor. As customers could view this as unethical, it might deter them from purchasing the
business’s product(s).

 Using non-polluting methods of production may be more expensive than a method that
causes substantial pollution. A profit-maximizing business might be tempted to use the
cheaper option, but this would be unethical.

 Some businesses choose to locate in countries where the laws restricting business activities
are very limited or weak. Some might argue that such a move makes good business sense,
whilst others might argue that it is immoral or unethical because the move was made purely
in order to exploit the weaker laws of that country.

 The testing of products on animals is seen as morally unacceptable by some customers.

However, a business might be trying to confirm the safety of its products before selling
them. Is such a business unethical?
 Glossary

1. Stakeholders: people or groups of people who can be affected by – and therefore have an interest
in – any action by an organization.

2. Stakeholder concept: the view that businesses and their managers have responsibilities to a wide
range of groups, not just shareholders

3. Corporate social responsibility: the concept that accepts that businesses should consider the
interests of society in their activities and decisions, beyond the legal obligations that they have
 Past paper questions
1. Define the term ‘ethics.[2]
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
2. Briefly explain two ways ethics might influence the activities of a business[3]
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
3. Define the term ‘stakeholders’[2]
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
4. Explain two responsibilities of a stakeholder group.[3]
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
5. Explain how the interests of two stakeholder groups could affect the decisions of a business[5]
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
6. Explain how a business might benefit from acting ethically.[5]
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
7. Analyze the rights and responsibilities of employees as stakeholders in a business[8]
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
8. Discuss how the stakeholders of a public sector organization might be affected by a reduction in
Government financial support for the organization.[12]
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
9. Analyze why a business needs to be accountable to its stakeholders.[8]
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
10. Analyze why a business needs to be accountable to its stakeholders.[12]
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
External influences on business activity
Why does the government support businesses?
Businesses creates employment opportunities. Even though each one may not employ many staff,
collectively the small business sector employs a very significant proportion of the working
population in most countries. Increase competition for larger business. Without this competition,
larger firms could exploit consumers with high prices and poor service. Increase national output
as small businesses contributes significantly to the output of the country New start-ups of today
may become large businesses of tomorrow.

How does the government support businesses?

Providing low cost premises to new businesses (Location Support) government Grants to small
businesses to train employees (Labor Support) government Interest free loans to small
businesses (Financial Support) government Offering various business ideas and support

Government assistance for all businesses

It is also common for governments to intervene in industry in ways that will support both small and large
businesses. These measures could include:

 subsidies to help keep prices down.

 subsidies to stop a loss-making business failing and protect employment.
 grants to relocate to particular areas with high unemployment.
 financial support for consumers to buy products (e.g. houses) that will increase national output.
What is Economic Growth?

This is when a country’s Gross Domestic Product increases i.e. more goods and services produced than in
the previous year. The Gross Domestic Product (GDP) is the total value of output of goods and services in
a country in one year. When the countries are experiencing economic growth the living standards are
generally improving.

Causes of economic growth

The main factors that lead to economic growth are:

 Technological changes and expansion of industrial capacity: Governments stimulate this form of non-
inflationary economic growth by encouraging business investment and innovation in new industries
and products.
 Increases in economic resources, such as a higher working population or discovery of new oil and gas
reserves: A country’s economy can increase its total output when more economic resources are
available.
 Increases in productivity: Higher labor productivity can be achieved with a more highly skilled
workforce and a greater willingness by workers to accept and work with new technology.

How can Economic Growth affect the business?

If Economic growth is not achieved i.e. if output is decreasing it might cause various problems such as;

 Falling output is directly linked to decreasing demand and hence increasing unemployment
 Standard living will generally decrease
 Lack of motivation for businesses to expand and invest

Benefits of economic growth

Economic growth can lead to the following benefits:

 Real GDP growth raises average living standards if the population increases at a slower rate.
 Higher output levels usually result from increased employment, which increases consumer incomes
and reduces the rate of unemployment.
 More resources can be devoted to desirable public-sector projects, such as health and education,
without reducing resources in other sectors.
 Absolute poverty can be reduced, or even eliminated, if the benefits of growth spread to the whole
population.
 Businesses should experience rising demand for their products, although this will depend on income
elasticity of demand.
 Higher GDP makes more resources available for government through greater income from taxes and
reduced spending on social benefits.

Business cycle

The four stages of the business cycle are:

 Growth: This is when GDP is rising, unemployment is falling, and the country has higher standards of
living. Businesses tend to do well in this period.
 Boom: This is a period of very rapid economic growth with rising incomes and profits. Inflation
increases due to very high demand for goods and services. Shortages of key skilled workers lead to
substantial wage increases. High inflation makes an economy’s goods uncompetitive. Business
confidence eventually falls as profits are hit by higher costs. Interest rates are usually increased to
reduce inflation. A downturn often results from this.
 Downturn or recession: Falling demand and higher interest rates start to take effect. Real GDP growth
slows and may even start to fall. This is technically called a recession. Incomes and consumer demand
fall, and profits are reduced. Some businesses make record losses and others fail completely.
 Slump: A very serious and prolonged recession can lead to a slump, where real GDP falls substantially
and product and asset prices fall. This is much more likely to occur if the government fails to take
corrective economic action.
 Recovery and growth: All downturns eventually lead to a recovery when real GDP starts to increase
again. This is because corrective government action starts to take effect. Also, one effect of lower
product prices is to increase the competitiveness of the country’s exports and demand for them starts
to increase.
Is a recession always bad?
An economic recession has serious consequences for most businesses and the whole economy. As output
is falling, fewer workers are needed. Unemployment increases and incomes fall. Demand for products
declines further. Government tax revenue also falls as less income tax and sales revenue tax are received.
Businesses producing luxury high-priced products experience reduced demand, creating spare capacity

However, there are also opportunities that some businesses could take advantage of:

 Capital assets, such as factories, may be relatively cheap and businesses could invest in expectation of
an economic recovery.
 Demand for inferior goods (negative income elasticity of demand) could actually increase.
 The risk of retrenchment and job losses may encourage improved relations between employers and
employees, leading to increased efficiency.
 Decisions to close factories and offices could reduce business costs significantly. They will then be
more able to take advantage of economic growth when this starts again

How business strategy could adapt to either economic growth or recession

Inflation and deflation
The spending power of one dollar is the goods that can be bought with that dollar. The spending power of
money can change over time. If one dollar buys fewer goods this year than it did last year, then the value
of money has fallen. This must have been caused by inflation.

