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Unit 1 : What is a Business?

1.1 Keywords

Production Management: Oversees the manufacturing of products or the delivery of services.

Marketing: Develops customer interest and awareness as the product enters the market.

Finance/Accounts: Designed for the fiscal management, oversight, and reporting of a business's economic viability.

Human resources: Human resource departments ensure organizational efficiency to meet business goals and handle recruitment, training, and conflict management.

Primary sector: Extracts and produces raw materials from natural resources. It includes activities like agriculture, mining, forestry, and fishing.

Secondary sector: Involves transforming raw materials from the primary sector into finished goods. It includes manufacturing industries such as automotive, construction, and food processing.

Tertiary sector: Known as the service sector, it provides services rather than goods. It includes a wide range of businesses like financial institutions, schools, hotels, and restaurants.

Quaternary sector: An extension of the tertiary sector and includes knowledge-based services such as information technology, research and development, education, and consulting.

Nature of Business

Creating a business takes the work of financial and human resources. This usually leads to a risk for the individual or the entrepreneur.

Example: The marketing department of a fast-food company becomes very excited about the possibility of a zero saturated fat French fry, but the production department does not have the knowledge or financial resources to research and create this.

Business Plan

• The aims of the business.

• Details of existing and potential competition.

• Amount of funding required with a timeline illustrating how the funding will be used.

• Finance needed under different scenarios if the external factors change.

• Timelines for implementation and a commitment to review aims if forecasts are not met.

• A comprehensive marketing plan with sales forecasts.

• A projected profit and loss account and cash flow forecast.

1.2 Private vs Public:

Public companies are entities that have sold a portion of themselves to the public via an initial public offering (IPO), meaning their shares are traded on stock exchanges and they must disclose business and financial activities to the public.

Private companies are owned by their founders, management, or a group of private investors, and do not trade their shares on public markets. They are not required to disclose detailed information publicly and have more flexibility in their operations.

Social Enterprise:

A social enterprise is a business that prioritizes social objectives as its main goal. It operates with a commercial mindset to maximize societal and environmental benefits, reinvesting profits into social programs rather than distributing them to shareholders.

Cooperatives:

A cooperative is a private, member-owned business organization that's controlled by the people who use its products, supplies, or services. Cooperatives are formed voluntarily to meet members' common economic, social, and cultural needs and aspirations through a jointly-owned and democratically-controlled enterprise.

NGO's:

An NGO, or non-governmental organization, is a nonprofit group operating independently of government, dedicated to addressing social, environmental, or political issues. NGOs often focus on humanitarian activities, advocacy, and community development.

For-Profit:

1.3 Business Objectives

Vision And Business Statement

A Mission Statement is a way of defining briefly and succinctly the reason or purpose for the business's existence. A Vision Statement defines how the company sees itself evolving in the future.

There are typically 4 main objectives. Ethical Objectives include a deliberate attempt by the company to take a position that is viewed as morally correct to stakeholders.

Profit maximization, survival/break-even, cost minimization, growth.

There are typically 2 main objectives: strategies and tactical objectives .

A strategy can be defined as the longer-term plan with an aim for the business, driven by the vision of the owner. A tactic or operational objective is much more short term in nature and is usually defined as a tool or mechanism designed to help achieve the overall strategic objective.

CSR can be defined as "the continuing commitment by business to behave ethically and contribute to economic development." Source: Russell-Walling (2007)

The Global Reporting Initiative provides a framework for companies to report on their CSR commitments.

1.4 Stakeholders

What is a Stakeholder?

A stakeholder is a person, group, or system that affects or can be affected by an organization's operations.

Internal include full and part-time employees, shareholders, managers, CEO with the board of directors.

External include suppliers with customers, special interest or pressure groups, competitors, government.

Conflict is likely due to different stakeholders having different interests.

Potential Conflict include pricing for customers, managers being tasked with increasing production, CEO introducing changes to work schedules, and CEO's discontinuing products.

1.5 Growth and evolution:

Guiding questions

  • What are economies of scale, both internal and external, and diseconomies of scale?
  • What is the difference between internal and external growth?
  • Why do some organizations grow, and what is the most appropriate way for a business to grow externally?
  • Why do some organizations remain small?

    • Economies of scale (A02)

    Chapter Summary: This unit emphasizes the pivotal role of change across all chapters. As organizations expand, they tap into economies of scale, lowering long-term production costs. These economies can be internal firm growth or external industry expansion. While giants like telecoms and car manufacturers enjoy vast economies of scale, small firms face hurdles in competing due to limited resources and market share.

