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Starting a Business - What is enterprise? The term enterprise has two common meanings. Firstly, an enterprise is simply another name for a business. You will often come across the use of the word when reading about start-ups and other businessesSimon Cowells enterprise or Michelle set up her successful enterprise after leaving teaching. Secondly, and perhaps more importantly, the word enterprise describes the actions of someone who shows some initiative by taking a risk by setting up, investing in and running a business. Look again at two key words above initiative and risk. A person who takes the initiative is someone who makes things happen. He or she tends to be decisive. A business opportunity is identified and the person does something about it. Showing initiative is about taking decisions and being bold not everyone is like that! Risk-taking is slightly different. In business there is no such thing as a sure fire bet. All business investments carry an element of risk which is the chance or probability that things will go wrong. At the worst, the risk of an enterprise might mean the person making the investment loses all his/her money or becomes personally liable for the debts of the business. The trick is to take calculated risks, and to ensure that the likely returns from taking a risk are enough to make the gamble worthwhile. Someone who shows enterprise is an entrepreneur.

Starting a Business - Objectives of a new business What motivates someone to become an entrepreneur? Money of course! The chance to earn significant profits, buy a yacht, take numerous holidays, buy designer goods and send the kids to the best private schools. But, wait a minute! Is money and personal wealth really the main motivation? Evidence suggests that there are many more reasons why someone wants to start a business. Every business starts small. But by taking on some calculated risks, a lot of determination and some luck, a start-up business can become very large, profitable and valuable. However, not every entrepreneur wants to build a big business and earn a fortune. The objectives when starting a business can be broadly split into two categories: Financial objectives, and Non-financial objectives The media tend to focus on the financial objectives so lets deal with these first.

Financial objectivesMost business start-ups begin with one main financial objective to survive.

Why survival? Because a large percentage of new businesses do not survive much beyond their launch. The entrepreneur discovers that the business idea is not viable the business cannot be run profitably or it runs out of cash. Start-ups have a high failure rate. Survival is about the business living within its means. To survive, the business needs to have enough cash to pay the debts of the business as they arise suppliers, wages, rent, raw materials and so on. To survive, a business needs to have: Sufficient sources of finance (e.g. cash, a bank overdraft, share capital) A viable business model i.e. one which can make a profit If survival can be assured, then profit is the next most important financial objective for a new business. A profit is earned when the revenue of the business exceeds the total costs. The entrepreneur can choose to reinvest (aka retain) the profit in the business, or take it out as a personal payment or dividend. For many small business owners, profit is the return for all the hard work and risks taken. Profit is the reward for taking a risk and making an investment. Ideally, the profit earned is sufficient to provide the entrepreneur with enough income to live. In many cases it will be more than sufficient, once the business has been trading successfully for a few years However, it is important to appreciate that, to make a sustainable profit, a new business needs to be able to: Add value Sell into a large enough market Another financial objective is personal wealth. Some entrepreneurs have an objective that goes beyond wanting to earn an adequate income. They aim to build a valuable business that can substantially increase their personal wealth.

Non-financial objectivesContrary to popular belief, starting a business is not always about financial objectives. Very often a new business is started with other, non-financial objectives in mind. Here are some of the non-financial motives that are often quoted by entrepreneurs: More control over working life want to choose what kind of work is done. The need for greater independence is a major motivator. Need a more flexible and convenient work schedule, including being able to work from or close to home. This motive is an important reason behind the many home-based business start-ups Feel that skills are being wasted and that potential is not being fulfilled Want to escape an uninteresting job or career A desire to pursue an interest or hobby Fed up with being told what to do want to be the boss! Want the feeling of personal satisfaction from building a business Want a greater share of the rewards from the effort being put in compared with simply being paid by an employer Fed up with working in a business hierarchy or bureaucratic organisation (people with entrepreneurial characteristics often feel stifled working and having to co-exist with others!

As a response to a shock or other major change in personal circumstances e.g. redundancy, divorce, illness, bereavement Starting a Business - What is an entrepreneur? There are many definitions of what is meant by an entrepreneur, but they tend to say the same thing, which is that an entrepreneur is Someone who takes a risk by starting a business An entrepreneur is someone who is enterprising. In other words he/she: Takes the initiative in trying to exploit a business opportunity Takes time to understand and calculate the risks involved Makes an investment to set up the business Goes ahead, despite the risk that the business venture might fail When deciding whether or not to take the risk of starting a business, an entrepreneur asks questions such as: Do I have a clear idea about the vision for the business? Am I really determined and committed to making the business work? Do I appreciate and accept the personal challenges and sacrifices that I will have to make? Can I handle the inevitable feeling of isolation and insecurity that a start-up brings? Can I afford to fail? What are the financial implications if the business does not succeed? Will customers really buy the product, assuming that I get it right? Who already provides this product (or something similar) and can I do it better or cheaper? How will I know if the business is succeeding or failing? Is my business plan sufficiently realistic, particularly in terms of cash flows and likely start-up losses? Can I access the resources (cash, supplies, distribution) that are needed to make the idea work? Do I need to obtain legal protection for the idea? In recent years the media have glamorised the challenge of starting and growing a business. A quick search on Amazon.co.uk will display many books by entrepreneurs and other business experts describing how they made it, my first million etc. Prime-time television shows such as Dragons Den, Risking it All and The Apprentice have proved hugely popular by showcasing the challenges faced in setting up a business. Entrepreneurs such as Lord Sugar, Sir Richard Branson and Sir James Dyson have earned enormous fortunes and provide inspiration for the next generation of budding business leaders. Entrepreneurs play an important role in society. They make a major contribution to economic activity. Imagine how many jobs are created by the thousands of new businesses that are set up every year and by the small businesses that prosper and take on more staff. Entrepreneurs encourage innovation through investment and risk-taking. Many of the products and services you use every day have been developed through entrepreneurial activity rather than in the research laboratories or board-rooms of large multinationals.

However, it is important to realise that starting a business is rarely glamorous. In fact it is nearly always very hard work. For every success story there are almost certainly many more business failures or businesses that dont meet the expectations of the people who set them up. Starting a Business - Sources of business ideas Where does an entrepreneur come up with the idea for his/her business? In practice there are many ways in which the business opportunity and idea is first spotted. As we shall see, sometimes luck plays a big part; at other times there is a role for approaches which encourage deliberate creativity. Here are some of the main sources of business ideas for start-ups: Business experience Many ideas for successful businesses come from people who have experience of working in a particular market or industry. For the start-up, there are several advantages of applying this experience to a new business: Better and more detailed understanding of what customers want Knowledge of competitors, pricing, suppliers etc Less need for start-up market research Entrepreneur is able to make more realistic assumptions in the business plan about sales, costs etc Industry contacts, who might then become the first customers of the start-up! All of the above help the business planning process and you could argue that they reduce the risks of a start-up. On the other hand, you might argue that familiarity breeds contempt. In other words, detailed experience of an industry means that the budding entrepreneur doesnt have a fresh perspective. Someone who is new to a market may be able to exploit approaches that have worked in other industries to make an impact with the start-up. Personal experience Many ideas come to entrepreneurs from their day-to-day dealings in life, or from their hobbies and interests. For some of us, frustrating or bad experiences are a source of irritation. For the entrepreneur they might suggest a business opportunity. It is often said that one of the best ways to spot a business opportunity is to look for examples of poor customer service (complaints, product returns, persistent queues etc). Such examples suggest that there is an opportunity to do something better, quicker or cheaper than the existing products. Hobbies and interests are also a rich source of business ideas, although you have to be careful to avoid assuming that, just because you have a passion for collecting rare tin openers, there is a ready market from people with similar interests! Many people have tried to turn their hobby into a business and found that generates only a small contribution to household income. Observation Simply observing what goes on around you can be a good way of spotting an idea. Often an idea will be launched in another country and has not yet been tried in other, similar economies. When