If one dollar buys more goods this year than it did last year, then the value of money has increased. This
must have been caused by deflation

Low rate of inflation can have following benefits for the business;

 Cost increases can be passed on to the consumers more easily if there is a general increase in the
prices.
 The real value of debts owed by companies will fall. This means that, because the value of money is
falling, when a debt is repaid it is repaid with money of less value than the original loan.
 Rising prices are also likely to affect assets held by firms, so the value of fixed assets could rise. This
will increase the value of business and make the company more financially secure.
 Since inventories are bought in advance and then sold later, there is an increased profit margin from
the effect of inflation.
However, high rates of inflation can have very serious drawbacks for the business

Employees will become much more concerned about the real value of their incomes and may demand
higher wages. There might be chances of higher industrial disputes.

 Consumers may have less affording powers and may expect lower prices
 Rapid inflation may lead to high interest rates and borrowing may become expensive and people may
be more inclined towards savings rather than spending and the demand for the business’s product
may fall.
 The cost of supplies and other expenses may increase, and businesses may face cash flow shortages
due to paying higher bills.

Business strategy during a period of rapid inflation might focus on.

 Cutting back on investment spending

 Cutting profit margins to limit their own price rise to stay as competitive as possible.
 Reducing borrowings to the levels at which the interest payments are manageable
 Reducing the time period for customers to pay
 Reducing labor costs

Is deflation beneficial?

It might be thought that, if rapid inflation has so many negative effects, then a period of falling prices could
be beneficial? Here are some reasons why most businesses would not actually benefit from deflation:

 Consumers delay making important purchases, hoping that prices will fall further. This causes a
reduction in demand, leading to a possible recession.
 Businesses with long-term debts make interest payments and loan repayments with money that has
risen in value since the original loan was taken out. Borrowing to invest is discouraged.
 As prices fall, the future profitability of new investment projects appears doubtful.
 Inventories of materials and finished goods fall in value. Businesses hold as few inventories as possible.
Although this reduces their working capital needs, it also reduces orders for supplies from other
businesses.

What is Unemployment?

Unemployment is a term referring to individuals who are employable and actively seeking a job but are
unable to find a job. Included in this group are those people in the workforce who are working but do not
have an appropriate job.
Types of unemployment

 Cyclical unemployment
 Cyclical unemployment
 Frictional unemployment

Impact of changing unemployment on the business

Unemployment means that an economy is not making full use of the workers that are available. The
economy will not grow as quickly as it could, and it may start to slow down. This downturn in economic
activity will directly affect businesses. Higher unemployment will mean that many households will have
less income. For many businesses, this will result in lower sales as people spend less. However, the demand
for some products and services will increase when unemployment is higher. This is because consumers
swap to cheaper alternatives. Such goods and services are often supermarkets’ own-brand products and
are sometimes thought of as lesser-quality goods. Businesses that provide them may benefit from higher
levels of unemployment. Businesses that benefit when there is an increase in unemployment will also
have more people to choose from if they need more staff. Businesses looking to recruit people may also
be able to offer lower pay and still attract new staff, although they cannot offer less than the national
minimum wage

Government policies to achieve macroeconomic objectives

Demand side policies aims to alter the Aggregate Demand of an economy to achieve economic objectives.
Aggregate Demand is the total demand for final goods and services in an economy at a given time. Demand
side policies may be Expansionary (where aggregate demand need to be increased) or Contractionary
(where aggregate demand need to be decreased)

Demand Side - Monetary Policy

Monetary policy is a change in interest rates by the government or central bank. (Monetary policy also
involves the money supply in an economy, however that is for economics syllabus only) Following are the
effects on business of high interest rates in an economy;

 Higher cost of interest on loan/borrowings

 Consumers’ incomes available to spend fall as savings increases
 Could lead to exchange rate appreciation as higher foreign investments will be attracted in a country
 Less consumer borrowing to buy expensive products

Demand Side - Fiscal Policy

This involves any change by the government in tax rates or public sector spending.

Taxation: there are two types of taxation Direct Tax and Indirect Tax.
 Direct Tax: These are the taxes paid directly from incomes. These include;Income Tax: These are taxes
on individual’s salary. Usually higher the income, higher would be the income tax. Income taxes are
usually levied as a percentage of the income earned.

Profit Tax (or Corporation tax): These are the taxes imposed on the profits made by the business

Indirect Tax: these are taxes added to the prices of goods and services and taxpayers pay the tax as
they purchase the goods. These include;

Gross Sales Tax (GST)/ Value Added Tax(VAT): these are taxes added to the prices of goods and
services. They are inflationary in nature i.e. they make the goods more expensive to buy

Import Tariffs and Quotas: An import tariff is a tax on an imported product and an import quota is a
physical limit to the quantity of a product that can be imported.

Major impacts of imposing these trade barriers are;

 Imported products will become expensive and domestic firms will become more competitive.