    Type of economy of scale

    Financial

    Purchasing

    Risk-bearing

    Marketing

    Research and development

    Pool of available labour grows as industry expands

    Financial: Increased collateral and lenders' confidence reduce finance costs. This falls under internal factors.

    Purchasing: Bulk purchasing enables the acquisition of raw materials at lower costs. (Internal)

    Risk-bearing: Large corporations can take the risk of venturing into new markets and funding prototypes of products, with uncertain outcomes.

    Marketing: Advertising using media with very large customer reach (eg television) lowers unit costs dramatically.(External)

    Research and development: As an industry grows, firms can share research facilities, reducing the costs of new product development.(External)

    Pool of available labour grows as industry expands: As an industry grows, local labour migrates to other areas and people gain skills through work experience and/or attending training colleges.(External)

    Diseconomies of scale (A02)

    Large firms can face diseconomies of scale, Long-run unit costs may rise due to management challenges with organizational growth, causing communication issues, demotivation, and quality concerns among staff. Multinational firms might also face difficulties coordinating supply chains across regions, elevating expenses.

    The difference between internal and external growth (A02)

    Internal growth: Organizations achieve internal growth, or organic growth, by selling more existing products to expand market share. It offers control over expansion, especially valued by private and family-owned businesses.

    External growth: An organization can also try to grow externally, which is often referred to as external growth. Methods of external growth include:

    Joint ventures

    Strategic alliances

    Takeovers

    Franchising

    Mergers and acquisitions

    Reasons some organizations grow, and external growth methods (A03)

    Organizations aim to grow due to various reasons:

    External growth methods Joint ventures and strategic alliances:

    External growth methods such as joint ventures and strategic alliances involve collaboration between firms to achieve mutual benefits:

    An example is entering a foreign market: a firm may form a joint venture or strategic alliance with a local company to leverage their market knowledge or labor resources. This partnership can lead to cost and time savings and help avoid costly mistakes.

    For more detailed insights into international market entry challenges and opportunities, refer to chapter 4.6.

    Mergers and acquisitions and takeovers:

    Some textbooks confuse mergers and acquisitions (M&As) with takeovers, but they differ in mutual agreement. Takeovers can be hostile, like Nestlé's acquisition of Rowntree against protests. Three main types of M&As exist:

    Franchising:

    Franchising: Franchisor sells business idea to franchisee. McDonald's, in "The Founder," showcases success through global expansion via franchising.

    IB Learner Profile:

    Franchising, exemplified by McDonald's, showcases diverse models. Exploring a different franchise in your country can enrich business research. Benefits include shared brand recognition, established business systems, and mutual growth opportunities.

    Benefits to the Franchisor and Benefits to the Franchisee:

    Benefits to the Franchisor: Benefits to the Franchisee: Challenges:

    Question for reflection:

    Has the franchise growth model increased the chances for economic sustainability at the expense of creativity?

    Revision checklist:

    1.6 Multinational Companies

    How can we evaluate the impact of multinational corporations (MNCs) on the host countries?

    Multinational corporations (MNCs) operate and control resources outside their home country, often outsourcing production processes. Notable examples include Ikea, Subway, and Apple. While MNCs like Costco, Ikea, and Walmart are welcomed by stakeholders like potential employees and consumers, they also face criticism for job displacement and impacts on local businesses.

    The Impact of Multinational Companies on the Host Country (A03)

    MNCs bring benefits such as job creation, revenue for host governments, technology transfer, and increased choice of goods and services. However, they also pose challenges such as unfair competition for local producers and potential tax avoidance practices. Perspectives on their impact vary, with some emphasizing economic benefits and others highlighting ethical concerns.

    MNCs often operate across different sectors of the economy, including the primary sector, which involves activities related to natural resources extraction and agriculture.

    Examples of Ireland and Singapore

    The Irish economy was transformed by encouraging multinational corporation (MNC) activity, leading to mixed results. Singapore's economic rise was also fueled by collaboration with MNCs in various sectors, resulting in impressive growth and local business development. Recent investigations reveal that some multinational corporations (MNCs) legally avoid paying taxes in the countries they operate in, opting for jurisdictions with more favorable tax laws. While journals like The Economist credit MNCs for driving economic wealth, their influence has faced challenges from pressure groups and other stakeholders. Your perspective determines which view is more persuasive.

    Revision Checklist