Stephen Waring was in the USA attending a wedding, by luck he sat next to someone who ran a household service business (treating lawns). After some brief market research, Stephen found out that there was no similar business in the UK, so he launched one. It has since become a hugely successful franchise business Green Thumb. It is worth looking at some other examples of how successful start-ups got their ideas in order to appreciate the diversity of sources. Here are some good ones: Entrepreneur Business Glasses Direct James Murray-Wells James was fed-up with being charged rip-off prices for prescription glasses. He researched the supply chain and found he could offer consumers the same product at substantially cheaper prices by selling direct. Will King Will found traditional wet-shaving painful due to his sensitive skin. His girlfriend suggested using oil to smooth the process. An oil-based solution to shaving was developed and is now a world leader. Will needed to find an alternative use for the output from his loss-making potato farm. He added value to the potatoes by turning them into premium-priced crisps. Fraser turned his grandmothers recipe for sugar-free jams into a best-selling grocery brand. Neil & Richard spotted the potential for grooming machines whilst working in entertainments industry. Gill made a lifestyle choice to move out of the corporate world and set up her own business. She combined her personal interest in teaching music to children with an idea for a franchise format. Where the Idea Came From

King of Shaves

Tyrrells Crisps

Will Chase

Superjam Beautiful Vending Jo Jingles

Fraser Doherty Neil Mackay & Richard Starrett Gill Thomas

Starting a Business - Risks and Rewards Taking a calculated risk An entrepreneur cannot avoid risk in a start-up and everyone knows that a large proportion of new businesses eventually fail. The trick is to assess: What the main risks are in a new business (e.g. unexpected costs, lower than expected sales, failure to secure distribution) The probability of the risks happening (this has to be an estimate) What would happen if the risks occur cost, cash etc The third part of the assessment above is perhaps the most important. For the small business, often starved of cash, even a relatively small event can prove disastrous. The entrepreneur has to assess the potential impact on the business of a risk, but also assess the upside (where things turn out to be better than expected).

So, a calculated risk can be defined as follows: A risk that has been given thoughtful consideration and for which the potential costs and potential benefits have been weighted and considered Entrepreneurs take calculated risks everyday, since they take decisions everyday. Each time they take a decision they are weighing up the significance of the options and (often intuitively) working out whether to go ahead. Rewards from enterprise Thats enough about the negative side of setting a business up. What about the rewards? We looked earlier at the motivations for setting up a business. Many of the intangible rewards that arise from being in business happen because these motives are achieved. A sense of satisfaction Building something Being in control Making that first sale Opening a new location Employing more people Getting an industry award or good publicity Getting great feedback from customers These are the kind of non-financial rewards that give entrepreneurs a buzz. However, ultimately, it is the financial rewards that justify the effort and make taking the risk worthwhile. To illustrate the potential financial rewards, here are some examples: Karen Darby sold her business SimplySwitch, a service allowing consumers to compare rates for gas and electricity suppliers among other things, to the Daily Mail for 22million Linda Bennett, one of Britains most successful female entrepreneurs, sold her womens fashion chain, LK Bennett, to two venture capitalists for 70million Gerry Pack started up his business Holiday Extras providing airport hotel rooms and parking with just 100. He sold it in 2005 for 43million Darren Richards started up his online dating agency (DatingDirect.com) with just 2,500 and sold it eight years later for 30million You should also remember that there is a strong tradition of entrepreneurs who have built and sold one business for a substantial amount going onto build other successful businesses. They never lose the entrepreneurial buzz. Such people are called serial entrepreneurs. Starting a Business - Creative thinking to create business ideas An entrepreneur is always on the look out for a business opportunity the thinking process takes place constantly. However, it can also be argued that a formal process of creative thinking can also help someone set up a new business. This is often referred to as deliberate creativity. Here are some of the models or approaches to deliberate creativity which might be used by a start-up:

Blue skies thinking: This is a kind of brainstorming in which the thinking process allows no limits in what is suggested and no preconceptions about what the answer might be. Blue skies thinking encourages contributors to throw in as many ideas as possible. Only when the flow of ideas has stopped does the process go on to consider which ideas might have commercial potential. Lateral thinking Originally created by Edward De Bono, lateral thinking is about reasoning that is not immediately obvious and about ideas that may not be obtainable by using only traditional step-by-step logic. Lateral thinking is sometimes called thinking outside the box it tries to come up with new and unexpected ideas. Six thinking hats Another approach to creative thinking from De Bono - this is a thinking tool for group discussion and individual thinking. The approach identifies six types of styles of thinking which can be used to come up with ideas and focus the group on good ideas:

Neutrality (white Hat)

Considering purely what information is available, what are the facts? Quantitative data on a market (e.g. sales, existing products) would be considered with this hat on. Instinctive gut reaction or statements of emotional feeling (but not any justification). Many entrepreneurs rely on their instinctive or gut feel with their business idea. Logic applied to identifying flaws or barriers, seeking mismatch. The black hat encourages the entrepreneur to think about the things that might go wrong with an idea. Logic applied to identifying benefits. This is the opposite of the black hat what are all the positives or upsides from the idea. What is the best that might happen? Statements of provocation and investigation, seeing where a thought goes. This is the hat which encourages lateral thinking. Thinking about thinking. The blue hat encourages the entrepreneur to consider and evaluate the ideas coming from the other five hats!

Feeling (red hat)

Negative judgement(black hat) Positive Judgement(yellow hat) Creative thinking (green hat) Process control (Blue hat)

Starting a Business - Invention An invention is something genuinely new something that has not been done before. It could be a substance, a product, a process etc.

Many of the entrepreneurs who climb the steps leading up to the Dragons Den believe that not only is their invention unique, but that it also has great business potential. Several questions usually follow from the Dragons: Is the invention really an original idea? Have any already been sold (i.e. is there any evidence of demand?) Can it be, or has it been protected by patents to prevent competitors from copying it? Inventions arise after a period of research often taking many years. The research process is usually costly, both in terms of cash spent and time taken. So it seems reasonable that a genuine invention should be capable of protection. For an invention, the protection comes from a patent.

A common question asked of applicants on Dragons Den is "have you got patent protection"? However, there are some strict rules that must be applied in order for a patent to be granted. In order for a patent to be granted, the invention must be: (1) New (2) Be an innovative step (i.e. not obvious to other people with knowledge of the subject) (3) Be capable of industrial application (i.e. it can be made and used!) (4) Not be excluded (certain types of invention don't count - e.g. scientific theories, artistic creations) If granted, a patent gives the owner the right to take legal action against others who try to take commercial advantage of the invention without getting the permission of the patent owner. A patent can last for up to 20 years. A key benefit of a patent is the ability of the patent owner to "licence" the right to use the invention. For example, a patent owner could grant a larger manufacturing business the right to use the idea in a product, in return for a royalty. Starting a Business - Invention An invention is something genuinely new something that has not been done before. It could be a substance, a product, a process etc. Many of the entrepreneurs who climb the steps leading up to the Dragons Den believe that not only is their invention unique, but that it also has great business potential. Several questions usually follow from the Dragons: Is the invention really an original idea? Have any already been sold (i.e. is there any evidence of demand?) Can it be, or has it been protected by patents to prevent competitors from copying it? Inventions arise after a period of research often taking many years. The research process is usually costly, both in terms of cash spent and time taken. So it seems reasonable that a genuine invention should be capable of protection. For an invention, the protection comes from a patent.