 Business costs might increase if they need to import raw material

 Other countries may also retaliate and introduce trade barriers and hence decreasing exports

Changes in Government Spending:

Government can achieve its desired economic objectives through changing its spending. Government can
also raises finance to pay for the expenditures it incurs. At the start of each fiscal year, government sets a
budget for the revenue and expenditures expected in a year. If revenue are budgeted more than
expenditures than this is called Government Budget Surplus and if expenditures are more than the
revenue, than this is called Budget Deficit. Major government expenditures in a country are education,
health, defense, transport and some others. ○ Government might increase their spending to increase
aggregate demand or vice versa.

- Supply Side Policy

It aims to alter the Aggregate Supply of an economy to achieve economic objectives. Aggregate Supply is
the total supply of goods and services produced within an economy at a given overall price level in a given
period of time. Supply side policies may be Expansionary (where aggregate supply need to be increased)
or Contractionary (where aggregate supply need to be decreased

The supply in a country can be increased and improved in the following ways;

 Privatization: where public sector businesses are sold off to private individuals.
 Improve training and efficiency
 Increase competition in all industries
 Government grants and subsidies

Exchange Rates

What is Exchange Rate Appreciation and Depreciation?

● Exchange Rate is the value of one currency in terms of another.

● Exchange Rate Appreciation is when value of one currency increases in terms of another

● Exchange Rate Depreciation is when the value of one currency decreases in terms of another.

How can change in Exchange Rates affect an Organization?

Appreciation Depreciation
Import prices fall. Import prices rise.
Export prices rise Export prices fall.

These exchange rate movements can cause serious damage to businesses, making business endeavors that
would have been profitable make losses because of changes in the currencies. The EU, for example, wants
to limit these bad effects, and hence established a common currency, the Euro.
 Practice questions

1. What is a multinational company? [2}

..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................

2. Explain two reasons for the growing importance of international trade. [2]
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................

3. Explain four possible advantages that might arise from the privatization of a public sector enterprise such as a postal
service. [8]
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................

4. Explain two possible advantages to your country’s economy from the existence of multinational companies. [6]
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
5. List three examples of multinational companies operating in your own country and outline their main business
activities in your country. [6]
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
External Influences on Business
Political and Legal Influences
What is Privatization?
The transfer of ownership, property or business from the government to the private sector is
termed privatization. The government ceases to be the owner of the entity or business. The
process in which a publicly-traded company is taken over by a few people is also called
Privatization.

What is Nationalization?

Nationalization refers to the action of a government taking control of a company or industry, which
generally occurs without compensation for the loss of the net worth of seized assets and potential
income.
Legal constraints on business activity
In most countries, governments have introduced laws that control business decisions and activities.
These fall into the following main categories:

• employment practices, conditions of work and wage levels

• marketing behavior, consumer rights and controls over some products

• competition

• location of businesses.

How can different Employment Laws affect an Organization?

POSITIVE IMPACT:
 Workers will feel more motivated and secure when working with a clear and fair employment
contract.

 Companies would be able to get more workers easily in the future as they provide their current
employees with the best and fair employment conditions.

 Safe working environment would reduce the risk of accidents hence more efficiency in work.

NEGATIVE IMPACT:
 Cost of business would increase if they started following the minimum wage rule.

 Supervisory and recruitment cost of the business would increase for selection and
promotion procedures.

 Employees might not even work hard to get more wage as they know whether they work
more or less they will get higher wages.

How can different Consumer Laws affect an Organization?

POSITIVE IMPACT:-

 Reduce the risk of court action

 Good brand name as the quality of the products would be good

 Reduced risk of consumer injury as the product would meet minimum performance
standards.
NEGATIVE IMPACT:-

 Cost of business would increase of redesigning the products in order to meet the law
 Advertisements cost would increase as they now have to give more accurate and reliable
information.
 Improving quality control standards can increase the cost of the product hence sales might
even get affected.

How can different Competition Laws affect an organization?

POSITIVE IMPACT:-

 Competition law affects businesses positively as it establishes a business culture which maintains
competition, thus allowing businesses to improve and develop in order to remain a strong competitor
in the field.

 Competition law also ensures that not one organization in a dominant market position can abuse this
position to the detriment of other businesses.
 Competition law encourages businesses to better themselves, whilst positively impacting consumers,
who have a better range of services to choose from due to market competition.

NEGATIVE IMPACT:-

 Anti-competitive conduct involves agreements which purposely aim to reduce competition in the
market to the advantage of the parties involved.

 Businesses have to keep their prices low to remain competitive in the market

What is Corporate Social Responsibility?

Corporate Social Responsibility (CSR) is a concept within businesses whereby companies ensure the
integration of social and environmental activities within their business operations for the good of society.

How can a business be socially responsible?

Social responsibility means that businesses, in addition to maximizing shareholder value, should act in a
manner that benefits society. Socially responsible companies should adopt policies that promote the well-
being of society and the environment while lessening negative impacts on them. Companies can act
responsibly in many ways, such as by promoting volunteering, making changes that benefit the
environment, and engaging in charitable giving. Consumers are more actively looking to buy goods and
services from socially responsible companies, hence impacting their profitability.
 CSR and social auditing

There is growing demand for businesses to report annually on how socially responsible they have been.
Just as annual accounts report on profits or losses, an annual social report indicates the social impact of a
business over the same period. It would show, for example, if profits were made at the expense of
stakeholder interests, or if the business made real efforts to meet its social responsibilities. Annual social
reports are called social audits

Advantages and Disadvantages of Social Responsibility.

Advantages:-

 Improves the image of the business: When you carry out CSR policies in your company, it increases
your goodwill. Customers will be a lot happier to avail your products/services because of the tidy
image of your company.
 Draws in new financiers: A business’s online reputation in the marketplace establishes whether it will
certainly get new investments or otherwise. With CSR programs, you can absolutely increase your
company’s picture. And when your company starts to grab adequate attention it brings in a number
of financiers.
 Aids draw in as well as preserve potential workers: when your business starts gaining goodwill
through substantial CSR activities, the employees are more probable to proceed with the company
for a much longer period. Millennials usually prefer organizations where they have a flexible job
society as well as they are able to really feel excellent in working with the organization. The
organization’s beliefs and values let the employees gain a level of self-pride.

DISADVANTAGES:

 It needs greater expenses and prices: implementing CSR plans and also policy is to bear high costs in
connection with installing CSR strategies as well as applying it, particularly for small entities.
 It promotes Greenwashing: CSR can be considered a method that could result in ineffectiveness,
discussing that it can result in green-washing.
 Shift in the profit-making goal: when you obtain involved in CSR tasks, you require to reduce on the
earnings margin, which can make your shareholders miserable







Practice questions

1. What is a conglomerate merger?

..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................

2. The producer of fruit drinks in your country has asked you to explain the difference between
vertical forward and backward integration. Give examples of each that would be relevant for
this business.
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................

3. Examine briefly three reasons why the owner of a small business might decide not to expand
the business
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
 ..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................
..........................................................................................................................................................





Business Strategy
What is the meaning and purpose of Business Strategy?

In simple terms a strategy is ‘how we get from where we are now to where we want to be in the future’.
A successful business will have SMART objectives. Its business strategy will be a clear plan and set of
policies that should help it focus on achieving these aims. Business strategy asks the big questions, such
as, ‘Which markets and products do we want to be in?’ It also makes the big decisions, such as, ‘Can we
expand from manufacturing operations into retailing?’ All businesses need strategies to provide
integration, direction and focus.

What is the meaning and purpose of Strategic Management?

Strategic management is the planned use of a business' resources to reach company goals and objectives.
Strategic management requires ongoing evaluation of the processes and procedures within an
organization and external factors that may impact how the company functions. The process of strategic
management should guide toplevel programs and decisions. Companies of all sizes and in all industries
can benefit from the practice of strategic management. Strategic management plays a key role in the
success of an organization. As its name suggests, this process involves making and implementing strategic
decisions to meet business objectives. It defines the steps a business need to go through to bring their
vision to life and ignite business grow

There are three key stages of strategic management. These are;

 Strategic Analysis – where is the business now

 Strategic Choice – identifying, choosing and deciding between options
 Strategic Implementation – Planning for and managing change

Corporate Strategy will be influenced by four main factors

 Resources available: This shows how much resources a business have. There are chances that various
policies and decisions are not taken solely because of the lack of resources

 Strengths of the Business: This is where the businesses keep their policies and decision focused on the
area in which they are best at.

 Competitive Environment: Competitive actions and environment are one of a major constraint on
business strategy. Businesses need to consider the impact of their decisions and feasibility in current
competitive environment.

 Objectives: What are short-term and long-term business aims will surely influence the strategy which
the business follows. Such as, if business aims to maximize shareholders wealth in the short-term than
spending huge amount on research and development will not be a suitable strategy.

Approaches of developing Business Strategy

a- Blue Ocean Strategy: BLUE OCEAN STRATEGY is the simultaneous pursuit of differentiation and low cost
to open up a new market space and create new demand. It is about creating and capturing uncontested
market space, thereby making the competition irrelevant. It is based on the view that market boundaries
and industry structure are not a given and can be reconstructed by the actions and beliefs of industry
players. 'Blue Ocean Strategy is referred to a market for a product where there is no competition or very
less competition. This strategy revolves around searching for a business in which very few firms operate
and where there is no pricing pressure’.
B-Red Ocean Strategy: A red ocean strategy involves competing in industries that are currently in
existence. This often requires overcoming an intense level of competition and Page 31 can often involve
the commoditization of the industry where companies are competing mainly on price. For this strategy,
the key goals are to beat the competition and exploit existing demand. “The key goals of the red ocean
strategy are to beat the competition and exploit existing demand.” One industry in which a red ocean
strategy would be necessary is the soft drink industry. This industry has been in existence for a long time,
and there are many barriers to entry. There are industry leaders in place such as Coke and Pepsi, and there
are also many smaller companies also in competition for market share. There’s also limited shelf space
and vending spots, well-established brand recognition of popular, current brands, and many other factors
that affect new competition. This causes the soft drink industry to be very competitive to enter and
succeed in.

Difference between red and blue ocean strategy

SCENARIO PLANNING
In an uncertain and fast-changing world, no one really knows what the future holds for any business.
Making fixed plans for the future leads to the risk of inflexibility. Making no plans for the future leads to
being unprepared for any future development or trend. In scenario planning, a group of senior managers
begin by identifying a limited number of possible outcomes or situations, called scenarios. They then
discuss what strategy the business could adopt if each scenario actually occurred. It sounds simple, and
possibly not worth the trouble or specific effort, however, building this set of assumptions is probably
the best thing you can ever do to help guide your organization in the long term
SWOT analysis
A SWOT analysis provides information that can be helpful in matching the firm’s resources and strengths
to the competitive environment in which it operates