A common question asked of applicants on Dragons Den is "have you got patent protection"? However, there are some strict rules that must be applied in order for a patent to be granted. In order for a patent to be granted, the invention must be:

(1) New (2) Be an innovative step (i.e. not obvious to other people with knowledge of the subject) (3) Be capable of industrial application (i.e. it can be made and used!) (4) Not be excluded (certain types of invention don't count - e.g. scientific theories, artistic creations) If granted, a patent gives the owner the right to take legal action against others who try to take commercial advantage of the invention without getting the permission of the patent owner. A patent can last for up to 20 years. A key benefit of a patent is the ability of the patent owner to "licence" the right to use the invention. For example, a patent owner could grant a larger manufacturing business the right to use the idea in a product, in return for a royalty. Starting a Business - Innovation Inventing something new is one thing. But making it commercially viable is quite another. That is where innovation comes in. Innovation is about putting a new idea or approach into action.

Innovation is commonly described as 'the commercially successful exploitation of ideas'. Successful innovation is mainly about creating or adding value. It does so either by: Improving existing goods, processes or services (process innovation), or by Developing goods, processes or services of value that have not existed previously (product innovation) However, both kinds of innovation require a business to: Challenge the status quo Have a deep understanding of customer needs Develop imaginative and novel solutions Innovation can come in many forms: Improving or replacing business processes to increase efficiency and productivity, or to enable the business to extend the range or quality of existing products and/or services Developing entirely new and improved products and services - often to meet rapidly changing customer or consumer demands or needs Adding value to existing products, services or markets to differentiate the business from its competitors and increase the perceived value to the customers and markets Whatever form it takes, innovation is a creative process. The ideas may come from:

Inside the business e.g. from employees, in-house designers, sales staff Outside the business, e.g. suppliers, customers, media reports, market research insights or from contacts at local universities or other research organisations Successful innovation comes from filtering those ideas, identifying those that the business will focus on and applying resources to exploit them.

The benefits can be significant, including: Improved productivity & reduced costs Building a brand Establishing an advantage over competitors Higher sales and profits Starting a Business - Planning a new business What is a business plan? A business plan is a written document that describes a business, its objectives, its strategies, the market it is in and its financial forecasts. The business plan has many functions, from securing external funding to measuring success within the business. Benefits of business planning to a start-up The main reasons why a start-up should produce a business plan are: Provides a focus on the business idea - is it really a good one, and why? Producing a document helps clarify thoughts and identify gaps in information The plan provides a logical structure to thinking about the business It encourages the entrepreneur to focus on what the business is really about and how customers and finance-providers can be convinced It helps test the financial viability of the idea - can the business achieve the required level of profitability and not run out of cash? The plan provides something which can be used to measure actual performance A business plan is essential to raising finance from outside providers - particular investors and banks Questions a start-up business plan should answer A business plan needs to address the issues of interest to the reader and user. Assuming that the plan is meant to be read by potential finance providers (e.g. a bank, business angel or venture capitalist) then it ought to provide convincing and realistic answers to questions such as: What is the business idea or opportunity? What is the product and how is it different or unique? What is the target market segment and who are the potential competitors? How large is the target market and is it growing? Who are the customers; how much will they buy and at what price? What will it cost to produce and sell the product? Can the product be made and/or sold profitably? At what stage will the business break-even and what are the likely profits? What investment is required to launch and establish the business? Where will the money come from and what type of finance is required? What are the main risks facing the business and how to handle them?

Starting a Business - What goes into a startup business plan? For a start-up there are usually two kinds of business plan - a simple one and a detailed one. Some businesses need to produce both. The simple business plan is rarely shown to outsiders of the business. It is written by the entrepreneur, for the entrepreneur. The simple plan helps summarise the key aims and targets of the business and the actions required to make the business a reality. It is likely to be written in quite an informal way. What would go into the simple plan? Areas such as: The idea - a simple description of the proposed business Where the idea came from and why it is a good one Key targets for the business - sales, profit, growth (gives a sense of direction for the business), ideally for the next 3-4 years Finance required - how much from the founder, how much to be loaned over how loan and from who Market overview - main segments, market size (value, quantity), growth, market shares of main competitors (if known) How the business will operate (location, premises, staff, distribution methods) Cash flow forecast (important) + trading forecast A detailed business plan is needed if a more complicated or larger business is planned as a start-up, or if the entrepreneur needs to raise money from business angels or get a substantial loan from a bank. Here is a summary of the key content: Executive summary: a brief 1-2 page summary of the detail! Should contain nothing new, but highlight the key points Market: a profile of the target market based on market research Product: what it is and how it is different from the competition (the "unique selling point") Competition: an honest description of the competition in the target market - what they do well, their weaknesses and their likely response Protecting the idea: how the product and business can be protected from competition e.g. patents, trademarks, distinctive approaches to marketing or distribution that competitors will find hard to replicate Management team: a crucial area for any investor. Who is involved in the start-up and what will they be doing? What experience and expertise do they bring? Which management roles will need to be filled as the business grows? Marketing: the key elements of the marketing mix should be explained here. Remember that for a start-up the marketing budget is likely to limited, so the plan should describe a credible approach to promoting the product and include realistic assumptions about how many customers will buy and at what price Production /operations: this explains what is involved in the production process, what capacity is needed, who will supply the business, where it will be located etc. Financial projections: a summary of the cash flow and trading forecasts. This section should highlight the key assumptions that have been made and also outline the main risks and opportunities in the forecasts (i.e. what might go wrong, or where things might prove better than forecast). Sources of finance: here the figures from the cash flow forecast are taken and used to highlight what funding the business needs, and when. Returns on investment: another key area for any investor. This is a description of how the entrepreneur expects investors to get a return on their investment. Who might eventually buy the business, when, and for how much?

Starting a Business - Starting a franchise A business idea for a start-up doesn't have to be original. Many new businesses are formed with the intention of offering an existing business idea. The use of franchises is a great example of that. The basic idea for a franchise is this. A franchisor grants a licence (the "franchise") to another business (the "franchisee") to allow it to trade using the brand or business format. That might sound a bit complicated! The trick is to remember that the franchisor is in charge the franchisor is the original owner of the business idea. Franchises are a significant part of business life in the UK: Franchises generated annual sales of 12.4 billion in the UK in 2007 There are over 800 different franchised business formats in the UK and that number is rising by around 5% each year The average sales turnover per franchise outlet is 360,000 90% of franchises are reported to be profitable A franchise has average borrowings of 70,000, suggesting that banks are happier to make loans to franchise businesses than other start-ups The typical franchisee is aged 47. 66% are men and 86% of franchisees are married! Franchises are particularly popular in the service sector Examples of well-known businesses that use franchising to expand their operations include: Subway McDonalds Starbucks Pizza Hut Thorntons Molly Maid Prontaprint You might have noticed from the list above that nearly all those businesses provide services rather than produce goods. Franchising is particularly suitable for service businesses. Advantages of running a franchise For a start-up entrepreneur, there are several advantages to investing in a franchise: It is still your own business even if you are sharing the profits with the franchisor The investment should be in a tried and tested format and brand The franchisee gets advice, support and training. The franchisor will also supply key equipment, such as IT systems, which are designed to support the operation of the business

It is easier to raise finance - the high street banks have significant experience of providing finance to franchises No industry expertise is required in most cases The franchisee benefits from the buying power of the franchisor It is easier to build a customer base the franchise brand name will already by established and many potential customers should already be aware of it The franchisee is usually given an exclusive geographical area in which to operate the franchise which limits the competition (since operators of the same franchise are not in direct competition with each other) Overall, investing in a franchise is a lower risk method of starting a business and there is a lower chance of business failure Disadvantages of running a franchise There are several disadvantages for the franchisee: Franchises are not cheap! The franchisee has to pay substantial initial fees and ongoing royalties and commission. He/she may also have to buy goods directly from the franchisor at a mark-up There are restrictions on marketing activities (e.g. not being allowed to undercut nearby franchises) and on selling the business There is always a risk that the franchisor will go out of business The franchise needs to earn enough profit to satisfy both the franchisee and franchisor there may not be enough to go round! There are many good franchise opportunities available for a start-up, but some poor ones too. So there is still a need for the entrepreneur to do market research into the franchise A franchise is a kind of "halfway house" for a budding entrepreneur. It is a lower risk method of market entry and it is often easier to raise finance. However, running a franchise does not offer the same kind of long-term financial rewards that owning a business outright can.