 Strengths: These are the internal factors about a business that are its current real advantages. They
could be used as a basis for developing a competitive advantage. They might include: experienced
management, product patents, loyal workforce and a good product range. These factors are identified
by undertaking an internal audit of the firm. This is often undertaken by specialist management
consultants who analyze the effectiveness of the business, its departments and its products. 
 Weaknesses: These are the internal business factors about a business that are viewed as
disadvantages. In some cases, these can be the opposite of strengths. For example, spare
manufacturing capacity might be a strength in times of a rapid economic upturn. However, if capacity
continues to be unused, then it could add substantially to the average costs of production. Weaknesses
might include: a poorly trained workforce, limited production capacity and ageing equipment. This
information would also have been obtained from an internal audit
 Opportunities: These are the potential areas for expansion of the business and future profits. These
factors are identified by an external audit of the market the business operates in and its major
competitors. Examples include: new technologies, export markets expanding faster than domestic
markets, and lower interest rates increasing consumer demand
 Threats: These are also external factors gained from an external audit. This audit analyses the business
and economic environment, market conditions and the strength of competitors. Examples of threats
include: new competitors entering the market, globalization driving down prices, changes in the law
regarding the sale of certain products, and changes in government economic policy.
Evaluations of SWOT Analysis :
S.W.O.T Analysis or sometimes called the S.W.O.T Matrix is a structured planning method used to
evaluate the strengths, weaknesses, opportunities and threats involved in a project or in a business
venture. It involves specifying the objective of the business venture or project and identifying the
internal and external factors that are favorable and unfavorable to achieve that objective. S.W.O.T.
Analysis can be used as a kick start to a brainstorming/strategy meeting or as an in depth strategy
tool to evaluate the rewards and risks of a business proposition. Subjectivity is often a limitation of a
SWOT Analysis as no two managers would necessarily arrive at the same assessment of the company
they work for. Secondly, SWOT analysis is basically not a quantitative form of assessment so the cost
of correcting a weakness will be very difficult to be compared with the potential profit from pursuing
an opportunity

PEST Analysis
he strategic Analysis of a firm’s macro-environment including Political, Economic, Social and
Technological factors. The four key areas covered by it are clearly external to the business and
beyond its control. They are considered as either being an opportunity or a threat. PEST Analysis is
complementary to SWOT, not an alternative.

Evaluations of PEST Analysis

Any significant new business strategy should be preceded by a detailed analysis of the wider
environment in which the strategy has to operate and be successful. Once completed, PET Analysis
cannot just stop. It may need to be constantly updated and reviewed, especially in a rapidly changing
wider environment. PEST Analysis is also useful for the businesses planning to expand in international
market
 Porter’s Five Forces

When is Porter’s Five Forces Model Used?

Porter's Five Forces is a model that identifies and analyzes five competitive forces that shape every
industry and helps determine an industry's weaknesses and strengths. Five Forces analysis is
frequently used to identify an industry's structure to determine corporate strategy. Porter's model can
be applied to any segment of the economy to understand the level of competition within the industry
and enhance a company's long-term profitability.

How to analyze a certain industry using Porter’s Five Forces Model?

Michael Porter provided a framework that models an industry as being influenced by five forces.
Porter's Five Forces is a model of analysis that helps to explain why different industries are able to
sustain different levels of profitability. Porter identified five undeniable forces that play a part in
shaping every market and industry in the world. The forces are frequently used to measure
competition intensity, attractiveness and profitability of an industry or market

Porter’s Five Forces as a framework for business strategy:

How does this analysis of the competition situation in an industry help a business take important
strategic decisions?

 By analyzing new markets in this way, it helps firms decide whether to enter or not. It provides an
insight into the potential profitability of markets. Is it better to enter a highly competitive market or
not?

 By analyzing the existing markets a business operates in, decision may be taken such as whether to
stay in market? How to reduce competitive rivalry?

 With the knowledge gained and the power of competitive forces, business can develop strategies that
might improve their own competitive position. These could include the following;The Five Forces are;
 Supplier Power: Here you assess how easy it is for suppliers to drive up prices. This is driven by the
number of suppliers of each key input, the uniqueness of their product or service, their strength and
control over you, the cost of switching from one to another, and so on. The fewer the supplier choices
you have, and the more you need suppliers' help, the more powerful your suppliers are.
 Buyer Power: Here you ask yourself how easy it is for buyers to drive prices down. Again, this is driven
by the number of buyers, the importance of each individual buyer to your business, the cost to them
of switching from your products and services to those of someone else, and so on. If you deal with
few, powerful buyers, then they are often able to dictate terms to you. 
 Competitive Rivalry: What is important here is the number and capability of your competitors. If you
have many competitors, and they offer equally attractive products and services, then you'll most likely
have little power in the situation, because suppliers and buyers will go elsewhere if they don't get a
good deal from you. On the other hand, if no-one else can do what you do, then you can often have
tremendous strength.
 Threat of Substitution: This is affected by the ability of your customers to find a different way of doing
what you do – for example, if you supply a unique software product that automates an important
process, people may substitute by doing the process manually or by outsourcing it. If substitution is
easy and substitution is viable, then this weakens your power.
 Threat of New Entry: Power is also affected by the ability of people to enter your market. If it costs
little in time or money to enter your market and compete effectively, if there are few economies of
scale in place, or if you have little protection for your key technologies, then new competitors can
quickly enter your market and weaken your position. If you have strong and durable barriers to entry,
then you can preserve a favorable position and take fair advantage of it

Evaluations of Porter’s Five Forces Model

A detailed Porter's Five Forces analysis can provide clarity and help you plan what you need to do in order
to continue to be successful. Porter Five Forces Model surely provides various insights of industry to the
management however it is sometimes criticized because; It analyses an industry at just one moment in
time – whereas the industries are rapidly changing these days due to globalization and technological
changes The model can become very complex when trying to use it to analyze many modern industries
with joint ventures, multiple product groups and different market segments within the same industry

Strategic Choice:

Strategic choice is the next logical element in the strategic decision making process. If there are no
important choices to be made, there is no point in giving much consideration to the decision making
process at all. Strategic Choice is concerned with available and deciding between them. Good Strategic
choices have to be challenging enough to gain competitive advantage, but also achievable and within the
resource capabilities of the organization. There are various techniques available to assist the management
tin consideration of the strategic choices available.
Ansoff Matrix:

When is Ansoff Matrix used

The Ansoff Matrix, also known as the Ansoff product/market Growth Matrix, is a strategic planning tool
used to analyze and generate four alternative directions for the strategic development of a business or
corporation. In a nutshell, it helps executives, managers, and marketers with business management by
analyzing strategic options for further growth while considering the potential risk of each option.

The Ansoff Matrix Explained

Also referred to as the Ansoff matrix, due to its grid format, the Ansoff Model helps marketers identify
opportunities to grow revenue for a business through developing new products and services or "tapping
into" new markets. So it's sometimes known as the ‘Product-Market Matrix’ instead of the ‘Ansoff Matrix’.
The Ansoff Model's focus on growth means that it's one of the most widely used marketing models. It is
used to evaluate opportunities for companies to increase their sales through showing alternative
combinations for new markets (i.e. customer segments and geographical locations) against products and
services offering four strategies Strategic questions that can be answered using the matrix include:

Market penetration: Samsung has reduced the European prices of its range of 4k TVs by up to €1 200. This
was in response to price cuts by other manufacturers, but Samsung’s reductions were largely an attempt
to increase market share. Market penetration is the least risky of all four possible strategies in the Ansoff
matrix, because there are fewer unknowns – the market and product parameters both remain the same.
However, it is not risk-free. If low prices are the method used to penetrate the market, they could lead to
a potentially damaging price war that reduces the profit margins of all firms in the industry.
Product development; The launch of Diet Pepsi took an existing product, developed it into a slightly
different version and sold it in the soft drinks market where Pepsi was already available. Product
development often involves innovation (as with 5G mobile (cell) phones) and these brand-new products
can offer a distinctive identity to the business.

Market development: Market development could include exporting goods to overseas markets or selling
to a new market segment. Lucozade used to be promoted as a health tonic for people with colds and
influenza. It was successfully repositioned into the sports drink market, appealing to a new, younger range
of consumers. Dell or HP can use existing business computer systems and repackage them for sale to
consumer markets.

Diversification: The Virgin Group is constantly seeking new areas for growth. The company’s expansion
from a media empire to an airline, then a train operator and more recently into finance, is an excellent
example of diversification. Tata Industries in India is another good example of a very diversified business,
manufacturing a huge range of products, from steel and cars to tea bags. Related diversification (e.g.
backward or forward vertical integration in the same industry) can be less risky than unrelated
diversification, which takes the business into a completely different industry. As the diversification strategy
involves new challenges in both markets and products, it is the riskiest of the four strategies. It may also
be a strategy that is outside the core competencies of the firm. However, diversification may be a possible
option if the high risk is balanced out by the chance of high profits. Another advantage of diversification is
the potential to gain a foothold in an expanding industry.

Evaluations of Ansoff Matrix

Ansoff Matrix helps to highlight the potential growth options for the business. Managers can apply the
decision making techniques to assess the costs, potential gains and risks associated with all options.
However, this technique has limitations too. It only considers two main factors in the strategic analysis of
the business’s options – it is important to consider SWOT and PEST analysis too.

Force-field analysis

The technique of force-field analysis, first developed by Kurt Lewin, involves looking at all of the forces for
and against a decision. It weighs up the potential advantages and disadvantages of a decision before a
choice is made. The main purpose of the technique is to give managers an insight that will allow them to
strengthen the forces supporting a decision, and reduce the forces that oppose it. In business, decisions
such as introducing a new product or service, or implementing a major internal change, could be analyzed
using this approach

Force field analysis does the following:

 Presents the positives and negatives of a situation so they are easily comparable.
 Considers all aspects of making the desired change.
 Encourages agreement about the relative priority of factors on each side of the balance sheet. 
 Encourages honest reflection on the underlying roots of a problem and its solution.

Force Field Analysis is a useful decision-making technique. It helps you make a decision by analyzing the
forces for and against a change, and it helps you communicate the reasoning behind your decision. You
can use it for two purposes: to decide whether to go ahead with the change; and to increase your chances
of success, by strengthening the forces supporting change and weakening those against it. You use the tool
by listing all of the factors (forces) for and against your decision or change. You then score each factor
based on its influence, and add up the scores for and against change to find out which of these wins. You
can then look at strengthening the forces that support the change and managing the forces against the
change, so that it's more successful.

Conducting a force-field analysis

1. Analyse the current situation and the desired situation.

2. List all of the factors driving change towards the desired situation.

3. List all of the constraining factors against change towards the desired situation.

4. Allocate a numerical score to each force, indicating the scale or significance of each force: 1 =
extremely weak and 10 = extremely strong.

5. Chart the forces on the diagram with driving forces on the left and restraining forces on the right.

6. Total the scores and establish from this whether the change is really viable. Is it worth going ahead? If
yes, then the next stage is important.

7. Discuss how the success of the change or proposed decision can be affected by decreasing the strength
of the restraining forces and increasing the strength of the driving forces.
Evaluation of force-field analysis
This technique is widely used in assessing strategic decisions that require major internal changes to the
business. It has two main limitations as a strategic choice method:

 Unskilled or inexperienced managers could fail to identify all of the relevant forces involved in the
change process.
 The allocation of numerical values to the driving and constraining forces is rather subjective. Two
managers independently undertaking the same force-field analysis could arrive at rather different
values for the forces and, consequently, propose very different decisions based on their assessments.

Decision Trees
Decision tree analysis is the process of drawing a decision tree, which is a graphic representation of various
alternative solutions that are available to solve a given problem, in order to determine the most effective
courses of action. Decision trees are comprised of nodes and branches - nodes represent a test on an
attribute and branches represent potential alternative outcomes. Decision Trees is a method of
considering all the available options and chances of them occurring. This technique is based on a diagram
that is drawn to represent four main features of a business decision;

 All of the options open to a manager

 The different possible outcomes resulting from these options
 The chances of these outcomes occurring
 The economic returns from these outcomes

How decision trees are constructed

 It is constructed from left to right

 Each branch of the tree represents an option together with a range of consequences or outcomes and
the chances of these occurring

 Decision points are denoted by a square – these are decision nodes

 A circle shows that a range of outcomes may result from a decision – a chance node

 Probabilities are shown alongside each of these possible outcomes. These probabilities are the
numerical values of an event occurring – they measure the chance of an outcome occurring

 The economic returns are the expected financial gains or losses of a particular outcome
 Benefits and Limitations of Decision Trees.