Starting a Business - Social enterprise One kind of business structure that has grown rapidly in the UK in recent years is the social enterprise. Social enterprises are the most common form of not-for-profit enterprises. The clue in the phrase not-for-profit tells you much about the aims and objectives of social enterprises. However, it is important to appreciate that a social enterprise is not a charity. Social enterprises are defined as: Businesses with primarily social objectives whose surpluses are principally reinvested for that purpose in the business or community, rather than being driven by the need to maximise profit for shareholders and owners. In other words, a social enterprise is a proper business that makes its money in a socially responsible way. These ventures are not necessarily formed to reinvest all profits into the communities. Social entrepreneurs can make a good profit themselves. However, their business model is also designed to benefit others.

Social enterprises complete alongside other businesses in the same marketplace, but use business principles to achieve social aims. A few things all social enterprises have in common are: They are directly involved in producing goods or providing services They have social aims and ethical values They are self-sustaining, and do not rely on donations to survive (i.e. they are not charities)

Well known examples of social enterprises include Divine Chocolate, the Eden Project and fairtrade coffee company Cafedirect. Recent government data suggests that there are more than 55,000 social enterprises in the UK with a combined turnover of 27bn. Social enterprises account for 5% of all businesses with employees, and contribute 8.4billion per year to the UK economy. Starting a Business - Adding value Adding value sounds like a bit of business jargon and it is! However, it also has quite a precise meaning which is important. So it is worth learning this: Adding value = the difference between the price of the finished product/service and the cost of the inputs involved in making it Added value is equivalent to the increase in value that a business creates by undertaking the production process. It is quite easy to think of some examples of how a production process can add value. Consider the examples of new cars rolling down the production line being assembled by robots. The final, completed and shiny new car that comes off the production line has a value (price) that is more than the cost of the sum of the parts. Value has been added. Exactly how much is determined by the price that a customer pays. Alternatively, imagine a celebrity chef preparing a meal at his luxury restaurant. Once the cooking is complete, the meal is being served and sold for a high price, substantially more than the cost of buying the ingredients. Value has been added. You dont have to use robots or have the culinary skills of Gordon Ramsay to add value. For example, businesses can add value by: Building a brand a reputation for quality, value etc that customers are prepared to pay for. Nike trainers sell for much more than Hi-tec, even though the production costs per pair are probably pretty similar! Delivering excellent service high quality, attentive personal service can make the difference between achieving a high price or a medium one Product features and benefits for example, additional functionality in different versions of software can enable a software seller to charge higher prices; different models of motor vehicles are designed to achieve the same effect. Offering convenience customers will often pay a little more for a product that they can have straightaway, or which saves them time.

A business that successfully adds value should find that it is able to operate profitably. Why? Remember the definition of adding value: where the selling price is greater than the costs of making the product. By definition, a business that is adding substantial value must also be operating profitably. Finding ways to add value is a really important activity for a start-up or small business. Quite simply, it can make the difference between survival and failure; between profit and loss. The key benefits to a business of adding value include: Charging a higher price Creating a point of difference from the competition Protecting from competitors trying to steal customers by charging lower prices Focusing a business more closely on its target market segment Starting a Business - Beating the competition With all that competition out there, how does a small business compete effectively? The starting point has to be by providing a great product! In most markets, customers are looking for the best value for money. This means that a product which is better than the competition, and which sells for the same price, will most likely prove to be a winner. It is often the case that a business needs to have more than one product in order to succeed in a market. Offering a product range enables a business to provide customers with more choice and potentially attract customers who buy for different reasons. For example, a product range might include a budget or best value product, a mid-range product, and a higher-price premium product. Walk down the aisle of any large supermarket and look at the own-label ranges to see this in action. Quality is another great way to compete effectively. A quality product is one that meets customer needs. Maybe the customer wants something that is 100% reliable, or which uses high quality materials. A successful business can compete by consistently achieving the required quality level. By focusing on a high quality product, a successful business is often able to develop its brand reputation. In many consumer markets, brands are an important source of advantage. Customers trust good brands, are more loyal to them, and are often prepared to pay a higher price too. Customer service is an important way of beating the competition. Buying the product is one thing but what about the level of after-sales service? Is that an area where a small business can gain an advantage? The overall selling experience for a customer can be made to be better than the competition are staff well-informed and friendly? Price is the other main method of competing. For many businesses, the price charged is a reflection of two factors: 1. What the other competitors are charging 2. What the product costs to make or buy

If a business operates efficiently, that gives it a better chance of being able to offer a lower price than competitors and still make a reasonable profit. Topic: Business aims and objectives

Introduction When a sole trader sets up they may have some unstated aims or objectives - for example to survive for the first year. Other businesses may wish to state exactly what they are aiming to do, such as Amazon, the Internet CD and bookseller, who wants to make history and have fun. An aim is where the business wants to go in the future, its goals. It is a statement of purpose, e.g. we want to grow the business into Europe. Business objectives are the stated, measurable targets of how to achieve business aims. For instance, we want to achieve sales of 10 million in European markets in 2004. A mission statement sets out the business vision and values that enables employees, managers, customers and even suppliers to understand the underlying basis for the actions of the business. Business Objectives Objectives give the business a clearly defined target. Plans can then be made to achieve these targets. This can motivate the employees. It also enables the business to measure the progress towards to its stated aims. The most effective business objectives meet the following criteria: S Specific objectives are aimed at what the business does, e.g. a hotel might have an objective of filling 60% of its beds a night during October, an objective specific to that business. M - Measurable the business can put a value to the objective, e.g. 10,000 in sales in the next half year of trading. A - Agreed by all those concerned in trying to achieve the objective. R - Realistic the objective should be challenging, but it should also be able to be achieved by the resources available. T- Time specific they have a time limit of when the objective should be achieved, e.g. by the end of the year. The main objectives that a business might have are: 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. Profit maximisation try to make the most profit possible most like to be the aim of the owners and shareholders. 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. Sales 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. A business may find that some of their objectives conflict with one and other: Growth versus profit: for example, achieving higher sales in the short term (e.g. by cutting prices) will reduce short-term profit. Short-term versus long-term: for example, a business may decide to accept lower cash flows in the short-term whilst it invests heavily in new products or plant and equipment. Large investors in the Stock Exchange are often accused of looking too much at short-term objectives and company performance rather than investing in a business for the long-term. Alternative Aims and Objectives Not all businesses seek profit or growth. Some organisations have alternative objectives. Examples of other objectives: Ethical and socially responsible objectives organisations 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. 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 organisations that monitor or control private sector activities have objectives that are to ensure that the business they are monitoring comply with the laws laid down. Health care and education establishments their objectives are to provide a service most private schools for instance have charitable status. Their aim is the enhancement of their pupils through education. Charities and voluntary organisations their aims and objectives are led by the beliefs they stand for. Changing Objectives A business may change its objectives over time due to the following reasons:

A business may achieve an objective and will need to move onto another one (e.g. survival in the first year may lead to an objective of increasing profit in the second year). The competitive environment might change, with the launch of new products from competitors. Technology might change product designs, so sales and production targets might need to change.

Topic: Starting a business - what is required

An entrepreneur is defined as someone who has the ability to take risks and organise the factors of production. When starting a new business the entrepreneur faces a number of problems before they can start up. They need an idea and a will to succeed, but these are not enough on their own to be successful. A business needs: Finance to fund the other elements listed below: finance is usually the hardest thing to obtain in a start-up business. Labour to help develop a product or service and then to produce/deliver it. Customers without them, the business will fail. Obtaining customers means the business must undertake marketing. Suppliers provide many of the inputs, such as raw materials. Premises and equipment maybe a simple office, or possibly a large, modern factory; depending on what the business activity is. Management organisation & structure this is often very simple at the start-up stage (e.g. a sole trader!). Designed, researched and tested product or service a successful business is about more than just having a good idea the product needs to be brought to the marketplace in its best format. Dyson spent many years completing his first vacuum cleaner before being able to sell it. A business may also need to protect its idea or products. It can do this through: Copyright and patents make it illegal for other firms to copy directly the business idea or invention. Keep new products and services secret until they are ready for launch. Focus on retaining key staff that would be otherwise valuable for competitors to poach! Entrepreneurs An entrepreneur needs several skills to succeed: Have ideas

Ability to take risks Ability to persuade others to join the business or lend the business money Energy to keep the business going under tough circumstances it is often said that the best entrepreneurs are the most persistent

Topic: Business departments

A business is normally organised by its functions, e.g. marketing department, accounts department and so on. This is because being grouped together allows the functions to benefit from specialisation and division of labour. This leads to lower unit costs and a greater efficiency. However it can mean that there is departmental rivalry Larger businesses might have a number of businesses within the whole company. This would be coordinated by a Head Office, where all the major decisions are made. Other ways of organising the business could be more appropriate for different types of businesses: Product the functions are organised around the product so at a business like ICI, who are the UKs leading chemical manufacturer, a product manager would have a team of functions who would answer to them, like accounting, marketing and production Geographical a hierarchy might be split according to different places that the product is sold into for instance a business may have a Far Eastern division of its business, which would take into account the different cultural and supply differences of the region Market the organisation is based on market segments so an airline business like British Airways could concentrate on long haul, short haul, holiday makers, business clients and freight A business whose decision-making comes from one place only is known as a centralised organisation. Normally Head Office will decide on the major elements of strategy, no matter where the manufacturing plants and sales teams are positioned around the country or globe. This means that there are good opportunities for economies of scale. Other businesses, especially multinationals (see below) will opt for a more decentralised organisation where the individual businesses within the whole company group, make decisions for themselves. This means that there is more opportunity to react to the changing marketplace (one of the advantages of a small firm). However there is a possibility that these businesses (who may well be in different parts of the world) might be duplicating research or not bargaining in such as strong position as a bigger overall company. When a business reaches a certain size then it might split into different departments. These departments will specialise, employing people with expertise in these areas.

The main departments in a business might be:

Department Accounts

Role Provides a detailed record of the money coming in and going out of the business and prepares accounts as a basis for financial decisions

Human Resources Deals with all the recruitment, training, health and safety and pay or Personnel negotiations with unions/workers Production Purchasing Sales and marketing Makes sure that the production plans are met on time and products of the right quality are produced Buys all the raw materials and goods required for production Sales function deals with all aspects of selling to customers; the marketing function carries out marketing research, organises advertising and product promotion

Topic: Starting a business - getting the finance

The entrepreneur will need to finance to the business. This means they will need to find money to pay for: The purchase of plant & machinery, office equipment etc Renting or buying premises and offices (e.g. the first 3 months rent may need to be paid in advance) Essential business services such as insurance The purchase of stocks of raw materials and components to allow production to start The wages and salaries of the first employees to join the business (who may be needed before any goods or services are actually sold) To provide financial cover whilst the business waits for customers to pay The main ways in which an entrepreneur can find finance for a new business are: Own money Bank loans Bank overdraft Money from friends Grant assistance from government bodies These types of finance can be split into INTERNAL and EXTERNAL sources of finance. Internal sources of finance are generated from the business itself (e.g. cash from sales) and external sources of finance from outside the business (e.g. a bank loan). The business can also split the types of finance into categories relating to length of time the money is needed for Short-term: bank overdraft Medium term: bank loan; lease; hire purchase; government grants

Long term: bank loan; mortgage; share issue (for limited companies); debenture Business Plan A business plan sets out how a business is going to achieve its aims and objectives. It is extremely useful for a new business to use a plan because it can be used to show potential investors how their money is going to be spent. A business plan will probably contain the following elements: Statement of aims and objectives Description of market the business is selling to Main competitors (how will they respond to a new competitor?) Production and sales forecasts Equipment needed Distribution plan for how to get product to customers In the plan, great care should be taken to estimate and forecast how the cash will come into and leave the business in the early weeks and months. This is because in the early days of setting up a business, finance is hardest to manage. It is uncertain how easy it will be to find customers and will they buy the product or service at the price that is being asked? The business will be incurring significant start-up costs which will eat into the available funds. Topic: Growing a business

Introduction The growth of a business is when it expands in size. The size of a business can be measured by the following means: Sales turnover (or sales revenue) Number of employees Share capital (the number of shares times the price of each share) Market share the sales of the business of a particular product as a proportion of all sales of that type of product. A 5% market share would mean that 1 in 20 of all products sold are sold by that business. Number of outlets (e.g. shops) They may mean to grow in size or sometimes it just happens without the business making a conscientious effort to do so. Businesses either grow organically or by acquisition and mergers. Organic growth means the business grows by expanding its sales or their operations and is financed through its own profits. Acquisitions and mergers are when the business joins or buys other businesses, not necessary

of the same type. Businesses may wish to expand for the following reasons: Benefit from economies of scale lower unit costs due to an increase in size A larger market share (selling more products than before) means they can charge higher prices and gain more profit As means of survival if they wish to compete with other growing businesses Some businesses start selling or acquiring businesses that are not in the same market as the markets they are presently selling in. This is known as diversification. Businesses may wish to diversify because: Helps spread the risks across a number of products. If one product fails due to market conditions then other products in different markets should not be affected. Good way of expanding if present market seems already full. Gives the business fresh objectives and may act to motivate managers and staff. A business can grow organically in the following ways: Lower price - People will buy more at lower prices. Increase advertising - Customers are made more aware of the attraction of the products. Sell in different location - Selling to a new set of customers, more potential. Sell on credit - Customers are attracted by the ability to buy now pay later. Mergers and Acquisitions A merger is where two or more businesses AGREE to join together to become one larger firm. An acquisition is when one firm BUYS another firm. When a one business buys another it is possible that the acquisition or merger integrates the new product with the existing product. This integration can either be vertical or horizontal integration. Mergers and acquisitions are an important option for larger businesses that wish to grow rapidly. However, they are a high risk strategy it is easy to buy the wrong business, at the wrong price for the wrong reasons! The advantages of mergers and acquisitions are: Economies of scale, which reduces unit costs. Greater market share for horizontal integration, which means the business can often charge higher prices. Spreads risks if products different. Reduces competition if a rival is taken over. Other businesses can bring new skills and specialist departments to the business. It is easier to raise money if a larger business.

The disadvantages of mergers and acquisitions are: Diseconomies of scale if business becomes too large, which leads to higher unit costs. Clashes of culture between different types of businesses can occur, reducing the effectiveness of the integration. May need to make some workers redundant, especially at management levels this may have an effect on motivation. May be a conflict of objectives between different businesses, meaning decisions are more difficult to make and causing disruption in the running of the business. Constraints on Growth Though a business may wish to grow in size, there may be reasons why it cannot do this: Financial limitations a business may not be able to raise the necessary finance to grow any bigger perhaps it has not made enough profits to generate the cash or the bank is not keen to lend it more money at the moment. Size of the market there is often a limit to number of people who are willing to buy the type of product that the business is producing e.g. a printing press manufacturer will know that there are only a small number of publishers in the UK who will be able to buy the product. Government controls means that a business cannot necessarily have more than 25% of the market share. This often arises when one business joins with another. If the government thinks it is not in the public interest to have such a large business, then the joining together may not take place. Human resources are limited in terms of the skills available. Especially in more specialised areas it may be difficult to find enough qualified staff in the area to expand the business. In the South East of England, where unemployment is very low for some types of jobs, businesses have struggled to expand for this very reason. Topic: Sole Traders

A sole trader is a business that is owned by one person. It may have one or more employees. It is the most common form of ownership in the UK. The main advantages of setting up as a sole trader are: Total control of the business by the owner. Cheap and easy to start up few forms to fill in and to start trading the sole trader does not need to employ any specialist services, other than setting up a bank account and informing the tax offices. Keep all the profit as the owner, all the profit belongs to the sole trader. Business affairs are private competitors cannot see what you are earning, so will know less about how the business works and how it succeeds.