There are risks and rewards associated with the process of decision tree analysis. The advantages of
decision tree analysis include: simple and easy to interpret decision trees; valuable without requiring large
amounts of hard data; helps decision makers ascertain best, worst, and expected results for various
scenarios; and can be combined with various decision techniques. When using decision tree analysis, there
may also be some disadvantages. Disadvantages include: uncertain values can lead to complex calculations
and uncertain outcomes; decision trees are unstable, and minor data changes can lead to major structure
changes; information gain in decision trees can be biased; and decision trees can often be relatively
inaccurate. A popular alternative to decision trees is the influence diagram, which is a more compact,
mathematical graphical representation of a decision situation.

Benefits of decision tree

 They force the decision maker to consider all the options and variables related to the decision

 This approach encourages logical thinking and discussion among managers.

Limitations of decision tree

 The primary limitations concerns the accuracy of the data used. Estimated economic returns may be
based on forecasts of market demand or estimates of most likely financial outcome. The scope for
inaccuracy of the data makes the results of decision tree analysis a useful guide, but no more.
 The probabilities of event occurring may be based on past data, but circumstance may change.
 Decision tree aids the decision making process, but they cannot replace either the consideration of
risk or the impact of qualitative factors on decision making

















Corporate Planning and Implementation
What is the meaning of Corporate Planning?

Corporate planning is a process that is used by businesses to map out a course of action to grow, increase
profits, gain exposure, or strengthen brand identity. Corporate planning is a tool that successful business
use to leverage their resources more wisely than their competitors. Corporate planning is a total system
of planning which involves the determination of the objectives for the company as a whole and for each
department of the it; formulation of strategies for the attainment of these objectives (all this being done
against the background of SWOT analysis); conversion of strategies into tactical plans (or operational
plans); implementation of tactical plans and a review of the progress of tactical plans against the corporate
planning objectives.

What is the importance of Corporate Planning?

Every business needs to understand its market and its ambitions. It needs to have a clear set of goals that
will drive operations and help the business become profitable. A corporate plan sets out the actions
required, and identifies the resources available, to deliver the stated aims and objectives. Your corporate
plan is an important document that will help you continually monitor finances and liabilities, identify
opportunities and control your internal systems and structures.

Setting Your Strategy:

The fundamental purpose of a corporate plan is to set your business' strategy. At this stage you must
decide on your mission and vision -- what it is you want to achieve from your business. You also need to
look at the opportunities and threats from the markets you want to operate in, and assess your business
strengths and weaknesses. By analyzing this information you should be able to set some realistic goals that
will define how you're going to move your business forward.

Planning Your Operations

Once you know what you want to achieve, you can use these objectives to look at how you will achieve
them. At an operational level, the purpose of corporate planning is to help you plan and prepare the
resources you need to deliver your objectives. For example, at this stage you must ensure you have the
correct finances in place, the ability to obtain inventory and the correct staff and other resources to
convert this into your final product or service. An effective corporate plan enables you to make workable
plans to deliver the value to your customers.

Monitoring and Control

Incorporated into your plan should be clearly measurable indicators that allow you to assess how well you
are performing against your initial plans. Such metrics will include financial information to enable full
accounting, but should also look at whether key milestones have been passed and whether customers
value your output. Any examples of variance from the plans you set earlier should be examined to
determine if remedial action is possible to control any further deviation.

Potential benefits of corporate plans

 Senior managers have a clear focus and sense of purpose for what they are trying to achieve. Strategies
are then chosen with the best chance of achieving the objective which has been set.
 The plan helps to communicate this sense of purpose and focus to all managers, employees and other
stakeholders. This is an important requirement for corporate plans to be effective. This benefit of
planning is important to any business, no matter what its size.
 An important benefit of any corporate plan is the control and review process. The original objectives
can be compared with actual outcomes to see how well the business’s performance matched its aims.
 The planning process itself is a very useful exercise. When effectively done, preparing for and
producing the corporate plan forces senior managers to consider the organization’s strengths and
weaknesses in relation to the business environment

Potential limitations of corporate plans

Plans are great if nothing changes. The best-laid plans of any business can be made obsolete by rapid and
unexpected internal or external changes. This does not mean that planning is useless. Part of the planning
process is to look ahead to consider how to respond to unforeseen events However, if a business puts a
five-year plan into effect and then refuses to make any variations or adaptations to it, no matter how much
external environmental factors might change, then inflexibility could be disastrous. The corporate planning
process should be as adaptable and flexible as possible to allow corporate plans to continue to be relevant
and useful during periods of change.

Corporate Culture:

What is the meaning of Corporate Culture?

Corporate culture refers to the beliefs and behaviors that determine how a company's employees and
management interact and handle outside business transactions. Often, corporate culture is implied, not
expressly defined, and develops organically over time from the cumulative traits of the people the
company hires. A company's culture will be reflected in its dress code, business hours, office setup,
employee benefits, turnover, hiring decisions, treatment of clients, client satisfaction, and every other
aspect of operations.
Impact of Corporate Culture on Business Decisions
Culture and decisions making occur when the culture is either strong or weak. Strong culture promotes
and facilitates successful strategic decision making while weak culture does not. Strong culture means
that there is very widespread sharing of common beliefs and practices and norms within the businesses.
Everyone in the business has accepted what the business stands for. However in weak cultures
employees may have no agreed set of beliefs and there is no pride in ownership of work. People may
form their own groups within this type of organizations.