The reasons why sole traders are often successful are: Can offer specialist services to customers e.g. appliance repair specialists. Can be sensitive to the needs of customers since they are closer to the customer and will react more quickly, because they are the decision makers too. Can cater for the needs of local people a small business in a local area can build up a following in the community due to trust if people can see the owner they feel more comfortable than if the owner is in some far off town, not able to hear the views of the local community. The legal requirements of a sole trader are to: Keep proper business accounts and records for the Inland Revenue (who collect the tax on profits) and if necessary VAT accounts Comply with legal requirements that concern protection of the customer (e.g. Sale of Goods Act) The main disadvantages of being a sole trader are: Unlimited liability see below. Can be difficult to raise finance, because they are small, banks will not lend them large sums and they will not be able to use any other form of long-term finance unless they change their ownership status. Can be difficult to enjoy economies of scale, i.e. lower costs per unit due to higher levels of production. A sole trader, for instance, may not be able to buy in bulk and enjoy the same discounts as larger businesses. There is a problem of continuity if the sole trader retires or dies what happens to the business next? The reasons for being a sole trader are often a balance between business and personal costs and benefits. Many will prefer the satisfaction of running a business with little paper work against the risks, pressure and probably long working hours. A sole trader is liable for any debts that the business incurs. This means that any money that the owner has put into the business could be lost, BUT IMPORTANTLY, if the business continues to incur further costs then the owner has to pay these as well. In some cases they may have sell some of their own possessions to pay creditors. Such a risk often puts potential sole traders off setting up businesses, but also makes them consider the other forms of business structure.

Topic: Partnerships

A partnership is a business where there are two or more owners of the enterprise. Most partnerships are between two and twenty members though there are examples like John Lewis and some of the major world accountancy firms where there are hundreds of partners. A partner is normally set up using a Deed of Partnership. This contains: Amount of capital each partner should provide (i.e. starting cash). How profits or losses should be divided. How many votes each partner has (usually based on proportion of capital provided). Rules on how to take on new partners. How the partnership is brought to an end, or how a partner leaves. The advantages of a sole trader becoming a partnership are: Spreads the risk across more people, so if the business gets into difficulty then there are more people to share the burden of debt Partner may bring money and resources to the business (e.g. better premises to work from) Partner may bring other skills and ideas to the business, complementing the work already done by the original partner Increased credibility with potential customers and suppliers who may see dealing with the business as less risky than trading with just a sole trader For example, a builder, working originally as a sole trader, may team up with an architect or carpenter to form a partnership. Either would bring added expertise, but also might bring added capital and/or contacts. Of course the builder could team up with another builder as well sharing the risk, and potentially the workload. The main disadvantages of becoming a partnership are: Have to share the profits. Less control of the business for the individual. Disputes over workload. Problems if partners disagree over of direction of business. The next step for a partnership is to move towards becoming a private limited company. However some partnerships do not want to move to this stage. The advantages of remaining a partnership rather than becoming a private limited company are: Costs money to set up limited company (may need to employ a solicitor to set up the paper work). Company accounts are filed so the public can view them (and competitors). May need to spend money on an auditor to check the accounts before they are filed.

When a partnership finishes then, depending on how the Deed of Partnership is set up, each partner has an agreed slice of the business. Topic: Limited Companies

A limited company is a business that is owned by its shareholders, run by directors and most importantly whose liability is limited. Limited liability meansthat the investors can only lose the money they have invested and no more. This encourages people to finance the company, and/or set up such a business, knowing that they can only lose what they put in, if the company fails. For people or businesses who have a claim against the company, limited liability means that they can only recover money from the existing assets of the business. They cannot claim the personal assets of the shareholders to recover amounts owed by the company. To set up as a limited company, a company has to register with Companies House and is issued with a Certificate of Incorporation. It also needs to have a Memorandum of Association which sets out what the company has been formed to do, and Articles of Association which are internal rules over including what the directors can do and voting rights of the shareholders. Limited companies can either be private limited companies or public limited companies. The difference between the two are: Shares in a public limited company (plc) can be traded on the Stock Exchange and can be bought by members of the general public. Shares in a private limited company are not available to the general public; and The issued share capital of a plc (the initial value of the shares put on sale) must be greater than 50,000 in a plc. A private limited company may have a smaller share capital A private limited company might want to become a plc because: Shares in a private limited company cannot be offered for sale to the general public, so restricting availability of finance, especially if the business wants to expand. Therefore, it is attractive to change status It is also easier to raise money through other sources of finance e.g. from banks [Note: becoming a plc does not necessarily mean that the company is quoted on the Stock Exchange. To do that, the company must do a flotation (see below)] The disadvantages of a being a public limited company (plc) are: Costly and complicated to set up as a plc need to employee specialist bankers and lawyers to help organise the converting to the plc.

Certain financial information must be made available for everyone, competitors and customers included (would you want them to know how much profit you are making?) Shareholders in public companies expect a steady stream of income from dividends, which might mean that the business has to concentrate on short term objectives of creating a profit, whereas it might be better to work on longer term objectives, such as growth and investment. Threat of takeover, because another company can buy up a large number of shares because they are traded publicly (can be sold to anyone). If they buy enough, they can then persuade other shareholders to join with them to vote in a new management team. Shareholders own the company. They buy shares because: Shares normally pay dividends, which is a share of the profits at the end of the year. Companies on the Stock Exchange usually pay dividends twice each year. Over time the value of the share may increase and so can be sold for a profit this is known as a capital gain. Of course, the price of shares can go down as well as up, so investing in shares can be very risky. If they have enough shares they can influence the management of the company. A good example is a venture capitalist that will often buy up to 80% of the shares of a company and insist on choosing some of the directors. Flotation A company may float on the stock market. This means selling all or part of the business to outside investors. This generates additional funds for the business and can be a major form of fund raising. When shares in a plc are first offered for sale to the general public as the company is given a listing on the Stock Exchange. Divorce of ownership and control As a business becomes larger, the ownership and control of the business may become separated. This is because the shareholders may have the money, but not the time or the management skills to run the company. Therefore, the day-to-day running of the business is entrusted to the directors, who are employed for their skills, by the shareholders. The shareholders are therefore divorced from the running the business for 364 days of the year. They will have their say at the Annual General Meeting (AGM) of the company, where the directors present the accounts and results. Very recently a couple of businesses have had very strong shareholder unrest leading the company to tone down a number of their decisions. In practice directors tend to have at least a modest shareholding in the company. This provides the director with an incentive to achieve good dividends and capital growth for the share (an increase in the share price).

Topic: Franchises

A franchise is where a business sells a sole proprietor the right to set up a business using their name. Examples of major franchises are: McDonalds Clarks Shoes Pizza Hut Holiday Inn The franchisor is the business whose sells the right to another business to operate a franchise they may run a number of their own businesses, but also may want to let others run the business in other parts of the country. A franchise is bought by the franchisee once they have purchased the franchise they have to pay a proportion of their profits to the franchiser on a regular basis. Depending on the business involved, the franchiser may provide training, management expertise and national marketing campaigns. They may also supply the raw materials and equipment. The advantages of being a franchisor: Large companies see it as a means of rapid expansion with the franchisee providing most of the finance. If the franchise model works, then there are large profits to made from - selling franchises - royalty payments - selling raw materials and equipment. The advantages of setting up as a franchisee are: The franchisee is given support by the franchiser. This includes marketing and staff training. So starting a business in this way requires less expertise and is less lonely! The franchisee may benefit from national advertising and being part of a well-known organisation with an established name, format and product Less investment is required at the start-up stage since the franchise business idea has already been developed A franchise allows people to start and run their own business with less risk. The chance of failure among new franchises is lower as their product is a proven success and has a secure place in the market The disadvantages of setting up as a franchisee are: Cost to buy franchise can be very expensive (hundreds of thousands of pounds). Have to pay a percentage of your revenue to the business you have bought the franchiser from. Have to follow the franchise model, so less flexible. You would probably be told what

prices to set, what advertising to use and what type of staff to employ. In conclusion, a buying a franchise a good way of an individual setting up a business because: They do not have to establish themselves in the same as a sole trader might have to. They will have the support of a tried and tested business model, often with a national marketing campaign behind them. Topic: Cooperatives

A co-operative is where a number of individuals or businesses work together to achieve a common purpose. They are normally formed so individuals and small businesses can benefit from being part of a larger group, meaning they have more power to buy or bargain. There are three main types of co-operatives: Retail co-operatives Marketing or trader co-operatives Worker co-operatives A retail co-operative is probably the most familiar co-op. The Co-Op shops and Leo Hypermarkets are a regular sight in the high street. The objectives of a co-op tend to set them apart from other businesses. The objectives are normally more focused on the members of the co-operative, the local community and the world community. Though profits are required to enable them to reinvest in their business, they will not be a primary objective. Though co-operatives exist to overcome some of the trading difficulties faced by small businesses, they can still face of number of problems in their operation: The system of one member one vote in some societies means a long, drawn out decision-making process Co-operatives may find it difficult to raise finance since banks are not so willing to lend them money because their main aim is not to make a profit Idealistic and ethical aims may not be agreeable with all members, so creating unrest and disharmony The aims held by many co-operatives may not lead to profits in the long run (though many co-op shops will continue to exist at a loss because the owners feel they are providing an important service to the community.)

Topic: Span of Control and Hierarchies

In a business of more than one person, unless the business has equal partners, then there are managers and subordinates. Subordinates are workers controlled by the manager. A hierarchy describes the structure of the management of the business, from the top of the company the managing director, through to the shop floor worker, who reports to their foreman, in a manufacturing business. The hierarchy of a business is usually best understood by drawing an organisation chart showing which levels of management and employees report to whom. An example of a hierarchy is shown in the diagram below

A span of control is the number of people who report to one manager in a hierarchy. The more people under the control of one manager - the wider the span of control. Less means a narrower span of control. An example of a narrow span of control is shown in the diagram below:

The advantages of a narrow span of control are: A narrow span of control allows a manager to communicate quickly with the employees under them and control them more easily Feedback of ideas from the workers will be more effective It requires a higher level of management skill to control a greater number of employees, so there is less management skill required An example of a wide span of control is shown in the diagram below:

The advantages of wide span of control are: There are less layers of management to pass a message through, so the message reaches more employees faster It costs less money to run a wider span of control because a business does not need to

employ as many managers The width of the span of control depends on: The type of product being made products which are easy to make or deliver will need less supervision and so can have a wider span of control Skills of managers and workers a more skilful workforce can operate with a wider span of control because they will need less supervision. A more skilful manager can control a greater number of staff A tall organisation has a larger number of managers with a narrow span of control whilst a flat organisation has few managers with a wide span of control. A tall organisation can suffer from having too many managers (a huge expense) and decisions can take a long time to reach the bottom of the hierarchy BUT, a tall organisation can provide good opportunities for promotion and the manager does not have to spend so much time managing the staff Chain of command is the line on which orders and decisions are passed down from top to bottom of the hierarchy. In a hierarchy the chain of command means that a production manager may be higher up the hierarchy, but will not be able to tell a marketing person what to do. The advantages of hierarchies are: Helps create a clear communication line between the top and bottom of the business this improves co-ordination and motivation since employees know what is expected of them and when. Hierarchies create departments and departments form teams. There are motivational advantages of working in teams. The disadvantages of hierarchies are: The formation of departments can mean that: - Departments work for themselves and not the greater good of the business. - Departments do not see the whole picture in making decisions. Hierarchies can be inflexible and difficult to adjust, especially when businesses need to adapt to changing markets remember employees do not tend to react well to change.

Topic: Stakeholders and business ethics

Introduction A stakeholder is any individual or organisation that is affected by the activities of a business. They may have a direct or indirect interest in the business, and may be in contact with the business on a daily basis, or may just occasionally. The main stakeholders are: Shareholders (not for a sole trader or partnership though) they will be interested in their dividends and capital growth of their shares. Management and employees they may also be shareholders they will be interested in their job security, prospects and pay. Customers and suppliers. Banks and other financial organisations lending money to the business. Government especially the Inland Revenue and the Customs and Excise who will be collecting tax from them. Trade Unions who will represent the interests of the workers. Pressure Groups who are interested in whether the business is acting appropriately towards their area of interest. Stakeholders versus Shareholders It is important to distinguish between a STAKEHOLDER and a SHAREHOLDER. They sound the same but the difference is crucial! Shareholders hold shares in the company that is they own part of it. Stakeholders have an interest in the company but do not own it (unless they are shareholders). Often the aims and objectives of the stakeholders are not the same as shareholders and they come into conflict. The conflict often arises because while shareholders want short-term profits, the other stakeholders desires tend to cost money and reduce profits. The owners often have to balance their own wishes against those of the other stakeholders or risk losing their ability to generate future profits (e.g. the workers may go on strike or the customers refuse to buy the companys products).

Social Responsibility Social responsibility is the duty and obligation of a business to other stakeholders.

Stakeholder Shareholder Employee Supplier Customer Local community Government Environment

Example of responsibility to that stakeholder Good return on investment Fair pay and working conditions Regular business and prompt payment Fair price and safe product Jobs and minimum disruption Employment for local community Less pollution

Social responsibility for one group can conflict with other groups, especially between shareholders and stakeholders. Ethics Ethics refers to the moral rights and wrongs of any decision a business makes. It is a value judgement that may differ in importance and meaning between different individuals. Businesses may adopt ethical policies because they believe in them or they believe that by showing they are ethical, they improve their sales. Two good examples of businesses that have strong ethical policies are The Body Shop and CoOp. Some examples of ethical policies are: Reduce pollution by using non-fossil fuels. Disposal of waste safely and in an environmentally friendly manner. Sponsoring local charity events. Trading fairly with developing countries

External Environment: introduction to the external environment Introduction A business does not operate in a vacuum. It has to act and react to what happens outside the factory and office walls. These factors that happen outside the business are known as external factors or influences. These will affect the main internal functions of the business and possibly the objectives of the business and its strategies. Main Factors The main factor that affects most business is the degree of competition how fiercely other businesses compete with the products that another business makes. The other factors that can affect the business are: Social how consumers, households and communities behave and their beliefs. For instance, changes in attitude towards health, or a greater number of pensioners in a population. Legal the way in which legislation in society affects the business. E.g. changes in employment laws on working hours. Economic how the economy affects a business in terms of taxation, government spending, general demand, interest rates, exchange rates and European and global economic factors. Political how changes in government policy might affect the business e.g. a decision to subsidise building new houses in an area could be good for a local brick works. Technological how the rapid pace of change in production processes and product innovation affect a business. Ethical what is regarded as morally right or wrong for a business to do. For instance should it trade with countries which have a poor record on human rights. Changing External Environment Markets are changing all the time. It does depend on the type of product the business produces, however a business needs to react or lose customers. Some of the main reasons why markets change rapidly: Customers develop new needs and wants. New competitors enter a market. New technologies mean that new products can be made. A world or countrywide event happens e.g. Gulf War or foot and mouth disease. Government introduces new legislation e.g. increases minimum wage. Business and Competition Though a business does not want competition from other businesses, inevitably most will face a degree of competition. The amount and type of competition depends on the market the business operates in: Many small rival businesses e.g. a shopping mall or city centre arcade close rivalry.