The main types of corporate culture

Many management writers have used different ways to identify and classify different types of
organizational culture. These are the most widely recognized culture types:

 Power culture: This is associated with autocratic leadership. Power is concentrated at the center of
the organization. Swift decisions can be made as so few people are involved in making them.

 Role culture: This is most associated with bureaucratic organizations. People in an organization with
this culture operate within the rules and show little creativity. The structure of the organization is
well-defined, and each individual has clear delegated authority. Power and influence come from a
person’s position within the organization.

 Task culture: Groups are formed to solve particular problems and there will be lines of
communication similar to a matrix structure. Such teams often develop a distinctive culture because
they are empowered to take decisions. Team members are encouraged to be creative.

 Person culture: There may be some conflict between individual goals and those of the whole
organization, but this is the most creative type of culture.

 Entrepreneurial culture: Success is rewarded in an organization with this culture. However, failure is
not necessarily criticized as it is considered an inevitable consequence of showing initiative and risk-
taking.

Changing corporate culture:

Many businesses have turned themselves around, transforming potential bankruptcy into commercial
success. Very often, this transformation has been achieved by changing the culture of the business. The
existing culture of a business can become a real problem when it restricts growth, development and
success. Here are some examples of situations when changing culture would seem to be essential:

 A traditional family firm, which has always promoted members of the family into senior posts,
converts to a public limited company. New investors demand more transparency and recognition of
natural talent from externally recruited employees.
 A product-led business needs to respond to changing market conditions by encouraging more
worker involvement. A team- or task-based culture may need to be adopted.

 A recently privatized business used to operate on bureaucratic principles when it was

governmentowned. It now needs to become more profit-oriented and customer-focused. An
entrepreneurial culture may need to be introduced for the first time.

 A takeover may result in the business that was bought out adapting its culture to ensure consistency
within the newly created larger company.

 Declining profits and market share may be the result of poorly motivated workers, low quality and
poor customer service. A person-based culture might help to transform the prospects of this
business

Guidelines for changing organization culture

Changing the values and attitudes of people is never going to be an easy task. The process could take up
to several years. However, following are the guidelines that may be followed to ensure successful change
implementation;

 Concentrate on the positive aspects of the business and how it currently operates, and enlarge on
these. This will be much easier and more popular with staff than focusing on, and trying to change
negative aspects.
 Establish new objectives and a mission statement that accurately reflects the new values and
attitudes that are to be adopted – and these needs to be communicated to all staff
 Encourage ‘bottom-up’ participation of workers when defining existing problems or when devising
new solutions. The biggest mistake could be to try to impose a ‘new culture’ on workers without
explaining the need for change or without giving them the opportunity to propose alternative ways
of working
 Train staff in new procedures and new ways of working to reflect the changed value system of the
business. If people believe in the change and benefits of it then it will become more acceptable to
them
 Change the staff reward system to avoid rewarding success in the ‘old ways’ and ensure that
appropriate behavior that should be appreciated should receive recognition
Resistance to Strategic Change
Resistance is one the biggest problems any organization will face when it attempts to introduce changes.
The staff may show resistance to change due to the following reasons.

 Fear of the unknown – change is uncertain for people

 Fear of Failure – new skills and abilities may not be possessed by existing staff
 Losing something of value – workers could lose status or job security
 False benefits about the need for change – staff may not consider the change to be necessary
 Lack of trust – workers may not trust their managers and may not believe on the advantages being
communicated to them
 Inertia – this is the fear of having to work harder may cause resistance

Transformational Leadership

What is the meaning of Transformational Leadership?

Transformational leadership is defined as a leadership approach that causes change in individuals and
social systems. In its ideal form, it creates valuable and positive change in the followers with the end goal
of developing followers into leaders. Enacted in its authentic form, transformational leadership enhances
the motivation, morale and performance of followers through a variety of mechanisms. These include
connecting the follower's sense of identity and self to the mission and the collective identity of the
organization; being a role model for followers that inspires them; challenging followers to take greater
ownership for their work, and understanding the strengths and weaknesses of followers, so the leader can
align followers with tasks that optimize their performance.

Importance of Transformational Leadership

 Transformational leadership increases the chances of successful change within the business.
 It increases the flexibility and adaptability of a business to cope with frequent change. The business
world is becoming more dynamic and one change may be followed by the need for further flexibility.
 It focuses on leading change, not forcing it on employees with an autocratic style. That encourages
workers to accept change and work towards making it success.
 It improve employees’ motivation and performance.
Contingency Planning and Crisis Management

What is Contingency Planning/Risk Management/Crisis Management?

Contingency planning is defined as a course of action designed to help an organization respond to an event
that may or may not happen. Contingency plans can also be referred to as ‘Plan B’ because it can work as
an alternative action if things don’t go as planned.

The Stages of Contingency Planning

 Identify the potential disasters that could affect the business.
 Assess the likelihood of these occurring – this will include the likelihood and impact of unlikely events
that may occur
 Minimize the potential impact of crises – may be through staff training, emergency contacts, pro-active
precautionary measures, insurance etc.
 Plan for continued operations of the business – resuming business activities after the unlikely event that
may occur

Evaluations of Contingency Planning

Contingency planning and risk management are essential components of any business strategy. A small
business owner working on limited funds must pay careful attention to contingency planning and risk
management when evaluating the strengths and weaknesses of a proposed business strategy. Smart
planning can provide the edge the small business owner needs to establish a niche in the market and
sustain growth. Contingency plans are an essential part of risk management. They help to ensure that
you've always got a backup option when things go wrong, or when the unexpected happens. To develop a
contingency plan, first conduct a risk assessment: identify your business-critical operations, identify the
threats to those operations, and analyze the potential impact of each threat.

Benefits and limitations of contingency planning