A few large rival firms e.g. washing powder or Coke and Pepsi. A rapidly changing market e.g. where the technology is being developed very quickly the mobile phone market. A business could react to an increase in competition (e.g. a launch of rival product) in the following ways: Cut prices (but can reduce profits) Improve quality (but increases costs) Spend more on promotion (e.g. do more advertising, increase brand loyalty; but costs money) Cut costs, e.g. use cheaper materials, make some workers redundant Social Environment and Responsibility Social change is when the people in the community adjust their attitudes to way they live. Businesses will need to adjust their products to meet these changes, e.g. taking sugar out of childrens drinks, because parents feel their children are having too much sugar in their diets. The business also needs to be aware of their social responsibilities. These are the way they act towards the different parts of society that they come into contact with. Legislation covers a number of the areas of responsibility that a business has with its customers, employees and other businesses. It is also important to consider the effects a business can have on the local community. These are known as the social benefits and social costs. A social benefit is where a business action leads to benefits above and beyond the direct benefits to the business and/or customer. For example, the building of an attractive new factory provides employment opportunities to the local community. A social cost is where the action has the reverse effect there are costs imposed on the rest of society, for instance pollution. These extra benefits and costs are distinguished from the private benefits and costs directly attributable to the business. These extra cost and benefits are known as externalities external costs and benefits. Governments encourage social benefits through the use of subsidies and grants (e.g. regional assistance for undeveloped areas). They also discourage social costs with fines, taxes and legislation. Pressure groups will also discourage social costs.

External Environment: Economic sectors Business activity is the process of transforming inputs into outputs by adding value. There are three main sectors of business activity: Primary sector Involves the extraction and production of raw materials, such as coal, wood and steel. A coal miner and a fisherman would be workers in the primary sector. Secondary sector Involves the transformation of raw materials into goods e.g. manufacturing steel into cars. A builder and a dressmaker would be workers in the secondary sector. Tertiary sector Involves the provision of services to consumers and businesses, such as cinema and banking. A shopkeeper and an accountant would be workers in the tertiary sector. Goods move through a chain of production. The chain of production follows the construction of a good from its extraction as a raw material through to its final sale to the consumer. So a piece of wood is cut from a felled tree (primary sector), made into a table by a carpenter (secondary) and finally sold in a shop (tertiary). Some businesses have elements of all sectors in their chain of production. Others businesses choose to specialise.Specialisation occurs when a producer concentrates on making a small number of products, or on providing a narrowly defined service. Examples of specialisation: Baker only baking bread Machinery that only cuts sheet metal Lawyer dealing only with criminal law Advantages of specialisation Producer becomes more efficient because they learn the best way (all the short cuts) to produce at the lowest cost A producer may be able to charge a higher price from a customer the customer is prepared to pay more for expert/specialist knowledge (e.g. a cosmetic surgeon) External Environment: The Business / Economic Cycle Economies go through a regular pattern of ups and downs in the value of economic activity (as measured by gross domestic product or GDP. This is known as the business cycle (sometimes you also see it referred to as the economic cycle). The business cycle is crucial for businesses of all kinds because it directly affects demand for their products. The business cycle is characterised by four main phases: Boom: high levels of consumer spending, business confidence, profits and investment. Prices and costs also tend to rise faster. Unemployment tends to be low as growth in the economy creates new jobs

Recession: falling levels of consumer spending and confidence mean lower profits for businesses which start to cut back on investment. Spare capacity increases + rising unemployment as businesses cut back and reduce stocks Slump / depression: a prolonged period of declining GDP - very weak consumer spending and business investment; many business failures; rapidly rising unemployment; prices may start falling (deflation) Recovery: things start to get better; consumers begin to increase spending; businesses feel a little more confident and start to invest again and build stocks; but it takes time for unemployment to stop growing Every business is affected by the stage of the business cycle, but some businesses are more vulnerable to changes in the business cycle than others. For example, a business that relies on consumer spending for its revenues will find that demand is closely related to movements in GDP. During a boom, such businesses should enjoy strong demand for their products, assuming that the products are actually what customers want! But during a slump, the business has to ride out the storm suffering a sharp drop in demand. You can see lots of examples of this in the UK economy currently. During the housing-market inspired boom of the early 2000s, many retail and consumer goods businesses took advantage of the boom. Consumers were prepared to take on significant personal debt in order to finance their purchases. However, the sharp economic downturn during 2008 and 2009 saw many businesses suffer sales falls of between 10-30%. Some did not survive their fixed costs were just too high to be able to remain viable. Businesses whose fortunes are closely linked to the rate of economic growth are referred to as cyclical businesses. Examples include: Fashion retailers Electrical goods House-builders Restaurants Advertising Overseas tour operators Construction and other infrastructure firms By contrast, some businesses actually benefit from an economic downturn. If their products are perceived by customers as representing good value for money, or a cheaper alternative than more expensive products, then consumers are likely to switch. Good examples that were featured in the UK media during the recession of 2008/09 included: Value retailers (e.g. Aldi, Lidl, Netto) Fast-food outlets (e.g. Dominos, Subway) Domestic holidays (e.g. B&Bs and holiday cottages) Chocolate for some reason, chocolate sales always increase strongly during an economic downturn! External Environment: Business and Globalisation Globalisation is arguably the most important factor currently shaping the world economy. Although it is not a new phenomenon (waves of globalisation can be traced back to the 1800s) the changes it is bringing about now occur far more rapidly, spread more widely and have a much greater business, economic and social impact than ever before. Globalisation is best thought of as a process that results in some significant changes for markets and businesses to address: for example

An expansion of trade in goods and services between countries (an opportunity for many businesses; a threat for others) An increase in transfers of financial capital across national boundaries including foreign direct investment (FDI) by multi-national companies and the investments by sovereign wealth funds (e.g. Middle Eastern governments buying assets in the UK) The internationalisation of products and services and the development of global brands such as Starbucks, Nike, Sony and Google Shifts in production and consumption e.g. the expansion of outsourcing and offshoring of production and support services, which has traditionally benefitted countries with lower labour costs & skilled labour markets such as India, at the expense of jobs in developed economies like the UK Increased levels of labour migration which has the effect of lowering wage costs in many industries, but for others is a problem (e.g. a loss of skilled workers leaving an economy) The emergence of countries playing a bigger role in the global trading system including China, Brazil, India and Russia A key result of globalisation is the increasing inter-dependence of economies. For example: Most of the worlds countries are dependent on each other for their macroeconomic health Many of the newly industrialising countries are winning a growing share of world trade and their economies aregrowing faster than in richer developed nations All countries have been affected by the credit crunch and decline in world trade, but many emerging market countries have slowed down rather than fall into a full-blown recession There are several alternative approaches for a business looking to expand globally many choose to follow one or more of the following: Establish production sites overseas Licence technology & other intellectual property Joint ventures Franchising Offshoring / outsourcing Selling directly to overseas markets either with sales agents, distribution agreements or online The motivations for successful businesses to operate globally are strong, and growing. For example: Higher profits and a stronger position and market access in global markets Reduced technological barriers to movement of goods, services and factors of production Cost considerations a desire to shift production to countries with lower unit labour costs Forward vertical integration (e.g. establishing production platforms in low cost countries where intermediate products can be made into finished products at lower cost) Avoidance of transportation costs and avoidance of tariff and non-tariff barriers Extending product life-cycles by producing and marketing products in new countries

External Environment: Government Spending Government spending is also known as public spending and in Brit